##### Table of Contents



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, 2003
 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. 
  QIAO XING UNIVERSAL TELEPHONE, INC. 
  British Virgin Islands 
  Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,
Peoples Republic of China 516023 
  Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each
class
    
    Name of each exchange
on which registeredNone
    
    N/A




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Securities registered or to be registered pursuant to Section 12(g) of the Act. $.001 Par Value Common Stock (Common Stock) 
  Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. None 
  Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of December 31, 2003: 15,537,718 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 o No x Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 o 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-




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15.CONTROLS AND PROCEDURESITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.PART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOMECONSOLIDATED STATEMENTS OF CASH FLOWSCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESINDEX TO EXHIBITSList of Significant Subsidiaries of the CompanyCode of EthicsCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer    Table of Contents  SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks
and uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as anticipate, estimate,
plans, potential, projects, continuing, ongoing, expects,
management believes, we believe, we intend and similar expressions.
These statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed for the reasons
described in this annual report. You should not place undue reliance on these
forward-looking statements. You should be aware that our actual results could differ materially from
those contained in the forward-looking statements due to a number of factors:  
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions You should also consider carefully the statements under Risk Factors and
other sections of this annual report, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements. The forward-looking statements speak only as of the date on which they are
made, and, except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements. We use data and industry forecasts in this annual report which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this
information. -3-




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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, 2001, 2002 and 2003 and the consolidated balance sheet data as of December
31, 2002 and 2003 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, 1999 and 2000 and the
consolidated balance sheet data as of December 31, 1999, 2000 and 2001 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. Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Net sales
    
    
    383,633
    
    
    
    392,529
    
    
    
    250,366
    
    
    
    549,967
    
    
    
    1,837,633
    
    
    
    222,025Cost of goods sold
    
    
    (259,658
    )
    
    
    (271,606
    )
    
    
    (212,229
    )
    
    
    (528,149
    )
    
    
    (1,583,061
    )
    
    
    (191,267
    )Gross profit
    
    
    123,975
    
    
    
    120,923
    
    
    
    38,137
    
    
    
    21,818
    
    
    
    254,572
    
    
    
    30,758Selling expenses
    
    
    (15,695
    )
    
    
    (15,325
    )
    
    
    (6,172
    )
    
    
    (5,286
    )
    
    
    (90,440
    )
    
    
    (10,927
    )General and administrative expenses
    
    
    (28,000
    )
    
    
    (40,108
    )
    
    
    (40,598
    )
    
    
    (68,233
    )
    
    
    (54,120
    )
    
    
    (6,539
    )Research and development
    
    
    (562
    )
    
    
    (497
    )
    
    
    (3,516
    )
    
    
    (451
    )
    
    
    (4,414
    )
    
    
    (533
    )In process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,579
    )
    
    
    (4,057
    )
 -4-




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Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Amortization of acquired intangible
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,192
    )
    
    
    (5,098
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,929
    )
    
    
    (3,254
    )Impairment loss on- Land use rights
    
    
    
    
    
    
    
    
    
    
    (5,004
    )
    
    
    
    
    
    
    
    
    
    
    - Property, machinery and equipment
    
    
    
    
    
    
    
    
    
    
    (8,722
    )
    
    
    
    
    
    
    
    
    
    
    Income (Loss) from operations
    
    
    79,718
    
    
    
    64,993
    
    
    
    (25,875
    )
    
    
    (52,152
    )
    
    
    2,898
    
    
    
    350Interest income
    
    
    1,981
    
    
    
    2,061
    
    
    
    2,000
    
    
    
    1,070
    
    
    
    3,045
    
    
    
    368Exchange loss, net
    
    
    (8
    )
    
    
    2,363
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    Interest expense:- Amortization of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (8,234
    )
    
    
    
    
    
    
    
    
    
    
    - Amortization of discount on
convertible debentures
    
    
    
    
    
    
    
    
    
    
    (6,469
    )
    
    
    
    
    
    
    
    
    
    
    - Other loan
    
    
    (5,577
    )
    
    
    (23,550
    )
    
    
    (8,404
    )
    
    
    (17,867
    )
    
    
    (18,985
    )
    
    
    (2,294
    )Gain on sale of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,050
    
    
    
    
    
    
    
    Other (expenses) income, net
    
    
    252
    
    
    
    (197
    )
    
    
    (187
    )
    
    
    124
    
    
    
    7,738
    
    
    
    935Income (Loss) before income tax
    
    
    76,366
    
    
    
    45,670
    
    
    
    (47,273
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    (641
    )(Provision for) Reversal of prior
years accrual of income tax
    
    
    (20,298
    )
    
    
    (16,599
    )
    
    
    25,687
    
    
    
    
    
    
    
    
    
    
    
    Income (Loss) before minority
interests
    
    
    56,068
    
    
    
    29,071
    
    
    
    (21,586
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    (641
    )Minority interests
    
    
    (6,365
    )
    
    
    (5,600
    )
    
    
    164
    
    
    
    6,248
    
    
    
    (9,228
    )
    
    
    (1,115
    )Equity in earnings of an affiliate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,802
    
    
    
    822Net income (loss)
    
    
    49,703
    
    
    
    23,471
    
    
    
    (21,422
    )
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    (934
    )Earnings (loss) per common share- Basic (2)
    
    Rmb5.33
    
    Rmb2.03
    
    Rmb(1.67)
    
    Rmb1.12
    
    Rmb(0.50)
    
    US$
    (0.06
    )- Diluted (2)
    
    Rmb5.32
    
    Rmb1.98
    
    Rmb(1.67)
    
    Rmb0.95
    
    Rmb(0.50)
    
    US$
    (0.06
    )Weighted average number of- Basic (2)
    
    
    9,333,000
    
    
    
    11,572,000
    
    
    
    12,838,000
    
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    15,420,000- Diluted (2)
    
    
    9,344,000
    
    
    
    11,878,000
    
    
    
    12,838,000
    
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    15,420,000
 -5-




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As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Balance Sheet DataCash and cash equivalents
    
    
    2,870
    
    
    
    33,490
    
    
    
    7,616
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,796Working capital
    
    
    56,917
    
    
    
    136,616
    
    
    
    147,505
    
    
    
    266,773
    
    
    
    298,586
    
    
    
    36,076Property, machinery and equipment,
net
    
    
    48,473
    
    
    
    182,140
    
    
    
    183,600
    
    
    
    5,112
    
    
    
    98,305
    
    
    
    11,877Construction-in-progress
    
    
    106,937
    
    
    
    17,869
    
    
    
    576
    
    
    
    
    
    
    
    1,184
    
    
    
    143Land use rights, net
    
    
    112,301
    
    
    
    226,463
    
    
    
    221,359
    
    
    
    189,405
    
    
    
    187,111
    
    
    
    22,607Debt issuance cost, net
    
    
    
    
    
    
    8,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    576,847
    
    
    
    939,267
    
    
    
    911,238
    
    
    
    742,708
    
    
    
    1,567,961
    
    
    
    189,442Short-term-debts
    
    
    103,270
    
    
    
    170,443
    
    
    
    189,990
    
    
    
    40,000
    
    
    
    440,982
    
    
    
    53,279Long-term-debts
    
    
    8,169
    
    
    
    44,869
    
    
    
    8,163
    
    
    
    8,163
    
    
    
    11,939
    
    
    
    1,442Total liabilities
    
    
    281,794
    
    
    
    411,173
    
    
    
    360,689
    
    
    
    98,074
    
    
    
    757,707
    
    
    
    91,546Minority interests (1)
    
    
    17,666
    
    
    
    23,266
    
    
    
    23,102
    
    
    
    87,054
    
    
    
    232,833
    
    
    
    28,131Shareholders equity
    
    
    277,387
    
    
    
    504,828
    
    
    
    527,447
    
    
    
    557,580
    
    
    
    577,421
    
    
    
    69,765Cash flows dataCash flows from operating activities
    
    
    110,628
    
    
    
    (7,568
    )
    
    
    26,489
    
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (37,141
    )Cash flows from investing activities
    
    
    (214,669
    )
    
    
    (243,200
    )
    
    
    (75,145
    )
    
    
    (136,170
    )
    
    
    203,530
    
    
    
    24,590Cash flows from financing activities
    
    
    100,353
    
    
    
    281,315
    
    
    
    22,852
    
    
    
    195,760
    
    
    
    216,138
    
    
    
    26,114
  (1)
    
    Mr. Rui Lin Wu and Mr. Zhi Yang Wu own minority equity interests in
certain subsidiaries of our company.  (2)
    
    Earnings per share is computed by dividing net income for 1999 by
9,333,000 shares, for 2000 by 11,572,000 shares, for 2001 by 12,838,000
shares, for 2002 by 14,685,000 shares and for 2003 by 15,420,000 shares.
Diluted earnings 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.  (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, 2003 of US$1.00 = Rmb 8.2767. 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-




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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: Noon Buying Rate(1)Calendar Year
    
    Average (2)(Rmb per US$)1999
    
    
    8.27832000
    
    
    8.27842001
    
    
    8.27702002
    
    
    8.27702003
    
    
    8.2772
    (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-




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Calendar Month
    
    High
    
    LowDecember 2003
    
    
    8.2772
    
    
    
    8.2765January 2004
    
    
    8.2772
    
    
    
    8.2767February 2004
    
    
    8.2773
    
    
    
    8.2769March 2004
    
    
    8.2774
    
    
    
    8.2767April 2004
    
    
    8.2772
    
    
    
    8.2768May 2004
    
    
    8.2773
    
    
    
    8.2769June 2004
    
    
    8.2768
    
    
    
    8.2766
 As of June 25, 2004, being the latest practicable date, the exchange rate was
US$1.00 = Rmb 8.2767. B. CAPITALIZATION AND INDEBTEDNESS. Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS. Not applicable. D. RISK FACTORS. 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 our
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. -8-




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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,
2003, our five largest accounts receivable accounted for approximately 64% of
our total accounts receivable. Total accounts receivable as of December 31,
2002 were minimal following our sale of a subsidiary. 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 operations 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 the approval of the
Mainland Chinese government. -9-




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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 $12 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, Qiao Xing Mobile Communication Company Limited and Qiao
Xing Communication 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 17.5%. At present, substantially all of the Groups income was generated in China
by Hui Zhou Qiao Xing Communication Industry Limited (QXCIL) and CEC Telecom
Co., Ltd. (CECT). QXCIL was exempted from state income tax and local income
tax for two years starting from -10-




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January 1, 2003, and then was subject to a 50% reduction in state income
tax and full exemption in local income tax for the following three years. CECT
is regarded as Hi-tech enterprises by the Mainland Chinese government and are
subjected to the Mainland Chinese enterprise income taxes at a rate of 15%.
CECT is exempted from the PRC enterprise income tax for the period from May 22,
2000 to December 31, 2002, and then subject to a 50% reduction in state income
tax and full exemption in local income tax for the following three years. During the fiscal year ended December 31, 2002, 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 income tax for the following two years. The tax holiday of state
income tax expired on January 1, 1999. The tax holiday of local income tax
continued for the years ended December 31, 2001 and 2002. 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 a tax holiday granted by the relevant tax
bureau, under which QXTI 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, QXTI is entitled to an 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 the relevant tax bureau on the
entitlement to the 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 a state
income tax rate at 10% for each of the years ended December 31, 2000, 2001 and
2002. Accordingly, the excess provision of Mainland Chinese enterprise income
tax in prior years was reversed in 2001, which resulted in an income tax
benefit of Rmb 25,687,000. If the tax holiday of QXTI described above had not existed, the Groups
income tax expenses (net of minority interests) for the year ended December 31,
2001 would have been increased by Rmb 18,868,000, representing the effect of no
benefit of state income tax for 2000 and prior periods. Basic loss per common
share would have been approximately Rmb 2.99 for -11-




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the year ended December 31, 2001, and diluted loss per common share would
have been approximately Rmb 2.99 for the year ended December 31, 2001. 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.
Further, we do not maintain any key-person life insurance on his life, with
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 44.3% of our outstanding
shares as of June 30, 2004. 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-




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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:  
    
    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
    
    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. Some 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:  
    
    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;
    
    the provisions of Regulation FD aimed at preventing issuers
from making selective disclosures of material information;
    
    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
    
    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 with the same
information which is generally available about public companies organized in
the United States. Since we are a British Virgin Islands company, the rights of our shareholders
may be more limited than those of shareholders of a company organized in the
United States. Under the laws of most jurisdictions in the United States, majority and
controlling shareholders generally have certain fiduciary responsibilities to
the minority shareholders. Shareholder action must be taken in good faith, and
actions by controlling shareholders which are -13-




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obviously unreasonable may be declared null and void. British Virgin
Island law protecting the interests of minority shareholders may not be as
protective in all circumstances as the law protecting minority shareholders in
U.S. jurisdictions. In addition, the circumstances in which a shareholder of a
BVI company may sue the company derivatively, and the procedures and defenses
that may be available to the company, may result in the rights of shareholders
of a BVI company being more limited than those of shareholders of a company
organized in the U.S. Furthermore, our directors have the power to take certain actions without
shareholder approval which would require shareholder approval under the laws of
most U.S. jurisdictions. The directors of a BVI corporation, subject in
certain cases to court approval but without shareholder approval, may implement
a reorganization, merger or consolidation, the sale of any assets, property,
part of the business, or securities of the corporation. Our ability to amend
our Memorandum of Association and Articles of Association without shareholder
approval could have the effect of delaying, deterring or preventing a change in
our control without any further action by the shareholders, including a tender
offer to purchase our common stock at a premium over then current market
prices. 
 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY. From our inception through December 31, 2002, Qiao Xing Universal
Telephone, Inc. (Qiao Xing or we) was principally engaged in the
manufacturing and sales of telecommunication terminals and equipment, including
corded and cordless telephone sets, in China. 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 August 1995, we were awarded the ISO9001 certificate, which reflects
our reputation as a high quality telephone manufacturer. 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. As
of June 30, 2004, we owned 80% of Qiao Xing Mobile Communication Co. Ltd. (QX
Mobile), an international business company incorporated in the British Virgin
Islands on January 31, 2002. QX Mobile owns 65% of CEC Telecom Co., Ltd., a
limited liability company established in China. We also own 100% of Qiao Xing -14-




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Communication Holdings, Ltd., an international business company
incorporated in the British Virgin Islands on May 21, 2002 (QX Communication
Holdings), which owns 90% of Hui Zhou Qiao Xing Property, Ltd. (QX Property), a
PRC joint venture, and 90% of Hui Zhou Qiao Xing Communication Industry, Ltd.
(QX Communication), a PRC joint venture. The remaining 10% of each of QX
Property and QX Communication is owned by Qiao Xing Group Limited, a PRC
company owned by Rui Lin Wu and his eldest son Zhi Yang Wu. Messrs. Wu and Wu
are two of our executive officers and directors. Refer to Item 4.B. Business Overview for a description of the important
events in the development of our business for the period from the beginning of
2002 up to the date of filing of this report. 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 rights; and 3) Rmb
6.2 million for acquisition of property, machinery and equipment. For 2002, our total capital expenditure was about Rmb 12.4 million, which
primarily included: 1) Rmb 10.3 million for acquisition of property, machinery
and equipment; and 2) Rmb 2.1 million for payment of land use rights. For 2003, our total capital expenditure was about Rmb 233.1 million, which
primarily included: 1) Rmb 44.6 million for property, machinery and equipment;
and 2) Rmb 188.5 million for other acquired intangible assets. Our principal place of business and our executive office is the Qiao Xing
Science Industrial Park, Tang Quan, Huizhou City, Guangdong, Peoples Republic
of China, 516023, 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. -15-




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B. BUSINESS OVERVIEW. 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 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 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. Through the fiscal year ended December 31, 2002, we were 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. For 2000, 2001 and 2002, we ranked as the second largest in house
telephone manufacturer by number of sales units. In May and June 2002, our then-wholly owned subsidiary Qiao Xing Mobile
Communication Co. Ltd. (QX Mobile) entered into two sale and purchase
agreements for acquisitions of an aggregate equity interest of 65% in CEC
Telecom Co., Ltd. (CECT) for an aggregate consideration of Rmb 312,750,000
(US$37,772,000) (the Acquisitions). CECT is a limited liability company
established in China and is principally engaged in production and sales of
mobile phones and accessories in China. In February 2003, the Acquisitions
were approved by all the appropriate governmental authorities, including the
Ministry of Information Industry, the State Development Planning Commission,
the Ministry of Foreign Trade and Economic Cooperation and the State
Administration for Industry and Commerce. The process of obtaining new
business licenses was finally completed and a new business license for the new
entity was granted. Pursuant to an agreement dated May 23, 2002, QX Mobile acquired a 25%
equity interest in CECT from Tianjin Taida Company Limited (Tianjin) for cash
consideration of Rmb 108,750,000 (US$13,134,000). -16-




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Pursuant to an agreement dated May 23, 2002 and a supplementary agreement
dated May 23, 2002, QX Mobile acquired 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 (US$24,638,000). As of December 31, 2002, we had made prepayments of Rmb 180,000,000
(US$21,700,000) to the sellers according to the payment terms prescribed in the
agreements. The remaining consideration was payable as follows: Rmb
132,750,000 (US$16,072,000) within 6 months after the completion of shares
transfers at the relevant government bureau of the PRC (date of shares
transfers). We made the final payment of Rmb 132,750,000 on August 7, 2003. As of February 8, 2003, the Acquisitions were completed because all
conditions precedent as set out in the agreements had been fulfilled. Such
conditions precedent included, among others, (i) approval from the Chinese
government on the shares transfers and (ii) completion of collateral
arrangements on QX Mobiles equity interest in CECT and certain land use rights
of the Group. On August 20, 2002, QX Mobile entered into a subscription agreement for
its sale of 200,000 shares representing 20% of the total outstanding equity of
QX Mobile to Galbo Enterprises Limited, a non-affiliated BVI corporation
(Galbo), for Rmb 67,000,000 (US$8,092,000). The subscription price was fully
paid before December 31, 2002. The subscription price was applied by QX Mobile
toward the acquisition of its 65% interest in CECT. Upon completion of the
subscription, our controlling interest in QX Mobile was reduced to 80%. On December 31, 2002, we entered into an agreement with Central Grace
Technologies Ltd., a non-affiliated BVI corporation (Central Grace), for our
sale to Central Grace of our 100% interest in Qiao Xing Holdings Ltd. (QXHL),
our intermediate holding company which held a 90% interest in Qiao Xing
Telecommunication Industry Co. Ltd. (QXTI), our former principal operating
subsidiary. On July 10 and 11, 2003, we entered into supplemental agreements
with Central Grace to amend certain provisions of the original agreement. The amended material terms of the sale provide as follows:  
    
    The total consideration for the purchase was Rmb 210,000,000 (US$25,362,000), which was paid in full on July 16, 2003  
    
    Central Grace assumed all disclosed and undisclosed liabilities of QXHL except:  
    
    the current liabilities of QXTI due to us of Rmb 231,585,507 (US$27,969,000)
    
    the current liabilities of QXHL due to us of Rmb 8,172,953 (US$987,000)
    
    the current assets due from us of Rmb 113,543,063 (US$13,713,000) -17-




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
    
    We retained the ownership of the following Excluded Assets of QXHL, which have been formally
re-registered in the name of subsidiaries of our subsidiary, QX Communication Holdings:  
    
    land use rights for 667,000 square meters of land at Ji Ma, Huizhou
    
    the fixed line telephone sales and distribution network
    
    the mobile phone business, which includes the GSM
manufacturing, production and sales departments and the research and
development department
    
    the die cast moulds for the production of fixed line telephones and mobile phones  
    
    Central Grace executed a Share Mortgage Deed for our benefit to secure the repayment of our loan facility to Central Grace
for the payment of the purchase price by Central Grace, which was cancelled upon full payment by Central Grace.  
    
    We entered into a license agreement with QXTI and the 10% holder of QXTI by which QXTI as licensor granted to us the
exclusive and non-transferable use of its trademarks, patents applications and registered designs through December 2006 in
exchange for nominal consideration.  
    
    We conveyed all rights to the technology and intellectual property for our wireless fixed telephone (wuxiangtong)
technology to Central Grace, reserving all exclusive marketing and distribution rights. Through our QX Communication Holdings subsidiary, we will continue to
conduct the business of the research and development, production, and
distribution of mobile phones and the design and distribution of fixed line
telephones, wireless telephones and fax machines. Business Operations and Product Range We classify our products into two core business segments, namely mobile
phones and indoor phones. In view of the fact that we operate principally in
Mainland China, no geographical segment information is presented.
Sales in the PRC market accounted for approximately 98% and 99% of our total
revenues for the fiscal years ended December 31, 2002 and 2003,
respectively. 2001
    
    2002
    
    2003Net sales:
    
    Rmb000
    
    Rmb000
    
    Rmb000Mobile phones
    
    
    
    
    
    
    341,629
    
    
    
    1,688,397Indoor phones
    
    
    250,366
    
    
    
    208,338
    
    
    
    149,236250,366
    
    
    
    549,967
    
    
    
    1,837,633
 -18-




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Currently, we are engaged through our Hui Zhou Qiao Xing Communication
Industry Co., Ltd. subsidiary in manufacturing GSM mobile phones for CEC
Telecom and developing and marketing wire and wireless telephones (indoor
phones), especially telephones with special functions. We have ceased the
manufacturing of indoor telephones. Instead, we subcontract our indoor
telephone manufacturing orders to designated manufacturers. 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. During 2002, we developed the wuxiangtong telephone. It is a cordless and
wireless phone that employs the GSM core technology with the look, functions
and dimensions of an ordinary press-key phone. With its wireless connection to
the GSM network, the service fee for using the wuxiangtong telephone is the
same as using a fixed line telephone, since only the caller and not the
receiving party pays for the call. Such phones are most suitable for those
corporate, government and residential users in the remote parts of the rural
areas, where communication via fixed optical fiber lines would be very costly.
A majority of the land in China would benefit from this extended coverage. It
can also be used as mobile public phones, for outdoor users and land commuters. During 2002, we developed the short message telephone, a corded fixed line
telephone that can send and receive short messages like mobile phones. In
addition to its function as an ordinary caller ID display telephone, its other
functions include the ability to send and receive short messages, an alarm
clock function, games and calendar memo options. During 2002, we developed the web telephone model. In addition to its
ordinary telephone functions, our web phone can browse the internet, send and
receive e-mail and send mobile phone short messages. We launched the sale of the wuxiangtong and short message telephones in
2003. The wuxiangtong and short message telephones are special telephones with
much higher margins than ordinary wire and wireless telephones. -19-




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During 2003, we launched the new Little Smart phone, referred to in
Chinese as XiaoLingTong. It is a China Personal Handyphone System (PHS)
service that supplements and extends China Telecoms and China Netcoms fixed
line network service in China. With Little Smart phones, users can communicate
freely within the areas covered by fixed line networks via wireless
connectivity. Because China Netcom and China Telecom subscribers can enjoy
XiaoLingTong services for the cost of a fixed line call, it is a much welcomed
communication service for the average income group within the cities and
suburban areas of China. As of October 2003, we believe that there were more
than 28 million users of XiaoLingTong in over 800 cities and towns within
China. The Little Smart phone was jointly developed with UTStarcom (Nasdaq:
UTSI). As of December 31, 2003, we were producing and selling more than 200
corded models and 36 cordless models, four models of fax machines, four models
of wireless fixed phones, and eight models of short message telephones. Our
subsidiary, QX Communication Industry, currently also designs, develops and
manufactures GSM mobile phones for CEC Telecom. We have an extensive
nationwide sales network that comprises more than 5,000 retail outlets in
China. During 2004, we launched our ADSL modem. Asymmetric digital subscriber
lines (ADSL) is a new modem technology that converts existing twisted-pair
telephone lines into access paths for high speed Internet surfing. ADSL
requires a special ADSL modem such as ours to function. We intend to enter the terminal core chip technology field of mobile
communications to jointly develop GSM terminal core chips with an overseas
mobile communications terminal technology research and development company. Production Facilities We currently only manufacture GSM mobile phone for sale exclusively to CEC
Telecom. All of the other products which we sell are manufactured by
unaffiliated third parties. 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 GSM phones 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. -20-




