##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 20-F

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

OR

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002


OR

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

For the transition period
from________to________


Commission file number 0-29946

QIAO XING UNIVERSAL TELEPHONE, INC.




(Exact name of Registrant as specified in its charter)


QIAO XING UNIVERSAL TELEPHONE, INC.




(Translation of Registrants name into English)


British Virgin Islands




(Jurisdiction of incorporation or organization)


Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,
Peoples Republic of China 516023




(Address of principal executive offices)


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

|              |  |                      
|------------- |  | ---------------------
|Title of each |  | Name of each exchange
|class         |  | on which registered  
|              |  |                      
|None          |  | N/A                  





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

$.001 Par Value Common Stock (Common Stock)

(Title of Class)


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

None

(Title of Class)


Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of December 31, 2002:

15,282,400 Shares of Common Stock

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

Yes [X] No [  ]

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

Item 17 [  ] Item 18 [X]

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

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

Not Applicable.

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TABLE OF CONTENTS



|                                                  |                                                                                       |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
|PART I                                           
|                                                  | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|                                                  | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|                                                  | ITEM 3. KEY INFORMATION                                                              
|                                                  | ITEM 4. INFORMATION ON THE COMPANY                                                   
|                                                  | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|                                                  | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|                                                  | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|                                                  | ITEM 8. FINANCIAL INFORMATION                                                        
|                                                  | ITEM 9. THE OFFER AND LISTING                                                        
|                                                  | ITEM 10. ADDITIONAL INFORMATION                                                      
|                                                  | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|                                                  | 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                                                      
|PART III                                         
|                                                  | ITEM 17.FINANCIAL STATEMENTS                                                         
|                                                  | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                                  | ITEM 19. EXHIBITS                                                                    
|SIGNATURES                                       
|CERTIFICATIONS                                   
|INDEX TO EXHIBITS                                
|EX-4.1 Sales and Purchase Agreement              
|EX-4.2 Sales and Purchase Agreement              
|EX-4.3 Agreement for Sale of The One Issued Share
|EX-4.4 Supplemental Agreement for Sale of The One
|EX-4.5 Further Supplemental Agreement for Sale   
|EX-99.1 Certification of the CEO                 
|EX-99.2 Certification of the CFO                 



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##### Table of Contents






SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements that involve risks
and uncertainties. These include statements about our expectations, plans,
objectives, assumptions or future events. In some cases, you can identify
forward-looking statements by terminology such as anticipate, estimate,
plans, potential, projects, continuing, ongoing, expects,
management believes, we believe, we intend and similar expressions.
These statements involve estimates, assumptions and uncertainties that could
cause actual results to differ materially from those expressed for the reasons
described in this annual report. You should not place undue reliance on these
forward-looking statements.

You should be aware that our actual results could differ materially from
those contained in the forward-looking statements due to a number of factors:



| |  |  | dependence upon certain customers
| | - |  | ---------------------------------
|
| |  |  | dependence on key personnel      
|
| |  |  | control by principal shareholder 
|
| |  |  | competitive factors              
|
| |  |  | the operation of our business    
|
| |  |  | general economic conditions      

You should also consider carefully the statements under Risk Factors and
other sections of this annual report, which address additional factors that
could cause our actual results to differ from those set forth in the
forward-looking statements and could materially and adversely affect our
business, operating results and financial condition. All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the applicable cautionary
statements.

The forward-looking statements speak only as of the date on which they are
made, and, except to the extent required by federal securities laws, we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.

We use data and industry forecasts in this annual report which we have
obtained from internal surveys, market research, publicly available information
and industry publications. Industry publications generally state that the
information they provide has been obtained from sources believed to be reliable
but that the accuracy and completeness of such information is not guaranteed.
Similarly, we believe that the surveys and market research we or others have
performed are reliable, but we have not independently verified this
information.

-3-



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PART I




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.




