##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    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
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 o o
 QIAO XING UNIVERSAL TELEPHONE, INC.
  QIAO XING UNIVERSAL TELEPHONE, INC.  (Translation of Registrants name into English)
 British Virgin Islands  (Jurisdiction of incorporation or organization)
 Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,
Peoples Republic of China 516023  (Address of principal executive offices)
 Albert Leung, CFO
011-86-752-2820-268 (telephone)  albertleung@qiaoxing.com.hk (email)  011-86-752-2820-268 (facsimile)
 Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,  Peoples Republic of China 516023
  Title of each 
class
    
    Name of each exchange
on which registered$.001 Par Value Common Stock
(Common Stock)
    
    NASDAQ
   (Title of Class)
   (Title of Class)
    o þ
  o þ
  þ o
  o þ o
  þ
    
    U.S. GAAPo
    
    International Financial Reporting Standards as issued by
the International Accounting Standards Boardo
    
    Other
  o
    
    Item 17o
    
    Item 18
  o þ




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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 4A. UNRESOLVED STAFF COMMENTSITEM 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 ABOUTITEM 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 COMMITTEESITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSPART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESINDEX TO EXHIBITSList of Significant Subsidiaries of the CompanyCertification of Chief Executive Officer Pursuant to Rule 13a-14(a)Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18.U.S.C. Section 1350Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18.U.S.C. Section 1350    Table of Contents  SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
   
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions
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##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM
3. KEY INFORMATION
 A. SELECTED FINANCIAL DATA.
  2003
    
    2004
    
    2005
    
    2006
    
    2007Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Net sales
    
    
    1,783,760
    
    
    
    1,720,389
    
    
    
    2,635,184
    
    
    
    3,221,212
    
    
    
    3,874,107
    
    
    
    531,092Cost of goods sold
    
    
    (1,543,796
    )
    
    
    (1,497,177
    )
    
    
    (2,156,798
    )
    
    
    (2,651,392
    )
    
    
    (2,898,964
    )
    
    
    (397,412
    )Gross profit
    
    
    239,963
    
    
    
    223,212
    
    
    
    478,386
    
    
    
    569,820
    
    
    
    975,143
    
    
    
    133,680Operating expenses:Selling expenses
    
    
    (75,843
    )
    
    
    (29,065
    )
    
    
    (24,726
    )
    
    
    (28,401
    )
    
    
    (59,820
    )
    
    
    (8,200
    )General and administrative expensesIncluding stock-based compensation
    
    
    (75,115
    )
    
    
    (90,554
    )
    
    
    (55,341
    )
    
    
    (126,076
    )
    
    
    (131,074
    )
    
    
    (17,969
    )Research and development
    
    
    (6,649
    )
    
    
    (18,378
    )
    
    
    (20,694
    )
    
    
    (30,747
    )
    
    
    (34,452
    )
    
    
    (4,723
    )In process research and development
    
    
    (35,263
    )
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
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2003
    
    2004
    
    2005
    
    2006
    
    2007Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Amortization of acquired intangible assets
    
    
    (31,361
    )
    
    
    (11,880
    )
    
    
    (11,880
    )
    
    
    (15,178
    )
    
    
    (32,280
    )
    
    
    (4,425
    )Income from operations
    
    
    15,732
    
    
    
    73,335
    
    
    
    365,745
    
    
    
    327,679
    
    
    
    717,517
    
    
    
    98,363Interest income
    
    
    3,045
    
    
    
    492
    
    
    
    7,130
    
    
    
    8,108
    
    
    
    42,127
    
    
    
    5,775Exchange gain (loss), net
    
    
    
    
    
    
    
    
    
    
    (2,659
    )
    
    
    3,225
    
    
    
    28,255
    
    
    
    3,874Interest expense
    
    
    (17,022
    )
    
    
    (27,060
    )
    
    
    (41,752
    )
    
    
    (100,432
    )
    
    
    (248,014
    )
    
    
    (34,000
    )Loss on re-measurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,439
    )
    
    
    (129,084
    )
    
    
    (17,696
    )Loss on extinguishment of convertible debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (142,090
    )
    
    
    (19,479
    )Gain on disposal of interests in subsidiaries
    
    
    
    
    
    
    
    
    
    
    10,307
    
    
    
    
    
    
    
    482,614
    
    
    
    66,160Gain on sale of equity investee
    
    
    
    
    
    
    11,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of stocks by subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    383,965
    
    
    
    52,637Provision for litigation settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,319
    )
    
    
    (2,100
    )Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (7,348
    )
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    2,088
    
    
    
    1,597
    
    
    
    640
    
    
    
    4,453
    
    
    
    59,055
    
    
    
    8,096Income before income tax
    
    
    3,843
    
    
    
    59,761
    
    
    
    332,063
    
    
    
    108,594
    
    
    
    1,179,026
    
    
    
    161,630Provision for income tax
    
    
    (5,862
    )
    
    
    (7,397
    )
    
    
    (25,486
    )
    
    
    (58,192
    )
    
    
    (124,120
    )
    
    
    (17,015
    )Income before minority interests
    
    
    (2,019
    )
    
    
    52,364
    
    
    
    306,577
    
    
    
    50,402
    
    
    
    1,054,906
    
    
    
    144,615Minority interests
    
    
    (28,800
    )
    
    
    (51,903
    )
    
    
    (99,270
    )
    
    
    (84,473
    )
    
    
    (168,554
    )
    
    
    (23,107
    )Equity in earnings of equity investees
    
    
    6,802
    
    
    
    955
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) before extraordinary gain
    
    
    (24,017
    )
    
    
    1,416
    
    
    
    207,307
    
    
    
    (34,071
    )
    
    
    886,352
    
    
    
    121,508Extraordinary gain on acquisition of minority interests
    
    
    
    
    
    
    
    
    
    
    37,592
    
    
    
    14,237
    
    
    
    17,596
    
    
    
    2,412Net Income (Loss)
    
    
    (24,017
    )
    
    
    1,416
    
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    903,948
    
    
    
    123,920Other comprehensive (loss) incomeTranslation adjustments
    
    
    (746
    )
    
    
    70
    
    
    
    1,821
    
    
    
    7,203
    
    
    
    (50,106
    )
    
    
    (6,869
    )
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2003
    
    2004
    
    2005
    
    2006
    
    2007Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Comprehensive income (loss)
    
    
    (24,763
    )
    
    
    1,486
    
    
    
    246,720
    
    
    
    (12,631
    )
    
    
    853,842
    
    
    
    117,051Basic earnings (loss) per common shareBefore extraordinary gain
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    11.32
    
    
    
    (1.44
    )
    
    
    24.46
    
    
    
    3.35Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    2.05
    
    
    
    0.60
    
    
    
    0.49
    
    
    
    0.07After extraordinary gain
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    13.37
    
    
    
    (0.84
    )
    
    
    24.95
    
    
    
    3.42Diluted earnings (loss) per common shareBefore extraordinary gain
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    11.32
    
    
    
    (2.03
    )
    
    
    24.20
    
    
    
    3.31Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    2.05
    
    
    
    0.59
    
    
    
    0.48
    
    
    
    0.07After extraordinary gain
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    13.37
    
    
    
    (1.44
    )
    
    
    24.68
    
    
    
    3.38Weighted average number of shares outstanding- Basic (2)
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    29,836,000
    
    
    
    29,836,000- Diluted (2)
    
    
    15,420,000
    
    
    
    16,560,000
    
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    30,201,000
    
    
    
    30,201,000
 2003
    
    2004
    
    2005
    
    2006
    
    2007Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Balance Sheet DataCash and bank deposits
    
    
    122,466
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    3,033,010
    
    
    
    415,788Working capital
    
    
    302,027
    
    
    
    429,253
    
    
    
    856,839
    
    
    
    1,498,715
    
    
    
    3,946,468
    
    
    
    541,012Property, machinery and equipment, net
    
    
    98,305
    
    
    
    107,162
    
    
    
    52,664
    
    
    
    209,542
    
    
    
    192,601
    
    
    
    26,403Construction in progress
    
    
    1,184
    
    
    
    50,934
    
    
    
    59,105
    
    
    
    60,295
    
    
    
    
    
    
    
    Lease prepayments, net
    
    
    182,985
    
    
    
    178,577
    
    
    
    173,161
    
    
    
    207,206
    
    
    
    36,106
    
    
    
    4,950Debt issuance cost, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,845
    
    
    
    
    
    
    
    Total assets
    
    
    1,523,303
    
    
    
    2,042,048
    
    
    
    2,534,547
    
    
    
    4,177,986
    
    
    
    6,378,841
    
    
    
    874,461Short-term-debts
    
    
    439,472
    
    
    
    700,186
    
    
    
    754,212
    
    
    
    1,155,290
    
    
    
    1,471,454
    
    
    
    201,718Long-term-debts
    
    
    11,939
    
    
    
    10,428
    
    
    
    7,959
    
    
    
    229,784
    
    
    
    196,854
    
    
    
    26,986Total liabilities
    
    
    771,189
    
    
    
    1,157,693
    
    
    
    1,316,418
    
    
    
    2,192,713
    
    
    
    2,260,956
    
    
    
    309,949Minority interests (1)
    
    
    190,980
    
    
    
    242,883
    
    
    
    220,832
    
    
    
    115,224
    
    
    
    1,095,917
    
    
    
    150,237Shareholders equity
    
    
    561,134
    
    
    
    641,471
    
    
    
    997,297
    
    
    
    1,870,049
    
    
    
    3,021,968
    
    
    
    414,275Cash flows data
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2003
    
    2004
    
    2005
    
    2006
    
    2007Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Cash flows from operating activities
    
    
    (307,404
    )
    
    
    (204,036
    )
    
    
    116,682
    
    
    
    (156,840
    )
    
    
    954,654
    
    
    
    130,872Cash flows from investing activities
    
    
    159,323
    
    
    
    (82,451
    )
    
    
    (3,822
    )
    
    
    (603,009
    )
    
    
    (650,317
    )
    
    
    (89,151
    )Cash flows from financing activities
    
    
    260,345
    
    
    
    304,841
    
    
    
    136,505
    
    
    
    1,465,657
    
    
    
    1,675,920
    
    
    
    229,748
 
 (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 2003 by 15,420,000 shares, for 2004
by 16,443,000 shares, for 2005 by 18,319,000 shares, for 2006 by 23,712,000 shares and for
2007 by 29,836,000 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, 2007 of US$1.00 = Rmb 7.2946. 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. Exchange Rate Information
   Noon Buying Rate(1)Calendar Year
    
    Average(2)(Rmb per US$)2003
    
    
    8.27712004
    
    
    8.27682005
    
    
    8.18262006
    
    
    7.95792007
    
    
    7.5806
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(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)
    
    Annual averages are calculated from the month-end rates. Calendar Month
    
    High
    
    Low
    
    AverageJanuary 2008
    
    
    7.2946
    
    
    
    7.1818
    
    
    
    7.2405February 2008
    
    
    7.1973
    
    
    
    7.1100
    
    
    
    7.1644March 2008
    
    
    7.1110
    
    
    
    7.0105
    
    
    
    7.0722April 2008
    
    
    7.0185
    
    
    
    6.9840
    
    
    
    6.9997May 2008
    
    
    7.0000
    
    
    
    6.9377
    
    
    
    6.9725June 2008
    
    
    6.9633
    
    
    
    6.8591
    
    
    
    6.8993July 2008 (through July 8)
    
    
    6.8608
    
    
    
    6.8510
    B. CAPITALIZATION AND INDEBTEDNESS.
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
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RISK FACTORS
 Our future revenues and operating results are inherently unpredictable, and as a result, we may
fail to meet the expectations of securities analysts or investors, which could cause our stock
price to decline.
  
    
    the current economic environment and other developments in the telecommunications
industry;
    
    the mix of our products sold, including inventory items with low product costs;
    
    our ability to control expenses;
    
    fluctuations in demand for and sales of our products, the acceptance of our products
in the marketplace, and the general level of spending in the telecommunications
industry;
    
    our ability to maintain appropriate manufacturing capacity, and particularly to
limit excess capacity commensurate with the volatile demand levels for our products;
    
    our ability to successfully complete a transition to an outsourced manufacturing
model;
    
    the ability of our outsourced manufacturers to timely produce and deliver
subcomponents, and possibly complete products in the quantity and of the quality we
require;
    
    competitive factors, including the introduction of new products and product
enhancements by competitors and potential competitors, pricing pressures, and the
competitive environment in the markets into which we sell our products, including
competitors with substantially greater resources than we have;
    
    our ability to effectively develop, introduce, manufacture, and ship new and
enhanced products in a timely manner without defects;
    
    the availability and cost of components for our products;
    
    new product introductions that may result in increased research and development
expenses and sales and marketing expenses that are incurred in one quarter, with
revenues, if any, that are not recognized until a subsequent or later quarter; and
    
    the unpredictability of consumer demand and difficulties in meeting such demand.
  -8-




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Our stock price is highly volatile.
  
    
    quarterly variations in our operating results;
    
    significant developments in the businesses of other telecommunications companies;
    
    changes in financial estimates by securities analysts;
    
    changes in market valuations or financial results of telecommunications-related
companies;
    
    announcements by us or our competitors of technology innovations, new products, or
significant acquisitions, strategic partnerships or joint ventures;
    
    any deviation from projected growth rates in revenues;
    
    any loss of a major customer or a major customer order;
    
    additions or departures of key management or engineering personnel;
    
    any deviations in our net revenue or in losses from levels expected by securities
analysts;
    
    activities of short sellers and risk arbitrageurs;
    
    future sales of our common stock; and
    
    volume fluctuations, which are particularly common among highly volatile securities
of telecommunications-related companies.
  We experience intense competition with respect to our products.
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We are subject to a concentration of credit risk.
  The economy of China differs from the economies of most countries and creates significant risks.
    Our currency is not freely convertible.
  -10-




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We may not maintain adequate insurance coverage for damage to our Chinese factories.
  The discontinuation of the preferential tax treatment currently available to our PRC subsidiary,
CEC Telecom Co., Ltd., could materially adversely affect our results of operations.
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The dividends that our BVI-incorporated investment holding subsidiaries receive from their
subsidiaries in the PRC and our global income may be subject to PRC tax under the new PRC
Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.
In addition, our foreign corporate holders of ordinary shares may be subject
to a PRC withholding tax upon the dividends payable by us and upon gains realized on the sale of
our ordinary shares, if we are classified as a PRC resident enterprise.
   -12-




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Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiarys
ability to distribute profits to us, or otherwise materially and adversely affect us.
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We depend upon certain key personnel to manage our company.
  We are controlled by one of our shareholders, whose interests may differ from other shareholders.
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Our holding company structure creates restrictions on the payment of dividends.
  As a foreign private issuer, we are not subject to certain rules promulgated by Nasdaq that other
Nasdaq-listed issuers are required to comply with.
  
    
    our independent directors do not hold regularly scheduled meetings in executive
session;
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of
directors, and our CEO may be present and participate in the deliberations concerning his compensation;
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors; and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person.
  It may be difficult to serve us with legal process or enforce judgments against us or our
management.
  -15-




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
    
    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.
  