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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:  
    
    sampling test method is used to inspect all incoming materials on a
sample basis;
    
    at each stage of production process, quality control
inspectors monitor the production flow and check the quality of the
products; and
    
    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, 2003. Sales and Marketing 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
5,000 retail outlets. 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 for household telephones. Our QX Communication subsidiary has established long-term strategic
partnership relationships with many of Chinas telecommunications operators,
including China Telecom, China Netcom, China Railcom, China Mobile and China
Unicom. These operators are launching -21-




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various value added services such as SMS short messages, wireless fixed
telephones (wuxiangtong), and ADSL. We have become a major supplier to these
operators to provide them with numerous categories of value added service
products across China. We are the dominant supplier for more than 20 provinces
in China. We have established strategic relationships with leading distributors of
telecommunications terminal products in Southeast Asia, the United States,
Europe and the Middle East. These include Binatone, the British leader in this
field, and Unisonic, a major supplier to Bell South. We periodically hold distributor fairs in order to attract and select
potential distributors for our products at home and abroad. 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. 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 400 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 42,784,000 (US$5,169,000) in 2003 for advertising and
promotion. In 2003, we focused on selling short message phones and wireless
fixed phones, which generate much higher margins than ordinary telephones. In
addition to the established distribution network, we sell our products to China
Telecommunication, mobile network operators or their subcontractors to promote
our new products jointly. Backed up by all levels of government, these
operators have dominant influence over consumers, which is very favorable for
us to introduce new products into the market and capture market share swiftly.
To strengthen our marketing team, we recruited 200 new associates in 2003, all
of whom are university diploma holders with IT knowledge background. To date,
over one-third of them have been retained and designated for marketing or
sales. -22-




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Materials and Components We held a suppliers meeting in 2003, in which more than 100 mobile phone
components suppliers bid for supplying us with materials and components for our
GSM phones. Our management believes it a good way to select better suppliers
and would contribute to the reduction of our manufacturing cost in the future. Research and Development Our
research and development (R&D) and engineering, technical and
design functions are performed in the PRC through our own R&D, engineering,
technical and design divisions and through appointed external technology
development experts. As of December 31, 2003, we employed 200 staff in our
R&D, engineering, technical and design divisions, who work closely with our
sales and marketing executives to gauge the market demand in developing new
products and new models of existing products. The R&D, engineering, technical
and design divisions are currently monitoring more than 200 particular models
of corded telephones, 36 particular models of cordless telephones, ten models
of GSM cellular telephones, four models of wireless fixed phones (wuxiangtong),
eight models of short message telephones, three Little Smart telephones, and
two ADSL products. In 2003, we spent Rmb 4,414,000 (US$533,000) on research and development activities. 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:  
    
    functions and designs;
    
    brand name recognition;
    
    distribution capability;
    
    after-sale service;
    
    short lead time in product development;
    
    product quality; and
    
    capability of mass production. 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 Desai in Guangdong, which are currently the second and third sellers of
telephones in the PRC, according to the statistical report released by the
Trade and Foreign Economy Statistics Division of National Statistic Bureau.
However, TCL and Desai are now diversifying into home electric appliance
manufacture, including -23-




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televisions, air conditioners, computers, DVD sets and Hi-Fi systems,
which will likely divert some of their resources from the telephone
manufacturing business. We have partnered with UTStarcom, the industry leader in the area of
Little Smart phones. Together with our extensive distribution network and
outstanding brand recognition, we compete successfully with other manufacturers
of Little Smart phones. In 2002, our telephones were granted the label of Chinese Renowned Brand
Name Product by the China Promotion Commission for Top Product Strategy. We
believe that this recognition has created a favorable marketing environment for
us. CECTs Business Overview CEC Telecom Co., Ltd. (CECT) was jointly initiated and co-established in
China in May 2000 by six companies, including China Electronics Corporation
(CEC), Tianjin TEDA Investment Holding Co., Ltd., Shenzhen SED Electronics
Corporation, Wuhan Zhongyuan Electronics Group Co., Ltd., China Computer
Software and Technology Service Corporation and China National Integrated
Circuit Design Center. It is one of the few manufacturers that have been
approved to manufacture both GSM and CDMA mobile phones in China. China Electronics Corporation (CEC), with registered capital of Rmb 6.15
billion and 36 wholly owned companies (www.cec.com.cn), is one of the leading
companies in the domestic electronics industry in China. CECT is equipped with the most advanced mobile phone research, development
and production capability in China. Supported by R&D and technical centers
(in-house or out-sourced with suppliers/subcontractors) at three locations in
Huizhou, Shanghai and Beijing, with 200, 86 and 176 staff, respectively, it has
mastered international advanced communication technology to develop different
types of mobile phones such as GSM, CDMA, GPRS, PDA, and their value added
services. Among these mobile phone production technologies, 2.5G and 3G of GSM
and CDMA are up to international standards. CECT is currently engaged mainly
in the R&D and production of 2.5G and 3G GSM and CDMA mobile phones, production
of RF components, LCD moulds and other mobile phones with entertainment and
service functions like GPS messages, finance and stock e-commerce systems,
games and images download. CECT has been actively developing cooperation agreements and relationships
with such global mobile telecommunications leaders as Qualcomm (Nasdaq: QCOM),
Wavecomm (Nasdaq: WVCM), MiTAC, Skyworks (Nasdaq: SWKS), BenQ and AOL. Through
cooperation agreements, CECT is able to utilize world-advanced technology to
improve its own research and development efforts. -24-




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In addition, CECT is striving to develop its own technology, utilizing
blue tooth technology. Its Blue Tooth mobile phone has all of the
functions of a Smart Phone. Also, when used in the proximity of a fixed line
network, such as in the users residence or office, the calling or receiving
signal can automatically be connected to the fixed line network via a wireless
modem. This would allow the communication to be charged per the fixed line
call basis, which could create substantial savings for the users and a higher
utilization rate of the fixed line network for the telephone operators. At present, CECT has launched more than 45 types of GSM, GPRS, CDMA and
GPS mobile phones, among which the color monitor, symphony with radio, MP3 and
built-in camera are their key functions. Utilizing its R&D competitive edge,
CECT has developed different product platforms according to different mobile
phone systems. It has also positioned its products to different consumer
markets such as specializing for business use, feminine style and masculine
style, etc. There are four major product series: basic communication,
fashionable style, functional based and high-end luxury. CECT has a production site at Cheung Ping Technology Park in Beijing
covering 17,000 square meters. Another production site for CECT mobile phones
at Huizhou of Guangdong came into operation in November 2003. CECT has established a distribution network throughout China with more
than 240 wholesale outlets and more than 350 aftersales service centers in 31
provinces and municipalities. CECT also maintains strategic relations with more than ten national
distributors and 50 provincial distributors. CECT partners with many national
retailers who own appliance supermarkets across China, including Gome Appliance
Company, the biggest appliance retailer in China. With its own research and development strength and cooperation with world
industry leaders, CECT took the lead in introducing to the market functional
and high-end mobile phones. One such mobile phone is the Smart Phone. CECTs
Smart Phone (CECT Mio 8380), installed with the Smart Phone 2002 operating
system from Microsoft and with a built-in Intel 200M X-Scale CPU, has received
the approval from China Mobile after passing the relevant software tests. The
Smart Phone is jointly launched by CECT and MiTAC (http://mitac.mic.com.tw/), a
reputable Taiwan computer manufacturer. The 2002 operating system has given
this new generation of mobile phones a great variety of internet related
functions and other applications. The Smart Phone is able to perform data
interchange with computers in a swift manner, and its other functions include
MMS, digital camera/video, MP3, games, MSN messaging and even movie viewing. -25-




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CECTs Mio 8380 represents the future of mobile phone development and
marks the breakthrough in the technology of the mobile phone industry in China.
It was collected and displayed by the China Telecommunication Museum on 10th
June 2003. CECT has launched to the market a series of fashionable mobile phones to
cater to specific consumer groups. The T520 model is specifically designed to
target the office lady customer group and is equipped with a double color
monitor, 40 chord polyphonic ring tones, and state-of-the-art technology. Its
exterior is in the form of a water droplet, resembling a beetle. Its mirror
function turns the monitor into a mirror, which can help its user maintain her
most presentable appearance. The delicate exterior design and unique embedded
characteristics reflect the awareness, self confidence and charisma of Chinese
office ladies of modern times. In 2004, CECTs T520 phone was recognized as
the most popular female mobile phone. The T688 model is embedded with handwriting recognition technology, which
is only available in mobile phones produced by brands such as Nokia and CECT.
The T688 is less expensive than other comparable products and has been well
received among the working and business population. In 2003, CECT branded mobiles were awarded as one of the ten Outstanding
Brand Name home-made mobile phones in China. The Common Stock Purchase Agreement for Equity Line of Credit Facility 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 established 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.
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. -26-




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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. 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:  
    
    the volume weighted average price is less than the minimum
threshold price we designate;
    
    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
    
    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 -27-




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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 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:  
    
    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;
    
    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;
    
    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;
    
    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
    
    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:  
    
    under any presently existing or future employee benefit plan,
which plan has been or may be approved by our stockholders;
    
    under any compensatory plan for a full-time employee or key consultant;
    
    in an underwritten registered public offering; -28-




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
    
    in connection with a strategic partnership or other business
transaction, the principal purpose of which is not to raise money;
    
    in connection with a private placement of securities if the
purchasers do not have registration rights; or
    
    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. As of June 30, 2004, no registration statement for the shares has been
filed or declared effective by the SEC. Therefore, we cannot currently
exercise any rights under the equity line of credit facility. -29-




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C. ORGANIZATIONAL STRUCTURE AS OF JUNE 30, 2004. (FLOW CHART) -30-




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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 (i) a two-storied industrial building in Qiao Xing Industrial Zone, Huizhou
City, Guangdong, PRC, and (ii) an industrial building in Chang Ping Beijing,
PRC. In view of our production capacity and our current production plan, we
plan to expand our Huizhou GSM mobile production lines from three to five in
the second half of 2004. 
 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 2003 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
8.2767 on December 31, 2003. A. OPERATING RESULTS. Fiscal 2003 compared to Fiscal 2002 (i) Net sales Analysis of our sales revenue by product category for fiscal year 2003 and
2002 is as follows: Year ended December 312003
    
    2002Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    1,688,397
    
    
    
    92
    
    
    
    341,629
    
    
    
    62Indoor telephones
    
    
    149,236
    
    
    
    8
    
    
    
    208,338
    
    
    
    38Total
    
    
    1,837,633
    
    
    
    100
    
    
    
    549,967
    
    
    
    100
 -31-




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Net sales revenue increased by Rmb 1,288 million from Rmb 550 million for
fiscal year 2002 to Rmb 1,838 million (US$222 million) for fiscal year 2003,
representing an increase of 234%. It was mainly attributed to the additional
revenue from mobile telephones sales during the year 2003 following the
completion of the acquisition of CECT on February 8, 2003. In the fixed line indoor phone business segment, Chinese consumers prefer
to use value added telephone products to replace ordinary telephones. Such
value added products are more fashionable, have multiple functions and higher
quality. In theory, all the in-door telephone consumers will eventually
replace their ordinary telephones with such value added products. The market
potential for value added telephones is anticipated to be very large. In
response to this market change, we took steps in 2003 to upgrade our product
line. Since it takes time to promote new products, the sales of such value
added products in 2003 were less than that of the ordinary telephones sold in
2002. However, with the transition period now behind us, we are well poised in
2004 to take full advantage of the shift in consumer preference for higher
value added telephone products. During the fiscal year 2002, sales of mobile telephones to CECT totaled
Rmb342 million as the Group was one of the major suppliers of CECT at that
time. Following the completion of the acquisition of CECT, whereby the Group
effectively owns a 52% equity interest in CECT, CECT became a subsidiary and
its results and operations are consolidated in the financial statements of the
Company. Therefore, the sales of mobile telephones for the period from
February 8, 2003 to December 31, 2003 represent sales to mobile telephones
distributors and dealers who will then sell the products to the ultimate
consumers. Actual sales of mobile telephones of Rmb 1,688 million for the fiscal year
2003 were slightly lower than originally anticipated at the beginning of the
year because of the outbreak of SARS in Mainland China during 2003. The
outbreak of SARS significantly affected the sales performance of the Group for
a few months in 2003 because people were afraid of being infected by SARS in
public places and spent less money purchasing mobile telephones, including the
Groups products. In the first few months after the completion of acquisition
of CECT, the Group had spent substantial resources in developing a sales
network throughout China, and had conducted research on new product
development. Thereafter, upon the end of the SARS outbreak in China in June
2003, the Group resumed its advertising and promotion efforts and was able to
catch up most of the anticipated sales volume in the second half of 2003,
resulting in an overall satisfactory sales performance of mobile telephones
during fiscal year 2003. In 2002, the revenue from the sale of mobile phones was Rmb 342 million,
while the sale of mobile phones amounted to Rmb 1,688 million in 2003,
representing an increase of Rmb 1,346 million. Net sales of indoor telephones
were only Rmb 149 million, representing a decrease of Rmb 59 million. -32-




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(ii) Gross Profit Analysis of our gross profit by product category for fiscal years 2003 and
2002 is as follows: Year ended December 312003
    
    2002Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    240,003
    
    
    
    94
    
    
    
    45,538
    
    
    
    209Indoor telephones
    
    
    14,569
    
    
    
    6
    
    
    
    (23,720
    )
    
    
    (109
    )Total
    
    
    254,572
    
    
    
    100
    
    
    
    21,818
    
    
    
    100
 Gross profit for fiscal year 2003 was Rmb 255 million (US$30.8 million),
representing an increase of Rmb 233 million from Rmb 22 million in fiscal year
2002. The increase was mainly due to increased sales of mobile telephones
which command a higher gross profit compared with indoor telephones. This also
represents an overall increase in the average gross profit margin from 4.0% in
2002 to 13.9% in 2003. Gross profit margin of mobile phones in 2002 and 2003
was 13.4% and 14.2%, respectively, and was generally comparable. In 2002, the
gross profit margin of the Group represented the gross profit earned on the
manufacturing and sale of mobile phones to CECT, but in 2003, the gross profit
margin represented the gross profit earned on the manufacturing and sale of
mobile phones to mobile phone distributors and dealers. Since the mobile
telephone market in China was very competitive with the presence of both local
and overseas competitors, the Group was not able to sell its products at a very
high price, resulting in maintaining a slight increase of 0.8% in gross profit
margin in 2003. Nonetheless, the gross profit margin of indoor telephones generated a
significant increase of 21.1% from a gross loss margin of 11.3% to a gross
profit margin of 9.8%. The Group experienced keen competition in the indoor
telephone market in China in 2002 that caused a reduction in our selling prices
in order to maintain our market share. In 2003, the indoor telephone market
was still competitive but the Group restructured its telephone operations and
shifted its focus to research and development and distribution of value added
products of higher quality, with a more fashionable look and multiple advanced
functions, while containing the cost of its products. As such, the Group was
able to sell its value added indoor telephones at a higher price to those
customers looking for a better quality of telephones, resulting in a
significant improvement in gross profit margin. -33-




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(iii) Selling expenses Selling expenses increased by Rmb 85.15 million from Rmb 5.29 million for
fiscal year 2002 to Rmb 90.44 million (US$10.93 million) for fiscal year 2003.
The increase was predominantly attributable to: (a) the acquisition of CECT on February 8, 2003, which contributed to
selling expenses of Rmb 81.53 million for fiscal year 2003 incurred by CECT,
including advertising and promotion of Rmb 43.5 million, salaries of a sales
team of 980 people with an aggregate amount of Rmb 12.3 million, as well as
other selling expenses including transportation, travel and entertainment,
samples and telecommunication expenses incurred by the sales representative
offices; (b) an increase of advertising expenditures for certain new model indoor
telephones. (iv) General and administrative expenses General and administrative expenses decreased by Rmb 14.1 million from Rmb
68.2 million in fiscal year 2002 to Rmb 54.1 million (US$6.5 million) in fiscal
year 2003. This decrease was mainly attributable to: (a) decrease in allowance for doubtful receivables of about Rmb 34.2
million from Rmb 35.0 million in 2002 to Rmb 0.8 million in 2003. (b) disposal of business of QXTI, an ex-subsidiary, resulting in decrease
of general and administrative expenses of about Rmb 8.6 million from Rmb 27.8
million (excluding allowance for doubtful receivables) in fiscal year 2002 to
Rmb 19.2 million (excluding allowance for doubtful receivables) in fiscal year
2003. Before December 31, 2002, the Group was engaged in the manufacturing and
selling of indoor telephones. Subsequently, the Group was engaged in trading
of indoor telephones only. This results in reduction of headcounts and
business activities of the indoor telephones segment in 2003. (c) this is partly offset by the acquisition of CECT which contributed to
the substantial increase in general and administrative expenses of Rmb 28.3
million incurred by CECT during the period from February 8, 2003 (date of
acquisition of CECT) to December 31, 2003; (v) Research and development Research and development increased by Rmb 3.96 million from Rmb 0.45
million for fiscal year 2002 to Rmb 4.41 million (US$0.53 million) for fiscal
year 2003. The increase was predominantly attributable to the acquisition of
CECT on February 8, 2003, which contributed to significant increase in research
and development on new mobile phone models. -34-




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(vi) In process research and development There was a write-off of in process research and development expenses of
Rmb 33.6 million at the date of acquisition of CECT on February 8, 2003 in
accordance with FASB Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method. (vii) Amortization of acquired intangible assets There was a substantial increase in the amortization of acquired
intangible assets of Rmb 42.2 million in 2003, as a result of the acquisition
of CECT on February 8, 2003 in accordance with SFAS No. 142 Goodwill and Other
Intangible Assets. (viii) Stock-based compensation Stock-based compensation increased from nil in 2002 to Rmb 26.9 million in
2003. The Company has elected to follow APB No. 25 Accounting for Stock Issued
to Employees to account for the incentive stock options granted to employees,
under which the Group recognized no compensation expense in fiscal year 2002
since no employee options were granted at prices below the market price on the
grant dates. Compensation expense of Rmb 26,929,000 (US$3.25 million) is
recorded in fiscal year 2003 based on the excess of the quoted market price of
the underlying stock of US$8.77 per share as of December 31, 2003 over the
re-priced exercise price of US$5.50 per share. (ix) Interest expense Interest expenses for bank borrowings and shareholders loan increased
slightly from Rmb 17.9 million in 2002 to Rmb 19.0 million (US$2.3 million) in
2003. Despite the reduction of bank borrowings to Rmb 40 million on December 31,
2002 following the disposal of QXTI, an ex-subsidiary, the Groups short-term
bank borrowings increased significantly during fiscal year 2003 mainly because
of the increase in scale of operation of CECT during 2003. Moreover, CECTs
customers are mainly distributors and dealers in various provinces and cities
which require the Group to provide extended credit terms, and are unwilling to
pay pre-purchase deposits to CECT. Hence, the Groups overall bank borrowings
were increased to Rmb 439.5 million as of December 31, 2003 resulting in an
interest expense of Rmb 19.0 million during fiscal year 2003. -35-




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(x) Gain on sale of a subsidiary Gain on sale of a subsidiary of Rmb 79 million in 2002 represents the gain
on sale of the one issued share of Qiao Xing Holdings Ltd. which took place on
December 31, 2002. The background information of the transaction was as
follows. On December 31, 2002, an agreement for sale of the one issued share
of Qiao Xing Holdings Limited (QX Holdings) was entered into between us and
Central Grace Technologies Limited (Central Grace), a corporation incorporated
under the laws of the British Virgin Islands. The agreement was subsequently
amended by the parties. The consideration for the purchase of the one issued
share was Rmb 210,000,000, which was paid in full as of July 16, 2003. As a result of the transaction, a gain on sale of a subsidiary amounting
to Rmb 79,050,000 was recognized for the year ended December 31, 2002. The determination of the gain on sale of a subsidiary is set out as
follows: Rmb000
    
    US$000Consideration
    
    
    210,000
    
    
    
    25,362Net assets sold
    
    
    (125,070
    )
    
    
    (15,105
    )Minority interests sold
    
    
    (5,880
    )
    
    
    (710
    )Gain on sale of a subsidiary
    
    
    79,050
    
    
    
    9,547
 Our management believes that we can benefit from focusing our business on
research and development activities and market development of the mobile phone
business segment, rather than the production of indoor phones. Second, the
indoor phone manufacturing business is not as profitable as the mobile phone
business. It was, therefore, sensible to sell off this part of our business
and concentrate on the mobile phone business. However, we still continue to
develop indoor phones with enhanced features with market potential. In that
regard, the Group does not currently intend to manufacture its enhanced indoor
phones, but will rely on third parties. There was no gain/loss on sale of subsidiary in fiscal year 2003. (xi) Other income, net Other income, net, increased by Rmb 7.6 million from Rmb 0.1 million for
fiscal year 2002 to Rmb 7.7 million (US$0.9 million) for fiscal year 2003. The
increase was predominantly attributable to the acquisition of CECT during
fiscal year 2003 which provides quality assurance and technological advisory
services for several mobile telephones manufacturers. -36-




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(xii) Equity in earnings of affiliate The Groups share in the net income of an affiliate increased by Rmb 6.8
million from nil for fiscal year 2002 to Rmb 6.8 million (US$0.8 million) for
fiscal year 2003. The increase was due to the acquisition of CECT during
fiscal year 2003. CECT held a 50% equity interest in an affiliate, CEC Mobile
Co, Ltd. (CECM). The Groups effective ownership was a 26% equity interest
in CECM. CECM is a limited liability company established in Mainland China on
January 10, 2002 and is engaged in the production and sale of CDMA mobile
phones. (xi) Net Income (Loss) and Earnings (Loss) Per Share A net loss of Rmb 7.8 million (US$0.9 million) was recorded for fiscal
year 2003, while net income of Rmb 16.5 million was recorded for fiscal year
2002. The difference of Rmb 24.3 million between fiscal years 2002 and 2003
was mainly due to the significant gain on sale of a subsidiary which amounted
to Rmb 79 million in fiscal year 2002, partly offset by the following in fiscal
year 2003:  (i)
    
    increase in gross profit of Rmb 232.8 million and other
income, net of Rmb 7.6 million;(ii)
    
    increase in selling expenses of Rmb 85.2 million;(iii)
    
    increase in in process research and development costs
written off of Rmb 33.6 million;(iv)
    
    increase in amortization of acquired intangible assets of Rmb
42.2 million; and(v)
    
    increase in stock-based compensation expense of Rmb 26.9
million Based on a weighted average of 15.4 million shares outstanding in 2003,
the Group reported a loss per share of Rmb 0.50 (US$0.06), compared to net
income per share of Rmb 1.12 on 14.7 million weighted-average shares
outstanding in 2002. The higher number of weighted average number of
outstanding shares is the result of additional shares issued in June and July
2003 in connection with the exercise of warrants by certain warrant holders and
external consultants. -37-




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Fiscal 2002 compared to Fiscal 2001 (i) Net sales Analysis of our sales revenue by product category for fiscal year 2002 and
2001 is as follows: Year ended December 312002
    
    2001Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    340,360
    
    
    
    62
    
    
    
    0
    
    
    
    0Caller ID display telephones
    
    
    128,419
    
    
    
    23
    
    
    
    133,360
    
    
    
    53Corded telephones
    
    
    38,340
    
    
    
    7
    
    
    
    56,585
    
    
    
    23Cordless telephones
    
    
    29,076
    
    
    
    5
    
    
    
    38,637
    
    
    
    15Smart card telephones
    
    
    5,694
    
    
    
    1
    
    
    
    20,689
    
    
    
    8Others
    
    
    8,078
    
    
    
    2
    
    
    
    1,095
    
    
    
    1Total
    
    
    549,967
    
    
    
    100
    
    
    
    250,366
    
    
    