ITEM 3. KEY INFORMATION



|A. |  | SELECTED FINANCIAL DATA.
|-- |  | ------------------------

We prepare the consolidated financial statements in accordance with United
States Generally Accepted Accounting Principles (US GAAP). The following
summary consolidated statements of operations data for the years ended December
31, 2000, 2001 and 2002 and the consolidated balance sheet data as of December
31, 2001 and 2002 were derived from our audited financial statements included
elsewhere in this Annual Report and should be read in conjunction with such
financial statements. The following summary consolidated statements of
operations data for the years ended December 31, 1998 and 1999 and the
consolidated balance sheet data as of December 31, 1998, 1999 and 2000 were
derived from our audited financial statements not included elsewhere in this
Annual Report and have been prepared in accordance with US GAAP and have been
derived from audited financial statements. The following summary financial data
should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the consolidated financial
statements and the notes thereto included elsewhere in this Annual Report.

|                                    |  |  |              |   |  |                         |          |         |  |         |          |         |  |         |          |             |  |        |          |   |  |        |         |   |  |       |  | 
|----------------------------------- |  |  | ------------ | - |  | ----------------------- | -------- | ------- |  | ------- | -------- | ------- |  | ------- | -------- | ----------- |  | ------ | -------- | - |  | ------ | ------- | - |  | ----- |  | 
|                                    |  |  |              |   | 
|                                    |  |  |              |   |  | Years ended December 31
|                                    |  |  |              |   |  |                        
|                                    |  |  |              |   |  | 1998                    |          | 1999    |  | 2000    |          | 2001    |  | 2002   
|                                    |  |  |              |   |  |                         |          |         |  |         |          |         |  |        
|                                    |  |  |              |   |  | Rmb000                 |          | Rmb000 |  | Rmb000 |          | Rmb000 |  | Rmb000 |          | US$000 (3)
|Net sales                           |  |  | 351,184      |   |  |                         | 383,633  |         |  |         | 392,529  |         |  |         | 250,366  |             |  |        | 549,967  |   |  |        | 66,421  |  
|Cost of goods sold                  |  |  | (251,935     | ) |  |                         | (259,658 | )       |  |         | (271,606 | )       |  |         | (212,229 | )           |  |        | (528,149 | ) |  |        | (63,786 | )
|                                    |  |  |              |   |  |                         |          |         |  |         |          |         |  |         |          |             |  |        |          |   |  |        |         |  
|                                    |  |  | Gross profit |   |  | 99,249                  |          |         |  | 123,975 |          |         |  | 120,923 |          |             |  | 38,137 |          |   |  | 21,818 |         |   |  | 2,635 | 
|Selling expenses                    |  |  | (11,173      | ) |  |                         | (15,695  | )       |  |         | (15,325  | )       |  |         | (6,172   | )           |  |        | (5,286   | ) |  |        | (638    | )
|General and administrative
expenses |  |  | (21,548      | ) |  |                         | (28,562  | )       |  |         | (40,605  | )       |  |         | (44,114  | )           |  |        | (68,684  | ) |  |        | (8,295  | )