    
    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.
  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.
   -16-




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ITEM
4. INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY.
       -17-




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Sale of $25,000,000 Senior Convertible Notes
 Background
  The Transaction
   
    
    the interest rate on the notes is 5.5% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning December 31, 2007
    
    the date of maturity of the notes is February 17, 2010, 30 months from the closing
date
    
    the notes are convertible at the investors option into our common stock, $0.001 per
share par value
    
    the initial conversion price for our common stock is $10.19 per share (which
represents a 10% premium to the five day volume weighted average price (VWAP) of our
common stock as of the date of closing this transaction), subject to adjustment as
provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect to
such conversion, the investors (together with their affiliates) would beneficially own
in excess of 9.99% of our common stock outstanding immediately after giving effect to
the conversion without prior written notice to us
 -18-




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
    
    the conversion price for our common stock is subject to reset if the average of the
daily VWAP of our common stock for the five trading days ending on each two-month
anniversary of the closing until maturity (each a Reset Date) is less than $9.26 (or
such lower reset price as previously adjusted pursuant hereto). In that event, the
conversion price is reset to a price equal to 90% of the VWAP of our common stock for
the five trading days ending on the applicable Reset Date. In no event will the
conversion price be reset to a price less than $5.56 per share.
    
    the notes require an automatic repricing of the conversion price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the conversion price. (This ratchet adjustment provision does not
apply in the case of certain exempt issuances.)
    
    the notes are unsecured
    
    the investors can require us to redeem the notes on the first anniversary of the
issuance of the notes in an amount equal to the sum of (a) the outstanding principal of
the notes, and (b) the accrued and unpaid interest thereon
    
    we have the right to require the investors to convert the notes into shares of our
common stock if the VWAP of our common stock exceeds for thirty (30) consecutive
trading days $15.285 (150% of the conversion price), subject to certain additional
terms and conditions
    
    we may be required to prepay the notes if certain transactions or events of default
occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of
125%, or
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 
    
    we are subject to certain cash penalties if we are unable to deliver to the
investors the common stock receivable upon conversion of the notes and exercise of the
warrants in a timely manner
  
    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $10.19 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance on August 17, 2007
    
    the warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the warrants is not available for the resale of the
 shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event that
the holder would beneficially own in excess of 9.99% of our common stock outstanding
immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the warrant exercise price. (This ratchet adjustment provision does
not apply in the case of certain exempt issuances.)
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Recent
Development  Initial Public Offering of QX Mobile Shares And Non-Competition
Arrangement
   (i)
    
    making investments in businesses that result in or may result in direct or indirect
competition with QX Mobiles business;
 (ii)
    
    soliciting any business, for itself or for other persons, from any person that has business
relationships with QX Mobile;
 (iii)
    
    soliciting the employment of, or hiring, any officer, directors or employee of QX Mobile;
and
 (iv)
    
    interfering with QX Mobiles business or encouraging other persons to interfere with QX
Mobiles business.
  -20-




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B. BUSINESS OVERVIEW.
         -21-




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2005
    
    
    2006
    
    
    2007Rmb000
    
    Rmb000
    
    Rmb000Net sales:Mobile phones
    
    
    2,380,531
    
    
    
    2,985,432
    
    
    
    3,636,431Indoor phones
    
    
    254,653
    
    
    
    235,780
    
    
    
    237,6762,635,184
    
    
    
    3,221,212
    
    
    
    3,874,107
 -22-




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QX Mobile and Its Subsidiary CECTs Business Overview
      -23-




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HZQXCIs Business Operations and Product Range
        (i)
    
    the design and manufacture through sub-contractors of COSUN-branded GSM mobile
phones for its own account;(ii)
    
    the development and marketing of wired and wireless telephones (indoor phones),
including telephones with special functions; and
 -24-




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(iii)
    
    the development and sale of internet-related products and other consumer
electronics products.
      (i)
    
    Little Smart phones with removable cards;(ii)
    
    ADSL2. Compared to the first generation of ADSL, its upstream channel rate and
downstream channel rate are much faster; and(iii)
    
    Home Gateway (residential gateway). The Home Gateway is a device that acts as
a hub between the home environment and the broadband network. Under the control of the
service provider, it simplifies the user experience when utilizing broadband services.
 -25-




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(iv)
    
    EasyPay Terminal is a type of payment terminal with common phone functions.
Wherever you are, at home, office or variety marketplace, it can act like a DTMF/FSK
caller ID phone, as well as an advanced electronic payment tool, applied to pay your
bills, query your account, transfer funds between credit or debit cards, etc.EasyPay Terminal is particularly designed for individual users. It could be used as
soon as you connect it to PSTN through a single telephone cable without spending
time on setup or installation. Secondly, it is easy for new users to operate with a
user-friendly interface. Therefore, almost everyone can learn how to use it
rapidly. Thirdly, EasyPay Terminal has high security through binding telephone
numbers, PSAM (Purchase Secure Access Module) with serial numbers of both card and
terminal. Lastly, it is affordable for most people in China and is becoming more
and more popular among individual users.
    Production Management
  Quality Assurance System
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
    
    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.
  Sales and Marketing
 HZQXCIs Indoor Telephone Division
     -27-




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HZQXCIs Mobile Phone Division
    -28-




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Materials and Components
   Research and Development
   -29-




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Competition
  
    
    functions and designs;
    
    performance/cost ratio;
    
    brand name recognition;
    
    distribution capability;
    
    after-sale service;
    
    short lead time in product development;
 -30-




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
    
    product quality; and
    
    capability of mass production.
     -31-




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C. ORGANIZATIONAL STRUCTURE AS OF JULY 8, 2008.
 
 -32-




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D. PROPERTY, PLANTS AND EQUIPMENT.
  
 ITEM
4A. UNRESOLVED STAFF COMMENTS
  
 ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
   Fiscal 2007 compared to Fiscal 2006
 (i)
    
    Net sales
  Year ended December 312007
    
    
    2006Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    3,636,431
    
    
    
    94
    
    
    
    2,985,432
    
    
    
    93Indoor telephones
    
    
    237,676
    
    
    
    6
    
    
    
    235,780
    
    
    
    7Total
    
    
    3,874,107
    
    
    
    100
    
    
    
    3,221,212
    
    
    
    100
  -33-




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Year ended December 312007
    
    
    2006Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    2,692,678
    
    
    
    93
    
    
    
    2,457,129
    
    
    
    93Indoor telephones
    
    
    206,286
    
    
    
    7
    
    
    
    194,263
    
    
    
    7Total
    
    
    2,898,964
    
    
    
    100
    
    
    
    2,651,392
    
    
    
    100
 -34-




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Year ended December 312007
    
    
    2006Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    943,753
    
    
    
    97
    
    
    
    528,303
    
    
    
    92Indoor telephones
    
    
    31,390
    
    
    
    3
    
    
    
    41,517
    
    
    
    8Total
    
    
    975,143
    
    
    
    100
    
    
    
    569,820
    
    
    
    100
   -35-




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-36-




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-37-




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-38-




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-39-




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-40-




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RMB000Deemed proceeds from disposal
    
    
    721,188Less: Share of net assets relating to minority interest disposed of
    
    
    (221,659
    )Less: Goodwill relating to minority interest disposed of
    
    
    (16,915
    )Gain on disposal
    
    
    482,614
    RMB000Share of net assets of Qiao Xing Mobile Communication Co.,
Ltd. after IPO
    
    
    1,315,647Less: Share of net assets of Qiao Xing Mobile Communication
Co., Ltd. before IPO
    
    
    (915,057
    )Increase in share of net assets after IPO
    
    
    400,590Less: Goodwill relating to equity interest deemed disposed of
    
    
    (16,625
    )Gain on deemed disposal
    
    
    383,965
  -41-




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-42-




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-43-




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Fiscal 2006 compared to Fiscal 2005
   Year ended December 312006
    
    2005 (Restated)Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    2,985,432
    
    
    
    93
    
    
    
    2,380,531
    
    
    
    90Indoor telephones
    
    
    235,780
    
    
    
    7
    
    
    
    254,653
    
    
    
    10Total
    
    
    3,221,212
    
    
    
    100
    
    
    
    2,635,184
    
    
    
    100
     -44-




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Year ended December 312006
    
    2005 (Restated)Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    2,457,129
    
    
    
    93
    
    
    
    1,941,313
    
    
    
    90Indoor telephones
    
    
    194,263
    
    
    
    7
    
    
    
    215,485
    
    
    
    10Total
    
    
    2,651,392
    
    
    
    100
    
    
    
    2,156,798
    
    
    
    100
     -45-




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Year ended December 312006
    
    2005 (Restated)Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    528,303
    
    
    
    92
    
    
    
    439,218
    
    
    
    92Indoor telephones
    
    
    41,517
    
    
    
    8
    
    
    
    39,168
    
    
    
    8Total
    
    
    569,820
    
    
    
    100
    
    
    
    478,386
    
    
    
    100
      -46-




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
    
    COSUN-branded mobile phone handsets: brand building and maintenance and the
expansion of the distribution network subsequent to the receipt of a separate
mobile phone handsets manufacturing license from the PRC government in June
2006;
    
    Indoor phones: additional sales force and the establishment of provincial
offices for a stronger relationship with our telecommunication operator
clients.
    
    
    office expenses relating to new offices set up in provinces to serve clients
of the indoor phone business segment who are telecommunication operators, and
    
    increased number of after-sales service points and workshops for the
COSUN-branded mobile phone handsets.
    -47-




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-48-




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-49-




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(i)
    
    increase in gross profit of Rmb 91.4 million (US$ 11.7 million);(ii)
    
    increase in general and administrative expenses of Rmb 70.7 million (US$
9.1 million);(iii)
    
    increase in research and development costs of Rmb 10.1 million (US$1.3
million);(iv)
    
    increase in in-process research and development of Rmb 41.7 million (US$
5.3 million);(v)
    
    increase in interest expense of Rmb 58.7 million (US$ 7.5 million);(vi)
    
    increase in loss on re-measurement of embedded derivative of Rmb 134.4
million (US$ 17.2 million);(vii)
    
    decrease in gain on disposal of subsidiary of Rmb 10.3 million (US$ 1.3
million);(viii)
    
    increase in provision for income tax of Rmb32.7 million (US$ 4.2 million);(ix)
    
    decrease in minority interests of Rmb 14.8 million (US$ 1.9 million); and
 -50-




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(x)
    
    decrease in extraordinary gain on acquisition of minority interests
of Rmb 23.4 million (US$ 3.0 million).
       
    
    Interest expense relating to the accretion of convertible note discounts of Rmb
140.3 million (US$ 19.2 million) which did not involve any outflow of cash;
    
    loss on re-measurement of embedded derivatives of Rmb 129.1 million (US$ 17.7
million) which did not involve any outflow of cash;
    
    Loss on extinguishment of convertible debts of Rmb 142.1 million (US$ 19.5 million)
which did not involve any outflow of cash;
    
    Gain on disposal of interests in subsidiaries of Rmb 482.6 million (US$ 66.2
million) which did not involve any inflow of cash;
    
    Gain on sale of stocks by subsidiary of Rmb 384.0 million (US$ 52.6 million) which
did not involve any inflow of cash;
    
    decrease in accounts and bills receivable of Rmb 201.6 million (US$ 27.6 million);
and
    
    decrease in prepaid expenses of Rmb 167.4 million (US$ 22.9 million).
 -51-




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-52-




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Critical Accounting Policies and Estimates
          -53-




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-54-




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-55-




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-56-




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-57-




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-58-




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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  Year ended December 31, 2007
    
    Rmb 34,452,000Year ended December 31, 2006
    
    Rmb 30,747,000Year ended December 31, 2005
    
    Rmb 20,694,000
 D. TREND INFORMATION.
  E. OFF-BALANCE SHEET ARRANGEMENTS.
  -59-




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F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
   2007Rmb000
    
    
    US$000Capital expenditures authorized and contracted for:- Purchase of machinery and equipment
    
    
    130
    
    
    
    18
   AmountRmb000
    
    US$000For the years ending December 31,- 2008
    
    
    5,274
    
    
    
    723- 2009
    
    
    3,052
    
    
    
    418- 2010
    
    
    3,052
    
    
    
    418Total
    
    
    11,378
    
    
    
    1,559
    -60-




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AmountRmb000
    
    US$000For the years ending December 31,- 2008
    
    
    200,930
    
    
    
    27,545- 2009
    
    
    193,927
    
    
    
    26,585Total
    
    
    394,857
    
    
    
    54,130
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. DIRECTORS AND SENIOR MANAGEMENT.
  Name
    
    Age
    
    PositionRui Lin Wu
    
    
    56
    
    
    Chairman and Chief Executive OfficerZhi Yang Wu
    
    
    35
    
    
    Vice Chairman and SecretaryAlbert Leung
    
    
    51
    
    
    Chief Financial OfficerZe Yun Mu
    
    
    42
    
    
    Non-Executive DirectorEdward Tsai
    
    
    51
    
    
    Non-Executive DirectorYi Hong Zhang
    
    
    66
    
    
    Non-Executive Director
  Mr. Rui Lin Wu
 Mr. Zhi Yang Wu
 -61-




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Mr. Albert Leung
 Mr. Ze Yun Mu
 Dr. Edward Tsai
 Mr. Yi Hong Zhang
 B. COMPENSATION.
  -62-