    100
 Net sales revenue increased by Rmb 300 million from Rmb 250 million for
fiscal year 2001 to Rmb 550 million (US$66.4 million) for fiscal year 2002,
representing an increase of 120%. It was mainly attributed to the additional
revenue from mobile telephones sales during the year 2002. This major shift in
the sales mix has been made because of the intense competition in the corded
phones industry as well as the general upgrade of the standard of living in
China where more corded phone or cordless phone users are adopting mobile
phones. This also led to a significant decrease in sales value of our corded,
cordless and smart card phone products. In 2002, the revenue from
manufacturing GSM mobile phones was RMB 341,000,000, while net sales of fixed
line telephones was only RMB 208,000,000, representing a decrease of RMB
42,000,000. (ii) Gross Profit Analysis of our gross profit by product category for fiscal years 2002 and
2001 is as follows: -38-




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Year ended December 312002
    
    2001Rmb000
    
    %
    
    Rmb000
    
    
%Mobile telephones
    
    
    45,538
    
    
    
    209
    
    
    
    0
    
    
    
    0Caller ID display telephones
    
    
    (19,450
    )
    
    
    (89
    )
    
    
    21,071
    
    
    
    55Corded telephones
    
    
    (5,616
    )
    
    
    (26
    )
    
    
    6,356
    
    
    
    17Cordless telephones
    
    
    (5,100
    )
    
    
    (23
    )
    
    
    3,647
    
    
    
    10Smart card telephones
    
    
    33
    
    
    
    
    
    
    
    5,968
    
    
    
    15Others
    
    
    6,413
    
    
    
    29
    
    
    
    1,095
    
    
    
    3Total
    
    
    21,818
    
    
    
    100
    
    
    
    38,137
    
    
    
    100
 Gross profit for fiscal year 2002 was Rmb 22 million (US$2.6 million),
representing an decrease of Rmb 16 million from Rmb 38 million in fiscal year
2001. This also represents a decrease in the average gross profit margin from
15.2% in 2001 to 4.0% in 2002. The decrease was mainly due to keen competition
in the telephone market in China that caused a reduction in our selling prices
in order to maintain the market share. (iii) Selling, General and Administrative Expenses Selling expenses decreased by Rmb 0.89 million from Rmb 6.17 million for
fiscal year 2001 to Rmb 5.29 million (US$0.64 million) for fiscal year 2002.
The decrease was predominantly attributable to a reduction of advertising
expenditures on promotion and marketing activities. The transportation
expenses incurred in terms of percentage of sales also decreased from 0.31%
during fiscal year 2001 to 0.17% during fiscal year 2002. This was due to the
fact that the transportation costs for mobile phones were much lower than other
corded and cordless phones because of its production sites proximity to the
railway stations and key delivery spots. General and administrative expenses increased by Rmb 24.6 million from Rmb
44.1 million in fiscal year 2001 to Rmb 68.7 million (US$8.3 million) in fiscal
year 2002. This increase was mainly attributable to the substantial increase
in the provision for doubtful debt (about Rmb 26 million), but partly offset by
the decrease in the research and development expenses for GSM mobile phones
(about Rmb 3 million). Other general and administrative expenses were generally
comparable between fiscal year 2002 and 2001. (iv) Impairment loss on land use rights and property, machinery and
equipment There was an impairment loss on land use rights and property, machinery
and equipment which amounted to Rmb 5 million (US$0.6 million) and Rmb 8.7
million (US$1 million) respectively, in fiscal year 2001. -39-




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The impairment loss on land use rights related to a parcel of land in
BaiGang District, XiaoJinKou Town. Capitalized software represented acquisition costs to obtain proprietary
software provided by a third party, which was recorded under machinery,
equipment and software. We evaluated the recoverability of the capitalized
software cost and determined to make a full provision of the carrying value of
capitalized software cost in view of the reduction of DECT sales in 2001 and
the low sales projection of DECT mobile phones. (v) Interest expenses Interest expenses for bank borrowings and shareholders loan increased
from Rmb 8.4 million in 2001 to Rmb 17.9 million (US$2.2 million) in 2002 due
to the significant increase of short-term bank borrowings during the year 2002
mainly for the purpose of the CECT acquisition. The convertible debentures had been fully converted in 2001 so that there
was no more amortization of debt issuance costs and discount of convertible
debentures incurred during 2002. (vi) Gain on sale of subsidiary Our management believes that we can benefit from focusing our business on
the market development and R&D activities of mobile phones rather than the
production of indoor phones. Besides, the indoor phone manufacturing business
was not profitable, which also became a burden to us. It was, therefore,
sensible to sell off this part of our business and concentrate on the mobile
phone business. We still continue our business on the sales and development of
indoor phones, especially on their enhanced features with market potential. Gain on sale of a subsidiary of Rmb 79 million (US$9.5 million) represents
the gain on sale of the one issued share of Qiao Xing Holdings Ltd. which took
place on December 31, 2002. The background information of the transaction was
as follows. On December 31, 2002, an agreement for sale of the one issued
share of Qiao Xing Holdings Limited (QX Holdings) was entered into between us
and Central Grace Technologies Limited (Central Grace), a corporation
incorporated under the laws of the British Virgin Islands. The agreement was
subsequently amended by the parties. The consideration for the purchase of the
sale share was RMB 210,000,000 and was paid in full as of July 16, 2003. Central Grace made various warranties, undertakings, covenants and
indemnities to us and assumed all disclosed and undisclosed liabilities of QX
Holdings excluding:  (i)  the settlement of the current liabilities of QXTI due to us
in the sum of RMB 231,585,507 -40-




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(ii)  the settlement of the current liabilities of QX Holdings due
to us in the sum of RMB 8,172,953 (iii)  the settlement of the current assets of QXTI due from us of
RMB 113,543,063 Central Grace executed a Share Mortgage Deed for our benefit to secure the
repayment of our loan facility to Central Grace for the payment of the purchase
price by Central Grace, which was cancelled upon full payment by Central Grace. All properties of QX Holdings sold in the transaction included but was not
limited to: (i)  factory and manufacturing equipment (ii)accounts receivable (iii)  trademarks, registered designs and patent applications (iv)  landed property but the following businesses and assets were excluded (Excluded Assets): (i)  certain land use rights (ii)  fixed line telephone sales network (iii)  mobile telephone business including but not limited to the
research and development department and manufactory (iv)  die cast moulds As a result of the sale transaction, a gain on sale amounting to RMB
79,050,000 was recognized in our profit and loss account for the year ended
December 31, 2002. The calculation details of the gain on sale of a subsidiary is set out as
follows: Rmb000
    
    US$000Consideration
    
    
    210,000
    
    
    
    25,362Net asset value sold
    
    
    (125,070
    )
    
    
    (15,105
    )Minority interests sold
    
    
    (5,880
    )
    
    
    (710
    )Gain on sale of subsidiary
    
    
    79,050
    
    
    
    9,547
 (vii) Acquisition of equity interest in CEC Telecom Ltd. (CECT) The execution of agreements for the acquisition of 65% of the equity of
CECT took place during year 2002, and the transaction was completed on February
8, 2003, when all the necessary approvals and documentation for closing were
obtained. The operating results of CECT were, -41-




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therefore, not included in Qiao
Xings consolidated financial statements for the year ended December 31, 2002. (viii) Reversal of overaccrual of prior years income taxes Reversal of overaccrual of prior years income taxes consists of: 2001
    
    2002Rmb000
    
    Rmb000
    
    US$000Mainland Chinese income tax- current
    
    
    18,868
    
    
    
    
    
    
    
    - deferred
    
    
    6,819
    
    
    
    
    
    
    
    25,687
    
    
    
    
    
    
    
    
 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. 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, 2001 and 2002. Accordingly, the
excess provision of Mainland Chinese enterprise income tax in prior years was
written back in 2001. -42-




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(ix) Net Income and Earnings Per Share Net income of Rmb 16.5 million (US$1.99 million) was recorded for fiscal
year 2002, while a net loss of Rmb 21.4 million was recorded for fiscal year
2001. The net income for fiscal year 2002 was achieved mainly due to the
significant gain on sale of a subsidiary which amounted to Rmb 79 million
(US$9.5 million), partly offset by the following:  i)
    
    decrease in gross profit of Rmb 16.3 million; andii)
    
    decrease in write-back of provision for income tax of Rmb 25.7 million Based on a weighted average of 14.7 million shares outstanding in 2002,
the Group reported an income per share of Rmb 1.12 (US$0.135), compared to loss
per share of Rmb 1.67 on 12.8 million weighted-average shares outstanding in
2001. The higher number of outstanding shares is the result of additional
shares issued in August 2002 in connection with consultant services rendered
relating to the acquisition of CECT. B. LIQUIDITY AND CAPITAL RESOURCES. During fiscal year 2003, we were principally engaged in (i) the sales of
telecommunication equipment, including cord and cordless indoor telephone sets,
in Mainland China; and (ii) production and sales of mobile phones and
accessories in Mainland China. We did not declare or pay dividends in fiscal
year 2003. In summary, about Rmb 307 million (US$37.1 million) was used in operating
activities, about Rmb 204 million (US$24.6 million) was provided by investing
activities and about Rmb 216 million (US$26.1 million) was provided by
financing activities during the year ended December 31, 2003. Consequently,
cash and cash equivalents increased by Rmb 111.5 million (US$13.5 million) from
Rmb 10.9 million (US$1.3 million) at the beginning to Rmb 122.5 million
(US$14.8 million) at the end of year 2003. (i) Cash flows from operating activities There was a net operating cash outflow of Rmb 307 million (US$37.1
million) despite the net loss of only Rmb 7.7 million (US$0.9 million) for the
fiscal year 2003. This was mainly attributable to an increase in operating
assets and decrease in operating liabilities from fiscal year 2002 to fiscal
year 2003, consisting primarily of an increase in accounts receivable and
prepaid expenses of Rmb 221 million and Rmb 159 million, respectively, as well as
a decrease in customer deposits of Rmb 294 million following the acquisition of
CECT. Toward the end of 2003, the Group expanded its mobile phone distribution
network in most major cities and provinces in Mainland China, mainly through a
provincial distribution network. These -43-




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distributors do not pay advance
deposits for products prior to their being manufactured and shipped. CECT also
granted credit terms ranging from 90 days to 180 days to its customers. Before
CECT was acquired by the Group, its customers were mainly national distribution
agents who were willing to make deposits to CECT to purchase the mobile
telephones. Towards the end of 2003, with our emphasis on provincial
distribution agents to whom sales are usually on credit, there was a
significant decrease in customer deposits in CECT. Usually, CECT had to make
prepayments to vendors for product research, development and design of
components and accessories. The increase in prepayments to vendors subsequent
to the acquisition of CECT on February 8, 2003 to December 31, 2003 was related
to the preparation for the significant increase in the scale of the Groups
business in 2004. The operating cash outflow was then partly offset by the following: (a) decrease in inventories of Rmb 172 million, since the Group had
performed advertising and promotion efforts to sell several old models of
mobile phones in the first half of 2003; and (b) non-cash expenses, including amortization and depreciation of Rmb 55
million, write-off of in process research and development costs of Rmb 34
million and compensation costs for stock options and warrants issued of Rmb 27
million. (ii) Cash flows from investing activities Net cash inflow from investing activities amounted to Rmb 204 million
(US$24.6 million) during the year ended December 31, 2003. This was mainly due
to the net cash inflow of Rmb 210 million from the sale of QXTI, an
ex-subsidiary, and a net cash inflow of Rmb 39 million following the
acquisition of CECT. The net cash inflow was then partly offset by the
acquisition of property, machinery and equipment of Rmb 45 million. (iii) Cash flows from financing activities Net cash inflow from financing activities amounted to Rmb 216 million
(US$26.1 million) for the year ended December 31, 2003. It was mainly
attributed to the addition of short-term borrowings during the year and an
increase in pledged bank deposits of Rmb 44 million for securing more bank
borrowings. As of December 31, 2003, our consolidated working capital was Rmb
299 million (US$36.1 million) as compared to Rmb 267 million (US$32.2 million)
as of December 31, 2002. Historically, we have financed our operations and capital expenditures
principally through cash generated from operating activities and bank
borrowings. Outstanding bank borrowings accounted for 5% and 28% of our total
assets as of December 31, 2002 and December 31, 2003, respectively. Seasonal
working capital needs have been met through short-term borrowings under
revolving lines of credit. -44-




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As of December 31, 2003, the Group had banking facilities of approximately
Rmb 609,969,000 (US$73,697,000) for loans and trade financing, of which Rmb
439,472,000 (US$53,097,000) were used as of that date. Contractual Obligations and Commitments The Group has operating lease agreements for office premises, which extend
through November 2006. Lease expense for the years ended December 31, 2001,
2002 and 2003 was approximately Rmb 1,304,000, Rmb 1,422,000 and Rmb 4,116,000,
respectively. Future minimum lease payments as of December 31, 2003 under
agreements classified as operating leases with non-cancelable terms amounted to
approximately Rmb 3,856,000 (US$466,000) within one year, and approximately Rmb
10,259,000 (US$1,240,000) within two to five years. 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. 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, 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 consolidated financial statements. 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 consolidated financial statements. -45-




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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 such
assets is considered impaired when the anticipated cash flows are less than the
assets carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of the asset.
Fair market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Goodwill. We adopted Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 requires that
goodwill be tested for impairment at least annually, or more frequently if events or changes in
circumstances indicate that it might be impaired, using the prescribed two-step
process. The first step screens for potential impairment of goodwill if the
fair value of the reporting unit is less than its carrying value, while the
second step measures the amount of goodwill impairment, if any, by comparing -46-




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the implied fair value of goodwill to its carrying value. We completed our
annual goodwill impairment test during the year ended December 31, 2003 and
determined that no adjustment to the carrying value of goodwill was required. Identifiable Intangible Assets. We adopted SFAS No. 141, Business
Combinations. In particular, an intangible asset which is acquired in a
business combination should be recognized as an asset apart from goodwill if it
satisfies either the contractual-legal or separability criterion. SFAS No.
141 specifically excludes assembled workforce acquired in a business
combination from recognition apart from goodwill. With the adoption of SFAS No. 142, intangible assets with indefinite
useful lives are no longer amortized, while intangible assets with finite
useful lives will continue to be amortized over their useful lives. We adopted SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, whereby intangible assets with finite useful lives are
required to be tested for impairment if events or changes in circumstances
indicate that the asset might be impaired, using the prescribed two-step
process. The first step is a recoverability test which screens for potential
impairment of an asset based on whether the undiscounted sum of estimated
future cash flows from an asset is less than its carrying value. The second
step measures the amount of impairment, if any, by comparing the fair value of
the asset to its carrying value. We completed our annual identifiable
intangible assets impairment test during the year ended December 31, 2003 and
determined that no adjustment to the carrying value of identifiable intangible
assets was required. 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 financial reporting period, we must include an expense with the tax provision
in the statement of operations. Income Taxes. We account for income taxes 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 consolidated
financial statements for each financial period. On this basis, our subsidiary, QXTI,
provided for the enterprise income tax in Mainland China using a 24% state income tax rate for the years 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 to the tax holiday under which
the -47-




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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 reversed in 2001. Convertible Debentures. We accounted for convertible debentures issued
during the year ended December 31, 2000 in accordance with Accounting
Principles Board Opinion 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 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 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 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, respectively,
and unamortized discounts of convertible debentures amounted to approximately
Rmb 6,335,000 and Rmb 5,580,000, respectively, were recognized as interest
expense. Critical Accounting Policies: Adoption of New Accounting Policies (i) In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 provides interpretive guidance
on the accounting for all acquisitions of financial institutions, except
transactions between two or more mutual enterprises. Restatement of previously
issued financial statements will be required. Those transition provisions are
effective as of October 1, 2002; however, early application is permitted. The
Group does not anticipate that the adoption of SFAS No. 147 will have any
effect on its consolidated financial statements. -48-




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(ii) In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair market value of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of FIN 45 apply on a
prospective basis to guarantees issued or modified after December 31, 2002. (iii) In December 2002, the FASB issued SFAS No. 148: Accounting for
Stock-Based Compensation-Transition and Disclosure-and Amendment of FASB
Statement No.123. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Group adopted the disclosure provisions of SFAS No. 148 effective December
31, 2002. The adoption of SFAS No. 148 is not expected to have a material
impact on the Groups consolidated financial statements. (iv) In January 2003, the FASB issued Interpretation No. 46:
Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)
(FIN46). FIN46 addresses consolidation by business enterprises of certain
variable interest entities, commonly referred to as special purpose entities.
The Group is required to implement the other provisions of FIN46 in 2003. The
adoption of FIN46 is not expected to have a material impact on the Groups
consolidated financial statements. (v) In April 2003, the FASB issued SFAS No.149 Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No.149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No.133 Accounting for Derivative Instruments and
Hedging Activities. It is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. All provisions of SFAS No.149 should be applied prospectively. The
adoption of SFAS 149 is not expected to have a material impact on the Groups
consolidated financial statements. (vi) In May 2003, the FASB issued SFAS No.150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classifies a financial instrument that is within its scope as a
liability (or as an asset in some circumstances). It is effective for
financial -49-




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instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is to be implemented by reporting the cumulative effect of a
change in an accounting principle for financial instruments created before the
issuance date of SFAS No.150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The adoption of SFAS No.150
is not expected to have a material impact on the Groups consolidated financial
statements. (vii) In May 2003, the Emerging Issues Task Force (EITF) finalized EITF
00-21 Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses
the accounting for multiple element revenue arrangements, which involve more
than one deliverable or unit of accounting in circumstances where the delivery
of those units takes place in different accounting periods. EITF 00-21
requires disclosures of the accounting policy for revenue recognition of
multiple element revenue arrangements and the nature and description of such
arrangements. The accounting and reporting requirements are effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 does not have a significant impact on the
Groups financial statements. (viii) In December 2003, the FASB issued SFAS No. 132 (Revised)
Employers Disclosure About Pensions and Other Postretirement Benefits. SFAS
No. 132 (Revised) retains disclosure requirements in original SFAS 132 and
requires additional disclosures relating to assets, obligations, cash flows and
net periodic benefit cost. SFAS No. 132 (Revised) is effective for fiscal
years ending after December 15, 2003, except that certain disclosures are
effective for fiscal years ending after June 15, 2004. The Group currently
does not have any broad-based pension or postretirement benefit plans which
require disclosure. Accordingly, the adoption of SFAS No. 132 (Revised) does
not have a significant impact on the Groups financial statements. (ix) In July and December 2003, the EITF published EITF Issue 03-9
Interaction of Paragraphs 11 and 12 of FASB Statement No. 142 Regarding
Determination of the Useful Life and Amortization of an Intangible Asset
(EITF 03-9). EITF 03-9 provides guidance in determining whether or not an
intangible asset has an indefinite useful life and, if not, the appropriate
useful life for the intangible asset. The Group has applied the provisions of
EITF 03-9 in accounting for the acquisition of CECT in 2003. 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: Year ended December 31, 2003
    
    Rmb 4,414,000Year ended December 31, 2002
    
    Rmb       451,000Year ended December 31, 2001
    
    Rmb 3,516,000
 -50-




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D. TREND INFORMATION. Sales In the mobile phone business segment, CEC Telecom Co. Ltd. (CECT), an
operating subsidiary of ours, has been launching more new products to capture a
larger market share of the domestic, as well as international, mobile phone
market. CECT anticipates significantly higher sales revenue as a result of the
successful penetration of the new products into those markets. It has signed a contract with Beijing Jia Sheng Rui Tong (JSRT) appointing
JSRT as the chief distributor of CECTs new T688 model mobile phones in China.
According to the agreement, JSRT is to underwrite the sale of 500,000 sets of
T688 models within a five-month period. With our strong in-house R&D capability and the cooperation with other top
domestic and overseas players in the industry, we are bringing to the market,
on average, one new model a month. We believe this could help us boost our
sales revenue and also secure a larger market share of the mobile phone market
in China. In addition, CECTs strength in R+D and production has drawn attention
from outside China. We are now discussing producing mobile phones for some
foreign clients and the anticipated mobile phone orders would also contribute
to our sales growth in the subsequent years. In the indoor phone business segment, our focus in fiscal year 2004 is R+D
and the launching of more satisfactory value added products to satisfy the
continuously improving consumption levels of Chinese people. We are confident
that these relatively high-end phone products can continue to achieve
significant growth in fiscal year 2004. The new products launched in 2004 include the following:  1.
    
    The Personal Handyphone System (PHS) products;2.
    
    The self-developed ADSL products;3.
    
    Fax machine sales will increase; and4.
    
    WuXianTong (Wireless Fixed Telephone) products, which are
becoming very popular in the market. In addition, during fiscal year 2004, we continued to seek partnership
relationships with international telecommunication terminal distributors,
including Binatone, Unisonic(supplier of BellSouth), and Wal-Mart. We are
convinced that the export of indoor telephones, especially 2.4 G coded
telephones, will contribute considerable share to our sales growth of indoor
telephones. -51-




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Gross Profit Our total gross profit margin percentage in fiscal year 2003 was
approximately 13.9%. We achieved a gross profit margin of approximately 14.2%
and 9.8% for sales of our mobile phone products and indoor phone products in
2003, respectively. On this basis, we anticipate that with the increase in
sales revenue, there will be corresponding growth in gross profit in both the
mobile phone and the indoor phone business segments. Production Our total production capacity has increased substantially after the
acquisition of CECT. CECT has a production base in Beijing with a production
capacity of 1.2 million sets of mobile phones. In 2003, we added an additional
two production lines for CECT in the factory of Qiao Xing Science Industrial
Park at Huizhou, with annual production capacity of 1 million sets of mobile
phones. We plan to add three production line in CECT HuiZhou production base,
thus increasing the capacity there to 2.4M. In addition, our subsidiary, Qiao
Xing Communication Industry Co., Ltd. (QXCI), also manufactures GSM mobiles for
CECT. In the event that our production cannot meet the market demand, we will
apply OEM to guarantee supplying CECT brand mobile phones for our clients. Prices There is keen price competition in the market of our products, especially
for basic models, which are regarded as commodities because of the lack of
difference between brands. However, through continuous upgrade of our
products, we expect to be able to maintain our sales price in 2004 at a level
comparable to that in 2003 in both the mobile phone and the indoor phone
business segments. Inventory We forecast that our inventory value will increase in step with the
increase in the scale of our business in 2004 in both the mobile phone and the
indoor phone business segments. Because of their short product life cycle, we
do not want to keep huge volume of mobile phones as inventories as they will
become obsolete within a short time. On the other hand, we need to maintain a
certain level of inventories to meet customers demand of our products. We
believe that our existing inventory level in relation to the scale of our
business is optimal and we will continue to apply the existing strategy to plan
our inventory level in 2004. -52-




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E. OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS. Capital commitment for purchase of property, machinery and equipment As of the December 31, 2003 balance sheet, we had the following known
contractual obligations: Future minimum lease payments under a capital lease are as follows: 2003Rmb000
    
    US$000Payable during the following periods- 2004
    
    
    1,909
    
    
    
    231- 2005
    
    
    1,909
    
    
    
    231- 2006
    
    
    1,909
    
    
    
    231- 2007
    
    
    954
    
    
    
    114Total minimum lease payments
    
    
    6,681
    
    
    
    807Less: Amount representing future interest
    
    
    (1,395
    )
    
    
    (169
    )Present value of minimum lease payments
    
    
    5,286
    
    
    
    638Less: Current portion
    
    
    (1,510
    )
    
    
    (182
    )Non-current portion
    
    
    3,776
    
    
    
    456
 Operating lease commitments We have operating lease agreements for office premises, which extends
through November 2006. At December 31, 2003, our future minimum lease payments
required under non-cancelable operating leases with terms in excess of one year
are as follows: -53-




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##### Table of Contents



AmountRmb000
    
    US$000For the years ending December 31,2004
    
    
    3,856
    
    
    
    4662005
    
    
    4,667
    
    
    
    5642006
    
    
    2,919
    
    
    
    3532007
    
    
    2,673
    
    
    
    323Total
    
    
    14,115
    
    
    
    1,706
 Lease expenses for the years ended December 31, 2001, 2002 and 2003 were
approximately Rmb 1,304,000, Rmb 1,422,000 and Rmb 4,116,000 respectively. Other commitments Other commitments not provided for in the consolidated financial
statements were analyzed as follows: 2003Rmb000
    
    US$000Authorized
and contracted for
- Research and development
    
    3,104
    
    
    