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|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |     |       |  |       | 
|--------------------------------------------- | ---------------------- | ----------------------------------- | --------- | --------------------------------------- | ------ | ----------------------- | --------- | ------- | ------ | ------- | ---------- | ------- | ------ | ------- | ---------- | ----------- | ------- | - | ---------- | ----- | ------ |  | ---------- | --- | ----- |  | ----- | 
|                                              |                        |                                     |           |                                         |        | Years ended December 31
|                                              |                        |                                     |           |                                         |        | 1998                    |           | 1999    |        | 2000    |            | 2001    |        | 2002   
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |        
|                                              |                        |                                     |           |                                         |        | Rmb000                 |           | Rmb000 |        | Rmb000 |            | Rmb000 |        | Rmb000 |            | US$000 (3)
|Impairment loss on                            |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|                                              |                        | - Land Use Rights                   |           |                                         |       |                         |           |         |       |         |            |         |       |         |            |             | (5,004  | ) |            |       |       |  |            |     |      | 
|                                              |                        | - Property, machinery
and equipment |           |                                         |       |                         |           |         |       |         |            |         |       |         |            |             | (8,722  | ) |            |       |       |  |            |     |      | 
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|Income (loss) from operations                 |                        |                                     | 66,528    |                                         |        |                         | 79,718    |         |        |         | 64,993     |         |        |         | (25,875    | )           |         |   | (52,152    | )     |        |  | (6,298     | )  
|Interest expense                              |                        |                                     | (5,101    | )                                       |        |                         | (5,577    | )       |        |         | (23,550    | )       |        |         | (23,107    | )           |         |   | (17,867    | )     |        |  | (2,158     | )  
|Interest income                               |                        |                                     | 287       |                                         |        |                         | 1,981     |         |        |         | 2,061      |         |        |         | 2,000      |             |         |   | 1,070      |       |        |  | 129        |    
|Gain on sale of subsidiary                    |                        |                                     |          |                                         |        |                         |          |         |        |         |           |         |        |         |           |             |         |   | 79,050     |       |        |  | 9,547      |    
|Exchange gain(loss), net                      |                        |                                     | 10        |                                         |        |                         | (8        | )       |        |         | 2,363      |         |        |         | (104       | )           |         |   |           |       |        |  |           |    
|Other (expenses) income, net                  |                        |                                     | (971      | )                                       |        |                         | 252       |         |        |         | (197       | )       |        |         | (187       | )           |         |   | 124        |       |        |  | 15         |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|                                              |                        | Income (loss) before
income tax     |           |                                         | 60,753 |                         |           |         | 76,366 |         |            |         | 45,670 |         |            |             | (47,273 | ) |            |       | 10,225 |  |            |     | 1,235 | 
|(Provision for) Write-back
of income tax      |                        |                                     | (7,900    | )                                       |        |                         | (20,298   | )       |        |         | (16,599    | )       |        |         | 25,687     |             |         |   |           |       |        |  |           |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|                                              |                        |                                     |           | Income (loss) before
minority interests |        |                         | 52,853    |         |        |         | 56,068     |         |        |         | 29,071     |             |         |   | (21,586    | )     |        |  | 10,225     |     |       |  | 1,235 | 
|                                              | Minority interests (1) |                                     |           | (5,590                                  | )      |                         |           | (6,365  | )      |         |            | (5,600  | )      |         |            | 164         |         |   |            | 6,248 |        |  |            | 754 |      
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|                                              |                        |                                     |           | Net income (loss)                       |        |                         | 47,263    |         |        |         | 49,703     |         |        |         | 23,471     |             |         |   | (21,422    | )     |        |  | 16,473     |     |       |  | 1,989 | 
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|Earnings (loss) per common
share              |                       
|- Basic (2)                                   |                        |                                     | Rmb5.96   |                                         |        |                         | Rmb5.33   |         |        |         | Rmb2.03    |         |        |         | Rmb (1.67  | )           |         |   | Rmb1.12    |       |        |  | US$0.14    |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|- Diluted (2)                                 |                        |                                     | Rmb5.96   |                                         |        |                         | Rmb5.32   |         |        |         | Rmb1.98    |         |        |         | Rmb  (1.67 | )           |         |   | Rmb0.95    |       |        |  | US$0.11    |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|Weighted average number of
outstanding shares |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|- Basic (2)                                   |                        |                                     | 7,936,000 |                                         |        |                         | 9,333,000 |         |        |         | 11,572,000 |         |        |         | 12,838,000 |             |         |   | 14,685,000 |       |        |  | 14,685,000 |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    
|- Diluted (2)                                 |                        |                                     | 7,936,000 |                                         |        |                         | 9,344,000 |         |        |         | 11,878,000 |         |        |         | 12,838,000 |             |         |   | 17,390,000 |       |        |  | 17,390,000 |    
|                                              |                        |                                     |           |                                         |        |                         |           |         |        |         |            |         |        |         |            |             |         |   |            |       |        |  |            |    