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C. BOARD PRACTICES.
    Audit Committee
  
    
    recommend annually to our 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 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 our 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.
 Nominating Committee
  
    
    assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends;
    
    develop membership qualifications for the board of directors and all board
committees;
    
    monitor compliance with board of director and board committee membership criteria;
 -63-




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
    
    review and recommend directors for continued service as required based on our
evolving needs;
    
    coordinate and assist management and the board of directors in recruiting new
members to the board of directors; and
    
    investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors.
 Compensation Committee
  
    
    review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers;
    
    evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors;
    
    set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors; and
    
    set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits).
 Nasdaq Requirements
   
    
    our independent directors do not hold regularly scheduled meetings in executive
session;
 -64-




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
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation;
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors; and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person.
  D. EMPLOYEES
  E. SHARE OWNERSHIP.
  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    each of our current executive officers and directors; and
    
    all current directors and executive officers as a group.
   Number
    
    
    PercentName of Beneficial Holder
    
    Shares Beneficially OwnedWu Holdings Limited
    
    
    6,819,000
    (1)
    
    
    22.0Rui Lin Wu
    
    
    6,819,000
    (1)
    
    
    22.0Zhi Yang Wu
    
    
    0
    
    
    
    0Zhi Zhong Wu
    
    
    0
    
    
    
    0
 -65-




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Number
    
    
    PercentName of Beneficial Holder
    
    Shares Beneficially OwnedAlbert Leung
    
    
    0
    
    
    
    0Ze Yun Mu
    
    
    0
    
    
    
    0Edward Tsai
    
    
    0
    
    
    
    0Yi Hong Zhang
    
    
    0
    
    
    
    0All directors and executive officers as a group (6 persons)
    
    
    6,819,000
    
    
    
    22.0Galbo Enterprises Limited (2)
    
    
    1,562,348
    
    
    
    5.0
 
 (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.(2)
    
    Their address is 8th Floor, Kat Cheung Mansion, 1 Lai Shun Street, North Point,
Hong Kong. The 2005 Stock Compensation Plan
  
    
    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.
  -66-




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
    
    545,000 options              Rui Lin Wu, Chairman
    
    400,000 options              Zhi Yang Wu, Vice Chairman
    
    400,000 options              Zhi Zhong Wu, son of Chairman
    
    400,000 options              Zhi Jian Wu, son of Chairman
  Other Options and Warrants Outstanding
  
    
    warrants to purchase an aggregate of 375,000 shares of common stock at $9.86 per
share at any time until February 17, 2010 which we granted to two accredited investors
and the placement agent and finders in February 2005 in connection with a stock
purchase agreement (February 2005 SPA Warrants)
    
    warrants to purchase an aggregate of 37,494 shares of common stock at $9.86 per
share at any time until April 13, 2010 which we granted to three accredited investors
and two finders in April 2005 in connection with a stock purchase agreement (April
2005 SPA Warrants)
    
    warrants to purchase an aggregate of 400,000 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to an accredited investor in
January 2006 in connection with a stock purchase agreement (January 2006 SPA
Warrants)
    
    warrants to purchase an aggregate of 35,500 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to a financial consultant and
its employees and related parties in February 2006 in connection with certain corporate
finance consulting and advisory services rendered to the Company during 2005
(February 2006 Warrants)
    
    warrants to purchase an aggregate of 18,753 shares of common stock at $7.00 per
share at any time until February 22, 2010 which we granted to an accredited investor in
February 2006 in connection with a stock purchase agreement (February 2006 SPA
Warrants)
    
    warrants to purchase an aggregate of 600,000 shares of common stock at $14.30 per
share at any time until October 31, 2010 which we granted to two accredited investors
 -67-




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and the placement agent in October 2006 in connection with the sale of 2,000,000 shares
of our common stock at US$12.00 per share (October 2006 SPA Warrants)
    
    warrants to purchase an aggregate of 545,455 shares of common stock at $14.30 per
share at any time until October 31, 2011 which we granted to two accredited investors
and the placement agent in October 2006 in connection with the sale of $26,000,000 of
our senior convertible notes (October 2006 CB Warrants)
    
    warrants to purchase an aggregate of 736,016 shares of common stock at $10.19 per
share at any time until August 17, 2012 which we granted to two accredited investors
and the placement agent in August 2007 in connection with the sale of $25,000,000 of
our senior convertible notes (August 2007 CB Warrants)
    
    warrants to purchase an aggregate of 473,814 shares of common stock at $13.00 per
share at any time until November 2, 2011 which we granted to an accredited investor and
a finder in November 2007 in connection with a stock purchase agreement (November 2007
SPA Warrants)
   1.
    
    February 2005 SPA Warrants  436,254 warrants at $8.4756 per warrant2.
    
    April 2005 SPA Warrants  43,618 warrants at $8.4756 per warrant3.
    
    January 2006 SPA Warrants  438,828 warrants at $7.4061 per warrant4.
    
    February 2006 Warrants  38,946 warrants at $7.4061 per warrant5.
    
    February 2006 SPA Warrants  19,815 warrants at $6.6249 per warrant6.
    
    October 2006 SPA Warrants  1,543,165 warrants at $ 5.5600 per warrant7.
    
    October 2006 CB Warrants  1,402,879 warrants at $5.5600 per warrant8.
    
    August 2007 CB Warrants  1,348,921 warrants at $5.5600 per warrant9.
    
    November 2007 SPA Warrants  1,107,838 warrants at $ 5.5600 per warrant
 -68-




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS.
      B. RELATED PARTY TRANSACTIONS.
 Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    Major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiWu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholder
of CECT, QXCI and QXPLHuizhou Qiaoxing Famous Science &
Technology Co., Ltd. (QFST)
    
    A company 80% owned by QXGLChina Electronics Corporation (CEC)
    
    Minority owner of CECT until July 29, 2005China Electronics Beijing Real
Estate Management Co., Ltd.
(CEBREM)
    
    CEC is a shareholder
  2005
    
    2006
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Operating lease rentals charged by CEC
    
    
    1,325
    
    
    
    
    
    
    
    
    
    
    
    
 -69-




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##### Table of Contents



2005
    
    2006
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Property management fees paid and payable to:- CEBREM
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    - QXGL
    
    
    61
    
    
    
    90
    
    
    
    100
    
    
    
    14Sales to:- QFST
    
    
    41,928
    
    
    
    69,232
    
    
    
    95,514
    
    
    
    13,094
   2006
    
    2007RMB000
    
    RMB000
    
    US$000Due from:- Exquisite Jewel Limited
    
    
    5
    
    
    
    5
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    22
    
    
    
    329
    
    
    
    27
    
    
    
    4Due to:- Mr. Rui Lin Wu
    
    
    4,516
    
    
    
    608
    
    
    
    83Accounts receivable from:- QFST
    
    
    44,443
    
    
    
    97,070
    
    
    
    13,307
   C. INTERESTS OF EXPERTS AND COUNSEL.
  
 ITEM
8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
   -70-




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B. SIGNIFICANT CHANGES.
  -71-




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##### Table of Contents



ITEM
9. THE OFFER AND LISTING
 A. OFFER AND LISTING DETAILS.
  Period
    
    High
    
    LowYear ended December 31, 2003
    
    $
    14.33
    
    
    $
    1.90Year ended December 31, 2004
    
    $
    14.98
    
    
    $
    6.50Year ended December 31, 2005
    
    $
    8.50
    
    
    $
    5.04Year ended December 31, 2006
    
    $
    17.09
    
    
    $
    6.49Year ended December 31, 2007
    
    $
    19.56
    
    
    $
    7.16Quarter ended March 31, 2006
    
    $
    8.85
    
    
    $
    6.49Quarter ended June 30, 2006
    
    $
    12.40
    
    
    $
    7.21Quarter ended September 30, 2006
    
    $
    14.15
    
    
    $
    9.81Quarter ended December 31, 2006
    
    $
    17.09
    
    
    $
    11.79Quarter ended March 31, 2007
    
    $
    19.56
    
    
    $
    12.58Quarter ended June 30, 2007
    
    $
    18.40
    
    
    $
    12.26Quarter ended September 30, 2007
    
    $
    13.97
    
    
    $
    7.78Quarter ended December 31, 2007
    
    $
    12.44
    
    
    $
    7.16Quarter ended March 31, 2008
    
    $
    8.11
    
    
    $
    5.18Quarter ended June 30, 2008
    
    $
    7.52
    
    
    $
    4.39Month ended January 31, 2008
    
    $
    8.11
    
    
    $
    6.77Month ended February 29, 2008
    
    $
    7.75
    
    
    $
    6.62Month ended March 31, 2008
    
    $
    6.43
    
    
    $
    5.18Month ended April 30, 2008
    
    $
    7.52
    
    
    $
    5.72Month ended May 31, 2008
    
    $
    7.07
    
    
    $
    6.14Month ended June 30, 2008
    
    $
    5.99
    
    
    $
    4.39Month ended July 31, 2008*
    
    $
    4.22
    
    
    $
    4.07
 
 *
    
    Through July 8, 2008 B. PLAN OF DISTRIBUTION.
  -72-




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##### Table of Contents



C. MARKETS.
  D. SELLING SHAREHOLDERS.
  E. DILUTION.
  F. EXPENSES OF THE ISSUE.
  
 ITEM
10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL.
  B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
   -73-




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-74-




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##### Table of Contents



-75-




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##### Table of Contents



C. MATERIAL CONTRACTS.
  D. EXCHANGE CONTROLS.
  E. TAXATION.
  United States Federal Income Taxation
  
    
    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.
  -76-




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##### Table of Contents




    
    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.
   -77-




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##### Table of Contents



British Virgin Islands Taxation
    F. DIVIDENDS AND PAYING AGENTS.
  G. STATEMENT BY EXPERTS.
  H. DOCUMENTS ON DISPLAY.
  I. SUBSIDIARY INFORMATION.
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  -78-




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##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM
13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  -79-




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Managements Annual Report on Internal Control Over Financial Reporting.
       -80-




---



##### Table of Contents



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 (a) Audit Fees.
 (b) Audit  Related Fees.
 (c) Tax Fees.
 (d) All Other Fees.
 (e) Audit Committee Pre-Approval Policies and Procedures.
  -81-




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##### Table of Contents



(f).
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM
18. FINANCIAL STATEMENTS
 -82-




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
  F-1




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Internal
Control  Integrated Framework
   
 F-2




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##### Table of Contents



Note
    
    
    2006
    
    
    2007RMB000
    
    
    RMB000
    
    
    US$000(Note 2(v))ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    1,096,477
    
    
    
    3,033,010
    
    
    
    415,788Restricted cash
    
    
    14
    
    
    
    286,025
    
    
    
    197,951
    
    
    
    27,137Restricted cash held in trust by a
director
    
    
    14
    
    
    
    87,748
    
    
    
    
    
    
    
    Accounts receivable, net (includes
net amount receivable from a
related party of RMB97,070,000
(2006: RMB44,443,000))
    
    
    3
    
    
    
    839,645
    
    
    
    941,518
    
    
    
    129,071Bills receivable
    
    
    
    
    
    
    421,647
    
    
    
    115,261
    
    
    
    15,800Inventories
    
    
    4
    
    
    
    232,356
    
    
    
    304,024
    
    
    
    41,678Prepaid expenses
    
    
    5
    
    
    
    453,024
    
    
    
    273,881
    
    
    
    37,546Other current assets
    
    
    6
    
    
    
    4,182
    
    
    
    1,111,408
    
    
    
    152,360Due from related parties
    
    
    28
    
    
    
    29
    
    
    
    27
    
    
    
    4Deferred income taxes
    
    
    21
    
    
    
    5,924
    
    
    
    13,350
    
    
    
    1,830Deferred debt issuance costs, net
    
    
    17
    
    
    
    22,847
    
    
    
    14,579
    
    
    
    1,999Total current assets
    
    
    
    
    
    
    3,449,904
    
    
    
    6,005,009
    
    
    
    823,213Property, machinery and equipment, net
    
    
    7
    
    
    
    209,542
    
    
    
    192,601
    
    
    
    26,403Construction-in-progress
    
    
    
    
    
    
    60,295
    
    
    
    
    
    
    
    Land use rights, net
    
    
    8
    
    
    
    207,206
    
    
    
    36,106
    
    
    
    4,950Other non-current assets
    
    
    9
    
    
    
    8,249
    
    
    
    
    
    
    
    Investment at cost
    
    
    10
    
    
    
    7,803
    
    
    
    7,803
    
    
    
    1,070Goodwill
    
    
    12
    
    
    
    110,134
    
    
    
    76,594
    
    
    
    10,500Other acquired intangible assets, net
    
    
    13
    
    
    
    93,008
    
    
    
    60,728
    
    
    
    8,325Deferred debt issuance costs, net
    
    
    17
    
    
    
    31,845
    
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    4,177,986
    
    
    
    6,378,841
    
    
    
    874,461LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term bank borrowings
    
    
    14
    
    
    
    1,155,290
    
    
    
    1,471,454
    
    
    
    201,718Accounts payable
    
    
    
    
    
    
    225,639
    
    
    
    180,573
    
    
    
    24,755Other payables
    
    
    15
    
    
    
    11,989
    
    
    
    42,009
    
    
    
    5,759Accrued liabilities
    
    
    16
    
    
    
    61,688
    
    
    
    104,984
    
    
    
    14,392Deposits received
    
    
    
    
    
    
    2,036
    
    
    
    4,539
    
    
    
    622Deferred revenues
    
    
    
    
    
    
    15,389
    
    
    
    26,402
    
    
    
    3,620Due to related parties
    
    
    28
    
    
    
    4,516
    
    
    
    608
    
    
    
    83Taxation payable
    
    
    21
    
    
    
    46,272
    
    
    
    73,301
    
    
    
    10,049Embedded derivative liability
    
    
    17
    
    
    
    340,899
    
    
    
    19,004
    
    
    
    2,605Convertible notes
    
    
    17
    
    
    
    87,471
    
    
    
    135,667
    
    
    
    18,598Total current liabilities
    
    
    