    
    375
 -54-




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT. Our senior management and directors are as follows: Name
    
    Age
    
    PositionRui Lin Wu
    
    
    52
    
    
    Chairman and Chief Executive OfficerZhi Yang Wu
    
    
    31
    
    
    Vice Chairman and SecretaryShi Jie
    
    
    36
    
    
    Executive DirectorAlbert Leung
    
    
    47
    
    
    Chief Financial OfficerZe Yun Mu
    
    
    38
    
    
    Non-Executive DirectorZhu Ming
    
    
    36
    
    
    Non-Executive Director
 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 Wuis 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 the executive commissioner 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. Wu
also serves as the chairman of Qiao Xing Mobile Communication Co. and a
director of CEC Telecom Co., Ltd. since February 2003. Mr. Zhi Yang Wuis 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. Wu also serves as the chairman of CEC Telecom Co.,
Ltd. and CEC Mobile Ltd. since February 2003. Mr. Shi Jieserves as chief financial officer and a director of Qiao Xing
Group Ltd. since 2000. He also serves as a director of CEC Telecom Co., Ltd.
since February 2003. Prior to that, Mr. Shi served as our chief financial
officer and controller of finance from 1997 to 2000. He -55-




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also served as deputy general manager of QXTI from 1997 to 1999. From
1994 to 1997, Mr. Shi served as department head of the finance department of
QXTI. Mr. Albert Leungserves as our chief financial officer since his
appointment in December 2003. Mr. Leung received a Higher Diploma in
Accountancy from Hong Kong Polytechnic in 1980 and a Diploma in Advanced
Commercial Studies from LEcole des Hautes Etudes Commerciales in France in
1984. He is a registered member of the Hong Kong Society of Accountants since
1988 and the Association of Chartered Certified Accountants, Great Britain,
since 1986. Prior to joining us in December 2003, Mr. Leung served as chief
financial officer of Yantai Dahua Holdings Company Limited (YDHCF.OB) from
February 2003 until December 2003. From March 2001 until February 2003, he
served as a consultant with AB Management Consulting Company, Hong Kong,
providing accounting services, tax compliance and finance for small and medium
enterprises in Hong Kong. From November 1999 to October 2000, Mr. Leung served
as regional financial controller in Singapore for Euro RSCG Asia Pacific. From
December 1998 to April 1999, he served as property manager (cost control) for
The Hong Kong Jockey Club. Mr. Leung devotes his full working time to our
affairs. Mr. Ze Yun Muserves as a non-executive director since September 15, 2003.
Mr. Mu currently serves as the external affairs director since 1998 for
Huizhou Wei Guo Machinery Factory and served as a technician for them from 1990
to 1998. Mr. Zhu Mingserves as a non-executive director since January 2003. Since
2001, he serves as a director of Guangzhou Guo Wei Science & Technology Ltd.
and he was a director of JiLin Zhongxin Science & Technology Co., Ltd. during
2000 to 2001. From 1997 to 2000, he served as assistant to the chairman of
Huizhou Qiao Xing Group Ltd. From 1992 to 1997, he was a clerk of the Haikou
Branch of China Industrial and Commercial Bank. 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, 2003 on an accrual basis, for services in all capacities, was Rmb 2,515,464
(US$304,000). During the fiscal year ended December 31, 2003, we contributed
an aggregate amount of Rmb 9,632 (US$1,164) toward the pension plans of our
directors and executive officers. 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. -56-




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C. BOARD PRACTICES. Each of our current directors was elected at our last annual meeting of
shareholders held December 3, 2003 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 currently
consists of Rui Lin Wu, Ze Yun Mu and Zhu Ming. Its functions are to:  
    
    recommend annually to the Board of Directors the appointment
of our independent public accountants;
    
    discuss and review the scope and the fees of the prospective
annual audit and review the results thereof with the independent
public accountants;
    
    review and approve non-audit services of the independent public accountants;
    
    review compliance with our existing accounting and financial policies;
    
    review the adequacy of our financial organization; and
    
    review managements procedures and policies relative to the
adequacy of our internal accounting controls and compliance with
U.S. federal and state laws relating to financial reporting. D. EMPLOYEES. As of December 31, 2003 and giving effect to the staff of CECT, our
majority owned subsidiary, we had a total of 834 full time employees, of which
10 are key management staff, 236 are engaged in sales and marketing, 104 are
engaged in finance and administration, 238 are engaged in production and 246
are engaged in research and development. 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 30, 2004 by:  
    
    each person who is known by us to own beneficially more than
5% of our outstanding common stock;
    
    by each of our current executive officers and directors; and
    
    by all current directors and executive officers as a group. -57-




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As of June 30, 2004, we had 16,637,918 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. Number
    
    PercentName of Beneficial Holder
    
    Shares Beneficially
    
    OwnedWu Holdings Limited
    
    
    6,819,000
    (1)
    
    
    41.0Rui Lin Wu
    
    
    7,119,000
    (1)
    
    
    42.8Zhi Yang Wu
    
    
    250,000
    
    
    
    1.5Shi Jie
    
    
    0
    
    
    
    0Albert Leung
    
    
    0
    
    
    
    0Ze Yun Mu
    
    
    0
    
    
    
    0Zhu Ming
    
    
    0
    
    
    
    0All directors and executive officers as a group (6)
    
    
    7,369,000
    
    
    
    44.3
  (1)
    
    Wu Holdings Limited is a British Virgin Islands corporation which is
wholly owned by the Qiao Xing Trust. 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. 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. 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:  
    
    encourage ownership of our common stock by our officers,
directors, employees and advisors;
    
    provide additional incentive for them to promote our success
and our business; and
    
    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 -58-




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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 30, 2004, all 2,000,000 options had been exercised and no
options to purchase shares of our common stock under the Plan remained
outstanding. Other Options and Warrants Outstanding As of June 30, 2004, the following additional options and warrants to
purchase shares of our common stock were outstanding:  
    
    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
    
    warrants to purchase an aggregate of 340,800 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
    
    warrants to purchase 80,000 shares of common stock at $7.00
per share at any time through March 1, 2005 which we granted to a
former public relations consultant in March 2002 
 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. -59-




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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. 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: Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiNon-executive independent directorMr. Ming Zhu
    
    (appointed on January 2, 2003)Non-executive independent directorMr. Ze Yun Mu
    
    (appointed on September 15, 2003)Mr. Jie Shi
    
    Director (appointed on January 2, 2003)Mr. Zhong Ai Li
    
    Director (resigned on January 2, 2003)Mr. Guo Liang Zhang
    
    Director (resigned on January 2, 2003)Ms. Liu Rong Yang
    
    Director (resigned on September 15, 2003)Mr. Zhi Fang Zhang
    
    Director (resigned on January 2, 2003)Mr. Zi Shu Huang
    
    Director (resigned on January 2, 2003)Wu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderJia Xing Electronic Supplies Company Limited
    
    Common directorQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Properties Limited
    
    Common directorRui Xing Electronic Development Company
Limited
    
    Common directorShanghai Sunplus Communication Technology
Company Limited
    
    Common directorDalian Yu Tian Ocean Biochemistry
Technology Company Limited
    
    Common directorHuizhou Calilee Telecommunication Company
Limited (Calilee)
    
    A company 5% owned by QXGLShenzhen Tianna I/E Trade Company Limited
    
    A company 90% owned by QXGLCEC Wireless R&D Limited (CECW)
    
    CECT and CECW have common ownersBeijing China Electronics Changsheng
Investment Management Company Limited
    
    Minority owner of CECT is a shareholder
 -60-




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China Electronics Beijing Real Estate
Management Co., Ltd.
    
    Minority owner of CECT is a shareholderChina Electronics Corp.
    
    Minority owner of CECTChina National Electronics Import & Export
Corporation
    
    Minority owner of CECT is a shareholderGoldcellcom Co., Ltd
    
    Minority owner of CECT is a shareholderWuhan Zhongyuan Electronics Group Co., Ltd.
    
    Minority owner of CECT is a shareholder
 Summary of related party transactions is as follows: 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals charged by- China Electronics Corp
    
    
    
    
    
    
    
    
    
    
    2,049
    
    
    
    248- QXGL
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    4Property management fees paid and payable to
China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    
    
    
    
    
    
    
    
    788
    
    
    
    95Recovery of general and administrative expenses
(at cost) in respect of factory and office
premises subleased to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Jia Xing Electronic Supplies Company
Limited
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    - Qiao Xing Properties Limited
    
    
    1,776
    
    
    
    
    
    
    
    
    
    
    
    - Rui Xing Electronic Development Company
Limited
    
    
    915
    
    
    
    
    
    
    
    
    
    
    
    Interest income from CEFCL
    
    
    
    
    
    
    
    
    
    
    1,851
    
    
    
    224Rental income from- QXGL
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    - CECM
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    133Commission paid and payable to CECW
    
    
    
    
    
    
    28,200
    
    
    
    5,181
    
    
    
    626Purchases from- Jia Xing Electronic Supplies Company
Limited
    
    
    13,436
    
    
    
    
    
    
    
    
    
    
    
    - Qiao Xing Properties Limited
    
    
    20,471
    
    
    
    10,061
    
    
    
    34
    
    
    
    4- Rui Xing Electronic Development Company
Limited
    
    
    8,033
    
    
    
    9,214
    
    
    
    
    
    
    
    - Shanghai Sunplus Communication Technology
Company Limited
    
    
    
    
    
    
    
    
    
    
    24,366
    
    
    
    2,944- Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    
    
    
    
    13,005
    
    
    
    1,571Sales to- CECT *
    
    
    
    
    
    
    344,458
    
    
    
    26,821
    
    
    
    3,241- CECM
    
    
    
    
    
    
    
    
    
    
    238,857
    
    
    
    28,859- Calilee
    
    
    
    
    
    
    
    
    
    
    611,281
    
    
    
    73,856- Goldcellcom Co., Ltd
    
    
    
    
    
    
    
    
    
    
    7,980
    
    
    
    964
 -61-




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*
    
    Sales to CECT after February 8, 2003 have been eliminated on the
consolidated statement of operations for 2003. Summary of related party balances is as follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Due from- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1- China National Electronics Import & Export
Corporation
    
    
    
    
    
    
    1
    
    
    
    - China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    
    
    
    
    4
    
    
    
    - Wuhan Zhongyuan Electronics Group Co., Ltd
    
    
    
    
    
    
    120
    
    
    
    15- CEFCL
    
    
    
    
    
    
    7,030
    
    
    
    849- Mr. Zhi Yang Wu
    
    
    216
    
    
    
    
    
    
    
    - Mr. Zhi Jian Wu Li
    
    
    160
    
    
    
    
    
    
    
    - QXGL
    
    
    100
    
    
    
    
    
    
    
    - Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    3506
    
    
    
    7,185
    
    
    
    868Due to- CECT
    
    
    22,195
    
    
    
    
    
    
    
    - Beijing China Electronics Changsheng
Investment Management Company Limited
    
    
    
    
    
    
    3,532
    
    
    
    427- China Electronics Corp
    
    
    
    
    
    
    969
    
    
    
    117- Goldcellcom Co., Limited
    
    
    
    
    
    
    40
    
    
    
    5- Dalian Yu Tian Ocean Biochemistry
Technology Company Limited
    
    
    
    
    
    
    10,000
    
    
    
    1,208- Mr Rui Lin Wu
    
    
    5,897
    
    
    
    471
    
    
    
    57- Mr. Zhi Zhong Wu
    
    
    166
    
    
    
    
    
    
    
    10- Mr. Jie Shi
    
    
    
    
    
    
    83
    
    
    
    1- Mr. Ming Zhu
    
    
    
    
    
    
    3
    
    
    
    - Mr. Ze Yun Mu
    
    
    
    
    
    
    1
    
    
    
    - Mr. Guo Liang Zhang
    
    
    146
    
    
    
    146
    
    
    
    18- Ms. Liu Rong Yang
    
    
    10
    
    
    
    11
    
    
    
    1- Ms. Zhi Fang Zhang
    
    
    10
    
    
    
    10
    
    
    
    1- Mr. Zi Shu Huang
    
    
    10
    
    
    
    10
    
    
    
    1- Mr. Zhong Ai Li
    
    
    218
    
    
    
    218
    
    
    
    2628,652
    
    
    
    15,494
    
    
    
    1,872
 -62-




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Accounts receivable from- CECM
    
    
    
    
    
    
    32,225
    
    
    
    3,893- Calilee
    
    
    
    
    
    
    40,556
    
    
    
    4,900
    
    
    
    72,781
    
    
    
    8,793Vendor deposits for the purchase of mobile phones- Shanghai Sunplus Communication Technology
Company Limited
    
    
    
    
    
    
    256,856
    
    
    
    31,034- Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    51,179
    
    
    
    6,183
    
    
    
    308,035
    
    
    
    37,217
 Included in accrued liabilities as of December 31, 2003 was a commission
payable of Nil (2002 : Rmb 11,331,000) to CECW. Except for the balances with the shareholders (Note 23), all other balances
with directors and related parties were unsecured, non-interest bearing and
without pre-determined repayment terms. Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in 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 make demand on the Group
for repayment before January 1, 2005. The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and QXGL on behalf of Qiao Xing Telecommunication Industry Company
Limited during the year ended December 31, 2001. As of December 31, 2002, the Groups bank deposit of approximately Rmb
2,483,000 and land use rights of net book value of Rmb 47,635,000 were pledged
to secure the banking facilities of an ex-subsidiary, QXTI. The pledges were
released in 2003. During the year ended December 31, 2002, QXTI provided corporate guarantees to
the banking facilities of CECT to the extent of Rmb 50,000,000. The guarantees
were released in 2003. During the year ended December 31, 2003, QXGL and China Electronics Corp.
provided corporate guarantees to the Groups banking facilities to the extent
of Rmb 320,000,000 and
Rmb 50,000,000 respectively. -63-




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C. INTERESTS OF EXPERTS AND COUNSEL. Not applicable. -64-




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ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION. The Consolidated Financial Statements are filed in this annual report as
Item 18. Export sales do not constitute a significant portion of our total sales
volume. There are no legal or arbitration proceedings, including those relating to
bankruptcy, receivership or similar procedures and those involving any third
party, which may have, or have had in the recent past, significant effects on
our financial position or profitability. We are not aware of any governmental
proceedings pending or known to be contemplated. We have no direct business operations, other than the ownership of our
subsidiaries. While we have no current intention of paying dividends, should
we, as a holding company, decide in the future to do so, 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 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. B. SIGNIFICANT CHANGES. Except as otherwise disclosed herein, we do not believe that any
significant change has occurred since the date of the annual financial
statements included in this annual report. -65-




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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: Period
    
    High
    
    LowYear ended December 31, 1999
    
    $
    51.00
    
    
    $
    2.75Year ended December 31, 2000
    
    $
    52.31
    
    
    $
    3.38Year ended December 31, 2001
    
    $
    6.63
    
    
    $
    1.79Year ended December 31, 2002
    
    $
    5.58
    
    
    $
    0.77Year ended December 31, 2003
    
    $
    14.33
    
    
    $
    1.90Quarter ended March 31, 2002
    
    $
    5.58
    
    
    $
    3.72Quarter ended June 30, 2002
    
    $
    4.85
    
    
    $
    3.36Quarter ended September 30, 2002
    
    $
    2.59
    
    
    $
    1.22Quarter ended December 31, 2002
    
    $
    3.71
    
    
    $
    0.77Quarter ended March 31, 2003
    
    $
    3.39
    
    
    $
    1.90Quarter ended June 30, 2003
    
    $
    13.03
    
    
    $
    2.19Quarter ended September 30, 2003
    
    $
    14.33
    
    
    $
    6.00Quarter ended December 31, 2003
    
    $
    10.97
    
    
    $
    8.04Quarter ended March 31, 2004
    
    $
    14.98
    
    
    $
    9.55Quarter ended June 30, 2004*
    
    $
    11.91
    
    
    $
    7.88Month ended December 31, 2003
    
    $
    10.79
    
    
    $
    8.51Month ended January 31, 2004
    
    $
    14.98
    
    
    $
    9.55Month ended February 29, 2004
    
    $
    13.16
    
    
    $
    11.50Month ended March 31, 2004
    
    $
    13.10
    
    
    $
    10.04Month ended April 30, 2004
    
    $
    11.91
    
    
    $
    7.88Month ended May 31, 2004
    
    $
    9.64
    
    
    $
    8.03Month ended June 30, 2004*
    
    $
    11.33
    
    
    $
    9.16
  *
    
    Through June 29, 2004 -66-




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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. 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. Corporate Powers. We are registered in the British Virgin Islands since
December 6, 1994, under British Virgin Islands International Business Companies
number 135241. Clause 4 of our Memorandum of Association states that the
objects for which we are established are to engage in any businesses which are
not prohibited by law in force in the British Virgin Islands. Directors. A director who is materially interested in any transaction
with us shall declare the material facts of and nature of his interest at the
meeting of the Board of Directors. A director may vote or be counted as the
quorum on any resolution of the Board in respect of any -67-




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transaction in which he is materially interested. With the prior or
subsequent approval by a resolution of members, the directors may, by a
resolution of directors, fix the emoluments of directors with respect to
services to be rendered in any capacity to us. The directors may, by a
resolution of directors, exercise all the powers of the Company to borrow
money. There is no age limit requirement for retirement or non-retirement of
directors. A director shall not require a share qualification. Share Rights, Preferences and Restrictions. Our authorized share capital
consists of 50 million shares of par value US$0.001 per share. All dividends
unclaimed for three years after having been declared may be forfeited by
resolution of the directors for our benefit. All shares vote as one class and
each whole share has one vote. We may redeem any of our own shares for such
fair value as we by a resolution of directors determine. All shares have the
same rights with regard to dividends and distributions upon our liquidation. Changing Share Rights. The rights of each class and series of shares that
we are authorized to issue shall be fixed by the resolution of directors. If
the authorized capital is divided into different classes, the rights attached
to any class may be varied with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class and of the holders
of not less than three-fourths of the issued shares of any other class which
may be affected by such variation. Shareholder Meetings. The directors may convene meetings of our members
at such times and in such manner and places as the directors consider necessary
or desirable. The directors shall convene such a meeting upon the written
request of members holding 10 percent or more of our outstanding voting shares.
At least seven days notice of the meeting shall be given to the members whose
name appears on the share register. Restrictions on Rights to Own Securities. There are no limitations on the
rights to own our securities. Change in Control Provisions. There are no provisions of our Memorandum
of Association and Articles of Association that would have an effect of
delaying, deferring or preventing a change in our control and that would have
operate only with respect to a merger, acquisition or corporate restructuring
involving us. Disclosure of Share Ownership. There are no provisions governing the
ownership threshold above which shareholder ownership must be disclosed. Applicable Law. Under the laws of most jurisdictions in the US, majority
and controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith
and actions by controlling shareholders which are obviously unreasonable may be
declared null and void. BVI law protecting the interests of -68-




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minority shareholders may not be as protective in all circumstances as the
law protecting minority shareholders in US jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of and for the benefit of our
company and to sue a company and its directors for his benefit and for the
benefit of others similarly situated, the circumstances in which any such
action may be brought, and the procedures and defenses that may be available in
respect of any such action, may result in the rights of shareholders of a BVI
company being more limited than those of shareholders of a company organized in
the US. Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles
of Association or an increase or reduction in our authorized capital, which
would require shareholder approval under the laws of most US jurisdictions. In
addition, the directors of a BVI corporation, subject in certain cases to court
approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability
to amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices. The International Business Companies Act of the British Virgin Islands
permits the creation in our Memorandum and Articles of Association of staggered
terms of directors, cumulative voting, shareholder approval of corporate
matters by written consent, and the issuance of preferred shares. Currently,
our Memorandum and Articles of Association only provide for shareholder
approval of corporate matters by written consent, but not for staggered terms
of directors, cumulative voting or the issuance of preferred shares. As in most US jurisdictions, the board of directors of a BVI corporation
is charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many
US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However, under our Articles of Association,
we are authorized to indemnify any director or officer who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being one of -69-




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our directors or officers, provided such person acted honestly and in good
faith and with a view to our best interests and, in the case of a criminal
proceeding, such person had no reasonable cause to believe that his conduct was
unlawful. Our Articles of Association also enable us to indemnify any director
or officer who was successful in such a proceeding against expense and
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding. The above description of certain differences between BVI and US corporate
laws is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above. Changes in Capital. Requirements to effect changes in capital are not
more stringent than is required by law. 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. E. TAXATION. The following is a summary of 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 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 the common stock. The discussion below is based upon laws and
relevant interpretations in effect as of the date of this annual report, all of
which are subject to change. -70-




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United States Federal Income Taxation The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, defined as 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. For taxable years beginning after December 31, 1996, a trust will be a
U.S. person only if:  
    
    a court within the United States is able to exercise primary
supervision over its administration; and
    
    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 our common stock, which we refer to as 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 our common stock. A U.S. investor receiving a distribution of our 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 our common stock, and then as gain from the
sale or exchange of a capital asset, provided that our 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 our common stock. Gain or loss on the sale or exchange of our common stock will be treated
as capital gain or loss if our 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 our common stock for more than one year at
the time of the sale or exchange. A holder of common stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on our common stock if the 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 the 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. -71-




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Backup withholding may be avoided by the holder of common stock if such
holder:  
    
    is a corporation or comes within other exempt categories; or
    
    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 are
generally exempt from backup withholding, although they 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 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 for BVI income tax
on gains realized during that year on sale or disposal of such shares; 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 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 British Virgin Islands. F. DIVIDENDS AND PAYING AGENTS. Not applicable. -72-




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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, 2003, our aggregate bank borrowings, at various fixed
interest rates, amounted to Rmb 439,472,000 (US$53,100,000). Due to the stable
interest rate in the PRC, we do not believe that material risk on interest
rates exists. As of December 31, 2003, about 99% 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. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. -73-




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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. 
 ITEM 15. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the
participation of our chairman and chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of the
end of our fiscal year. Based on this evaluation, which will be used as input
for further improvement actions, they concluded that our disclosure controls
and procedures are effective in timely alerting them to material information
about Qiao Xing Universal Telephone, Inc. and its consolidated subsidiaries. There have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of this evaluation. 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that we currently do not have at
least one audit committee financial expert serving on our audit committee. We
intend to identify and retain an audit committee financial expert no later than
July 31, 2005. 
 ITEM 16B. CODE OF ETHICS We have adopted a code of ethics that applies to all of our employees,
including our chief executive officer and our chief financial officer. -74-




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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees.The aggregate fees billed for each of the last two fiscal
years for professional services rendered by our principal accountant for the
audit of our annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years were $153,086 for the fiscal year ended
December 31, 2002 and $300,000 for the fiscal year ended December 31, 2003. (b) Audit  Related Fees.The aggregate fees billed in each of the last two
fiscal years for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under paragraph (a) of this Item were
$0 for the fiscal year ended December 31, 2002 and $0 for the
fiscal year ended December 31, 2003. (c) Tax Fees.The aggregate fees billed in each of the last two fiscal
years for professional services rendered by our principal accountant for tax
compliance, tax advice, and tax planning were $0 for the fiscal year
ended December 31, 2002 and $0 for the fiscal year ended December 31,
2003. (d) All Other Fees.The aggregate fees billed in each of the last two
fiscal years for products and services provided by our principal accountant,
other than the services reported in paragraphs (a) through (c) of this Item,
were $0 for the fiscal year ended December 31, 2002 and $0 for the
fiscal year ended December 31, 2003. (e) Audit Committee Pre-Approval Policies and Procedures. To ensure continuing auditor objectivity and to safeguard the independence of our auditors, our audit committee has determined a framework for the type and authorization of non-audit services which our auditors may provide. The audit committee has adopted policies for the pre-approval of specific services that may be provided by our auditors. The dual objectives of these policies are to ensure that we
benefit in a cost effective manner from the cumulative knowledge and experience of our auditors, while also ensuring that the auditors maintain the necessary degree of independence and objectivity. Our audit committee approved the engagement of Grobstein, Horwath and
 Company to render audit and non-audit services before they were engaged by us. All of the services described in each of paragraphs (b) through (d)
of this Item were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f).Not applicable. -75-