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|                                       |  |                    |         |         |  |         |          |         |  |         |          |         |  |  |         |   |  |  |          |   |  |  |         |  
|-------------------------------------- |  | ------------------ | ------- | ------- |  | ------- | -------- | ------- |  | ------- | -------- | ------- |  |  | ------- | - |  |  | -------- | - |  |  | ------- | -
|                                       |  | As of December 31,
|                                       |  |                   
|                                       |  | 1998               |         | 1999    |  | 2000    |          | 2001    |  | 2002   
|                                       |  |                    |         |         |  |         |          |         |  |        
|                                       |  | Rmb000            |         | Rmb000 |  | Rmb000 |          | Rmb000 |  | Rmb000 |          | US$000
|Balance Sheet Data                     |  |                    |         |         |  |         |          |         |  |         |          |         |  |  |         |   |  |  |          |   |  |  |         |  
|Cash and bank deposits                 |  |                    | 6,566   |         |  |         | 2,870    |         |  |         | 33,490   |         |  |  | 7,616   |   |  |  | 10,948   |   |  |  | 1,323   |  
|Working capital                        |  |                    | 128,162 |         |  |         | 56,917   |         |  |         | 136,616  |         |  |  | 147,505 |   |  |  | 266,773  |   |  |  | 32,219  |  
|Property, machinery and equipment,
net |  |                    | 33,449  |         |  |         | 48,473   |         |  |         | 182,140  |         |  |  | 183,600 |   |  |  | 5,112    |   |  |  | 617     |  
|Construction in progress               |  |                    | 26,272  |         |  |         | 106,937  |         |  |         | 17,869   |         |  |  | 576     |   |  |  |         |   |  |  |        |  
|Land use rights                        |  |                    | 5,364   |         |  |         | 112,301  |         |  |         | 226,463  |         |  |  | 221,359 |   |  |  | 189,405  |   |  |  | 22,875  |  
|Debt issuance cost, net                |  |                    |        |         |  |         |         |         |  |         | 8,234    |         |  |  |        |   |  |  |         |   |  |  |        |  
|Total assets                           |  |                    | 379,236 |         |  |         | 576,847  |         |  |         | 939,267  |         |  |  | 911,238 |   |  |  | 742,708  |   |  |  | 89,699  |  
|Short-term-debts                       |  |                    | 47,886  |         |  |         | 103,270  |         |  |         | 170,443  |         |  |  | 189,990 |   |  |  | 40,000   |   |  |  | 4,831   |  
|Long-term-debts                        |  |                    | 17,966  |         |  |         | 8,169    |         |  |         | 44,869   |         |  |  | 8,163   |   |  |  | 8,163    |   |  |  | 986     |  
|Total liabilities                      |  |                    | 203,955 |         |  |         | 281,794  |         |  |         | 411,173  |         |  |  | 360,689 |   |  |  | 98,074   |   |  |  | 11,845  |  
|Minority interest (1)                  |  |                    | 11,301  |         |  |         | 17,666   |         |  |         | 23,266   |         |  |  | 23,102  |   |  |  | 87,054   |   |  |  | 10,514  |  
|Shareholders equity                   |  |                    | 163,980 |         |  |         | 277,387  |         |  |         | 504,828  |         |  |  | 527,447 |   |  |  | 557,580  |   |  |  | 67,340  |  
|Cash flows data                        |  |                    |         |         |  |         |          |         |  |         |          |         |  |  |         |   |  |  |          |   |  |  |         |  
|Cash flows from operating activities   |  |                    | 14,711  |         |  |         | 110,628  |         |  |         | (7,568   | )       |  |  | 26,489  |   |  |  | (56,197  | ) |  |  | (6,787  | )
|Cash flows from investing activities   |  |                    | (28,965 | )       |  |         | (214,669 | )       |  |         | (243,200 | )       |  |  | (76,637 | ) |  |  | (297,827 | ) |  |  | (35,969 | )
|Cash flows from financing activities   |  |                    | 14,349  |         |  |         | 100,353  |         |  |         | 281,315  |         |  |  | 24,344  |   |  |  | 357,417  |   |  |  | 43,166  |  