    
    
    
    1,951,189
    
    
    
    2,058,541
    
    
    
    282,201Convertible notes
    
    
    17
    
    
    
    222,087
    
    
    
    189,660
    
    
    
    26,000Shareholders loans
    
    
    18
    
    
    
    7,697
    
    
    
    7,194
    
    
    
    986Deferred income taxes
    
    
    21
    
    
    
    11,740
    
    
    
    5,561
    
    
    
    762Total liabilities
    
    
    
    
    
    
    2,192,713
    
    
    
    2,260,956
    
    
    
    309,949Minority interests
    
    
    
    
    
    
    115,224
    
    
    
    1,095,917
    
    
    
    150,237Commitments and contingencies
    
    
    25Shareholders equity:Common stock, par value RMB0.008
(equivalent of US$0.001);
authorized 50,000,000 shares;
outstanding and fully paid -
29,605,003 shares as of December
31, 2006 and 30,948,836 as of
December 31, 2007
    
    
    19
    
    
    
    242
    
    
    
    251
    
    
    
    34Additional paid-in capital
    
    
    
    
    
    
    1,439,473
    
    
    
    1,737,541
    
    
    
    238,196Retained earnings
    
    
    
    
    
    
    422,036
    
    
    
    1,325,984
    
    
    
    181,776Cumulative translation adjustments
    
    
    
    
    
    
    8,298
    
    
    
    (41,808
    )
    
    
    (5,731
    )Total shareholders equity
    
    
    
    
    
    
    1,870,049
    
    
    
    3,021,968
    
    
    
    414,275Total liabilities, minority
interests and shareholders
equity
    
    
    
    
    
    
    4,177,986
    
    
    
    6,378,841
    
    
    
    874,461
  F-3




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##### Table of Contents



Note
    
    
    2005
    
    
    2006
    
    
    2007RMB000
    
    

RMB000
    
    

RMB000
    
    
    US$000(Note 2(v))Net sales
    
    
    
    
    
    
    2,635,184
    
    
    
    3,221,212
    
    
    
    3,874,107
    
    
    
    531,092Cost of goods sold
    
    
    
    
    
    
    (2,156,798
    )
    
    
    (2,651,392
    )
    
    
    (2,898,964
    )
    
    
    (397,412
    )Gross profit
    
    
    
    
    
    
    478,386
    
    
    
    569,820
    
    
    
    975,143
    
    
    
    133,680Operating expenses:Selling expenses
    
    
    
    
    
    
    (24,726
    )
    
    
    (28,401
    )
    
    
    (59,820
    )
    
    
    (8,200
    )General and administrative expenses
    
    
    
    
    
    
    (55,341
    )
    
    
    (126,076
    )
    
    
    (131,074
    )
    
    
    (17,969
    )Research and development
    
    
    
    
    
    
    (20,694
    )
    
    
    (30,747
    )
    
    
    (34,452
    )
    
    
    (4,723
    )In process research and development
    
    
    11
    (b)
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    Amortization of acquired intangible assets
    
    
    13
    
    
    
    (11,880
    )
    
    
    (15,178
    )
    
    
    (32,280
    )
    
    
    (4,425
    )Income from operations
    
    
    
    
    
    
    365,745
    
    
    
    327,679
    
    
    
    717,517
    
    
    
    98,363Interest income
    
    
    
    
    
    
    7,130
    
    
    
    8,108
    
    
    
    42,127
    
    
    
    5,775Exchange (loss) gain, net
    
    
    
    
    
    
    (2,659
    )
    
    
    3,225
    
    
    
    28,255
    
    
    
    3,874Interest expense
    
    
    30
    
    
    
    (41,752
    )
    
    
    (100,432
    )
    
    
    (248,014
    )
    
    
    (34,000
    )Loss on remeasurement of embedded derivatives
    
    
    17
    
    
    
    
    
    
    
    (134,439
    )
    
    
    (129,084
    )
    
    
    (17,696
    )Loss on extinguishment of convertible debts
    
    
    11
    (c)
    
    
    
    
    
    
    
    
    
    
    (142,090
    )
    
    
    (19,479
    )Gain on disposal of interests in subsidiaries
    
    
    11
    (a) & (c)
    
    
    10,307
    
    
    
    
    
    
    
    482,614
    
    
    
    66,160Gain on sale of stocks by subsidiary
    
    
    11
    (c)
    
    
    
    
    
    
    
    
    
    
    383,965
    
    
    
    52,637Provision for litigation settlement
    
    
    25
    (c)
    
    
    
    
    
    
    
    
    
    
    (15,319
    )
    
    
    (2,100
    )Impairment of investment at cost
    
    
    
    
    
    
    (7,348
    )
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    
    
    
    
    640
    
    
    
    4,453
    
    
    
    59,055
    
    
    
    8,096Income before income tax
    
    
    
    
    
    
    332,063
    
    
    
    108,594
    
    
    
    1,179,026
    
    
    
    161,630Provision for income tax
    
    
    21
    
    
    
    (25,486
    )
    
    
    (58,192
    )
    
    
    (124,120
    )
    
    
    (17,015
    )Income before minority interests
    
    
    
    
    
    
    306,577
    
    
    
    50,402
    
    
    
    1,054,906
    
    
    
    144,615Minority interests
    
    
    
    
    
    
    (99,270
    )
    
    
    (84,473
    )
    
    
    (168,554
    )
    
    
    (23,107
    )Net income (loss) before extraordinary
items
    
    
    
    
    
    
    207,307
    
    
    
    (34,071
    )
    
    
    886,352
    
    
    
    121,508Extraordinary items:Gains on acquisitions of minority
interests, net of nil tax
    
    
    11
    (a)
    
    
    37,592
    
    
    
    14,237
    
    
    
    17,596
    
    
    
    2,412Net income (loss)
    
    
    
    
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    903,948
    
    
    
    123,920Other comprehensive income (loss) 
Translation adjustments
    
    
    
    
    
    
    1,821
    
    
    
    7,203
    
    
    
    (50,106
    )
    
    
    (6,869
    )Comprehensive income (loss)
    
    
    
    
    
    
    246,720
    
    
    
    (12,631
    )
    
    
    853,842
    
    
    
    117,051Basic earnings (loss) per common share:Before extraordinary gain
    
    
    23
    
    
    RMB
    11.32
    
    
    RMB
    (1.44
    )
    
    RMB
    24.46
    
    
    US$
    3.35Extraordinary gain
    
    
    23
    
    
    RMB
    2.05
    
    
    RMB
    0.60
    
    
    RMB
    0.49
    
    
    US$
    0.07After extraordinary gain
    
    
    23
    
    
    RMB
    13.37
    
    
    RMB
    (0.84
    )
    
    RMB
    24.95
    
    
    US$
    3.42Diluted earnings (loss) per common share:Before extraordinary gain
    
    
    23
    
    
    RMB
    11.32
    
    
    RMB
    (2.03
    )
    
    RMB
    24.17
    
    
    US$
    3.31Extraordinary gain
    
    
    23
    
    
    RMB
    2.05
    
    
    RMB
    0.59
    
    
    RMB
    0.48
    
    
    US$
    0.07After extraordinary gain
    
    
    23
    
    
    RMB
    13.37
    
    
    RMB
    (1.44
    )
    
    RMB
    24.65
    
    
    US$
    3.38Weighted average number of shares outstandingBasic
    
    
    23
    
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    29,836,000
    
    
    
    29,836,000Diluted
    
    
    23
    
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    30,200,000
    
    
    
    30,200,000
  F-4




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##### Table of Contents



2005
    
    2006
    
    2007RMB000
    

RMB000
    

RMB000
    
    US$000(Note 2(v))Cash flows from operating activities:Net income (loss)
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    903,948
    
    
    
    123,920Adjustments to reconcile net income (loss) to
net cash used in operating activities -Depreciation of property, machinery and
equipment
    
    
    11,831
    
    
    
    11,124
    
    
    
    17,023
    
    
    
    2,334Land use right expense
    
    
    4,062
    
    
    
    4,130
    
    
    
    4,539
    
    
    
    622Bad debt expense
    
    
    111
    
    
    
    2,116
    
    
    
    2,961
    
    
    
    406Amortization of other acquired intangible
assets
    
    
    11,880
    
    
    
    15,178
    
    
    
    32,280
    
    
    
    4,425In process research and development
    
    
    
    
    
    
    41,739
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    700
    
    
    
    58,707
    
    
    
    38,626
    
    
    
    5,295Foreign exchange loss (gain)
    
    
    2,659
    
    
    
    (3,225
    )
    
    
    (27,447
    )
    
    
    (3,763
    )Interest expense on shareholders loans
    
    
    473
    
    
    
    459
    
    
    
    487
    
    
    
    67Amortization of deferred debt issuance costs
    
    
    
    
    
    
    11,339
    
    
    
    37,321
    
    
    
    5,116Accretion of convertible note discounts
    
    
    
    
    
    
    36,880
    
    
    
    140,251
    
    
    
    19,227Loss on remeasurement of embedded derivatives
    
    
    
    
    
    
    134,439
    
    
    
    129,084
    
    
    
    17,696Loss on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    142,090
    
    
    
    19,479Gain on disposal of interests in subsidiaries
    
    
    (10,307
    )
    
    
    
    
    
    
    (482,614
    )
    
    
    (66,160
    )Gain on sale of stocks by subsidiary
    
    
    
    
    
    
    
    
    
    
    (383,965
    )
    
    
    (52,637
    )Impairment of investment at cost
    
    
    7,348
    
    
    
    
    
    
    
    
    
    
    
    Provision for litigation settlement
    
    
    
    
    
    
    
    
    
    
    15,319
    
    
    
    2,100Net loss (gain) on disposal of property,
machinery and equipment
    
    
    (339
    )
    
    
    8
    
    
    
    99
    
    
    
    13Net gain on disposal of land use rights and
construction-in-progress
    
    
    
    
    
    
    
    
    
    
    (58,199
    )
    
    
    (7,978
    )Deferred income tax
    
    
    (2,327
    )
    
    
    (8,003
    )
    
    
    (11,938
    )
    
    
    (1,637
    )Minority interests
    
    
    99,270
    
    
    
    84,473
    
    
    
    168,554
    
    
    
    23,107Extraordinary gains on acquisitions of
minority interests
    
    
    (37,592
    )
    
    
    (14,237
    )
    
    
    (17,596
    )
    
    
    (2,412
    )Changes in operating assets and liabilities -Accounts receivable
    
    
    (230,265
    )
    
    
    (185,469
    )
    
    
    (104,834
    )
    
    
    (14,371
    )Bills receivable
    
    
    (162,814
    )
    
    
    (2,736
    )
    
    
    306,386
    
    
    
    42,002Inventories
    
    
    59,686
    
    
    
    2,418
    
    
    
    (71,166
    )
    
    
    (9,756
    )Prepaid expenses
    
    
    (12,171
    )
    
    
    (155,906
    )
    
    
    167,402
    
    
    
    22,949Other current assets
    
    
    722
    
    
    
    9,273
    
    
    
    (19,081
    )
    
    
    (2,616
    )Accounts payable
    
    
    34,670
    
    
    
    (112,141
    )
    
    
    (45,066
    )
    
    
    (6,178
    )Other payables
    
    
    7,348
    
    
    
    (1,286
    )
    
    
    (1,907
    )
    
    
    (261
    )Accrued liabilities
    
    
    24,726
    
    
    
    3,074
    
    
    
    31,552
    
    
    
    4,325Deposits received
    
    
    3,330
    
    
    
    (8,693
    )
    
    
    2,503
    
    
    
    343Deferred revenues
    
    
    (7,675
    )
    
    
    (38,053
    )
    
    
    11,013
    
    
    
    1,510Taxation payable
    
    
    66,457
    
    
    
    (22,614
    )
    
    
    27,029
    
    
    
    3,705Net cash provided by (used in) operating
activities
    
    
    116,682
    
    
    
    (156,840
    )
    
    
    954,654
    
    
    
    130,872
 F-5




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##### Table of Contents



2005
    
    2006
    
    2007RMB000
    

RMB000
    

RMB000
    
    US$000(Note 2(v))Cash flows from investing activities:Acquisitions of property, machinery and
equipment
    
    
    (8,926
    )
    
    
    (168,461
    )
    
    
    (8,017
    )
    
    
    (1,099
    )Acquisition of land use right
    
    
    
    
    
    
    (39,004
    )
    
    
    
    
    
    
    Expenditures on construction-in-progress
    
    
    (8,171
    )
    
    
    (1,190
    )
    
    
    
    
    
    
    Net cash inflow from disposal of equity
investee (Note 27(a))
    
    
    50,400
    
    
    
    
    
    
    
    
    
    
    
    Net cash outflow from acquisition of
minority interests (Note 11(a) and 27(b))
    
    
    (126
    )
    
    
    (170,343
    )
    
    
    
    
    
    
    Proceeds from disposal of property,
machinery and equipment
    
    
    6,882
    
    
    
    241
    
    
    
    209
    
    
    
    28Proceeds from disposal of land use rights
and construction-in-progress (Note 27(c ))
    
    
    
    
    
    
    
    
    
    
    180,000
    
    
    
    24,676Interest-bearing advances to a third party
    
    
    
    
    
    
    
    
    
    
    (998,331
    )
    
    
    (136,859
    )(Increase) decrease in restricted cash
    
    
    (43,881
    )
    
    
    (224,252
    )
    
    
    175,822
    
    
    
    24,103Net cash used in investing activities
    
    
    (3,822
    )
    
    
    (603,009
    )
    
    
    (650,317
    )
    
    
    (89,151
    )Cash flows from financing activities:Increase in short-term borrowings
    
    
    54,026
    
    
    
    403,991
    
    
    
    323,182
    
    
    
    44,305Repayment of capital lease obligation
    
    
    (3,775
    )
    
    
    
    
    
    
    
    
    
    
    Net proceeds from issuance of convertible
notes
    
    
    
    
    
    
    482,041
    
    
    
    175,088
    
    
    
    24,002Net proceeds from exercise of options and
warrants
    
    
    
    
    
    
    259,637
    
    
    
    30,911
    
    
    