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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. Not applicable. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Not applicable. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS -76-




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INDEPENDENT AUDITORS REPORT To the Shareholders and Board of Directors
Qiao Xing Universal Telephone, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Qiao Xing
Universal Telephone, Inc. and its subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations and comprehensive
income, cash flows and changes in shareholders equity for the years then
ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 consolidated financial position of Qiao
Xing Universal Telephone, Inc. and its subsidiaries as of December 31, 2003 and
2002, and the consolidated results of their operations and cash flows for the
years then ended, in conformity with U.S. generally accepted accounting
principles. GROBSTEIN, HORWATH & COMPANY LLP Sherman Oaks, California
June 18, 2004




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THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN LLP
(ANDERSEN). THE REPORT HAS NOT BEEN REISSUED BY ANDERSEN NOR HAS ANDERSEN CONSENTED
TO ITS INCLUSION IN THIS ANNUAL REPORT ON FORM 20-F. THE ANDERSEN REPORT REFERS TO
THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 2001 AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS), CASH FLOWS AND CHANGES IN
SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000 WHICH ARE NO
LONGER INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS. SUBSEQUENT TO THE DATE OF
THIS REPORT, THE COMPANYS CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 2002 AND 2003
AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, OF CASH FLOWS, AND OF CHANGES
IN STOCKHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003 WERE AUDITED
BY OTHER INDEPENDENT ACCOUNTANTS WHOSE REPORT APPEARS ON THE PRECEDING PAGE. (ANDERSEN LOGO)Arthur Andersen & Co21st Floor Edinburgh TowerThe LandmarkREPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
    
    15 Queens Road CentralHong Kong
 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. /s/ Arthur Andersen & CoARTHUR ANDERSEN & COCertified Public AccountantsHong KongHong
Kong,
June 28, 2002




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QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2003 Note
    
    2002
    
    2003Rmb000
    
    Rmb000

    
    US$000(Note 4)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,796Pledged bank deposits
    
    32 & 33
    
    
    12,483
    
    
    
    85,189
    
    
    
    10,293Bills receivable
    
    
    
    
    
    
    
    
    19,836
    
    
    
    2,397Accounts receivable, net
    
    5
    
    
    33
    
    
    
    254,951
    
    
    
    30,803Inventories
    
    6
    
    
    249
    
    
    
    149,287
    
    
    
    18,037Prepaid expenses
    
    7
    
    
    49,793
    
    
    
    387,224
    
    
    
    46,785Other current assets
    
    8
    
    
    295
    
    
    
    7,905
    
    
    
    955Receivable from sale of a subsidiary
    
    9
    
    
    282,377
    
    
    
    
    
    
    
    Taxation receivable
    
    26
    
    
    
    
    
    
    10,310
    
    
    
    1,246Due from related parties
    
    33
    
    
    506
    
    
    
    7,185
    
    
    
    868Total current assets
    
    
    
    
    356,684
    
    
    
    1,044,353
    
    
    
    126,180Property, machinery and equipment, net
    
    11
    
    
    5,112
    
    
    
    98,305
    
    
    
    11,877Construction-in-progress
    
    12
    
    
    
    
    
    
    1,184
    
    
    
    143Land use rights, net
    
    13
    
    
    189,405
    
    
    
    187,111
    
    
    
    22,607Other non-current assets
    
    14
    
    
    191,507
    
    
    
    
    
    
    
    Investment at equity
    
    15
    
    
    
    
    
    
    37,214
    
    
    
    4,496Investment at cost
    
    16
    
    
    
    
    
    
    14,965
    
    
    
    1,808Goodwill
    
    17
    
    
    
    
    
    
    72,088
    
    
    
    8,710Other acquired intangible assets, net
    
    18
    
    
    
    
    
    
    112,741
    
    
    
    13,621Total assets
    
    
    
    
    742,708
    
    
    
    1,567,961
    
    
    
    189,442LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    19 & 32
    
    
    40,000
    
    
    
    439,472
    
    
    
    53,097Accounts payable
    
    
    
    
    1,372
    
    
    
    177,373
    
    
    
    21,430Other payables
    
    20
    
    
    733
    
    
    
    14,630
    
    
    
    1,768Accrued liabilities
    
    21 & 33
    
    
    13,890
    
    
    
    20,069
    
    
    
    2,425Customer deposits
    
    
    
    
    
    
    
    
    77,220
    
    
    
    9,330Capital lease obligations, current portion
    
    22
    
    
    
    
    
    
    1,510
    
    
    
    182Due to related parties
    
    33
    
    
    28,652
    
    
    
    15,494
    
    
    
    1,872Taxation payable
    
    26
    
    
    5,264
    
    
    
    
    
    
    
    Total current liabilities
    
    
    
    
    89,911
    
    
    
    745,768
    
    
    
    90,104Capital lease obligations, non-current
portion
    
    22
    
    
    
    
    
    
    3,776
    
    
    
    456Shareholders loans
    
    23
    
    
    8,163
    
    
    
    8,163
    
    
    
    986Total liabilities
    
    
    
    
    98,074
    
    
    
    757,707
    
    
    
    91,546Minority interests
    
    
    
    
    87,054
    
    
    
    232,833
    
    
    
    28,131Shareholders equity:Common stock, par value Rmb0.008
(equivalent of US$0.001); authorized -
50,000,000 shares; outstanding and fully
paid - 15,282,400 shares as of December
31, 2002 and 15,537,718 shares as of
December 31, 2003
    
    24
    
    
    127
    
    
    
    129
    
    
    
    16Additional paid-in capital
    
    
    
    
    337,931
    
    
    
    366,246
    
    
    
    44,250Retained earnings
    
    
    
    
    219,572
    
    
    
    211,842
    
    
    
    25,595Cumulative translation adjustments
    
    
    
    
    (50
    )
    
    
    (796
    )
    
    
    (96
    )Total shareholders equity
    
    
    
    
    557,580
    
    
    
    577,421
    
    
    
    69,765Total liabilities, minority
interests and shareholders equity
    
    
    
    
    742,708
    
    
    
    1,567,961
    
    
    
    189,442
 The accompanying notes are an integral part of these consolidated financial statements. - 1 -




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Note
    
    2001
    
    2002
    
    2003Rmb000

    
    Rmb000

    
    Rmb000

    
    US$000(Note 4)Net sales
    
    33
    
    
    250,366
    
    
    
    549,967
    
    
    
    1,837,633
    
    
    
    222,025Cost of goods sold
    
    33
    
    
    (212,229
    )
    
    
    (528,149
    )
    
    
    (1,583,061
    )
    
    
    (191,267
    )Gross profit
    
    
    
    
    38,137
    
    
    
    21,818
    
    
    
    254,572
    
    
    
    30,758Operating expenses:Selling expenses
    
    
    
    
    (6,172
    )
    
    
    (5,286
    )
    
    
    (90,440
    )
    
    
    (10,927
    )General and administrative
expenses
    
    33
    
    
    (40,598
    )
    
    
    (68,233
    )
    
    
    (54,120
    )
    
    
    (6,539
    )Research and development
    
    
    
    
    (3,516
    )
    
    
    (451
    )
    
    
    (4,414
    )
    
    
    (533
    )In process research and
development
    
    18
    
    
    
    
    
    
    
    
    
    
    (33,579
    )
    
    
    (4,057
    )Amortization of acquired
intangible assets
    
    18
    
    
    
    
    
    
    
    
    
    
    (42,192
    )
    
    
    (5,098
    )Stock-based compensation
    
    25.b(i)
    
    
    
    
    
    
    
    
    
    
    (26,929
    )
    
    
    (3,254
    )Impairment loss on- Land use rights
    
    
    
    
    (5,004
    )
    
    
    
    
    
    
    
    
    
    
    - Property, machinery and
equipment
    
    
    
    
    (8,722
    )
    
    
    
    
    
    
    
    
    
    
    (Loss) Income from operations
    
    
    
    
    (25,875
    )
    
    
    (52,152
    )
    
    
    2,898
    
    
    
    350Interest income
    
    33
    
    
    2,000
    
    
    
    1,070
    
    
    
    3,045
    
    
    
    368Exchange loss, net
    
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    Interest expense:- Amortization of debt
issuance costs
    
    3.l.
    
    
    (8,234
    )
    
    
    
    
    
    
    
    
    
    
    - Amortization of discount on
convertible debentures
    
    3.l.
    
    
    (6,469
    )
    
    
    
    
    
    
    
    
    
    
    - Other loan
    
    
    
    
    (8,404
    )
    
    
    (17,867
    )
    
    
    (18,985
    )
    
    
    (2,294
    )Gain on sale of a subsidiary
    
    10
    
    
    
    
    
    
    79,050
    
    
    
    
    
    
    
    Other (expenses) income, net
    
    
    
    
    (187
    )
    
    
    124
    
    
    
    7,738
    
    
    
    935(Loss) Income before income
tax
    
    
    
    
    (47,273
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    (641
    )Reversal of prior years accrual
of income tax
    
    26
    
    
    25,687
    
    
    
    
    
    
    
    
    
    
    
    (Loss) Income before
minority interests
    
    
    
    
    (21,586
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    (641
    )Minority interests
    
    
    
    
    164
    
    
    
    6,248
    
    
    
    (9,228
    )
    
    
    (1,115
    )Equity in earnings of an affiliate
    
    15
    
    
    
    
    
    
    
    
    
    
    6,802
    
    
    
    822Net (Loss) Income
    
    
    
    
    (21,422
    )
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    (934
    )Other comprehensive income
(loss)- translation adjustments
    
    
    
    
    70
    
    
    
    (61
    )
    
    
    (746
    )
    
    
    (90
    )Comprehensive (loss) income
    
    
    
    
    (21,352
    )
    
    
    16,412
    
    
    
    (8,476
    )
    
    
    (1,024
    )(Loss) Income per common share- Basic
    
    28
    
    
    Rmb (1.67
    )
    
    
    Rmb 1.12
    
    
    
    Rmb (0.50
    )
    
    US$
    (0.06
    )- Diluted
    
    28
    
    
    Rmb (1.67
    )
    
    
    Rmb           0.95
    
    
    
    Rmb           (0.50
    )
    
    US$
    (0.06
    )Weighted average number of shares
outstanding- Basic
    
    28
    
    
    12,838,000
    
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    15,420,000- Diluted
    
    28
    
    
    12,838,000
    
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    15,420,000
 The accompanying notes are an integral part of these consolidated financial statements. - 2 -




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 2001
    
    2002
    
    2003Rmb000

    
    Rmb000

    
    Rmb000

    
    US$000(Note 4)Cash flows from operating activities:Net (loss) income
    
    
    (21,422
    )
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    (934
    )Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities -Depreciation of property, machinery and equipment
    
    
    16,942
    
    
    
    13,243
    
    
    
    8,995
    
    
    
    1,087Amortization of land use rights
    
    
    4,978
    
    
    
    5,008
    
    
    
    4,094
    
    
    
    495Amortization of other acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    42,192
    
    
    
    5,098Impairment loss on- Land use rights
    
    
    5,004
    
    
    
    
    
    
    
    
    
    
    
    - Property, machinery and equipment
    
    
    8,722
    
    
    
    
    
    
    
    
    
    
    
    In process research and development
    
    
    
    
    
    
    
    
    
    
    33,579
    
    
    
    4,057Net loss on disposal of property, machinery and
equipment
    
    
    105
    
    
    
    2,660
    
    
    
    195
    
    
    
    24Amortization of debt issuance costs
    
    
    8,234
    
    
    
    
    
    
    
    
    
    
    
    Amortization of discount on convertible
debentures
    
    
    6,469
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    26,929
    
    
    
    3,254Interest expense on shareholders loans
    
    
    478
    
    
    
    478
    
    
    
    478
    
    
    
    58Gain on sale of a subsidiary
    
    
    
    
    
    
    (79,050
    )
    
    
    
    
    
    
    Minority interests
    
    
    (164
    )
    
    
    (6,248
    )
    
    
    9,228
    
    
    
    1,115Equity in earnings of an affiliate
    
    
    
    
    
    
    
    
    
    
    (6,802
    )
    
    
    (822
    )Decrease (Increase) in operating assets -Accounts receivable
    
    
    27,811
    
    
    
    (26,023
    )
    
    
    (220,694
    )
    
    
    (26,665
    )Bills receivable
    
    
    
    
    
    
    
    
    
    
    (2,431
    )
    
    
    (294
    )Inventories
    
    
    238
    
    
    
    17,023
    
    
    
    172,156
    
    
    
    20,800Prepaid expenses
    
    
    8,471
    
    
    
    (60,156
    )
    
    
    (158,525
    )
    
    
    (19,153
    )Other current assets
    
    
    (6,167
    )
    
    
    (63,205
    )
    
    
    35
    
    
    
    4Deferred income tax assets
    
    
    (6,819
    )
    
    
    9,787
    
    
    
    
    
    
    
    Taxation receivable
    
    
    
    
    
    
    
    
    
    
    55,695
    
    
    
    6,729Due from related parties
    
    
    8,232
    
    
    
    3,338
    
    
    
    3,922
    
    
    
    474(Decrease) Increase in operating liabilities -Accounts payable
    
    
    (3,938
    )
    
    
    (1,334
    )
    
    
    62,436
    
    
    
    7,544Other payables
    
    
    (9,548
    )
    
    
    66,314
    
    
    
    (2,293
    )
    
    
    (277
    )Accrued liabilities
    
    
    1,335
    
    
    
    11,335
    
    
    
    (5,491
    )
    
    
    (664
    )Customer deposits
    
    
    
    
    
    
    
    
    
    
    (294,143
    )
    
    
    (35,539
    )Taxation payable
    
    
    (22,472
    )
    
    
    13,754
    
    
    
    (5,264
    )
    
    
    (636
    )Due to related parties
    
    
    
    
    
    
    20,406
    
    
    
    (23,965
    )
    
    
    (2,896
    )Net cash provided by (used in) operating activities
    
    
    26,489
    
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (37,141
    )Cash flows from investing activities:Acquisitions of property, machinery and equipment
    
    
    (2,145
    )
    
    
    (10,335
    )
    
    
    (44,599
    )
    
    
    (5,389
    )(Increase) Decrease in non-current assets
    
    
    
    
    
    
    (944
    )
    
    
    944
    
    
    
    114Net cash (outflow) inflow from acquisition of
subsidiaries (Note 31.d)
    
    
    
    
    
    
    (180,000
    )
    
    
    38,369
    
    
    
    4,636Net cash (outflow) inflow from sale of a subsidiary
(Note 31.c)
    
    
    
    
    
    
    (6,927
    )
    
    
    210,000
    
    
    
    25,372(Additions) Decrease of construction-in-progress
    
    
    (7,981
    )
    
    
    576
    
    
    
    (1,184
    )
    
    
    (143
    )Payment of land use rights
    
    
    (4,878
    )
    
    
    (2,140
    )
    
    
    
    
    
    
    Proceeds from disposal of property, machinery and
equipment
    
    
    190
    
    
    
    1,628
    
    
    
    
    
    
    
    (Increase) Decrease in due from related parties
    
    
    (56,300
    )
    
    
    56,300
    
    
    
    
    
    
    
    (Increase) Decrease in deposits for purchase of
property, machinery and equipment
    
    
    (4,031
    )
    
    
    5,672
    
    
    
    
    
    
    
    Net cash (used in) provided by investing activities
    
    
    (75,145
    )
    
    
    (136,170
    )
    
    
    203,530
    
    
    
    24,590Cash flows from financing activities:Increase in pledged bank deposits
    
    
    (1,492
    )
    
    
    (161,657
    )
    
    
    (44,207
    )
    
    
    (5,341
    )New short-term borrowings
    
    
    218,260
    
    
    
    585,967
    
    
    
    720,791
    
    
    
    87,086Repayment of short-term borrowings
    
    
    (198,713
    )
    
    
    (325,550
    )
    
    
    (461,319
    )
    
    
    (55,737
    )Contribution from minority shareholder
    
    
    
    
    
    
    67,000
    
    
    
    1,274
    
    
    
    154New long-term borrowings
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    New advances from related parties
    
    
    4,797
    
    
    
    
    
    
    
    
    
    
    
    Repayment of capital lease obligation
    
    
    
    
    
    
    
    
    
    
    (1,311
    )
    
    
    (158
    )Net proceeds from exercise of options and warrants
    
    
    
    
    
    
    
    
    
    
    910
    
    
    
    110Net cash provided by financing activities
    
    
    22,852
    
    
    
    195,760
    
    
    
    216,138
    
    
    
    26,114Effect of translation adjustments
    
    
    (70
    )
    
    
    (61
    )
    
    
    (746
    )
    
    
    (90
    )Net (decrease) increase in cash and cash equivalents
    
    
    (25,874
    )
    
    
    3,332
    
    
    
    111,518
    
    
    
    13,473Cash and cash equivalents, beginning of year
    
    
    33,490
    
    
    
    7,616
    
    
    
    10,948
    
    
    
    1,323Cash and cash equivalents, end of year
    
    
    7,616
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,796
 The accompanying notes are an integral part of these consolidated financial statements. - 3 -




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 Accumulated othercomprehensiveincome (loss) Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    cumulativeAdditional paid-in
    
    
    
    
    
    
    
    
    
    translationNote
    
    Number of shares
    
    Amount
    
    capital
    
    Dedicated reserves
    
    Retained earnings
    
    adjustments000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Balance as of December 31, 2000
    
    
    
    
    
    
    12,138
    
    
    
    100
    
    
    
    280,126
    
    
    
    10,541
    
    
    
    213,980
    
    
    
    81Issue of stock purchase
warrants to investors and
external consultants
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    458
    
    
    
    
    
    
    
    
    
    
    
    Conversion of convertible
debentures
    
    
    24
    
    
    
    2,144
    
    
    
    18
    
    
    
    43,157
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,422
    )
    
    
    Shareholders contribution
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70
    )Balance as of December 31, 2001
    
    
    
    
    
    
    14,282
    
    
    
    118
    
    
    
    324,219
    
    
    
    10,541
    
    
    
    192,558
    
    
    
    11Issue of shares to external
consultants
    
    
    24
    
    
    
    1,000
    
    
    
    9
    
    
    
    13,234
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,473
    
    
    
    Shareholders contribution
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Transfer from dedicated
reserves to retained
earnings
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,541
    )
    
    
    10,541
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Balance as of December 31, 2002
    
    
    
    
    
    
    15,282
    
    
    
    127
    
    
    
    337,931
    
    
    
    
    
    
    
    219,572
    
    
    
    (50
    )Issue of shares to
warrant/option holders
    
    
    24
    
    
    
    256
    
    
    
    2
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    Recognition of compensation
expense
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    26,929
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,730
    )
    
    
    Shareholders contribution
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (746
    )Balance as of December 31, 2003
    
    
    
    
    
    
    15,538
    
    
    
    129
    
    
    
    366,246
    
    
    
    
    
    
    
    211,842
    
    
    
    (796
    )
 The accompanying notes are an integral part of these consolidated financial statements. - 4 -




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##### Table of Contents



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 became listed on the
Nasdaq National Market in February 1999. The Company and its subsidiaries (the Group) are principally engaged in (i)
the sale of telecommunication terminals and equipment, including cord and
cordless telephone sets, in Mainland China; and (ii) production and sale of
mobile phones and accessories in Mainland China. During 2002, the Group entered into the following sale and purchase agreements
(the Agreements) for the acquisition of an aggregate equity interest of 65%
in CEC Telecom Co., 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 the production and sale of mobile phones
and accessories in Mainland China (the Acquisitions). Pursuant to an Agreement dated May 23, 2002, Qiao Xing Mobile Communication
Company Limited (QXMCCL), a subsidiary of the Company acquired a 25% equity
interest in CECT from Tianjin Taida Company Limited for cash consideration of
Rmb108,750,000. Pursuant to an Agreement and a supplementary Agreement, both
dated May 23, 2002, QXMCCL acquired a 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. On February 8, 2003, the acquisition of CECT was finally approved by all
necessary government authorities with the new business license granted
subsequently. 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. In addition, substantially all of the Group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 the
approval of the Mainland Chinese government. - 5 -




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1.
    
    ORGANIZATION AND NATURE OF OPERATIONS (Contd) 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 expectations. Total accounts
receivable as of December 31, 2002 was minimal following the Groups sale of a
subsidiary. As of December 31, 2003, the Groups five largest accounts
receivable accounted for approximately 64% of the Groups total accounts
receivable. 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 certain Mainland Chinese government
state-owned enterprises. Any deterioration of these strategic relationships
may have an adverse effect on the operations of the Group. - 6 -




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2.
    
    SUBSIDIARIES AND EQUITY JOINT VENTURES Details of the Companys subsidiaries and equity joint ventures as of December
31, 2003 were as follows: Percentage of equityPlace of
    
    interest attributableName
    
    incorporation
    
    to the Group
    
    Principal activities2002
    
    2003Hui
Zhou Qiao Xing Communication Industry Limited (QXCIL)
    
    Mainland China
    
    
    90
    %
    
    
    90Note i
    %
    
    Manufacturing of GSM mobile phones and sales of indoor phonesHui Zhou Qiao Xing Property Limited (QXPL)
    
    Mainland China
    
    
    90
    %
    
    
    90
    %
    
    Property holdingNote iiQiao Xing Mobile Communication Company Limited
    
    British Virgin Islands
    
    
    80
    %
    
    
    80
    %
    
    Investment holding(QXMCCL)
    
    
    
    
    
    
    
    
    
    Note iiiQiao Xing Communication Holdings Limited
    
    British Virgin Islands
    
    
    100
    %
    
    
    100
    %
    
    Investment holdingNote ivCEC Telecom Co., Ltd. (CECT)
    
    Mainland China
    
    
    
    
    
    
    52Note v
    %
    
    Production and sales of mobile phones and accessoriesBeijing
Jinxin Hengtong Technology Company Limited (BJHTCL)
    
    Mainland China
    
    
    
    
    
    
    46.8Note vi
    %
    
    Production of mobile phones and accessoriesBeijing Zhongdian Songda Consumer Communications Products Service Company Limited (BJZDSD)
    
    Mainland China
    
    
    
    
    
    
    52Note vii
    %
    
    Provision of mobile phone repair and maintenance services
 Notes -  i.
    
    Hui Zhou Qiao Xing Communication Industry Limited is an equity joint
venture established in Mainland China on December 2, 2002 between the
Group and Qiao Xing Group Limited, a company beneficially owned by Mr. Rui
Lin Wu, to be operated for a term of 15 years until December 1, 2017. Its
registered capital is Rmb10,629,000 which was fully paid up on March 28,
2003.ii.
    
    Hui Zhou Qiao Xing Property Limited is an equity joint venture
established in Mainland China on December 17, 2002 between the Group
and Qiao Xing Group Limited, a company beneficially owned by Mr. Rui
Lin Wu, to be operated for a term of 15 years until December 16,
2017. Its registered capital is Rmb2,125,800 which was fully paid up
on March 28, 2003.iii.
    
    Qiao Xing Mobile Communication Company Limited was incorporated in
the British Virgin Islands on January 31, 2002 between the Group and
Galbo Enterprises Ltd., an independent third party. Its authorized
capital is US$50,000, of which US$10,000 has been issued and paid up
on August 28, 2002.iv.
    
    Qiao Xing Communication Holdings Limited was incorporated in the
British Virgin Islands on May 21, 2002. Its authorized capital is
US$50,000, of which US$1 has been issued and paid up by June 8, 2002. - 7 -




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2.
    
    SUBSIDIARIES (Contd)v.
    
    CEC Telecom Co., Ltd. was established in Mainland China on May 22, 2000
for a term of 30 years until May 21, 2030. The Groups interest in CECT
is held through QXMCCL which in turn holds 65% of the issued capital of
CECT. The remaining 35% issued capital of CECT is held by China
Electronics Corporation and Tianjin Taida Company Limited, both of which
are Mainland Chinese government state-owned enterprises. CECTs
registered capital is Rmb300,000,000 which was fully paid up on May 18,
2000.vi.
    