|(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 1998 by
7,936,000 shares, for 1999 by 9,333,000 shares, for 2000 by 11,572,000
shares, for 2001 by 12,838,000 shares and for 2002 by 14,685,000 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, 2002 of US$1.00 = Rmb 8.28. 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.                  

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Exchange Rate Information

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

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

|              |  |                     |        | 
|------------- |  | ------------------- | ------ | 
|              |  | Noon Buying Rate(1)
|              |  |                    
|Calendar Year |  | Average (2)        
|              |  |                    
|              |  | (Rmb per US$)      
|1998          |  |                     | 8.3008 | 
|1999          |  |                     | 8.2783 | 
|2000          |  |                     | 8.2784 | 
|2001          |  |                     | 8.2770 | 
|2002          |  |                     | 8.2770 | 



---

|(1) |  | The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank
of New York. Since April 1994, the noon buying rate has been based on the
PBOC Rate. As a result, since April 1994, the noon buying rate and the
PBOC Rate have been substantially similar.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Determined by averaging the rates on the last business day of each month
during the relevant period.                                                                                                                                                                                                                                        

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|               |  |      |        |     |  |  |        | 
|-------------- |  | ---- | ------ | --- |  |  | ------ | 
|Calendar Month |  | High |        | Low
|               |  |      |        |    
|December 2002  |  |      | 8.2800 |     |  |  | 8.2771 | 
|January 2003   |  |      | 8.2800 |     |  |  | 8.2766 | 
|February 2003  |  |      | 8.2800 |     |  |  | 8.2768 | 
|March 2003     |  |      | 8.2776 |     |  |  | 8.2770 | 
|April 2003     |  |      | 8.2774 |     |  |  | 8.2769 | 
|May 2003       |  |      | 8.2771 |     |  |  | 8.2768 | 
|June 2003      |  |      | 8.2775 |     |  |  | 8.2768 | 

As of July 25, 2003, being the latest practicable date, the exchange rate was
US$1.00 = Rmb 8.2776.



|B. |  | CAPITALIZATION AND INDEBTEDNESS.
|-- |  | --------------------------------

Not applicable.



|C. |  | REASONS FOR THE OFFER AND USE OF PROCEEDS.
|-- |  | ------------------------------------------

Not applicable.



|D. |  | RISK FACTORS.
|-- |  | -------------

Technology risk

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

We may experience greater variability in our operating results than in the
past, particularly depending on the general economic conditions and the pace of
development and acceptance of new technologies.

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

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Operating risk

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

Concentration of credit risk

We perform ongoing credit evaluations of each customers financial
condition. We maintain reserves for potential credit losses and such losses in
the aggregate have not exceeded managements projections. As of December 31,
2001, our five largest accounts receivable accounted for approximately 31% of
our total accounts receivable. Total accounts receivable as of December 31,
2002 were minimal following our sale of a subsidiary.

The economy of China differs from the economies of most countries.

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

As substantially all of our operations are conducted in Mainland China, we
are subject to special considerations and significant risks not typically
associated with companies operating in North America and Western Europe. These
include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. Our results may be adversely
affected by changes in the political and social conditions in Mainland China,
and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation, among other things.

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

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Our currency is not freely convertible.

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

We depend on Chinese factories.