    4,238Net proceeds from issuance of common stocks
by the Company
    
    
    111,704
    
    
    
    317,900
    
    
    
    114,534
    
    
    
    15,701Net proceeds from IPO of common stocks by a
subsidiary
    
    
    
    
    
    
    
    
    
    
    1,026,610
    
    
    
    140,735Capital contributed by minority
shareholders of a subsidiary
    
    
    
    
    
    
    
    
    
    
    2,100
    
    
    
    288Net advances (to) from to related parties
    
    
    (25,450
    )
    
    
    2,088
    
    
    
    3,495
    
    
    
    479Net cash provided by financing activities
    
    
    136,505
    
    
    
    1,465,657
    
    
    
    1,675,920
    
    
    
    229,748Effect of translation adjustments
    
    
    1,405
    
    
    
    (991
    )
    
    
    (43,724
    )
    
    
    (5,994
    )Net increase in cash and cash equivalents
    
    
    250,770
    
    
    
    704,817
    
    
    
    1,936,533
    
    
    
    265,475Cash and cash equivalents, beginning of year
    
    
    140,890
    
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    150,313Cash and cash equivalents, end of year
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    3,033,010
    
    
    
    415,788Supplemental disclosure of cash flow
information:Interest paid
    
    
    41,752
    
    
    
    50,374
    
    
    
    60,459
    
    
    
    8,288Income tax paid
    
    
    8,687
    
    
    
    63,383
    
    
    
    103,834
    
    
    
    14,234Non-cash investing and financing activities:- Consideration for acquisition of equity
interest in a subsidiary paid in the form
of common stocks
    
    
    
    
    
    
    185,721
    
    
    
    
    
    
    
    - Consideration for extinguishment of
convertible notes liability paid in the
form of common stocks of a subsidiary
    
    
    
    
    
    
    
    
    
    
    721,188
    
    
    
    98,866- Stock issuance costs paid in the form
of share-based payment
    
    
    9,963
    
    
    
    48,631
    
    
    
    8,183
    
    
    
    1,122- Warrant issuance costs paid in the form
of share-based payment
    
    
    
    
    
    
    1,936
    
    
    
    769
    
    
    
    105- Convertible note issuance costs paid in
the form of share-based payment
    
    
    
    
    
    
    28,796
    
    
    
    9,891
    
    
    
    1,356
   F-6




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##### Table of Contents



Accumulatedothercomprehensiveincome (loss) Common stock
    
    Additional
    
    
    
    
    
    cumulativeNumber of
    
    
    
    
    
    paid-in
    
    Retained
    
    translationNote
    
    shares
    
    Amount
    
    capital
    
    earnings
    
    adjustments
    
    Total000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000
    
    RMB000Balance as of December 31, 2004
    
    
    
    
    
    
    16,645
    
    
    
    138
    
    
    
    445,089
    
    
    
    196,971
    
    
    
    (726
    )
    
    
    641,472Issuance of common stock
    
    
    19
    
    
    
    2,000
    
    
    
    16
    
    
    
    119,994
    
    
    
    
    
    
    
    
    
    
    
    120,010Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,041
    )
    
    
    
    
    
    
    
    
    
    
    (22,041
    )Issue of stock purchase
warrants to investors and
external consultants
    
    
    20
    (c)
    
    
    
    
    
    
    
    
    
    
    9,963
    
    
    
    
    
    
    
    
    
    
    
    9,963Recognition of compensation
expense
    
    
    19, 20
    (c)
    
    
    2
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244,899
    
    
    
    
    
    
    
    244,899Shareholders contribution
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    
    
    
    
    473Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,821
    
    
    
    1,821Balance as of December 31, 2005
    
    
    
    
    
    
    18,647
    
    
    
    154
    
    
    
    554,178
    
    
    
    441,870
    
    
    
    1,095
    
    
    
    997,297Issuance of common stock
    
    
    19
    
    
    
    10,958
    
    
    
    88
    
    
    
    791,654
    
    
    
    
    
    
    
    
    
    
    
    791,742Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,115
    )
    
    
    
    
    
    
    
    
    
    
    (77,115
    )Issue of stock purchase
warrants to investors and
external consultants
    
    
    20
    (c)
    
    
    
    
    
    
    
    
    
    
    116,090
    
    
    
    
    
    
    
    
    
    
    
    116,090Warrant issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Recognition of compensation
expense
    
    
    20
    (a)
    
    
    
    
    
    
    
    
    
    
    58,707
    
    
    
    
    
    
    
    
    
    
    
    58,707Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,834
    )
    
    
    
    
    
    
    (19,834
    )Shareholders contribution
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    459Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,203
    
    
    
    7,203Balance as of December 31, 2006
    
    
    
    
    
    
    29,605
    
    
    
    242
    
    
    
    1,439,473
    
    
    
    422,036
    
    
    
    8,298
    
    
    
    1,870,049Issuance of common stock
    
    
    19
    
    
    
    1,344
    
    
    
    9
    
    
    
    115,375
    
    
    
    
    
    
    
    
    
    
    
    115,384Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,032
    )
    
    
    
    
    
    
    
    
    
    
    (9,032
    )Issue of stock purchase
warrants to investors and
external consultants
    
    
    20
    (c)
    
    
    
    
    
    
    
    
    
    
    32,546
    
    
    
    
    
    
    
    
    
    
    
    32,546Warrant issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,838
    )
    
    
    
    
    
    
    
    
    
    
    (1,838
    )Recognition of compensation
expense
    
    
    20
    (b)
    
    
    
    
    
    
    
    
    
    
    39,209
    
    
    
    
    
    
    
    
    
    
    
    39,209Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    903,948
    
    
    
    
    
    
    
    903,948Reclassification of
embedded derivative
relating to 4.5% Notes
    
    
    17
    (b)
    
    
    
    
    
    
    
    
    
    
    89,531
    
    
    
    
    
    
    
    
    
    
    
    89,531Beneficial conversion
amount relating to 5.5%
Notes
    
    
    17
    (c)
    
    
    
    
    
    
    
    
    
    
    31,790
    
    
    
    
    
    
    
    
    
    
    
    31,790Shareholders contribution
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    487
    
    
    
    
    
    
    
    
    
    
    
    487Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,106
    )
    
    
    (50,106
    )Balance as of December 31, 2007
    
    
    
    
    
    
    30,949
    
    
    
    251
    
    
    
    1,737,541
    
    
    
    1,325,984
    
    
    
    (41,808
    )
    
    
    3,021,968Balance as of December 31,
2007 (in US$000)
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    238,196
    
    
    
    181,776
    
    
    
    (5,731
    )
    
    
    414,275
  F-7




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##### Table of Contents



Percentage of equityinterest attributablePlace of
    
    to the Group as ofName
    
    Note
    
    incorporation
    
    December 31,
    
    Principal activities2006
    
    2007Qiao Xing Mobile
Communication Co.,
Ltd. (QXMC)
    
    
    (a
    )
    
    BVI
    
    
    100.0
    %
    
    
    61.3
    %
    
    Investment holdingQiao Xing
Communication
Holdings Limited
(QXCH)
    
    
    (b
    )
    
    BVI
    
    
    100.0
    %
    
    
    100.0
    %
    
    Investment holdingCEC Telecom Co.,
Ltd. (CECT)
    
    
    (c
    )
    
    PRC
    
    
    93.4
    %
    
    
    59.2
    %
    
    Manufacture and sales of mobile phones and accessoriesBeijing CECT Yitong
Technology Co., Ltd
(BCYT)
    
    
    (d
    )
    
    PRC
    
    
    
    
    
    
    39.5
    %
    
    DormantHui Zhou Qiao Xing
Communication
Industry Limited
(QXCI)
    
    
    (e
    )
    
    PRC
    
    
    90.0
    %
    
    
    90.0
    %
    
    Manufacture and sales of mobile phones and indoor phonesHui Zhou Qiao Xing
Property Limited
(QXPL)
    
    
    (f
    )
    
    PRC
    
    
    90.0
    %
    
    
    90.0
    %
    
    Property and investment holding
 F-8




---



##### Table of Contents



Percentage of equityinterest attributablePlace of
    
    to the Group as ofName
    
    Note
    
    incorporation
    
    December 31,
    
    Principal activities2006
    
    2007Chifeng Sanchuan
Mining Co., Ltd.
(CSMC)
    
    
    (g
    )
    
    PRC
    
    
    90.0
    %
    
    
    90.0
    %
    
    Investment holding
        F-9




---



##### Table of Contents



Country risk
   F-10




---



##### Table of Contents



Concentration of credit risk
  Technology risk
          F-11




---



##### Table of Contents



F-12




---



##### Table of Contents



F-13




---



##### Table of Contents



Customer relationships
    
    3  5 yearsCompleted technology
    
    1.8  5  yearsCore technology
    
    4  5 yearsBacklog
    
    4  5 monthsLicenses
    
    5 years
      F-14




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##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Balance at beginning of year
    
    
    7,712
    
    
    
    9,591
    
    
    
    1,315Provision
    
    
    17,393
    
    
    
    24,603
    
    
    
    3,373Utilized
    
    
    (15,514
    )
    
    
    (23,071
    )
    
    
    (3,163
    )Balance at end of year
    
    
    9,591
    
    
    
    11,123
    
    
    
    1,525
       F-15




---



##### Table of Contents



F-16




---



##### Table of Contents



F-17




---



##### Table of Contents



F-18




---



##### Table of Contents



F-19




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Trade receivables- related party (Note 28)
    
    
    44,443
    
    
    
    97,070
    
    
    
    13,307- third parties
    
    
    803,818
    
    
    
    856,025
    
    
    
    117,351848,261
    
    
    
    953,095
    
    
    
    130,658Less: Allowance for doubtful accounts
    
    
    (8,616
    )
    
    
    (11,577
    )
    
    
    (1,587
    )Accounts receivable, net
    
    
    839,645
    
    
    
    941,518
    
    
    
    129,071
  2006
    
    2007RMB000
    
    RMB000
    
    US$000Beginning of year
    
    
    6,500
    
    
    
    8,616
    
    
    
    1,181Bad debt expense
    
    
    2,710
    
    
    
    3,384
    
    
    
    464Bad debt recovery
    
    
    (594
    )
    
    
    (423
    )
    
    
    (58
    )End of year
    
    
    8,616
    
    
    
    11,577
    
    
    
    1,587
 F-20




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##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Raw materials
    
    
    166,261
    
    
    
    194,788
    
    
    
    26,703Finished goods
    
    
    66,095
    
    
    
    109,236
    
    
    
    14,975232,356
    
    
    
    304,024
    
    
    
    41,678
   2006
    
    2007RMB000
    
    RMB000
    
    US$000Advances to suppliers
    
    
    395,996
    
    
    
    256,826
    
    
    
    35,208Prepaid design, licensing and tooling fees
    
    
    43,869
    
    
    
    16,092
    
    
    
    2,206Current portion of land use rights (Note 8)
    
    
    4,890
    
    
    
    830
    
    
    
    114Deferred listing fees (Note (a))
    
    
    7,681
    
    
    
    
    
    
    
    Other
    
    
    588
    
    
    
    133
    
    
    
    18453,024
    
    
    
    273,881
    
    
    
    37,546
   F-21




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##### Table of Contents



6.
    
    OTHER CURRENT ASSETSOther current assets consist of:
 2006
    
    2007RMB000
    
    RMB000
    
    US$000Advances to staff
    
    
    2,598
    
    
    
    3,306
    
    
    
    453Advances to a third party (Note (a))
    
    
    
    
    
    
    970,739
    
    
    
    133,076Interest receivable on advances to a
third party (Note (a))
    
    
    
    
    
    
    17,700
    
    
    
    2,426Rental and utility deposits
    
    
    183
    
    
    
    826
    
    
    
    113Receivable from sale of land use rights
and construction-in-progress (Note 27(c))
    
    
    
    
    
    
    108,904
    
    
    
    14,930Deposit for acquisition of land (Note (9))
    
    
    
    
    
    
    8,000
    
    
    
    1,097Other
    
    
    1,401
    
    
    
    1,933
    
    
    
    2654,182
    
    
    
    1,111,408
    
    
    
    152,360
   7.
    
    PROPERTY, MACHINERY AND EQUIPMENTProperty, machinery and equipment consist of:
 2006
    
    2007RMB000
    
    RMB000
    
    US$000Buildings and improvements
    
    
    156,163
    
    
    
    151,326
    
    
    
    20,745Machinery, equipment and software
    
    
    81,054
    
    
    
    83,384
    
    
    
    11,431Furniture and office equipment
    
    
    5,892
    
    
    
    6,231
    
    
    
    854Motor vehicles
    
    
    1,466
    
    
    
    2,149
    
    
    
    295244,575
    
    
    
    243,090
    
    
    
    33,325Less: Accumulated depreciation
    
    
    (35,033
    )
    
    
    (50,489
    )
    
    
    (6,922
    )Property, machinery and equipment, net
    
    
    209,542
    
    
    
    192,601
    
    
    
    26,403
   F-22




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##### Table of Contents



8.
    
    LAND USE RIGHTS, NETLand use rights consist of:
 2006
    
    2007RMB000
    
    RMB000
    
    US$000Cost
    
    
    242,051
    
    
    
    37,806
    
    
    
    5,183Less: Accumulated amortization
    
    
    (29,955
    )
    
    
    (870
    )
    
    
    (119
    )Land use rights, net
    
    
    212,096
    
    
    
    36,936
    
    
    
    5,064Amount classified as current portion
(Note 5)
    
    
    (4,890
    )
    
    
    (830
    )
    
    
    (114
    )Amount classified as non-current portion
    
    
    207,206
    
    
    
    36,106
    
    
    
    4,950
  9.
    
    OTHER NON-CURRENT ASSETSOther non-current assets consist of:
 2006
    
    2007RMB000
    
    RMB000
    
    US$000Deposits for purchase of property,
machinery and equipment
    
    
    249
    
    
    
    
    
    
    
    Deposit for acquisition of land (Note (a))
    
    
    8,000
    
    
    
    
    
    
    
    8,249
    
    
    
    
    
    
    
    
   F-23




---



##### Table of Contents



10.
    