    Beijing Jinxin Hengtong Technology Company Limited was established in
Mainland China on February 26, 2001 to be operated for a term of 30 years
until February 25, 2031. The Groups interest in BJHTCL is held through
CECT which in turn holds 90% of the issued capital of BJHTCL. BJHTCLs
registered capital is Rmb1,000,000 which was fully paid up. During the
year ended December 31, 2003, BJHTCL became dormant.vii.
    
    Beijing Zhongdian Songda Consumer Communications Products Services
Company Limited was established in Mainland China on June 4, 2001 to be
operated for a term of 10 years until June 3, 2011. The Groups interest
in BJZDSD is held through CECT which in turn holds 100% of the issued
capital of BJZDSD. BJZDSDs registered capital is Rmb2,000,000 which was
fully paid up. BJZDSD was de-registered in 2003.3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESa.
    
    Basis of consolidationThe 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.The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States (U.S.
GAAP). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
U.S. GAAP differs from that used in the statutory financial statements of
the major operating subsidiaries of the Group, which were prepared in
accordance with the relevant accounting principles and financial
reporting regulations applicable to joint venture enterprises as
established by the Ministry of Finance of the PRC. Certain accounting
principles stipulated under U.S. GAAP are not applicable in the PRC.b.
    
    SubsidiariesA subsidiary is a company, including the equity joint ventures, in which
the Company holds, directly or indirectly, more than a 50% equity
interest, as a long-term investment and over which it can exercise
control, as defined under U.S. GAAP. - 8 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)c.
    
    Investment at equityThe Groups investment in an affiliate for which its ownership exceeds
20%, but which are not majority-owned or controlled by the Group, is
accounted for using the equity method of accounting. Under the equity
method, the Groups proportionate share of the affiliates net income or
loss is included in the consolidated statements of operations, while the
Groups proportionate share of the affiliates capital transactions is
accounted for as changes in owners equity.d.
    
    Investment at costInvestments in which the Group does not have control or significant
influence are carried at cost less impairment for decline in value that
are deemed other than temporary. Income from investments is accounted
for to the extent of dividends received and receivable.e.
    
    GoodwillGoodwill represents the cost of an acquired company in excess of the fair
market value of the individual net tangible assets at the date of
acquisition. The Group adopted Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. SFAS
No. 142 requires that goodwill be tested for impairment upon first
adoption and annually thereafter, or more frequently if events or changes
in circumstances indicate that it might be impaired, using the prescribed
two-step process. The first step screens for potential impairment of
goodwill if the fair value of the reporting unit is less than its
carrying value, while the second step measures the amount of goodwill
impairment, if any, by comparing the implied fair value of goodwill to
its carrying value.The Group completed its annual goodwill impairment test during the year
ended December 31, 2003 and determined that no adjustment to the carrying
value of goodwill was required.f.
    
    Other acquired intangible assetsOther acquired intangible assets are required to be determined separately
from goodwill based on the assets fair value. The Group adopted SFAS No.
141, Business Combinations. In particular, an intangible asset which
is acquired in a business combination should be recognized as an asset
apart from goodwill if it satisfies either the contractual-legal or
separability criterion. SFAS No. 141 specifically excludes assembled
workforce acquired in a business combination from recognition apart from
goodwill.With the adoption of SFAS No. 142, intangible assets with indefinite
useful lives are no longer amortized, while intangible assets with finite
useful lives will continue to be amortized over their useful lives.The Group adopted SFAS No. 144 which requires that intangible assets with
finite useful lives be tested for impairment if events or changes in
circumstances indicate that the asset might be impaired, using the
prescribed two-step process. The first step is a recoverability test
which screens for potential impairment of an asset based on whether the
undiscounted sum of estimated future cash flows from an asset is less
than its carrying value. The second step measures the amount of
impairment, if any, by comparing the fair value of the asset to its
carrying value. - 9 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)f.
    
    Other acquired intangible assets (Contd )The Group completed its annual other acquired intangible assets
impairment test during the year ended December 31, 2003 and determined
that no adjustment to the carrying value of other acquired intangible
assets was required.g.
    
    InventoriesInventories are stated at the lower of cost, determined 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. Write-downs for declines in
net realizable value or for losses of inventories are recognized as an
expense in the year the impairment or loss occurs.h.
    
    Property, machinery and equipment and construction-in-progressProperty, 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 expenditures 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
assets estimated residual value. Leasehold improvements are amortized
over the lease term if shorter than the assets useful life. The
estimated useful lives are as follows: leasehold improvements  5 years
(over the lease term), buildings  8 to 30 years, machinery and equipment
 5 to 12 years, furniture and office equipment  5 to 10 years, and
motor vehicles  5 to 8 years.Construction-in-progress represents land costs as well as factory and
office buildings under construction. When material, 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 tests its investment in long-lived assets, including property,
machinery and equipment and amortizable intangible assets, for
recoverability whenever events or changes in circumstances indicate the
net carrying amount may not be recoverable. - 10 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)i.
    
    Land use rightsLand 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 48 to 51 years.j.
    
    Sales recognitionThe Group recognizes sales in accordance with SEC Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements.Sales represent the invoiced value of goods, net of value-added tax
(VAT), supplied to customers. Sales are recognized upon delivery of
goods and passage of title to customers.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).k.
    
    Advertising costsCosts incurred for producing and communicating advertising are generally
charged to expense when incurred.l.
    
    Debt issuance costs and borrowing costsCosts 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, except to the extent that they
are attributable to the acquisition, construction or production of an
asset that necessarily involves a substantial period of time before the
asset is ready for its intended use or sale, in which case the borrowing
costs are capitalized as part of the costs of the asset.m.
    
    Research and development expendituresResearch and development expenditures are charged to expenses as
incurred.n.
    
    Income taxesThe Group accounts for income taxes 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 consolidated financial statements or tax
returns. Deferred income taxes are provided using the liability method
and are 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 realize
their benefits or that future deductibility is uncertain. - 11 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)o.
    
    LeasesCapital leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets are transferred to
the Group. Property, machinery and equipment held under capital leases
are initially recorded at the present value of the minimum payments at
the inception of the leases, with equivalent liabilities categorized as
appropriate under current or non-current liabilities. Interest expense,
which represents the difference between the minimum payments at the
inception of the capital leases and the corresponding fair value of the
assets acquired, is allocated to accounting periods over the period of
the leases to produce a constant rate of charge on the outstanding
balance.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 expense
on a straight-line basis over the period of the relevant leases.p.
    
    Segment informationThe 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. SFAS No. 131 requires companies that have a single reportable
segment to disclose information about products and services, information
about geographic areas, and information about major customers. SFAS No.
131 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. The Group
classifies its products into two core business segments, namely mobile
phones and indoor phones. In view of the fact that the Group operates
principally in Mainland China, no geographical segment information is
presented.q.
    
    Foreign currency translationThe Companys functional currency is the United States dollar (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 are
included in the consolidated statements of operations and amounted to
approximately Rmb (104,000), nil and nil for the years ended December 31,
2001, 2002 and 2003, respectively.The translation of the Companys consolidated 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. - 12 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)r.
    
    Comprehensive incomeThe 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 the consolidated 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 consolidated statements of operations and
comprehensive income.s.
    
    Earnings (loss) per common shareEarnings (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.t.
    
    Stock-based compensationThe 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. Repriced options are accounted for
as compensatory options using variable accounting treatment. Under
variable plan accounting, compensation expense is adjusted for increases
or decreases in the fair market value of the Companys common stock.
Variable plan accounting is applied to the repriced options until the
options are exercised, forfeited or expire unexercised. Pro forma
disclosures were made assuming hypothetical fair value method application
as prescribed by SFAS 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 the Black-Scholes option-pricing model and recognizes this value over
the period in which the options vest. - 13 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)u.
    
    Financial instrumentsThe 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
shareholders 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 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 an 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 and fair values of the Groups financial instruments
at December 31, 2002 and 2003 are as follows: Carrying amount
    
    Fair value2002
    
    2003
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    US$000
    
    Rmb000
    
    Rmb000
    
    US$000Cash and cash equivalents
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,796
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,796Pledged bank deposits
    
    
    12,483
    
    
    
    85,189
    
    
    
    10,293
    
    
    
    12,483
    
    
    
    85,189
    
    
    
    10,293Bills receivable
    
    
    
    
    
    
    19,836
    
    
    
    2,397
    
    
    
    
    
    
    
    19,836
    
    
    
    2,397Accounts receivable, net
    
    
    33
    
    
    
    254,951
    
    
    
    30,803
    
    
    
    33
    
    
    
    254,951
    
    
    
    30,803Short-term borrowings
    
    
    40,000
    
    
    
    439,472
    
    
    
    53,097
    
    
    
    40,000
    
    
    
    439,472
    
    
    
    53,097Accounts payable
    
    
    1,372
    
    
    
    177,373
    
    
    
    21,430
    
    
    
    1,372
    
    
    
    177,373
    
    
    
    21,430Other payables
    
    
    733
    
    
    
    14,630
    
    
    
    1,768
    
    
    
    733
    
    
    
    14,630
    
    
    
    1,768Accrued liabilities
    
    
    13,890
    
    
    
    20,069
    
    
    
    2,425
    
    
    
    13,890
    
    
    
    20,069
    
    
    
    2,425Customer deposits
    
    
    
    
    
    
    77,220
    
    
    
    9,330
    
    
    
    
    
    
    
    77,220
    
    
    
    9,330
  v.
    
    Cash and cash equivalentsCash and cash equivalents include cash on hand, amount on deposits with
banks and all highly liquid investments with maturity dates of three
months or less at the time of acquisition.w.
    
    Recently issued accounting standards  (i)     In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 provides interpretive
guidance on the accounting for all acquisitions of financial
institutions, except transactions between two or more mutual enterprises.
Restatement of previously issued financial statements will be required.
Those transition provisions are effective as of October 1, 2002; however,
early application is permitted. The Group does not anticipate that the
adoption of SFAS No. 147 will have any effect on its consolidated
financial statements. - 14 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)w.
    
    Recently issued accounting standards (Contd )  (ii) In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN
45 elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit.
It also clarifies that at the time a company issues a guarantee, the
company must recognize an initial liability for the fair market value of
the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 is not expected to have a material impact on the
Groups consolidated financial statements.(iii) In December 2002, the FASB issued SFAS No. 148: Accounting for
Stock-Based Compensation-Transition and Disclosure-and Amendment of FASB
Statement No.123. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Group adopted the disclosure
provisions of SFAS No. 148 effective December 31, 2002. The adoption of
SFAS No. 148 is not expected to have a material impact on the Groups
consolidated financial statements.(iv) In January 2003, the FASB issued Interpretation No. 46:
Consolidation of Variable Interest Entities (an interpretation of ARB
No. 51) as revised in December 2003 (FIN46R). FIN46R addresses
consolidation by business enterprises of certain variable interest
entities, commonly referred to as special purpose entities. The adoption
of FIN46 is not expected to have a material impact on the Groups
consolidated financial statements.(v) In April 2003, the FASB issued SFAS No.149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No.149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No.133 Accounting for
Derivative Instruments and Hedging Activities. It is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of SFAS
No.149 should be applied prospectively. The adoption of SFAS 149 is not
expected to have a material impact on the Groups consolidated financial
statements. - 15 -




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3.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)w.
    
    Recently issued accounting standards (Contd )  (vi) In May 2003, the FASB issued SFAS No.150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classifies a
financial instrument that is within its scope as a liability (or as an
asset in some circumstances). It is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the
issuance date of SFAS No.150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. The adoption
of SFAS No.150 is not expected to have a material impact on the Groups
consolidated financial statements.(vii) In May 2003, the Emerging Issues Task Force (EITF)
finalized EITF 00-21 Revenue Arrangements with Multiple Deliverables.
EITF 00-21 addresses the accounting for multiple element revenue
arrangements, which involve more than one deliverable or unit of
accounting in circumstances where the delivery of those units takes place
in different accounting periods. EITF 00-21 requires disclosures of the
accounting policy for revenue recognition of multiple element revenue
arrangements and the nature and description of such arrangements. The
accounting and reporting requirements are effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The adoption of EITF 00-21 does not have a significant impact on
the Groups financial statements.(viii) In December 2003, the FASB issued SFAS No. 132 (Revised)
Employers Disclosure About Pensions and Other Postretirement Benefits.
SFAS No. 132 (Revised) retains disclosure requirements in original SFAS
132 and requires additional disclosures relating to assets, obligations,
cash flows and net periodic benefit cost. SFAS No. 132 (Revised) is
effective for fiscal years ending after December 15, 2003, except that
certain disclosures are effective for fiscal years ending after June 15,
2004. The Group currently does not have any broad-based pension or
postretirement benefit plans which require disclosure. Accordingly, the
adoption of SFAS No. 132 (Revised) does not have a significant impact on
the Groups financial statements.(ix) In July and December 2003, the EITF published EITF Issue 03-9
Interaction of Paragraphs 11 and 12 of FASB Statement No. 142 Regarding
Determination of the Useful Life and Amortization of an Intangible Asset
(EITF 03-9). EITF 03-9 provides guidance in determining whether or not
an intangible asset has an indefinite useful life and, if not, the
appropriate useful life for the intangible asset. The Group has applied
the provisions of EITF 03-9 in accounting for the acquisition of CECT in
2003 (Note 18). - 16 -




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##### Table of Contents



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, 2003 of
US$1.00 = Rmb8.2767. 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: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Trade receivables- related parties (Note 33)
    
    
    
    
    
    
    72,781
    
    
    
    8,793- third parties
    
    
    33
    
    
    
    182,942
    
    
    
    22,10333
    
    
    
    255,723
    
    
    
    30,896Less: Allowance for doubtful accounts
    
    
    
    
    
    
    (772
    )
    
    
    (93
    )Accounts receivable, net
    
    
    33
    
    
    
    254,951
    
    
    
    30,803
 Changes in the allowance for doubtful accounts were as follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    31,084
    
    
    
    
    
    
    
    Increase in allowance for
doubtful accounts
    
    
    34,997
    
    
    
    772
    
    
    
    93Reduction in allowance for
doubtful accounts arising from
sale of a subsidiary (Note 10)
    
    
    (66,081
    )
    
    
    
    
    
    
    End of year
    
    
    
    
    
    
    772
    
    
    
    93
  6.
    
    INVENTORIES Inventories consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Raw materials
    
    
    148
    
    
    
    35,187
    
    
    
    4,251Finished goods
    
    
    101
    
    
    
    114,100
    
    
    
    13,786249
    
    
    
    149,287
    
    
    
    18,037
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7.
    
    PREPAID EXPENSES Prepaid expenses consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Vendor deposits for the purchase
of mobile phones- related parties (Note 33)
    
    
    
    
    
    
    308,035
    
    
    
    37,217- third parties
    
    
    44,660
    
    
    
    69,494
    
    
    
    8,39744,660
    
    
    
    377,529
    
    
    
    45,614Prepaid design fees
    
    
    4,590
    
    
    
    9,612
    
    
    
    1,161Other
    
    
    543
    
    
    
    83
    
    
    
    1049,793
    
    
    
    387,224
    
    
    
    46,785
  8.
    
    OTHER CURRENT ASSETS Other current assets consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Advances to staff
    
    
    
    
    
    
    3,836
    
    
    
    463Advances to others
    
    
    
    
    
    
    1,200
    
    
    
    145Rental and utility deposits
    
    
    
    
    
    
    395
    
    
    
    48Deposits for purchase of property,
machinery and equipment
    
    
    
    
    
    
    822
    
    
    
    100Other
    
    
    295
    
    
    
    1,652
    
    
    
    199295
    
    
    
    7,905
    
    
    
    955
  9.
    
    RECEIVABLE FROM SALE OF A SUBSIDIARY Receivable from sale of a subsidiary consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Consideration receivable from Central Grace
    
    
    210,000
    
    
    
    
    
    
    
    Advances to
Qiao Xing Telecommunication Industry Company Limited
(QXTI)
    
    
    72,377
    
    
    
    
    
    
    
    282,377
    
    
    
    
    
    
    
    
 The consideration receivable from sale of a subsidiary was settled between
March 20, 2003 and July 16, 2003 (Note 10). The advances to QXTI, an ex-subsidiary, were collected in 2003. - 18 -




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10.
    
    SALE OF A SUBSIDIARY On December 31, 2002, an agreement for sale of the one issued share of Qiao
Xing Holdings Limited (QXHL) was entered into between Qiao Xing
Universal Telephone, Inc. (the Vendor) and Central Grace Technologies
Limited (the Purchaser), a corporation incorporated under the laws of
the British Virgin Islands. The consideration for the sale of the one
issued share was Rmb210,000,000 and the payment schedule was as follows: Settlement Date
    
    Rmb000March 20, 2003
    
    
    11,470June 5, 2003
    
    
    52,000
    *July 11, 2003
    
    
    31,435July 11, 2003
    
    
    44,661July 12, 2003
    
    
    10,434July 16, 2003
    
    
    60,000210,000
  *
    
    The amount was offset with a payable to QXTI of the same amount pursuant
to an agreement dated June 5, 2003. The Purchaser further represented, undertook, warranted and covenanted to
make reciprocal warranties, undertakings, covenants and indemnities to the
Vendor and to assume all disclosed and undisclosed liabilities of QXHL
excluding :  (i)
    
    the settlement of the current liabilities due to the Vendor
in the sum of RMB231,585,507 by QXTI(ii)
    
    the settlement of the current liabilities due to the Vendor
in the sum of RMB8,172,953 by QXHL(iii)
    
    the settlement of current assets due from QXMC in the sum of
RMB113,543,063 by QXTI Although the form of the sale of the one issued share of QXHL represents a sale
of stock, the economic substance of the transaction is the sale of QXHLs
indoor phone manufacturing assets and related liabilities. As of December 31, 2002, the condensed historical balances of QXHLs assets
and liabilities that were sold consist of: Rmb000Total current assets
    
    
    592,305Property, plant and equipment
    
    
    171,292Land use rights
    
    
    29,086Total current liabilities
    
    
    (637,613
    )Long term borrowings
    
    
    (30,000
    )Minority interests
    
    
    5,880130,950
 - 19 -




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10.
    
    SALE OF A SUBSIDIARY (Contd) Certain assets of QXHL were excluded from the sale transaction. Excluded assets
were certain land use rights, fixed line telephone sales network, mobile
telephone business including but not limited to the research and development
and manufacturing facilities, and die cast moulds. The excluded assets were
retained by the Group. The Group would continue to engage in the sale of indoor
phones as a core business segment of its ongoing operations, but intends to
outsource the manufacturing of indoor phones. Therefore the sale of a
subsidiary has not been accounted for as a discontinued operation. As a result of the sale transaction, a gain on disposal of RMB79,050,000 was
recognized for the year ended December 31, 2002. The calculation of the gain
on sale of a subsidiary is set out as follows: Rmb000Consideration
    
    
    210,000Net book value of assets sold and
liabilities assumed
    
    
    (125,070
    )Minority interests sold
    
    
    (5,880
    )Gain on sale of a subsidiary
    
    
    79,050
  11.
    
    PROPERTY, MACHINERY AND EQUIPMENT Property, machinery and equipment consists of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Buildings
    
    
    
    
    
    
    39,110
    
    
    
    4,725Leasehold improvements
    
    
    145
    
    
    
    6,728
    
    
    
    813Machinery, equipment and software
    
    
    24,264
    
    
    
    72,506
    
    
    
    8,760Furniture and office equipment
    
    
    709
    
    
    
    7,309
    
    
    
    883Motor vehicles
    
    
    123
    
    
    
    3,936
    
    
    
    47625,241
    
    
    
    129,589
    
    
    
    15,657Less: Accumulated depreciation and
amortization
    
    
    (11,407
    )
    
    
    (22,562
    )
    
    
    (2,726
    )Less: Accumulated impairment losses
    
    
    (8,722
    )
    
    
    (8,722
    )
    
    
    (1,054
    )Property, machinery and equipment, net
    
    
    5,112
    
    
    
    98,305
    
    
    
    11,877
 Machinery, equipment and software with cost of Rmb7,551,000 (US$912,000) and
accumulated depreciation and amortization of Rmb1,384,000(US$167,000) as of
December 31, 2003 were held under capital lease obligations. - 20 -




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12.
    
    CONSTRUCTION-IN-PROGRESS Construction-in-progress represents leasehold land, construction costs for
factory and staff quarters and machinery pending installation. 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Construction costs for factory and staff
quarters
    
    
    
    
    
    
    1,184
    
    
    
    143
 The capitalization of interest during the construction period of eight months
is not considered material to the consolidated financial statements.  13.
    
    LAND USE RIGHTS, NET Land use rights consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Land use rights
    
    
    203,047
    
    
    
    204,847
    
    
    
    24,750Less: Accumulated amortization
    
    
    (8,638
    )
    
    
    (12,732
    )
    
    
    (1,538
    )Less:
Accumulated impairment losses
    
    
    (5,004
    )
    
    
    (5,004
    )
    
    
    (605
    )Land use rights, net
    
    
    189,405
    
    
    
    187,111
    
    
    
    22,607
 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, 2002
and 2003, the land use rights consisted of certain parcels of land located in
Mainland China with a net book value of approximately Rmb136,826,000 and Rmb
133,900,000, respectively, held under land use rights ranging from 42 to 47
years and expiring in June 2042, July 2048, August 2049 and March 2050. In addition, as of December 31, 2002 and 2003, the Group also recorded land use
rights with a net book value of approximately Rmb 52,579,000 and Rmb
53,211,000, respectively, in respect of certain parcels of land which the Group
has not yet obtained the land use right certificates. The Group has obtained a
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 of Rmb 51,444,000 with no current land use right certificates. - 21 -




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##### Table of Contents



13.
    
    LAND USE RIGHTS, NET (Contd) Land use rights with a net book value of approximately Rmb136,826,000 and Rmb
133,900,000 as of December 31, 2002 and 2003 respectively were still vested
with QXTI, the Groups ex-subsidiary. The ownership of these recorded land use
rights were transferred from QXTI to the Group in January 2004. Land use rights with a net book value of Rmb 47,635,000 and Rmb 89,191,000 as
of December 31, 2002 were pledged as collateral for certain short-term
borrowings of the ex-subsidiary (Notes 31 and 33) and the unsettled
consideration of the Groups equity interest in CECT, respectively. These
pledges were released during 2003.  14.
    
    OTHER NON-CURRENT ASSETS Other non-current assets consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Deposits paid for equity interests in CECT
    
    
    180,000
    
    
    
    
    
    
    
    Fair value of shares issued to an
external consultant (Note 24)
    
    
    13,243
    
    
    
    
    
    
    
    Excess of cash received over share of net
assets of a minority shareholder of
QXMCCL
    
    
    (2,680
    )
    
    
    
    
    
    
    Other
    
    
    944
    
    
    
    
    
    
    
    191,507
    
    
    
    
    
    
    
    
 During the year ended December 31, 2002, the minority shareholder of Qiao Xing
Mobile Communication Company Limited (QXMCCL) paid Rmb 67 million for a 20%
equity interest in QXMCCL. The consideration was paid by the minority
shareholder of QXMCCL directly to the sellers of CECT as part of the deposits
paid by the Group. The amount of Rmb 67 million received in excess of the
minority shareholders share of net assets of QXMCCL is credited against the
deposits paid for the equity interests in CECT as of December 31, 2002.  15.
    
    INVESTMENT AT EQUITY 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Share of net assets as of February 8, 2003
    
    
    
    
    
    
    30,412
    
    
    
    3,674Share of profit of an affiliate
    
    
    
    
    
    
    6,802
    
    
    
    822
    
    
    
    37,214
    
    
    
    4,496
 - 22 -




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15.
    