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

Taxation

Our Company and its subsidiaries are subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdictions in which they
operate. Our Company, Qiao Xing Holdings Limited, Qiao Xing Mobile
Communication Company Limited and Qiao Xing Communication Holdings Limited were
incorporated under the International Business Companies Act of the British
Virgin Islands and, accordingly, are exempted from payment of the British
Virgin Islands income taxes. Our Company also registered in Hong Kong as a
branch office and is subject to Hong Kong income taxes at a rate of 16%.
During the fiscal year ended December 31, 2002, substantially all of the
Groups income was generated in China by Qiao Xing Telecommunication Industry
Company Limited (QXTI), a joint venture enterprise established in the Coastal
Economic Open Zone in China and subject to Chinese income taxes at a rate of
27% (24% state income tax and 3% local income tax). It was exempted from state

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income tax and local income tax for three years starting from January 1,
1994, and then was subject to a 50% reduction in state income tax and full
exemption in local income tax for the following two years. The tax holiday of
state income tax has expired on January 1, 1999. The tax holiday of local
income tax continued for the years ended December 31, 2001 and 2002.

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

Prior to obtaining confirmation from the relevant tax bureau on the
entitlement to the tax holiday as stated above, QXTI provided for enterprise
income tax using 24% for the years ended December 31, 1999 and 2000.
Subsequent to December 31, 2001, QXTI obtained a confirmation from the National
Tax Bureau to confirm that QXTI was able to enjoy the aforementioned tax
benefit pursuant to the Notice [1999] 52 and QXTI would be subject to a state
income tax rate at 10% for each of the years ended December 31, 2000, 2001 and
2002. Accordingly, the excess provision of Mainland Chinese enterprise income
tax in prior years was written back in 2001.

If the tax holiday of QXTI as mentioned above had not existed, the Groups
income tax expenses (net of minority interests) would have been increased by
approximately Rmb 2,351,000 for the year ended December 31, 2000, representing
the effect of 3% local tax exemption. In addition, income tax expenses (net of
minority interest) for the year ended December 31, 2001 would have been
increased by Rmb 18,868,000, representing the effect of no written back on
state income tax for 2000 and prior periods. The tax holiday had no impact on
operating results before tax generated in 2001 and 2002 as QXTI was in a tax
loss position. Basic earnings (loss) per common share would have been
approximately Rmb 1.83 and Rmb (2.99), respectively, for the years ended
December 31, 2000 and 2001, and diluted earnings (loss) per common share would
have been approximately Rmb 1.78 and Rmb (2.99), respectively, for the years
ended December 31, 2000 and 2001.

We depend upon certain key personnel to manage our company.

Our ability to successfully carry out our business plans continues to be
largely dependent upon the efforts of our senior management and executive
officers, particularly our chairman, Rui Lin Wu. We have not entered into any
employment agreement with Mr. Wu and the loss of his

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services would have a material adverse effect on our ability to achieve
our business objectives. We have obtained key-person life insurance in the
amount of US$2,000,000 on his life, with the proceeds payable to us.

We are controlled by one of our shareholders, whose interests may differ from
other shareholders.

Rui Lin Wu, our chief executive officer and chairman, and members of his
family beneficially own or control approximately 45.8% of our outstanding
shares as of July 31, 2003. Accordingly, he has controlling influence in
determining the outcome of any corporate transaction or other matter submitted
to the shareholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets, election of directors and other
significant corporate actions. He also has the power to prevent or cause a
change in control. In addition, without his consent, we could be prevented
from entering into transactions that could be beneficial to us. The interests
of this shareholder may differ from the interests of the other shareholders.

Our holding company structure creates restrictions on the payment of dividends.

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

It may be difficult to serve us with legal process or enforce judgments against
us or our management.

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

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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.   

Information about us may be unavailable due to exemptions under the Exchange
Act for a foreign private issuer.