    INVESTMENT AT COST
         F-24




---



##### Table of Contents



July 31,
    
    July 31,2005
    
    2006
    
    June 30, 2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Cash consideration
    
    
    4,607
    
    
    
    149,600
    
    
    
    380,425
    
    
    
    52,152Less: Ownership interest in cash
consideration
    
    
    
    
    
    
    (139,742
    )
    
    
    (367,295
    )
    
    
    (50,352
    )Net cash consideration
    
    
    4,607
    
    
    
    9,858
    
    
    
    13,130
    
    
    
    1,800Additional consideration:- Investment in China
Electronics Financial Co., Ltd.
(CEFCL) (Note (i))
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    - Investment in Beijing Jinxin
Hengtong Technology Company
Limited (BJHTCL) (Note (ii))
    
    
    50,393
    
    
    
    
    
    
    
    
    
    
    
    Total purchase consideration
    
    
    75,000
    
    
    
    9,858
    
    
    
    13,130
    
    
    
    1,800Fair value of net assets acquired:- Property, machinery and
equipment
    
    
    9,810
    
    
    
    1,511
    
    
    
    5,929
    
    
    
    813- Land use rights
    
    
    
    
    
    
    
    
    
    
    1,222
    
    
    
    168- Other tangible assets and
liabilities acquired
    
    
    121,990
    
    
    
    27,654
    
    
    
    41,819
    
    
    
    5,733- In-process research and
development
    
    
    65,237
    
    
    
    6,287
    
    
    
    7,981
    
    
    
    1,094- Other intangible assets
    
    
    67,617
    
    
    
    13,914
    
    
    
    16,009
    
    
    
    2,195Fair value of net assets acquired
    
    
    264,654
    
    
    
    49,366
    
    
    
    72,960
    
    
    
    10,003Negative goodwill
    
    
    189,654
    
    
    
    39,508
    
    
    
    59,830
    
    
    
    8,203Allocation of negative goodwill:- Property, machinery and
equipment
    
    
    (9,810
    )
    
    
    (1,511
    )
    
    
    (5,929
    )
    
    
    (813
    )- Land use rights
    
    
    
    
    
    
    
    
    
    
    (1,222
    )
    
    
    (168
    )- In-process research and
development
    
    
    (65,237
    )
    
    
    (6,287
    )
    
    
    (7,981
    )
    
    
    (1,094
    )- Other intangible assets
    
    
    (67,617
    )
    
    
    (13,914
    )
    
    
    (16,009
    )
    
    
    (2,195
    )Negative goodwill allocated to
fair value of long-term assets
    
    
    (142,664
    )
    
    
    (21,712
    )
    
    
    (31,141
    )
    
    
    (4,270
    )Extraordinary gain before
minority interests
    
    
    46,990
    
    
    
    17,796
    
    
    
    28,689
    
    
    
    3,933Less: Minority interests share
of extraordinary gain
    
    
    (9,398
    )
    
    
    (3,559
    )
    
    
    (11,093
    )
    
    
    (1,521
    )Extraordinary gain after minority
interests
    
    
    37,592
    
    
    
    14,237
    
    
    
    17,596
    
    
    
    2,412
 F-25




---



##### Table of Contents



RMB000Fair value of investment in BJHTCL
    
    
    50,393Less: Net assets disposed of (Note 27(b))
    
    
    (40,086
    )Gain on disposal of subsidiary
    
    
    10,307
 F-26




---



##### Table of Contents



RMB000Inventories
    
    
    28,530Property, machinery and equipment
    
    
    36,737Net deferred income tax liabilities
    
    
    (8,746
    )Other tangible assets and liabilities acquired
    
    
    100,048Intangible assets:- In-process research and development
    
    
    41,739- Other intangible assets
    
    
    63,656Goodwill (Note 12)
    
    
    94,100Fair value of net assets acquired
    
    
    356,064Satisfied by:- Cash consideration
    
    
    170,343- Fair value of the Companys share issued (1,562,348 shares @ US$15.17 each)
    
    
    185,721Total purchase consideration
    
    
    356,064
  F-27




---



##### Table of Contents



RMB000Cost of extinguishment (7,800,000 shares @ US$12.00 per share)
    
    
    721,188(Less) add: Carrying value of:- Convertible notes (Note 17(a))
    
    
    (238,325
    )- Embedded derivatives (Note 17(a))
    
    
    (365,476
    )- Deferred debt issuance costs (Note 17(a))
    
    
    24,703Loss on extinguishment
    
    
    (142,090
    )
  RMB000Deemed proceeds from disposal (7,800,000 shares @ US$12.00 per share)
    
    
    721,188Less: Share of net assets relating to minority interest disposed of
    
    
    (221,659
    )Less: Goodwill relating to minority interest disposed of (Note 12)
    
    
    (16,915
    )Gain on disposal
    
    
    482,614
 F-28




---



##### Table of Contents



RMB000Share of net assets of QXMC after IPO
    
    
    1,315,647Less: Share of net assets of QXMC before IPO
    
    
    (915,057
    )Increase in share of net assets after IPO
    
    
    400,590Less: Goodwill relating to equity interest deemed disposed of (Note 12)
    
    
    (16,625
    )Gain on deemed disposal
    
    
    383,965
   2006
    
    2007RMB000
    
    RMB000
    
    US$000Beginning of year
    
    
    20,714
    
    
    
    110,134
    
    
    
    15,098Adjustment (Note (a))
    
    
    (4,680
    )
    
    
    
    
    
    
    Amount arising on acquisition of the
remaining 20.0% interest in QXMC by
the Company (Note 11(b))
    
    
    94,100
    
    
    
    
    
    
    
    Amount disposed of due to the
disposition of minority interest in
QXMC (Note 11(c))
    
    
    
    
    
    
    (16,915
    )
    
    
    (2,319
    )Amount deemed disposed of due to the
sale of stocks by QXMC (Note 11(c))
    
    
    
    
    
    
    (16,625
    )
    
    
    (2,279
    )End of year
    
    
    110,134
    
    
    
    76,594
    
    
    
    10,500
   F-29




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Cost:- CECT brand
    
    
    39,835
    
    
    
    39,835
    
    
    
    5,461- Customer relationship
    
    
    5,418
    
    
    
    5,418
    
    
    
    743- Completed technology
    
    
    16,950
    
    
    
    16,950
    
    
    
    2,324- Core technology
    
    
    24,193
    
    
    
    24,193
    
    
    
    3,316- Backlog
    
    
    9,175
    
    
    
    9,175
    
    
    
    1,258- License
    
    
    1,725
    
    
    
    1,725
    
    
    
    23697,296
    
    
    
    97,296
    
    
    
    13,338Less: Accumulated amortization- Customer relationship
    
    
    306
    
    
    
    4,470
    
    
    
    613- Completed technology
    
    
    823
    
    
    
    10,866
    
    
    
    1,490- Core technology
    
    
    742
    
    
    
    10,455
    
    
    
    1,433- Backlog
    
    
    2,294
    
    
    
    9,175
    
    
    
    1,258- License
    
    
    123
    
    
    
    1,602
    
    
    
    2194,288
    
    
    
    36,568
    
    
    
    5,013Other acquired intangible assets, net
    
    
    93,008
    
    
    
    60,728
    
    
    
    8,325
  AmountRMB000
    
    US$000Year ending December 31,- 2008
    
    
    11,727
    
    
    
    1,607- 2009
    
    
    4,733
    
    
    
    649- 2010
    
    
    4,433
    
    
    
    608Total
    
    
    20,893
    
    
    
    2,864
 F-30




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Bills payable
    
    
    419,778
    
    
    
    264,335
    
    
    
    29,383Bank loans
    
    
    717,787
    
    
    
    1,157,119
    
    
    
    165,481Other borrowings, secured by bills
receivable
    
    
    17,725
    
    
    
    50,000
    
    
    
    6,8541,155,290
    
    
    
    1,471,454
    
    
    
    201,718
    2006
    
    2007RMB000
    
    RMB000
    
    US$000Pledged of:- Bank deposits of the Group
    
    
    286,025
    
    
    
    197,951
    
    
    
    27,137- Bank deposits of the Group held in trust
by a director
    
    
    87,748
    
    
    
    
    
    
    
    - Bank deposits of a director
    
    
    15,057
    
    
    
    36,519
    
    
    
    5,006- Bank deposits of an unrelated third party
    
    
    53,000
    
    
    
    
    
    
    
    - Bills receivable of the Group
    
    
    17,725
    
    
    
    50,000
    
    
    
    6,854Guarantees provided by:- QXGL
    
    
    449,000
    
    
    
    160,000
    
    
    
    21,934- QXGL and directors
    
    
    630,000
    
    
    
    570,000
    
    
    
    78,140- QXGL, directors and third parties
    
    
    
    
    
    
    400,000
    
    
    
    54,835- Directors
    
    
    279,300
    
    
    
    150,000
    
    
    
    20,563
 F-31




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Payables for purchase and construction
of property, machinery and equipment
    
    
    6,922
    
    
    
    5,692
    
    
    
    780Rental payable
    
    
    2,067
    
    
    
    645
    
    
    
    88Expenses relating to QXMCs IPO
    
    
    
    
    
    
    1,285
    
    
    
    176Proceeds received from employees for the
exercise of share options (Note 26(a))
    
    
    
    
    
    
    30,911
    
    
    
    4,238Others
    
    
    3,000
    
    
    
    3,476
    
    
    
    47711,989
    
    
    
    42,009
    
    
    
    5,759
   2006
    
    
    2007RMB000
    
    
    RMB000
    
    
    US$000Accruals for:- Design, licensing and tooling fees
    
    
    38,094
    
    
    
    48,491
    
    
    
    6,648- Salaries
    
    
    4,833
    
    
    
    5,027
    
    
    
    689- Staff benefits
    
    
    2,762
    
    
    
    2,761
    
    
    
    378- Advertising
    
    
    515
    
    
    
    35
    
    
    
    5- Warranty (Note 2(m))
    
    
    9,591
    
    
    
    11,123
    
    
    
    1,525- Interest
    
    
    1,379
    
    
    
    10,876
    
    
    
    1,491- Professional service fees
    
    
    
    
    
    
    9,756
    
    
    
    1,337- Listing fees (Note 5(a))
    
    
    3,575
    
    
    
    
    
    
    
    - Others
    
    
    939
    
    
    
    1,596
    
    
    
    219Provision for litigation settlement
(Note 25(c))
    
    
    
    
    
    
    15,319
    
    
    
    2,10061,688
    
    
    
    104,984
    
    
    
    14,392
  F-32




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$0003.5% unsecured senior convertible notes (Note (a))
    
    
    222,087
    
    
    
    
    
    
    
    4.5% unsecured senior convertible notes (Note (b))
    
    
    87,471
    
    
    
    189,660
    
    
    
    26,0005.5% unsecured senior convertible notes (Note (c))
    
    
    
    
    
    
    135,667
    
    
    
    18,598Total debts
    
    
    309,558
    
    
    
    325,327
    
    
    
    44,598Less: Amount classified as current liabilities
    
    
    (87,471
    )
    
    
    (135,667
    )
    
    
    (18,598
    )Amount classified as non-current liabilities
    
    
    222,087
    
    
    
    189,660
    
    
    
    26,000
     
    
    the notes bear interest at the rate of 3.5% per annum, payable in cash in arrears on
a calendar quarterly basis beginning June 30, 2006;
    
    the notes mature on June 12, 2009;
    
    the notes are unsecured and are guaranteed by the Companys subsidiary, QXMC;
    
    the notes are convertible, at the investors option, into common stock of the
Company at an initial conversion price of US$8.027 per share, or into common stock of
QXMC in the event of its initial public offering at a price equal to 7 times QXMCs
2005 consolidated earnings per share. The conversion price for the Companys common
stock is subject to reset when the volume weighted average price (VWAP) of the
Companys common stock for the five trading days ending on each two-month anniversary
from June 13, 2006 until maturity of the Notes (each a Reset Date) is less than
US$6.98 (or such previously reset price). In the event of a reset, the conversion
price will be set equal to the greater of US$5.15 or 90.0% of the VWAP of the Companys
common stock for the five trading days ending on the applicable Reset Date;
    
    the notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion;
    
    the holders of the notes have the right to require the Company to redeem the notes
after two years in an amount equal to the sum of (a) the outstanding principal of the
Notes, (b) the accrued and unpaid interest thereon, and (c) 6.0% on the sum of (a) and
(b); and
 F-33




---



##### Table of Contents




    
    the Company has the right, subject to certain terms and conditions, to deliver shares of its common stock in lieu of cash on redemption or maturity of the Notes, and
the number of shares would be determined by dividing the face amount and accrued
interest by the average closing price of the Companys common stock for the 10 days
prior to redemption, and then multiplying that amount by 0.975.
  
    
    the warrants have an initial exercise price of US$8.027 per share and may be
exercised at any time during a 5-year period commencing from June 13, 2006;
    
    the warrants will not be exercisable to the extent that after giving effect to such
exercise, the holder (together with its affiliates) would beneficially own in excess of
9.99% of the Companys common stock outstanding immediately after giving effect to such
exercise; and
    
    the warrants require an automatic repricing of the exercise price if the Company
makes certain sales of its common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price.
  2006
    
    2007RMB000
    
    RMB000
    
    US$000Gross proceeds from 3.5% Notes
    
    
    320,136
    
    
    
    320,136
    
    
    
    43,887Discount on notes:- Equity-classified June Investor Warrants
(Note (i))
    
    
    (18,519
    )
    
    
    (18,519
    )
    
    
    (2,539
    )- Liability-classified embedded derivatives
(Note (ii))
    
    
    (99,969
    )
    
    
    (99,969
    )
    
    
    (13,705
    )Value of debt component at date of issue
    
    
    201,648
    
    
    
    201,648
    
    
    
    27,643Foreign currency realignment
    
    
    (5,522
    )
    
    
    (8,453
    )
    
    
    (1,159
    )Accretion of discount (Note (iii))
    
    
    25,961
    
    
    
    45,130
    
    
    
    6,187Extinguishment of debt (Note 11(c))
    
    
    
    
    
    
    (238,325
    )
    
    
    (32,671
    )Value of debt component at end of year
    
    
    222,087
    
    
    