    INVESTMENT AT EQUITY (Contd) CEC Mobile Co, Ltd. (CECM) is a limited liability company established in
Mainland China to engage in the production and sale of mobile phones and
accessories. The Groups 26% equity interest in CECM is held through CECT,
which in turn holds 50% of the issued share capital of CECM. CECMs registered
capital of Rmb48,000,000 has been fully paid up. The results of operations of CECM for the period from February 8, 2003 to
December 31, 2003 is accounted for in the consolidated statement of operations
using the equity method. Summarized condensed financial information of CECM as of December 31, 2003 and
for the period from February 8, 2003 (date of acquisition of CECT) to December
31, 2003 is as follows: 2003Rmb000
    
    US$000(Unaudited)
    
    (Unaudited)Current assets
    
    
    149,167
    
    
    
    18,023Non-current assets
    
    
    1,494
    
    
    
    181Total assets
    
    
    150,661
    
    
    
    18,204Current liabilities
    
    
    76,233
    
    
    
    9,212Capital and reserves
    
    
    74,428
    
    
    
    8,992Total liabilities and equity
    
    
    150,661
    
    
    
    18,204Net sales
    
    
    270,546
    
    
    
    32,688Cost of sales
    
    
    (243,403
    )
    
    
    (29,408
    )Gross profit
    
    
    27,143
    
    
    
    3,280Operating expenses
    
    
    (12,910
    )
    
    
    (1,560
    )Income from operations
    
    
    14,233
    
    
    
    1,720Other expenses
    
    
    (629
    )
    
    
    (76
    )Net income
    
    
    13,604
    
    
    
    1,644The Groups equity in earnings (50%)
    
    
    6,802
    
    
    
    822
 - 23 -




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16.
    
    INVESTMENT AT COST Investment at cost represents the Groups 2.01% equity interest in
China Electronics Financial Co., Ltd (CEFCL) which is held through CECT,
which in turn holds 3.86% of the issued share capital of CEFCL. CEFCL is a
limited liability company established in Mainland China to engage in the
provision of financial services.  17.
    
    GOODWILL With the acquisition of CECT, the group has obtained significant research and
development capabilities and technologies as well as licenses to sell both CDMA
and GSM mobile phones in China. The acquisition of the above mentioned economic
resources further enhances the Groups capability to penetrate the mobile phone
market in China. As a result, the acquisition of the above mentioned economic
resources has contributed to the determination of a purchase price that results
in the recognition of goodwill of Rmb72,088,000. The amount allocated to
goodwill has been assigned to the mobile phones segment of the Groups
business. None of the goodwill is deductible for Mainland Chinese income tax
purposes. In accordance with SFAS No. 142, the Group performed an impairment test of the
goodwill assigned to the mobile phones segment of the Groups business as of
December 31, 2003 and determined that there was no indication of impairment. - 24 -




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##### Table of Contents



18.
    
    OTHER ACQUIRED INTANGIBLE ASSETS, NET The following comprise, with the acquisition of CECT, the components of the
Groups other acquired intangible assets as of December 31, 2003 that will
continue to be amortized under SFAS No. 142: ExpectedWeightedAverageAmortizat
    
    
    
    
    
    
    
    
    
    Accumulatedion Period
    
    Gross Carrying Value
    
    Amortization
    
    Intangible Assets, netRmb000
    
    US$000
    
    Rmb000
    
    US$000
    
    Rmb000
    
    US$000Trademarks
    
    Indefinite
    
    
    43,368
    
    
    
    5,240
    
    
    
    
    
    
    
    
    
    
    
    43,368
    
    
    
    5,240Intangible assets
subject to
amortizationCustomer relationship
    
    5 years
    
    
    29,250
    
    
    
    3,534
    
    
    
    5,363
    
    
    
    648
    
    
    
    23,887
    
    
    
    2,886Completed technology
    
    5 years
    
    
    4,564
    
    
    
    551
    
    
    
    837
    
    
    
    101
    
    
    
    3,727
    
    
    
    450Core technology
    
    5 years
    
    
    40,174
    
    
    
    4,854
    
    
    
    7,365
    
    
    
    890
    
    
    
    32,809
    
    
    
    3,964Backlog
    
    5 months
    
    
    26,619
    
    
    
    3,216
    
    
    
    26,619
    
    
    
    3,216
    
    
    
    
    
    
    
    License
    
    5 years
    
    
    10,958
    
    
    
    1,324
    
    
    
    2,008
    
    
    
    243
    
    
    
    8,950
    
    
    
    1,081In process research
and development
    
    
    
    
    33,579
    
    
    
    4,057
    
    
    
    33,579
    
    
    
    4,057
    
    
    
    
    
    
    
    50 months
    
    
    145,144
    
    
    
    17,536
    
    
    
    75,771
    
    
    
    9,155
    
    
    
    69,373
    
    
    
    8,381Total
    
    
    
    
    188,512
    
    
    
    22,776
    
    
    
    75,771
    
    
    
    9,155
    
    
    
    112,741
    
    
    
    13,621
 The Group recorded a one-time charge of Rmb33,579,000 (US$4,057,000) at the
date of acquisition in accordance with FASB Interpretation No. 4 Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method for purchased in process research and development
that had no alternative future use. The conclusion that the
in process development effort, or any material sub-component, had no
alternative future use was reached in consultation with the Groups management
and CECT management. The following table presents current and expected amortization expense of the
other acquired intangible assets for the year ended December 31, 2003 and the
subsequent five years: AmountRmb000
    
    US$000Aggregate amortization expense:For the year ended December 31, 2003
    
    
    75,771
    
    
    
    9,155Expected amortization expense:For the years ending December 31,2004
    
    
    16,988
    
    
    
    2,0522005
    
    
    16,988
    
    
    
    2,0522006
    
    
    16,988
    
    
    
    2,0522007
    
    
    16,988
    
    
    
    2,0522008
    
    
    1,421
    
    
    
    173Total
    
    
    69,373
    
    
    
    8,381
 - 25 -




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19.
    
    SHORT-TERM BORROWINGS Short-term borrowings consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Bills payable
    
    
    10,000
    
    
    
    269,472
    
    
    
    32,558Bank loans
    
    
    30,000
    
    
    
    170,000
    
    
    
    20,53940,000
    
    
    
    439,472
    
    
    
    53,097
 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 year ended December 31, 2002, 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 a weighted average interest rate of 3%
per annum as of December 31, 2002. As of December 31, 2002 and 2003, the bills payable and bank loans are secured
by pledged bank deposits of approximately Rmb10,000,000 and Rmb85,189,000,
respectively. The weighted average interest rate on bank loans, all due within one year, was
5.84% per annum and 5.08% per annum, respectively, as of December 31, 2002 and
2003.  20.
    
    OTHER PAYABLES Other payables consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Payable for construction work of factories
    
    
    
    
    
    
    8,932
    
    
    
    1,079Payable for purchase of property,
machinery and equipment
    
    
    660
    
    
    
    4,668
    
    
    
    564Other
    
    
    73
    
    
    
    1,030
    
    
    
    125733
    
    
    
    14,630
    
    
    
    1,768
 - 26 -




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21.
    
    ACCRUED LIABILITIES Accrued liabilities consist of: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Accruals for operating expenses- Commissions (Note 33)
    
    
    11,331
    
    
    
    8,451
    
    
    
    1,022- Salaries
    
    
    738
    
    
    
    2,673
    
    
    
    323- Advertising
    
    
    
    
    
    
    1,809
    
    
    
    218- Warranty
    
    
    
    
    
    
    2,981
    
    
    
    360- Others
    
    
    1,659
    
    
    
    1,743
    
    
    
    211Provision for staff benefit*
    
    
    162
    
    
    
    2,412
    
    
    
    29113,890
    
    
    
    20,069
    
    
    
    2,425
  *
    
    Provision for staff benefit is provided at 17.5% on employees basic
salaries. The provision for staff benefit is used for employees welfare,
employees education and workers association.  22.
    
    CAPITAL LEASE OBLIGATIONS Future minimum lease payments under a capital lease are as follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Payable during the following periods- 2004
    
    
    
    
    
    
    1,909
    
    
    
    231- 2005
    
    
    
    
    
    
    1,909
    
    
    
    231- 2006
    
    
    
    
    
    
    1,909
    
    
    
    231- 2007
    
    
    
    
    
    
    954
    
    
    
    114Total minimum lease payments
    
    
    
    
    
    
    6,681
    
    
    
    807Less: Amount representing future interest
    
    
    
    
    
    
    (1,395
    )
    
    
    (169
    )Present value of minimum lease payments
    
    
    
    
    
    
    5,286
    
    
    
    638Less: Current portion
    
    
    
    
    
    
    (1,510
    )
    
    
    (182
    )Non-current portion
    
    
    
    
    
    
    3,776
    
    
    
    456
 - 27 -




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##### Table of Contents



23.
    
    SHAREHOLDERS LOANS These represent unsecured loans from Mr. Rui Lin Wu (held in 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 make demand on the Group for repayment before January 1, 2005.
For financial reporting purposes, interest expense of approximately Rmb478,000
for each of the years ended December 31, 2001, 2002 and 2003 was imputed
according to cost of borrowings in Mainland China, and were recorded as
interest expense and shareholders contribution.  24.
    
    COMMON STOCK During the year ended December 31, 2001, an aggregate of US$5,216,000
(equivalent to Rmb43,175,000 based on an exchange rate of US$1 = Rmb8.2774) of
the face value of the Companys 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. 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. 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, 2003. In August 2002, the Company issued 1,000,000 shares of common stock to an
external consultant in connection with the acquisition of CECT. The fair value
of the 1,000,000 shares of approximately Rmb 13,243,000 was recorded as an
addition to the investment cost of CECT (Note 14). In June 2003, holders of 300,000 warrants and 319,000 warrants, with an
exercise price of US$6.6 per share and US$8.49 per share respectively,
exercised their warrants. The Company issued to them, at no consideration, an
aggregate of 131,505 and 103,813 shares of common stock respectively,
representing the difference between the then quoted market price and the
exercise price. In June and July 2003, an external consultant exercised 20,000 warrants and the
Company issued an aggregate of 20,000 shares of common stock to this external
consultant at an exercise price of US$5.50 per share. - 28 -




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##### Table of Contents



25.
    
    STOCK OPTIONS AND WARRANTSa.
    
    Stock purchase optionsThe 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.b.
    
    Stock options to employeesDuring 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 4, 2000. The
Company did not grant any options to employees during the years ended
December 31, 2002 and 2003. On January 2, 2002, the Company repriced the
exercise price of these options to US$5.50 per share.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 for the year ended December 31, 2001
and 2002 as no employee options were granted at prices below the market
price on the grant dates. Compensation expense of Rmb26,929,000 is
recorded for the year ended December 31, 2003 based on the excess of the
quoted market price of the underlying stock of US$8.77 per share as of
December 31, 2003 over the re-priced exercise price of US$5.50 per share
on the date of grant.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s common stock at an exercise
price of US$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. During the year
ended December 31, 2003, 20,000 common stock purchase warrants were
exercised at an exercise price of US$5.50 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 external consultants service period. - 29 -




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##### Table of Contents



25.
    
    STOCK OPTIONS AND WARRANTS (Contd)c.
    
    Stock purchase warrants (Contd)  (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 be exercised for one share of 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.(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 be exercised for one share of 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 the Black-Scholes option-pricing model on the grant date,
which had been applied for allocating the face value of the
convertible debentures 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.During the year ended December 31, 2003, 319,000 Detachable
Warrants were exercised at an exercise price of US$8.49 per share. - 30 -




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##### Table of Contents



25.
    
    STOCK OPTIONS AND WARRANTS (Contd)c.
    
    Stock purchase warrants (Contd)  (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 be exercised for one share of common stock
in 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 the Black-Scholes option-pricing model on the
grant date, which were recognized as prepaid stock issuance costs.
The prepaid stock issuance costs were written off in the year ended
December 31, 2002.During the year ended December 31, 2003, all warrants were
exercised at an exercise price of US$6.6 per share.(vi)
    
    During the year ended December 31, 2002, the Company issued
80,000 share warrants to the Companys investor relations advisor as
compensation. Each warrant can be exercised for one share of common
stock in the Company at an exercise price of US$7.00 per share and
is exercisable for the period from March 25, 2002 to March 1, 2005.
The fair value amounted to approximately Rmb39,744 (equivalent to
US$4,800) as computed using the Black-Scholes option-pricing model
on the grant date which has been recognized as compensation expense
in the year ended December 31, 2002. Changes in outstanding stock options and warrants during the years ended
December 31, 2001, 2002 and 2003 were as follows: No. of stock
    
    Weightedoptions/
    
    averagewarrants
    
    exercise priceUS$Outstanding, as of January 1, 2001
    
    
    2,343,000
    
    
    
    14.68Granted in 2001
    
    
    300,000
    
    
    
    6.60Outstanding, as of January 1, 2002
    
    
    2,643,000
    
    
    
    13.77Granted in 2002
    
    
    80,000
    
    
    
    7.00Outstanding, as of December 31, 2002
    
    
    2,723,000
    
    
    
    10.10Exercised in 2003
    
    
    (639,000
    )
    
    
    7.51Outstanding, as of December 31, 2003
    
    
    2,084,000Exercisable as of December 31, 2003
    
    
    2,084,000
    
    
    
    10.89Exercisable, as of December 31, 2002
    
    
    2,723,000
    
    
    
    10.10
 - 31 -




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##### Table of Contents



25.
    
    STOCK OPTIONS AND WARRANTS (Contd)c.
    
    Stock purchase warrants (Contd) The following table summarizes information about stock options and warrants
described above that are outstanding and exercisable at December 31, 2003: Options and warrants outstanding and exercisableWeighted-averageWeighted-average exercise
    
    remaining contractual lifeOptions/warrants
    
    price per option/warrant
    
    (years)US$995,000
    
    
    
    5.50
    
    
    
    1.288,000
    
    
    
    7.98
    
    
    
    0.13660,000
    
    
    
    20.76
    
    
    
    1.00341,000
    
    
    
    8.49
    
    
    
    1.4180,000
    
    
    
    7.00
    
    
    
    1.172,084,000
    
    
    
    10.89
    
    
    
    1.20
 The weighted average fair value of the common stock purchase options and
warrants on the grant dates were as follows: 2001
    
    2002
    
    2003US$
    
    US$
    
    US$Subscription Warrants II
    
    
    0.18
    
    
    
    
    
    
    
    Consultant Warrants III
    
    
    0.18
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    0.006
    
    
    
    
 The fair values were computed based on the following weighted average
assumptions: 2001
    
    2002
    
    2003Risk-free interest rate
    
    
    3.17
    %
    
    
    4.14
    %
    
    
    Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    Expected option/warrant life
    
    3 years
    
    1.93 years
    
    
    Expected stock price volatility
    
    
    57.21
    %
    
    
    123.38
    %
    
    
    
 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, 2001, 2002 and 2003 respectively are as follows: 2001
    
    2002
    
    2003US$
    
    US$
    
    US$Weighted average fair value of options
and warrants
    
    
    0.18
    
    
    
    0.006
    
    
    
    
 - 32 -




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##### Table of Contents



26.
    
    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, Qiao Xing Holdings Limited, Qiao Xing Mobile
Communication Company Limited and Qiao Xing Communication 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 17.5%
(2002: 16%). At present, substantially all of the Groups income was generated in Mainland
China by QXCIL and CECT. QXCIL was exempted from state income tax and local
income tax for two years starting from January 1, 2003, and then was subject to
a 50% reduction in state income tax and full exemption in local income tax for
the following three years. CECT is regarded as Hi-tech enterprises by the
Mainland Chinese government and are subjected to the Mainland Chinese
enterprise income taxes at a rate of 15%. CECT is exempted from the PRC
enterprise income tax for the period from May 22, 2000 to December 31, 2002,
and then subject to a 50% reduction in state income tax and full exemption in
local income tax for the following three years. CECM is exempted from the PRC enterprise income tax for the period from January
10, 2002 to December 31, 2004. Prior to the sale of QXTI (Note 10) on December 31, 2002, 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
was 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 from state income tax expired on
January 1, 1999. The tax holiday from local income tax continued for the years
ended December 31, 2001 and 2002. 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 QXTI 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, QXTI is entitled to an 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 the relevant tax bureau on the entitlement
to the 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 a state income tax rate at
10% for each of the years ended December 31, 2000, 2001 and 2002. Accordingly,
the excess provision of Mainland Chinese enterprise income tax in prior years
was reversed in 2001 which resulted in an income tax benefit of Rmb25,687,000. - 33 -




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##### Table of Contents



26.
    
    INCOME TAXES (Contd) If the tax holiday of QXTI described above had not existed, the Groups 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
benefit of state income tax for 2000 and prior. Basic loss per common share
would have been approximately Rmb2.99 for the year ended December 31, 2001, and
diluted loss per common share would have been approximately Rmb2.99 for the
year ended December 31, 2001. (Benefit) provision of income tax consists of: 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Mainland Chinese income tax- current
    
    
    (18,868
    )
    
    
    
    
    
    
    
    
    
    
    - deferred
    
    
    (6,819
    )
    
    
    
    
    
    
    
    
    
    
    (25,687
    )
    
    
    
    
    
    
    
    
    
    
    
 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: 2001
    
    2002
    
    2003Mainland Chinese statutory income tax rate
    
    
    (33.0
    %)
    
    
    33
    %
    
    
    (33
    %)Tax effect of tax holiday
    
    
    6
    %
    
    
    (6
    %)
    
    
    25.5
    %Net effect of disposal of a subsidiary
    
    
    
    
    
    
    (44
    %)
    
    
    Loss of the Company not subject to tax
    
    
    
    
    
    
    17
    %
    
    
    16
    %Non-deductible (taxable) activities :- Amortization of debt issuance
costs and discount of
convertible debentures
    
    
    8.4
    %
    
    
    
    
    
    
    - Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    35
    %Utilization of tax loss brought forward
    
    
    
    
    
    
    
    
    
    
    (43.5
    %)Reversal of over-provision of Mainland
Chinese income tax
    
    
    (39.9
    %)
    
    
    
    
    
    
    Others
    
    
    4.2
    %
    
    
    
    
    
    
    Effective income tax rate
    
    
    (54.3
    %)
    
    
    
    
    
    
    
 The gain on sale of a subsidiary amounting to Rmb79,050,000 as reported on the
consolidated statement of operations and comprehensive income for the year
ended December 31, 2002 was not subject to tax in the jurisdictions of Mainland
China or the British Virgin Islands. 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, 2002 and 2003 were as follows: - 34 -




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##### Table of Contents



26.
    
    INCOME TAXES (Contd) 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Write-off of obsolete and slow-moving
inventories
    
    
    
    
    
    
    194
    
    
    
    23Loss carryforwards
    
    
    
    
    
    
    1,702
    
    
    
    2061,896
    
    
    
    229Valuation allowance
    
    
    
    
    
    
    (1,896
    )
    
    
    (229
    )Deferred income tax assets
    
    
    
    
    
    
    
    
    
    
    
 Changes in the valuation allowance were as follows: 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    670
    
    
    
    1,055
    
    
    
    
    
    
    
    Increase (Release) in
valuation allowance
    
    
    385
    
    
    
    (1,055
    )
    
    
    1,896
    
    
    
    229End of year
    
    
    1,055
    
    
    
    
    
    
    
    1,896
    
    
    
    229
 A valuation allowance of approximately nil and Rmb1,896,000 were established as
of December 31, 2002 and 2003, respectively, for the deferred income tax assets
related mainly to loss carryforwards. The release of the allowance in 2002 was
due to the sale of the subsidiary generating the loss carryforward. Taxation (payable)/receivable comprised: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Mainland Chinese value-added tax
    
    
    (5,264
    )
    
    
    10,462
    
    
    
    1,264Mainland Chinese other taxes
    
    
    
    
    
    
    (152
    )
    
    
    (18
    )(5,264
    )
    
    
    10,310
    
    
    
    1,246
  27.
    
    DISTRIBUTION OF INCOME Prior to December 31, 2002, substantially all of the Groups income was
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) was distributable to its
joint venture partners after transfer to dedicated reserves (including
statutory surplus reserve and discretionary surplus reserve) 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. Following the sale of QXHL, the dedicated reserves of QXTI were released to
retained earnings prior to December 31, 2002. - 35 -




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##### Table of Contents



27.
    
    DISTRIBUTION OF INCOME (Contd) For the year ended December 31, 2003, substantially all of the Groups income
were contributed by QXCIL and CECT, equity joint venture enterprises
established in Mainland China. Income of QXCIL and CECT as determined under
generally accepted accounting principles in Mainland China (Mainland Chinese
GAAP) were distributable to their joint venture partners after transfer to
dedicated reserves and staff welfare fund as required under Mainland Chinese
Company Law and the companies articles of association, at rates determined by
the respective board of directors of QXCIL and CECT. For the year ended
December 31, 2003, both boards of directors of QXCIL and CECT did not recommend
any appropriation to dedicated reserves or staff welfare funds. The Group keeps its books and records under Mainland Chinese GAAP. Adjustments
between Mainland Chinese GAAP and US GAAP consists of transfers to the 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, (iv) amortization of discount of
convertible debentures as required under US GAAP, (v) amortization of goodwill
and (vi) recognition of identifiable intangible assets.  28.
    
    (LOSS) EARNINGS PER COMMON SHARE The following represents a reconciliation from basic (loss) earnings per common
share to diluted (loss) earnings per common share: 2001
    
    2002
    
    2003Rmb
    
    Rmb
    
    Rmb
    
    US$Net (loss) income
    
    
    (21,422,000
    )
    
    
    16,473,000
    
    
    
    (7,730,000
    )
    
    
    (934,000
    )Weighted average
common shares -
basic
    
    
    12,838,000
    
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    15,420,000Effect of dilutive
stock options and
warrants
    
    
    
    
    
    
    2,705,000
    
    
    
    
    
    
    
    Weighted average
common shares -
diluted
    
    
    12,838,000
    
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    15,420,000(Loss) earnings per
common share- Basic
    
    Rmb (1.67)
    
    Rmb        1.12
    
    Rmb        (0.50)
    
    US$
    (0.06
    )- Diluted
    
    Rmb (1.67)
    
    Rmb        0.95
    
    Rmb        (0.50)
    
    US$
    (0.06
    )
 The diluted loss per common share for the years ended December 31, 2001 and
2003 are the same as the basic loss per share as all potential ordinary shares
are anti-dilutive. - 36 -




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##### Table of Contents



29.
    
    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 company within the Group (employer) and their employees make monthly
contributions 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 Rmb1,061) per month and thereafter additional contributions are
voluntary. Prior to December 31, 2002, the Groups employees in Mainland China were mainly
employed by QXTI. During the year ended December 31, 2003, the Groups
employees in Mainland China were mainly employed by QXCIL and CECT. As stipulated by Mainland Chinese regulations, QXTI, QXCIL and CECT maintained
defined contribution retirement plans for all of their employees who were
residents of Mainland China. All retired employees were entitled to an annual
pension equal to their basic annual salary upon retirement. QXTI, QXCIL and
CECT contributed to a state sponsored retirement plan with amounts stipulated
by the local government of Mainland China and had 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. The aggregate employers contributions made by the Group amounted to
approximately Rmb795,000, Rmb898,000 and Rmb633,000 for the years ended
December 31, 2001, 2002 and 2003, respectively. - 37 -




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##### Table of Contents



30.
    
    COMMITMENTSa.
    
    Capital commitmentsCapital commitments for purchase of property, machinery and equipment not
provided for in the consolidated financial statements were analyzed as
follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Capital contribution authorized and
contracted for:- CECT
    
    
    132,750
    
    
    
    
    
    
    
    - Huizhou Qiao Xing Property Ltd.
and Huizhou Qiao Xing Communication
Industry Ltd.
    
    
    11,460
    
    
    
    
    
    
    
    - Purchase of property, machinery
and equipment
    
    
    
    
    
    
    1,251
    
    
    
    151144,210
    
    
    
    1,251
    
    
    
    151
  b.
    
    Operating lease commitmentsThe Group has operating lease agreements for office premises, which
extends through November 2007. At December 31, 2003, the Groups future
minimum lease payments required under non-cancelable operating leases
with terms in excess of one year are as follows: AmountRmb000
    
    US$000For the years ending December 31,2004
    
    
    3,856
    
    
    
    4662005
    
    
    4,667
    
    
    
    5642006
    
    
    2,919
    
    
    
    3532007
    
    
    2,673
    
    
    
    323Total
    
    
    14,115
    
    
    
    1,706
  Lease expenses for the years ended December 31, 2001, 2002 and 2003 were
approximately Rmb1,304,000, Rmb1,422,000 and Rmb4,116,000 respectively.c.
    