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



| |  |  | the rules under the Exchange Act requiring the filing with
the Securities and Exchange Commission of quarterly reports on Form
10-Q or current reports on Form 8-K;                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the provisions of Regulation FD aimed at preventing issuers
from making selective disclosures of material information;                                                                                                        
|
| |  |  | the sections of the Exchange Act regulating the solicitation
of proxies, consents or authorizations in respect of a security
registered under the Exchange Act; and                                                           
|
| |  |  | the sections of the Exchange Act requiring insiders to file
public reports of their stock ownership and trading activities and
establishing insider liability for profits realized from any
short-swing trading transaction.

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




ITEM 4. INFORMATION ON THE COMPANY



|A. |  | HISTORY AND DEVELOPMENT OF THE COMPANY.
|-- |  | ---------------------------------------

From our inception through December 31, 2002, Qiao Xing Universal
Telephone, Inc. (Qiao Xing; or we) was principally engaged in the
manufacturing and sales of telecommunication terminals and equipment, including
corded and cordless telephone sets, in China. Our history dates back to April
1992 when Mr. Rui Lin Wu, our founder and chief executive officer, established
Qiao Xing Telecommunication Industry Co. Ltd. in Huizhou, Peoples Republic of
China (PRC or China). We initially were engaged in the original design
manufacturing of corded telephones, whereby products are designed and
manufactured to the customers requirements and instructions and are marketed
under the customers designated brand name or without designated brand name.
When we commenced our operations in August 1992, we consisted of only 100
employees and two production lines producing telephones.

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In August 1995, we were awarded the ISO9001 certificate, which reflects
our reputation as a high quality telephone manufacturer.

Our company, formerly known as Pastiche Investments Limited, was
incorporated as an international business company under the International
Business Companies Act of the British Virgin Islands on December 6, 1994. As
of July 31, 2003, we owned 80% of Qiao Xing Mobile Communication Co. Ltd. (QX
Mobile), an international business company incorporated in the British Virgin
Islands on January 31, 2002. QX Mobile owns 65% of CEC Telecom Co., Ltd., a
limited liability company established in China. We also own 100% of Qiao Xing
Communication Holdings, Ltd., an international business company incorporated in
the British Virgin Islands on May 21, 2002 (QX Communication Holdings), which
owns 90% of Hui Zhou Qiao Xing Property, Ltd. (QX Property), a PRC joint
venture, and 90% of Hui Zhou Qiao Xing Communication Industry, Ltd. (QX
Communication), a PRC joint venture. The remaining 10% of each of QX Property
and QX Communication is owned by Qiao Xing Group Limited, a PRC company owned
by Rui Lin Wu and his eldest son Zhi Yang Wu. Messrs. Wu and Wu are two of our
executive officers and directors.

Refer to Item 4.B. Business Overview for a description of the important
events in the development of our business for the period from the beginning of
2002 up to the date of filing of this report.

For 2000, our total capital expenditure was about Rmb 194.3 million, which
primarily included: 1) Rmb 165.7 million for the construction of various
buildings in the Qiao Xing Industry Zone; 2) Rmb 10.5 million for the payment
of land use rights for another parcel of land; and 3) Rmb 9.1 million and Rmb
7.5 million for SMT equipment and vehicle, respectively. The construction work
of Qiao Xing Industry Zone was substantially completed in 2000 and commenced
production.

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

For 2002, our total capital expenditure was about Rmb 12.4 million, which
primarily included: 1) Rmb 10.3 million for acquisition of property, machinery
and equipment; and 2) Rmb 2.1 million for payment of land use rights.

Our principal place of business and our executive office is the Qiao Xing
Science Industrial Park, Tang Quan, Huizhou City, Guangdong, Peoples Republic
of China, 516023, telephone: (011) 86-752-2820-268. We have designated CT
Corporation, 111 Eighth Avenue, New York, New York 10011 as our agent for
service of process in the United States.

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|B. |  | BUSINESS OVERVIEW.
|-- |  | ------------------

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

In April 2001, we announced a new model telephone offering an enhanced
vibration feature to assist users with hearing deficiencies. In addition to
the normal sound-emitting speaker in the hand set, a special vibrating unit in
the speaker also transmits the same sounds through vibration.