    
    
    
    
    Less: Amount classified as current liabilities
    
    
    
    
    
    
    
    
    
    
    Amount classified as non-current liabilities
    
    
    222,087
    
    
    
    
    
    
    
    
    F-34




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Amount attributed to June Agent Warrants (Note (i))
    
    
    18,267
    
    
    
    18,267
    
    
    
    2,504Other cash costs
    
    
    23,622
    
    
    
    23,622
    
    
    
    3,238Total deferred debt issuance costs on initial
recognition
    
    
    41,889
    
    
    
    41,889
    
    
    
    5,742Foreign currency realignment
    
    
    (866
    )
    
    
    (1,231
    )
    
    
    (169
    )Accumulated amortization (Note (ii))
    
    
    (9,178
    )
    
    
    (15,955
    )
    
    
    (2,187
    )Disposed of on extinguishment of 3.5% Notes (Note
11(c))
    
    
    
    
    
    
    (24,703
    )
    
    
    (3,386
    )Net value at end of year
    
    
    31,845
    
    
    
    
    
    
    
    
    F-35




---



##### Table of Contents




    
    the notes bear interest at the rate of 4.5% per annum, payable in cash in arrears on
a calendar quarterly basis beginning December 31, 2006;
    
    the notes mature on April 30, 2009;
    
    the notes are convertible, at the investors option, into common stock of the
Company at an initial conversion price of US$14.30 per share. The conversion price for
the Companys common stock is subject to reset when the volume weighted average price
(VWAP) of the Companys common stock for the five trading days ending on each
six-month anniversary from October 31, 2006 until maturity of the Notes (each a Reset
Date) is less than US$13.00 (or such previously reset price). In the event of a
reset, the conversion price will be set equal to the greater of US$7.80 or 100% of the
VWAP of the Companys common stock for the five trading days ending on the applicable
Reset Date. As of December 31, 2007, the conversion price of the 4.5% Notes had been
reset to US$7.69 per share;
    
    the notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion; and
    
    the holders of the notes have the right to require the Company to redeem the notes
after one year in an amount equal to the sum of (a) the outstanding principal of the
Notes, (b) the accrued and unpaid interest thereon, and (c) 3% on the sum of (a) and
(b). Consequently, the 4.5% Notes were classified as current liabilities on the
consolidated balance sheet as of December 31, 2006. Due to the expiry of the early
redemption option in October 2007, the 4.5% Notes have been reclassified to non-current
liabilities as of December 31, 2007;
  
    
    the warrants have an initial exercise price of US$14.30 per share and may be
exercised at any time during a 5-year period commencing from October 31, 2006;
    
    the warrants will not be exercisable to the extent that after giving effect to such
exercise, the holder (together with its affiliates) would beneficially own in excess of
9.99% of the Companys common stock outstanding immediately after giving effect to such
exercise; and
    
    the warrants require an automatic repricing of the exercise price if the Company
makes certain sales of its common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price.
  2006
    
    2007RMB000
    
    RMB000
    
    US$000Gross proceeds from 4.5% Notes
    
    
    202,475
    
    
    
    202,475
    
    
    
    27,757
 F-36




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Discount on notes:- Equity-classified October
Investor Warrants (Note (i))
    
    
    (14,534
    )
    
    
    (14,534
    )
    
    
    (1,993
    )- Liability-classified embedded
derivatives (Note (ii))
    
    
    (111,341
    )
    
    
    (111,341
    )
    
    
    (15,263
    )Value of debt component at date of issue
    
    
    76,600
    
    
    
    76,600
    
    
    
    10,501Foreign currency realignment
    
    
    (48
    )
    
    
    (10,242
    )
    
    
    (1,404
    )Accretion of discount (Note (iii))
    
    
    10,919
    
    
    
    123,302
    
    
    
    16,903Value of debt component at end of year
    
    
    87,471
    
    
    
    189,660
    
    
    
    26,000
       F-37




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Amount attributed to June Agent
Warrants (Note (i))
    
    
    10,529
    
    
    
    10,529
    
    
    
    1,443Other cash costs
    
    
    14,385
    
    
    
    14,385
    
    
    
    1,972Total deferred debt issuance costs on
initial recognition
    
    
    24,914
    
    
    
    24,914
    
    
    
    3,415Foreign currency realignment
    
    
    94
    
    
    
    (510
    )
    
    
    (70
    )Accumulated amortization (Note (ii))
    
    
    (2,161
    )
    
    
    (24,404)
    )
    
    
    (3,345
    )Net value at end of year
    
    
    22,847
    
    
    
    
    
    
    
    
    F-38




---



##### Table of Contents




    
    the notes bear interest at the rate of 5.5% per annum, payable in cash in arrears on
a calendar semi-annual basis beginning December 31, 2007;
    
    the notes mature on February 17, 2010;
    
    the notes are convertible, at the investors option, into common stock of the
Company at an initial conversion price of US$10.19 per share. The conversion price for
the Companys common stock is subject to reset when the volume weighted average price
(VWAP) of the Companys common stock for the five trading days ending on each
two-month anniversary from August 17, 2007 until maturity of the Notes (each a Reset
Date) is less than US$9.26 (or such previously reset price). In the event of a reset,
the conversion price will be set equal to the greater of US$5.56 or 90% of the VWAP of
the Companys common stock for the five trading days ending on the applicable Reset
Date. As of December 31, 2007, the conversion price had been reset to US$7.69 per
share;
    
    the notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion; and
    
    the holders of the notes have the right to require the Company to redeem the notes
after one year in an amount equal to 100% of the sum of (a) the outstanding principal
of the Notes, (b) the accrued and unpaid interest thereon. Consequently, the 5.5% Notes
were classified as current liabilities on the consolidated balance sheet as of December
31, 2007.
  
    
    the warrants have an initial exercise price of US$10.19 per share and may be
exercised at any time during a 5-year period commencing from August 17, 2007;
    
    the warrants will not be exercisable to the extent that after giving effect to such
exercise, the holder (together with its affiliates) would beneficially own in excess of
9.99% of the Companys common stock outstanding immediately after giving effect to such
exercise; and
    
    the warrants require an automatic repricing of the exercise price if the Company
makes certain sales of its common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price.
 F-39




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Gross proceeds from 5.5% Notes
    
    
    
    
    
    
    189,900
    
    
    
    26,033Discount on notes:- Equity-classified August Investor Warrants (Note
(i))
    
    
    
    
    
    
    (13,703
    )
    
    
    (1,878
    )- Equity-classified embedded derivative (Note (ii))- Liability-classified embedded derivatives (Note
(ii))
    
    
    
    
    
    
    (11,064
    )
    
    
    (1,517
    )Value of debt component at date of issue
    
    
    
    
    
    
    165,133
    
    
    
    22,638Foreign currency realignment
    
    
    
    
    
    
    (6,375
    )
    
    
    (874
    )Beneficial conversion amount arising on conversion
price reset (iii)
    
    
    
    
    
    
    (31,790
    )
    
    
    (4,358
    )Accretion of discount (Note (iv))
    
    
    
    
    
    
    8,699
    
    
    
    1,192Value of debt component at end of year
    
    
    
    
    
    
    135,667
    
    
    
    18,598Less: Amount classified as current liabilities
    
    
    
    
    
    
    (135,667
    )
    
    
    (18,598
    )Amount classified as non-current liabilities
    
    
    
    
    
    
    
    
    
    
    
      F-40




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Amount attributed to August Agent
Warrants (Note (i))
    
    
    
    
    
    
    9,891
    
    
    
    1,356Other cash costs
    
    
    
    
    
    
    13,743
    
    
    
    1,884Total deferred debt issuance costs on
initial recognition
    
    
    
    
    
    
    23,634
    
    
    
    3,240Foreign currency realignment
    
    
    
    
    
    
    (754
    )
    
    
    (103
    )Accumulated amortization (Note (ii))
    
    
    
    
    
    
    (8,301
    )
    
    
    (1,138
    )Net value at end of year
    
    
    
    
    
    
    14,579
    
    
    
    1,999
    F-41




---



##### Table of Contents



WeightedNumber of
    
    average issueshares
    
    priceUS$Balance as of December 31, 2004
    
    
    16,645,176Issuance of shares to private investors
    
    
    2,000,000
    
    
    
    7.25Issuance of shares as compensation for services received (Note (a))
    
    
    1,500
    
    
    
    Balance as of December 31, 2005
    
    
    18,646,676Issuance of shares to private investors
    
    
    5,000,000
    
    
    
    8.70Issuance of shares to option holders (Note 20(a))
    
    
    2,000,000
    
    
    
    7.00Issuance of shares to warrant holders (Note 20(c))
    
    
    2,395,979
    
    
    
    7.83Issuance of shares as part consideration for the acquisition of
the remaining 20% interest in QXMC (Note 11(c))
    
    
    1,562,348
    
    
    
    15.17Balance of December 31, 2006
    
    
    29,605,003Issuance of shares to private investors
    
    
    1,300,000
    
    
    
    11.80Issuance of shares to warrant holders (Note 20(c))
    
    
    43,833
    
    
    
    4.54Balance of December 31, 2007
    
    
    30,948,836
   F-42




---



##### Table of Contents



Risk-free interest rate
    
    
    4.63
    %Expected dividend yield
    
    
    0.00
    %Expected term
    
    5 yearsExpected stock price volatility
    
    
    55.20
    %
     Weighted
    
    Weightedaverage
    
    averageShares
    
    exercise
    
    remaining
    
    AggregateUnderlying
    
    price
    
    contractual
    
    intrinsicOptions
    
    per share
    
    term
    
    ValueUS$
    
    
    
    US$000Balance as of January 1, 2007
    
    
    
    
    
    
    Granted on March 19, 2007:- To a director and employees
(Note (i))
    
    
    2,716,520
    
    
    
    7.50- To a consultant (Note (ii))
    
    
    1,200,000
    
    
    
    18.00Balance as of December 31, 2007
    
    
    3,916,520
    
    
    
    10.72
    
    
    3.7 years
    
    
    2,581Exercisable as of December 31, 2007
    
    
    2,031,720
    
    
    
    13.70
    
    
    2.4 years
    
    
    790
 F-43




---



##### Table of Contents



Fair value of QXMCs underlying ordinary share on grant date
    
    US$
    10.43Risk-free interest rate
    
    
    5.00
    %Expected dividend yield
    
    
    0.00
    %Expected term
    
    3.5 yearsExpected stock price volatility
    
    
    47.50
    %
    Fair value of QXMCs underlying ordinary share on grant date
    
    US$
    10.43Risk-free interest rate
    
    
    5.10
    %Expected dividend yield
    
    
    0.00
    %Expected term
    
    2.0 yearsExpected stock price volatility
    
    
    48.90
    %
 F-44




---



##### Table of Contents



WeightedNumber of
    
    averagestock
    
    exercisewarrants
    
    priceUS$Outstanding as of December 31, 2004
    
    
    390,800
    
    
    
    8.185Lapsed
    
    
    (390,800
    )
    
    
    8.185Issued:- To share investors and placement agent (Note (i))
    
    
    505,000
    
    
    
    9.860- To consultants for services rendered (Note (ii))
    
    
    30,000
    
    
    
    8.500Outstanding, as of December 31, 2005
    
    
    535,000
    
    
    
    9.784Issued:- To share investors and placement agents (Note (iii))
    
    
    1,350,000
    
    
    
    10.578- To 3.5% Notes investors and placement agent (Note 17(a))
    
    
    1,844,955
    
    
    
    8.027- To 4.5% Notes investors and placement agent (Note 17(b))
    
    
    545,455
    
    
    
    14.300- To a consultant as settlement of outstanding accounts payable (Note (iv))
    
    
    150,000
    
    
    
    8.125Repricing adjustment (Note (v))
    
    
    128,703
    
    
    
    Exercised
    
    
    (2,395,979
    )
    
    
    7.835Outstanding as of December 31, 2006
    
    
    2,158,134
    
    
    
    11.385Issued:- To share investors and placement agents (Note (vi))
    
    
    473,814
    
    
    
    13.000- To 5.5% Notes investors and placement agent (Note 17(c))
    
    
    736,016
    
    
    
    10.190Repricing adjustment (Note (vii))
    
    
    1,555,191
    
    
    
    Exercised (Note (viii))
    
    
    (56,877
    )
    
    
    7.983Outstanding as of December 31, 2007
    
    
    4,866,278
    
    
    
    7.763Exercisable as of December 31, 2007
    
    
    4,866,278
    
    
    
    7.763Exercisable as of December 31, 2006
    
    
    2,158,134
    
    
    
    11.385
     F-45




---



##### Table of Contents



Weighted-averageremainingNumber of
    
    contractual lifeExercise price (US$)
    
    outstanding warrant
    
    (years)6.625
    
    
    19,815
    
    
    
    2.157.406
    
    
    477,774
    
    
    
    2.057.690
    
    
    3,906,319
    
    
    
    3.758.796
    
    
    462,370
    
    
    
    2.154,866,278
    
    
    
    3.42
  2005
    
    2006
    
    2007Weighted average fair value
    
    US$
    2.39
    
    
    US$
    4.17
    
    
    US$
    4.54Risk-free interest rate
    
    
    3.60
    %
    
    
    4.76
    %
    
    
    4.00
    %Expected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected term
    
    2.61 years

    
    3.05 years

    
    2.30 yearsExpected stock price volatility
    
    
    65.71
    %
    
    
    57.41
    %
    
    
    62.07
    %
 F-46




---



##### Table of Contents



F-47




---



##### Table of Contents



2005
    
    2006
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000PRC income tax on current years profit- current
    
    
    27,813
    
    
    
    62,904
    
    
    
    136,058
    
    
    
    18,652- deferred
    
    
    (2,327
    )
    
    
    (8,003
    )
    
    
    (11,938
    )
    
    
    (1,637
    )Under provision of current income tax
in respect of prior years
    
    
    
    
    
    
    3,291
    
    
    
    
    
    
    
    25,486
    
    
    
    58,192
    
    
    
    124,120
    
    
    
    17,015
  2005
    
    2006
    
    2007PRC statutory income tax rate
    
    
    33.0
    %
    
    
    33.0
    %
    
    
    33.0
    %Tax effect of preferential tax rates
    
    
    (28.1
    %)
    