    Other commitmentsOther commitments not provided for in the consolidated financial
statements were analyzed as follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Authorized and contracted for
- Research and development
    
    
    828
    
    
    
    3,104
    
    
    
    375
 - 38 -




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##### Table of Contents



31.
    
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONa.
    
    Non-cash transactionsFor each of the years ended December 31, 2001, 2002 and 2003, imputed
interest on shareholders loans of approximately Rmb478,000 was recorded
as shareholders contribution and credited to additional paid-in capital.For the year ended December 31, 2001, a total of US$5,218,000 of
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.For the year ended December 31, 2002, the fair value of 1,000,000 shares
of common stock issued to an external consultant in connection with the
acquisition of CECT amounted to approximately Rmb13,243,000, and has been
recognized as an addition to the investment cost of CECT, presented as
another non-current asset.For the year ended December 31, 2003, compensation expense of
Rmb26,929,000 is recorded based on the excess of the quoted market price
of the underlying stock of US$8.77 per share as of December 31, 2003 over
the re-priced exercise price of US$5.50 per share on the date of grant,
and was recorded as shareholders contribution and credited to additional
paid-in capital.b.
    
    Cash paid for interest and income taxes is as follows 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Interest
    
    
    7,926
    
    
    
    17,389
    
    
    
    18,507
    
    
    
    2,236Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 - 39 -




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##### Table of Contents



31.
    
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Contd)c.
    
    Gain on sale of a subsidiaryOn December 31, 2002, the Group disposed of its interests in a
subsidiary, QXHL: Rmb000Cash and cash equivalents
    
    
    6,927Pledged bank deposits
    
    
    226,099Accounts receivables, net
    
    
    280,806Inventories
    
    
    62,591Prepaid expenses
    
    
    11,301Due from related parties
    
    
    4,581Property, plant and equipment, net
    
    
    171,292Prepaid land use rights
    
    
    29,086Accounts payable
    
    
    (30,046
    )Other payables
    
    
    (72,131
    )Accrued liabilities
    
    
    (11,072
    )Taxation payable
    
    
    (113,957
    )Long term borrowings
    
    
    (30,000
    )Short term borrowings
    
    
    (410,407
    )125,070Minority interests disposed
    
    
    5,880Gain on sale of a subsidiary
    
    
    79,050Total consideration
    
    
    210,000Satisfied by:Cash
    
    
    210,000
  Net cash (outflow) inflow in respect of disposal of a subsidiary was as
follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Cash consideration
    
    
    
    
    
    
    210,000
    
    
    
    25,372Cash and cash equivalents disposed of
    
    
    (6,927
    )
    
    
    
    
    
    
    Net cash (outflow) inflow in respect of
disposal of a subsidiary
    
    
    (6,927
    )
    
    
    210,000
    
    
    
    25,372
  d.
    
    Acquisition of CECTOn February 8, 2003, the Group has completed the acquisition of CECT and
its subsidiaries . Since the Group acquired less than a 100% interest in
CECT, the allocation of the purchase price only considers the 65% portion
of CECTs assets that the Group acquired. Details of the fair values of
net assets of CECT and its subsidiaries on February 8, 2003 were as
follows: - 40 -




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##### Table of Contents



31.
    
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Contd)d.
    
    Acquisition of CECT (Contd) Rmb000Cash and cash equivalents
    
    
    171,119Pledged bank deposits
    
    
    28,499Bills receivable
    
    
    17,405Accounts receivable
    
    
    34,224Inventories
    
    
    321,194Prepaid expenses
    
    
    178,906Other current assets
    
    
    7,645Taxation receivable
    
    
    66,005Due from related parties
    
    
    10,601Property, machinery and equipment
    
    
    57,784Land use rights
    
    
    1,800Investment at equity
    
    
    30,412Investment at cost
    
    
    14,965Goodwill
    
    
    72,088Other acquired intangible assets
    
    
    188,512Total assets acquired
    
    
    1,201,159Short-term borrowings
    
    
    140,000Accounts payable
    
    
    185,942Other payables
    
    
    16,190Accrued liabilities
    
    
    11,670Customer deposits
    
    
    371,363Capital lease obligations
    
    
    6,597Due to related parties
    
    
    10,807Total liabilities assumed
    
    
    742,569Minority shareholders interests
    
    
    135,277Net assets acquired
    
    
    323,313Satisfied by:Cash consideration
    
    
    312,750Fair value of shares issued to an external consultant in
2002
    
    
    13,243Excess of cash received over share of net assets of a
minority shareholder of QXMCCL
    
    
    (2,680
    )323,313
 - 41 -




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##### Table of Contents



31.
    
    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Contd)d.
    
    Acquisition of CECT (Contd)Net cash (outflow) inflow in respect of acquisition of CECT was as
follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Cash consideration
    
    
    (180,000
    )
    
    
    (132,750
    )
    
    
    (16,039
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    171,119
    
    
    
    20,675Net cash (outflow) inflow in
respect of acquisition of CECT
    
    
    (180,000
    )
    
    
    38,369
    
    
    
    4,636
  32.
    
    BANKING FACILITIES As of December 31, 2003, the Group had banking facilities of approximately
Rmb693,076,000 (US$83,738,000) for loans and trade financing, of which
Rmb439,472,000 (US$53,097,000) were used as of the same date. These banking
facilities were secured by:  a.
    
    the Groups pledged bank deposits of approximately
Rmb85,189,000 (US$10,293,000);b.
    
    corporate guarantee provided by Qiao Xing Group Limited to
the extent of Rmb320,000,000 (US$38,663,000); andc.
    
    corporate guarantee provided by China Electronics Corp. to
the extent of Rmb50,000,000 (US$6,041,000). - 42 -




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##### Table of Contents



33.
    
    RELATED PARTY TRANSACTIONS Name and relationship of related parties: Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiMr. Ming Zhu
    
    Non-executive independent director
(appointed on January 2, 2003)Mr. Ze Yun Mu
    
    Non-executive independent director
(appointed on September 15, 2003)Mr. Jie Shi
    
    Director (appointed on January 2, 2003)Mr. Zhong Ai Li
    
    Director (resigned on January 2, 2003)Mr. Guo Liang Zhang
    
    Director (resigned on January 2, 2003)Ms. Liu Rong Yang
    
    Director (resigned on September 15, 2003)Mr. Zhi Fang Zhang
    
    Director (resigned on January 2, 2003)Mr. Zi Shu Huang
    
    Director (resigned on January 2, 2003)Wu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderJia Xing Electronic Supplies Company Limited
    
    Common directorQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Properties Limited
    
    Common directorRui Xing Electronic Development Company Limited
    
    Common directorShanghai Sunplus Communication TechnologyCompany Limited
    
    Common directorDalian Yu Tian Ocean Biochemistry TechnologyCompany Limited
    
    Common directorHuizhou Calilee Telecommunication Company
Limited (Calilee)
    
    A company 5% owned by QXGLShenzhen Tianna I/E Trade Company Limited
    
    A company 90% owned by QXGLCEC Wireless R&D Limited (CECW)
    
    CECT and CECW have common ownersBeijing China Electronics ChangshengInvestment Management Company Limited
    
    Minority owner of CECT is a shareholderChina Electronics Beijing Real Estate
Management Co., Ltd.
    
    Minority owner of CECT is a shareholderChina Electronics Corp.
    
    Minority owner of CECTChina National Electronics Import & Export
Corporation
    
    Minority owner of CECT is a shareholderGoldcellcom Co., Ltd
    
    Minority owner of CECT is a shareholderWuhan Zhongyuan Electronics Group Co., Ltd.
    
    Minority owner of CECT is a shareholder
 - 43 -




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##### Table of Contents



33.
    
    RELATED PARTY TRANSACTIONS (Contd) Summary of related party transactions is as follows: 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals charged by- China Electronics Corp
    
    
    
    
    
    
    
    
    
    
    2,049
    
    
    
    248- QXGL
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    4Property management fees paid and payable toChina Electronics Beijing Real Estate
Management Co., Ltd
    
    
    
    
    
    
    
    
    
    
    788
    
    
    
    95Recovery of general and administrative expenses
(at cost) in respect of factory and office
premises subleased to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Jia Xing Electronic Supplies Company
Limited
    
    
    139
    
    
    
    
    
    
    
    
    
    
    
    - Qiao Xing Properties Limited
    
    
    1,776
    
    
    
    
    
    
    
    
    
    
    
    - Rui Xing Electronic Development Company
Limited
    
    
    915
    
    
    
    
    
    
    
    
    
    
    
    Interest income from CEFCL
    
    
    
    
    
    
    
    
    
    
    1,851
    
    
    
    224Rental income from- QXGL
    
    
    
    
    
    
    327
    
    
    
    
    
    
    
    - CECM
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    133Commission paid and payable to CECW
    
    
    
    
    
    
    28,200
    
    
    
    5,181
    
    
    
    626Purchases from- Jia Xing Electronic Supplies Company
Limited
    
    
    13,436
    
    
    
    
    
    
    
    
    
    
    
    - Qiao Xing Properties Limited
    
    
    20,471
    
    
    
    10,061
    
    
    
    34
    
    
    
    4- Rui Xing Electronic Development Company
Limited
    
    
    8,033
    
    
    
    9,214
    
    
    
    
    
    
    
    - Shanghai Sunplus Communication Technology
Company Limited
    
    
    
    
    
    
    
    
    
    
    24,366
    
    
    
    2,944- Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    
    
    
    
    13,005
    
    
    
    1,571Sales to- CECT *
    
    
    
    
    
    
    344,458
    
    
    
    26,821
    
    
    
    3,241- CECM
    
    
    
    
    
    
    
    
    
    
    238,857
    
    
    
    28,859- Calilee
    
    
    
    
    
    
    
    
    
    
    611,281
    
    
    
    73,856- Goldcellcom Co., Ltd
    
    
    
    
    
    
    
    
    
    
    7,980
    
    
    
    964
  *
    
    Sales to CECT after February 8, 2003 have been eliminated on the
consolidated statement of operations for 2003. Summary of related party balances is as follows: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Due from- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1- China National Electronics Import &
Export Corporation
    
    
    
    
    
    
    1
    
    
    
    - China Electronics Beijing Real
Estate Management Co., Ltd
    
    
    
    
    
    
    4
    
    
    
    - Wuhan Zhongyuan Electronics Group
Co., Ltd
    
    
    
    
    
    
    120
    
    
    
    15- CEFCL
    
    
    
    
    
    
    7,030
    
    
    
    849- Mr. Zhi Yang Wu
    
    
    216
    
    
    
    
    
    
    
    - Mr. Zhi Jian Wu Li
    
    
    160
    
    
    
    
    
    
    
    - QXGL
    
    
    100
    
    
    
    
    
    
    
    - Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    3506
    
    
    
    7,185
    
    
    
    868
 - 44 -




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##### Table of Contents



33.
    
    RELATED PARTY TRANSACTIONS (Contd) 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Due to- CECT
    
    
    22,195
    
    
    
    
    
    
    
    - Beijing China Electronics Changsheng
Investment Management Company Limited
    
    
    
    
    
    
    3,532
    
    
    
    427- China Electronics Corp.
    
    
    
    
    
    
    969
    
    
    
    117- Goldcellcom Co., Limited
    
    
    
    
    
    
    40
    
    
    
    5- Dalian Yu Tian Ocean Biochemistry
Technology Company Limited
    
    
    
    
    
    
    10,000
    
    
    
    1,208- Mr Rui Lin Wu
    
    
    5,897
    
    
    
    471
    
    
    
    57- Mr. Zhi Zhong Wu
    
    
    166
    
    
    
    
    
    
    
    10- Mr. Jie Shi
    
    
    
    
    
    
    83
    
    
    
    1- Mr. Ming Zhu
    
    
    
    
    
    
    3
    
    
    
    - Mr. Ze Yun Mu
    
    
    
    
    
    
    1
    
    
    
    - Mr. Guo Liang Zhang
    
    
    146
    
    
    
    146
    
    
    
    18- Ms. Liu Rong Yang
    
    
    10
    
    
    
    11
    
    
    
    1- Ms. Zhi Fang Zhang
    
    
    10
    
    
    
    10
    
    
    
    1- Mr. Zi Shu Huang
    
    
    10
    
    
    
    10
    
    
    
    1- Mr. Zhong Ai Li
    
    
    218
    
    
    
    218
    
    
    
    2628,652
    
    
    
    15,494
    
    
    
    1,872Accounts receivable from- CECM
    
    
    
    
    
    
    32,225
    
    
    
    3,893- Calilee
    
    
    
    
    
    
    40,556
    
    
    
    4,900
    
    
    
    72,781
    
    
    
    8,793Vendor deposits for the purchase of mobile phones- Shanghai Sunplus Communication Technology
Company Limited
    
    
    
    
    
    
    256,856
    
    
    
    31,034- Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    51,179
    
    
    
    6,183
    
    
    
    308,035
    
    
    
    37,217
 Included in accrued liabilities as of December 31, 2003 was a commission
payable of nil (2002: Rmb11,331,000) to CECW. Except for the balances with the shareholders (Note 23), all other balances
with directors and related parties were unsecured, non-interest bearing and
without pre-determined repayment terms. Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in 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 make demand on the Group
for repayment before January 1, 2005. The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and QXGL on behalf of QXTI during the year ended December 31, 2001. As of December 31, 2002, the Groups bank deposit of approximately Rmb2,483,000
and land use rights of net book value of Rmb47,635,000 were pledged to secure
the banking facilities of an ex-subsidiary, QXTI. The pledges were released in
2003. During the year ended December 31, 2002, QXTI provided corporate guarantees to
the banking facilities of CECT to the extent of Rmb50,000,000. The guarantees
were released in 2003. During the year ended December 31, 2003, QXGL and China Electronics Corp.
provided corporate guarantees to the Groups banking facilities to the extent
of Rmb320,000,000 and
Rmb 50,000,000 respectively. - 45 -




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##### Table of Contents



34.
    
    SEGMENT ANALYSIS The Group classifies its products into two core business segments, namely
mobile phones and indoor phones. In view of the fact that the Group operates
principally in Mainland China, no geographical segment information is
presented. 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Net sales:Mobile phones
    
    
    
    
    
    
    341,629
    
    
    
    1,688,397Indoor phones
    
    
    250,366
    
    
    
    208,338
    
    
    
    149,236250,366
    
    
    
    549,967
    
    
    
    1,837,633
 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000(Loss) Income from operations:Mobile phones
    
    
    
    
    
    
    41,539
    
    
    
    38,035Indoor phones
    
    
    (20,994
    )
    
    
    (87,812
    )
    
    
    1,372Other
    
    
    (4,881
    )
    
    
    (5,879
    )
    
    
    (36,509
    )(25,875
    )
    
    
    (52,152
    )
    
    
    2,898
 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Identifiable assets:Mobile phones
    
    
    
    
    
    
    3,224
    
    
    
    263,576Indoor phones
    
    
    490,600
    
    
    
    21,534
    
    
    
    22,194Other
    
    
    795
    
    
    
    203,530
    
    
    
    203,599491,395
    
    
    
    228,288
    
    
    
    489,369
 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Interest income:Mobile phones
    
    
    
    
    
    
    189
    
    
    
    3,033Indoor phones
    
    
    1,890
    
    
    
    879
    
    
    
    9Other
    
    
    110
    
    
    
    2
    
    
    
    32,000
    
    
    
    1,070
    
    
    
    3,045
 - 46 -




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##### Table of Contents



34.
    
    SEGMENT ANALYSIS (Contd) 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Interest expense:Mobile phones
    
    
    
    
    
    
    1,925
    
    
    
    18,507Indoor phones
    
    
    7,926
    
    
    
    15,464
    
    
    
    Other
    
    
    15,181
    
    
    
    478
    
    
    
    47823,107
    
    
    
    17,867
    
    
    
    18,985
 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Depreciation and amortization:Mobile phones
    
    
    
    
    
    
    223
    
    
    
    50,225Indoor phones
    
    
    21,535
    
    
    
    17,873
    
    
    
    897Other
    
    
    385
    
    
    
    155
    
    
    
    4,15921,920
    
    
    
    18,251
    
    
    
    55,281
 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000Capital expenditures:Mobile phones
    
    
    
    
    
    
    3,224
    
    
    
    232,382Indoor phones
    
    
    19,035
    
    
    
    9,251
    
    
    
    660Others
    
    
    
    
    
    
    
    
    
    
    6919,035
    
    
    
    12,475
    
    
    
    233,111
  a.
    
    Major customers  Mobile phones segmentDetails of individual customers accounting for more than 5% of the
Groups sales of mobile phones are as follows: 2001
    
    2002
    
    2003CECT (Note 33)
    
    
    
    
    
    
    99
    %
    
    
    2
    %Calilee (Note 33)
    
    
    
    
    
    
    
    
    
    
    36
    %CECM (Note 33)
    
    
    
    
    
    
    
    
    
    
    14
    %Digital China
    
    
    
    
    
    
    
    
    
    
    8
    %
  Indoor phones segmentDetails of individual customers accounting for more than 5% of the
Groups sales of indoor phones are as follows: 2001
    
    2002
    
    2003Zhong Nan Company
    
    
    
    
    
    
    6
    %
    
    
    13
    %Ji Nan Peoples Market Co., Ltd.
    
    
    
    
    
    
    5
    %
    
    
    7
    %Shan Xi ZhaoRui Science and Technology
Co., Ltd.
    
    
    
    
    
    
    6
    %
    
    
    6
    %An Hui Jiu Long Fu Communication Co.,
Ltd.
    
    
    
    
    
    
    6
    %
    
    
    5
    %ChengTeng Electronic Appliance Trading
Company of Yiwu City
    
    
    7
    %
    
    
    5
    %
    
    
    3
    %
 - 47 -




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##### Table of Contents



34.
    
    SEGMENT ANALYSIS (Contd)  b.
    
    Major suppliers  Details of individual suppliers accounting for more than 5% of the
Groups purchases are as follows: 2001
    
    2002
    
    2003Flextronics Technology Co. Ltd.
    
    
    
    
    
    
    31
    %
    
    
    13
    %Flextronics Enterprises Co. Ltd.
    
    
    
    
    
    
    31
    %
    
    
    7
    %QXTI
    
    
    
    
    
    
    
    
    
    
    10
    %YuHua TelTech (Shanghai) Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    16
    %Telson Electronics Co. Ltd
    
    
    
    
    
    
    
    
    
    
    6
    %Galaxy Information Technology Inc.
    
    
    
    
    
    
    
    
    
    
    6
    %Leader Communication (SuZhou) Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    6
    %Jia Xing Electronic Supplies Company
Limited (Note 33)
    
    
    8
    %
    
    
    
    
    
    
    
  35.
    
    OTHER ADDITIONAL INFORMATIONa.
    
    The following items were included in the consolidated statements of
operations and comprehensive income (loss): 2001
    
    2002
    
    2003Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Depreciation of property, machinery
and equipment
    
    
    16,942
    
    
    
    13,243
    
    
    
    8,995
    
    
    
    1,087Amortization of land use rights
    
    
    4,978
    
    
    
    5,008
    
    
    
    4,094
    
    
    
    495Amortization of other acquired
intangible assets
    
    
    
    
    
    
    
    
    
    
    42,192
    
    
    
    5,098Interest expense for:- Amortization of debt issuance
costs
    
    
    8,234
    
    
    
    
    
    
    
    
    
    
    
    - Amortization of discount of
convertible debentures
    
    
    6,469
    
    
    
    
    
    
    
    
    
    
    
    - bank loans
    
    
    6,683
    
    
    
    13,221
    
    
    
    7,556
    
    
    
    913- other bank borrowings
    
    
    1,243
    
    
    
    4,168
    
    
    
    10,353
    
    
    
    1,251- finance lease
    
    
    
    
    
    
    
    
    
    
    598
    
    
    
    72- shareholders loans (imputed
interest)
    
    
    478
    
    
    
    478
    
    
    
    478
    
    
    
    58Total interest expense
    
    
    23,107
    
    
    
    17,867
    
    
    
    18,985
    
    
    
    2,294Advertising expenses
    
    
    5,653
    
    
    
    1,346
    
    
    
    42,784
    
    
    
    5,169Research and development expenditures
    
    
    3,516
    
    
    
    451
    
    
    
    37,993
    
    
    
    4,590
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35.
    
    OTHER ADDITIONAL INFORMATION (Contd)b.
    
    The following unaudited pro forma information summarizes the results of
operations for the year ended December 31, 2002 and 2003 of the Company
and CECT. It has been prepared on the assumption that the acquisition had
occurred on January 1, 2002. The following pro forma financial
information is not necessarily indicative of the results that would have
occurred had the acquisition been completed at the beginning of periods
indicated, nor is it indicative of future operating results: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000(Unaudited)
    
    (Unaudited)
    
    (Unaudited)Net sales
    
    
    1,030,523
    
    
    
    1,902,619
    
    
    
    229,877Net (loss) income
    
    
    (132,464
    )
    
    
    44,560
    
    
    
    5,383(Loss) Income per share- Basic
    
    
    (9.02
    )
    
    
    2.89
    
    
    
    0.35- Diluted
    
    
    (9.02
    )
    
    
    2.65
    
    
    
    0.32Shares used in calculation
of net (loss) income per
share (unaudited)- Basic
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    15,420,000- Diluted
    
    
    14,685,000
    
    
    
    16,844,000
    
    
    
    16,844,000
  The pro forma results of operations give effect to certain adjustments,
including amortization of other acquired intangibles with definite lives,
associated with the acquisition. The following material non-recurring
charges have been excluded from the pro forma results: 2002
    
    2003Rmb000
    
    Rmb000
    
    US$000(Unaudited)
    
    (Unaudited)
    
    (Unaudited)In process research and development
    
    
    
    
    
    
    33,579
    
    
    
    4,058Stock-based compensation
    
    
    
    
    
    
    26,929
    
    
    
    3,254Gain on sale of a subsidiary
    
    
    79,050
    
    
    
    
    
    
    
    
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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     Report
of Independent Public Accountants (Arthur Andersen & Co.) 
  (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 our 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 our 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.*Exhibit 4.1
    
    Sales and Purchase Agreement on Shares of CEC Telecom Limited dated May 23, 2002**
 -128-




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Exhibit 4.2
    
    Sales and Purchase Agreement on Shares of CEC Telecom Ltd. dated May 23, 2002**Exhibit 4.3
    
    Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated December 31, 2002 between Qiao
Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.**Exhibit 4.4
    
    Supplemental Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated July 10, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.**Exhibit 4.5
    
    Further Supplemental Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated July 11,
2003 between Qiao Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.**Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of EthicsExhibit 12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Exhibit 12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Exhibit 13.1
    
    Certification of Chief Executive
Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350Exhibit 13.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
   *
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal
year ended December 31, 2001**
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal year ended December 31,
2002 -129-




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##### Table of Contents



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 30, 2004
    By:
    /s/ RUI LIN WURui Lin WuChairman




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##### Table of Contents



INDEX TO EXHIBITS DESCRIPTION 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.*Exhibit 4.1
    
    Sales and Purchase Agreement on Shares of CEC Telecom Limited
dated May 23, 2002**Exhibit 4.2
    
    Sales and Purchase Agreement on Shares of CEC Telecom Ltd.
dated May 23, 2002**Exhibit 4.3
    
    Agreement for Sale of The One (1) Issued Share of Qiao Xing
Holdings Limited dated December 31, 2002 between Qiao Xing
Universal Telephone, Inc. and Central Grace Technologies
Ltd.**Exhibit 4.4
    
    Supplemental Agreement for Sale of The One (1) Issued Share of
Qiao Xing Holdings Limited dated July 10, 2003 between Qiao
Xing Universal Telephone, Inc. and Central Grace Technologies
Ltd.**Exhibit 4.5
    
    Further Supplemental Agreement for Sale of The One (1) Issued
Share of Qiao Xing Holdings Limited dated July 11, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace
Technologies Ltd.**




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##### Table of Contents



Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of EthicsExhibit 12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Exhibit 12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Exhibit 13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350Exhibit 13.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
   *
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal
year ended December 31, 2001**
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal year ended December 31,
2002