    
    (71.1
    %)
    
    
    (11.8
    %)Losses (gains) of BVI companies not subject
to tax
    
    
    1.1
    %
    
    
    78.5
    %
    
    
    (11.0
    %)Non-deductible activities
    
    
    0.4
    %
    
    
    16.2
    %
    
    
    0.9
    %Changes in valuation allowance
    
    
    1.3
    %
    
    
    (6.0
    %)
    
    
    (0.2
    %)Effect of changes in expected future tax rates
    
    
    
    
    
    
    
    
    
    
    (0.4
    %)Effective income tax rate
    
    
    7.7
    %
    
    
    50.6
    %
    
    
    10.5
    %
  Deferred tax assets  current portion
 2006
    
    2007RMB000
    
    RMB000
    
    US$000Allowance for doubtful accounts
    
    
    845
    
    
    
    2,405
    
    
    
    330Write-off of obsolete and slow-moving
inventories
    
    
    3,849
    
    
    
    8,974
    
    
    
    1,230Provision for product warranties
    
    
    1,230
    
    
    
    1,971
    
    
    
    270Tax losses carried forward
    
    
    2,451
    
    
    
    
    
    
    
    8,375
    
    
    
    13,350
    
    
    
    1,830Valuation allowance
    
    
    (2,451
    )
    
    
    
    
    
    
    Deferred income tax assets
    
    
    5,924
    
    
    
    13,350
    
    
    
    1,830
 Deferred tax liabilities  non-current portion
 F-48




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Property, machinery and equipment
    
    
    2,212
    
    
    
    3,268
    
    
    
    448Land use rights
    
    
    
    
    
    
    281
    
    
    
    39Other acquired intangible assets
    
    
    (13,952
    )
    
    
    (9,110
    )
    
    
    (1,249
    )Deferred income tax liabilities
    
    
    (11,740
    )
    
    
    5,561
    
    
    
    762
  2006
    
    2007RMB000
    
    RMB000
    
    US$000Beginning of year
    
    
    8,952
    
    
    
    2,451
    
    
    
    336Increase in valuation allowance
    
    
    617
    
    
    
    
    
    
    
    Release of valuation allowance
    
    
    (7,118
    )
    
    
    (2,451
    )
    
    
    (336
    )End of year
    
    
    2,451
    
    
    
    
    
    
    
    
   2006
    
    2007RMB000
    
    RMB000
    
    US$000PRC enterprise income tax
    
    
    32,342
    
    
    
    64,566
    
    
    
    8,851PRC value-added tax
    
    
    12,964
    
    
    
    7,990
    
    
    
    1,096PRC other taxes
    
    
    966
    
    
    
    745
    
    
    
    10246,272
    
    
    
    73,301
    
    
    
    10,049
   F-49




---



##### Table of Contents



2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Net income (loss) before extraordinary items
    
    
    207,307,000
    
    
    
    (34,071,000
    )
    
    
    886,352,000
    
    
    
    121,508,000Amount allocated to participating
convertible notes
    
    
    
    
    
    
    
    
    
    
    (156,417,000
    )
    
    
    (21,443,000
    )Net income (loss) before extraordinary
items available to common stockholders
    
    
    207,307,000
    
    
    
    (34,071,000
    )
    
    
    729,935,000
    
    
    
    100,065,000Extraordinary items
    
    
    37,592,000
    
    
    
    14,237,000
    
    
    
    17,596,000
    
    
    
    2,412,000Amount allocated to participating
convertible notes
    
    
    
    
    
    
    
    
    
    
    (3,105,000
    )
    
    
    (425,000
    )Extraordinary items available to common
stockholders
    
    
    37,592,000
    
    
    
    14,237,000
    
    
    
    14,491,000
    
    
    
    1,987,000Net income (loss) after extraordinary items
available to common stockholders
    
    
    244,899,000
    
    
    
    (19,834,000
    )
    
    
    744,426,000
    
    
    
    102,052,000Net income (loss) before extraordinary
items available to common stockholders
    
    
    207,307,000
    
    
    
    (34,071,000
    )
    
    
    729,935,000
    
    
    
    100,065,000Add: Interest on 4.5% Notes
    
    
    
    
    
    
    14,636,000
    
    
    
    
    
    
    
    Less: Gain on remeasurement of embedded
derivatives relating to 4.5% Notes
    
    
    
    
    
    
    (29,449,000
    )
    
    
    
    
    
    
    Fully diluted net income (loss) before
extraordinary items available to common
stockholders
    
    
    207,307,000
    
    
    
    (48,884,000
    )
    
    
    729,935,000
    
    
    
    100,065,000Extraordinary items available to common
stockholders
    
    
    37,592,000
    
    
    
    14,237,000
    
    
    
    14,491,000
    
    
    
    1,987,000Fully diluted net income (loss) after
extraordinary items available to common
stockholders
    
    
    244,899,000
    
    
    
    (34,647,000
    )
    
    
    744,426,000
    
    
    
    102,052,000Weighted average common shares basic
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    29,836,000
    
    
    
    29,836,000Effect of dilutive stock options, warrants
and convertible notes
    
    
    1,000
    
    
    
    304,000
    
    
    
    364,000
    
    
    
    364,000
 F-50




---



##### Table of Contents



2005
    
    2006
    
    2007RMB
    
    RMB
    
    RMB
    
    US$Weighted average common shares diluted
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    30,200,000
    
    
    
    30,200,000Basic earnings (loss) per common share:Before extraordinary items
    
    
    11.32
    
    
    
    (1.44
    )
    
    
    24.46
    
    
    
    3.35Extraordinary items
    
    
    2.05
    
    
    
    0.60
    
    
    
    0.49
    
    
    
    0.07After extraordinary items
    
    
    13.37
    
    
    
    (0.84
    )
    
    
    24.95
    
    
    
    3.42Diluted earnings(loss) per common share:Before extraordinary items
    
    
    11.32
    
    
    
    (2.03
    )
    
    
    24.17
    
    
    
    3.31Extraordinary items
    
    
    2.05
    
    
    
    0.59
    
    
    
    0.48
    
    
    
    0.07After extraordinary items
    
    
    13.37
    
    
    
    (1.44
    )
    
    
    24.65
    
    
    
    3.38
      F-51




---



##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Capital expenditures authorized and
contracted for:- Purchase of machinery and equipment
    
    
    130
    
    
    
    130
    
    
    
    18- Construction of factory premises and
staff quarters
    
    
    39,031
    
    
    
    
    
    
    
    - Purchase of land use rights (Note 9(a))
    
    
    58,700
    
    
    
    
    
    
    
    97,861
    
    
    
    130
    
    
    
    18
   AmountRMB000
    
    US$000For the years ending December 31,- 2008
    
    
    5,274
    
    
    
    723- 2009
    
    
    3,052
    
    
    
    418- 2010
    
    
    3,052
    
    
    
    418Total
    
    
    11,378
    
    
    
    1,559
     F-52




---



##### Table of Contents



F-53




---



##### Table of Contents



RMB000Cash and cash equivalents
    
    
    126Other receivables
    
    
    751Property, machinery and equipment
    
    
    37,826Land use rights
    
    
    1,383Net assets disposed of
    
    
    40,086
  RMB000Cash consideration
    
    
    4,607Cash and cash equivalents disposed of
    
    
    126Less: Prepaid consideration as of December 31, 2004
    
    
    (1,000
    )Less: Unpaid consideration as at December 31, 2005
    
    
    (3,607
    )Net cash outflow in respect of acquisition of minority interests
    
    
    126
  F-54




---



##### Table of Contents



Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    Major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiWu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholder
of CECT, QXCI and QXPLHuizhou Qiaoxing Famous Science &
Technology Co., Ltd. (QFST)
    
    A company 80% owned by QXGLChina Electronics Corporation (CEC)
    
    Minority owner of CECT until July 29, 2005China Electronics Beijing Real
Estate Management Co., Ltd.
(CEBREM)
    
    CEC is a shareholder
  2005
    
    2006
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Operating lease rentals charged by CEC
    
    
    1,325
    
    
    
    
    
    
    
    
    
    
    
    Property management fees paid and payable to:- CEBREM
    
    
    852
    
    
    
    
    
    
    
    
    
    
    
    - QXGL
    
    
    61
    
    
    
    90
    
    
    
    100
    
    
    
    14Sales to:- QFST
    
    
    41,928
    
    
    
    69,232
    
    
    
    95,514
    
    
    
    13,094
  F-55




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##### Table of Contents



2006
    
    2007RMB000
    
    RMB000
    
    US$000Due from:- Exquisite Jewel Limited
    
    
    5
    
    
    
    5
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    22
    
    
    
    329
    
    
    
    27
    
    
    
    4Due to:- Mr. Rui Lin Wu
    
    
    4,516
    
    
    
    608
    
    
    
    83Accounts receivable from:- QFST
    
    
    44,443
    
    
    
    97,070
    
    
    
    13,307
   F-56




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##### Table of Contents



Mobile Phones
    
    Indoor Phones
    
    Corporate
    
    TotalRMB000
    
    RMB000
    
    RMB000
    
    RMB0002005Revenue
    
    
    2,380,531
    
    
    
    254,653
    
    
    
    
    
    
    
    2,635,184Gross margin
    
    
    439,218
    
    
    
    39,168
    
    
    
    
    
    
    
    478,386Inventories
    
    
    219,272
    
    
    
    16,825
    
    
    
    
    
    
    
    236,097Property, machinery and equipment
    
    
    50,506
    
    
    
    2,158
    
    
    
    
    
    
    
    52,664Expenditures for long-lived assets
    
    
    12,505
    
    
    
    265
    
    
    
    8,171
    
    
    
    20,9412006Revenue
    
    
    2,985,432
    
    
    
    235,780
    
    
    
    
    
    
    
    3,221,212Gross margin
    
    
    528,303
    
    
    
    41,517
    
    
    
    
    
    
    
    569,820Inventories
    
    
    213,688
    
    
    
    18,668
    
    
    
    
    
    
    
    232,356Property, machinery and equipment
    
    
    207,887
    
    
    
    1,645
    
    
    
    10
    
    
    
    209,542Expenditures for long-lived assets
    
    
    207,379
    
    
    
    109
    
    
    
    1,200
    
    
    
    208,6882007Revenue
    
    
    3,636,431
    
    
    
    237,676
    
    
    
    
    
    
    
    3,874,107Gross margin
    
    
    943,753
    
    
    
    31,390
    
    
    
    
    
    
    
    975,143Inventories
    
    
    289,937
    
    
    
    14,087
    
    
    
    
    
    
    
    304,024Property, machinery and equipment
    
    
    190,785
    
    
    
    1,709
    
    
    
    107
    
    
    
    192,601Expenditures for long-lived assets
    
    
    5,842
    
    
    
    549
    
    
    
    645
    
    
    
    7,036
 F-57




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##### Table of Contents



2005
    
    2006
    
    2007Beijing Beidou Communication & Equipment
Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    11
    %Shenzhen Laidi Technical Co., Ltd.
    
    
    
    
    
    
    24
    %
    
    
    10
    %Shenzhen Siecom Communication Technology
Development Co., Ltd.
    
    
    
    
    
    
    10
    %
    
    
    10
    %Beijing Ho.COM Electronic Co., Ltd.
    
    
    24
    %
    
    
    12
    %
    
    
    Beijing Jiusheng Technology Co., Ltd.
    
    
    
    
    
    
    14
    %
    
    
    
   2005
    
    2006
    
    2007QFST (Note 28)
    
    
    16
    %
    
    
    26
    %
    
    
    40
    %
 F-58




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##### Table of Contents



2005
    
    2006
    
    2007RMB000
    
    RMB000
    
    RMB000
    
    US$000Interest expense:- bank loans
    
    
    23,489
    
    
    
    33,801
    
    
    
    46,408
    
    
    
    6,362- other bank borrowings
    
    
    17,014
    
    
    
    10,261
    
    
    
    8,142
    
    
    
    1,116- finance lease
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    - convertible notes
    
    
    
    
    
    
    7,692
    
    
    
    15,405
    
    
    
    2,112- accretion of discounts on
convertible notes (Note 17)
    
    
    
    
    
    
    36,880
    
    
    
    140,251
    
    
    
    19,227- amortization of deferred
debt issuance costs (Note
17)
    
    
    
    
    
    
    11,339
    
    
    
    37,321
    
    
    
    5,116- shareholders loans
(imputed interest) (Note 18)
    
    
    473
    
    
    
    459
    
    
    
    487
    
    
    
    67Total interest expense
    
    
    41,752
    
    
    
    100,432
    
    
    
    248,014
    
    
    
    34,000Advertising expenses
    
    
    11,800
    
    
    
    13,886
    
    
    
    41,316
    
    
    
    5,664Shipping and handling costs
    
    
    7,390
    
    
    
    10,862
    
    
    
    19,011
    
    
    
    2,606
 F-59




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##### Table of Contents



ITEM 19. EXHIBITS
  
 142




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##### Table of Contents



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 4.1
    
    Securities Purchase Agreement dated as of August 17, 2007 covering the sale of $25,000,000 of our 5.5% senior
convertible notes and common stock purchase warrants*Exhibit 4.2
    
    Form of 5.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of August 17,
2007*Exhibit 4.3
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of August 17, 2007*Exhibit 4.4
    
    Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.**Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of Ethics***Exhibit 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 Report on Form 6-K filed with the SEC on
August 21, 2007, SEC File No. 000-29946.**
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2006.***
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003. 143




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##### Table of Contents



SIGNATURES
  QIAO XING UNIVERSAL TELEPHONE, INC.
(Registrant)Date: July 14, 2008
    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 4.1
    
    Securities Purchase Agreement dated as of August 17, 2007 covering the sale of $25,000,000 of our 5.5% senior
convertible notes and common stock purchase warrants*Exhibit 4.2
    
    Form of 5.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of August 17,
2007*Exhibit 4.3
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of August 17, 2007*Exhibit 4.4
    
    Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.**Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of Ethics***Exhibit 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 Report on Form 6-K filed with the SEC on
August 21, 2007, SEC File No. 000-29946.**
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2006***
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003