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

Business Operations and Product Range

Through the fiscal year ended December 31, 2002, we were principally
engaged in the design, manufacture and sale of telecommunication terminals and
equipment in the PRC, including primarily in house corded and cordless
telephone sets under the trademark of Qiao Xing. According to the National
Statistic Bureau of the China Technology Progress Information Centre, we were
the largest in house telephone manufacturer by number of sales units in the PRC
in 1999. For 2000, 2001 and 2002, we ranked as the second largest in house
telephone manufacturer by number of sales units.

Currently, we are engaged in manufacturing GSM mobile phones for CEC
Telecom and developing and marketing wire and wireless telephones, especially
telephones with special functions. We have ceased the manufacturing of
telephones. Instead, we subcontract our telephone manufacturing orders to
designated manufacturers.

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

In October 1997, we introduced the smart card telephones, which is the
first of many special function corded telephones that we expect to develop and
introduce to the market. In the

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first quarter of 1998, we developed and introduced caller ID display
telephones and coin operated telephones. We developed the digital cordless
phone in 1999 and introduced digitally enhanced cordless telephones (DECT) in
2000. In 2002, we commenced production of GSM phones.

As of December 31, 2002, we were producing and selling 180 corded models
and 26 cordless models, three models of fax machines, four models of wireless
fixed phones, and five models of short message telephones. Our subsidiary, QX
Communication, currently also designs, develops and manufactures GSM mobile
phones for CEC Telecom. We have an extensive nationwide sales network that
comprises 3,500 retail outlets in China.

Telephone Sales By Units

|              |  |                        |           |      |  |      |           |      |  |      |           |  |  |  |           |  |  |  |           | 
|------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- |  |  |  | --------- | 
|              |  | Year ended December 31
|              |  | 1998                   |           | 1999 |  | 2000 |           | 2001 |  | 2002
|              |  | sets                   |           | sets |  | sets |           | sets |  | sets
|corded        |  |                        | 2,339,999 |      |  |      | 3,154,412 |      |  |      | 3,063,825 |  |  |  | 1,416,143 |  |  |  | 971,347   | 
|cordless      |  |                        | 240,168   |      |  |      | 210,578   |      |  |      | 236,740   |  |  |  | 172,508   |  |  |  | 192,536   | 
|smart card    |  |                        | 152,574   |      |  |      | 240,633   |      |  |      | 189,646   |  |  |  | 151,043   |  |  |  | 80,746    | 
|caller ID     |  |                        | 72,691    |      |  |      | 538,560   |      |  |      | 1,332,633 |  |  |  | 2,324,454 |  |  |  | 3,725,487 | 
|coin operated |  |                        | 18,943    |      |  |      | 14,849    |      |  |      | 2,034     |  |  |  | 0         |  |  |  | 0         | 
|mobile        |  |                        | 0         |      |  |      | 0         |      |  |      | 0         |  |  |  | 0         |  |  |  | 314,116   | 
|Total         |  |                        | 2,824,375 |      |  |      | 4,159,032 |      |  |      | 4,824,878 |  |  |  | 4,064,148 |  |  |  | 5,284,232 | 

Average Wholesale Prices Per Set

|              |  |                        |     |      |  |      |     |      |  |      |     |  |  |  |     |  |  |  |       | 
|------------- |  | ---------------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- |  |  |  | --- |  |  |  | ----- | 
|              |  | Year ended December 31
|              |  | 1998                   |     | 1999 |  | 2000 |     | 2001 |  | 2002
|              |  | Rmb                    |     | Rmb  |  | Rmb  |     | Rmb  |  | Rmb 
|corded        |  |                        | 79  |      |  |      | 60  |      |  |      | 53  |  |  |  | 40  |  |  |  | 39    | 
|cordless      |  |                        | 317 |      |  |      | 279 |      |  |      | 281 |  |  |  | 224 |  |  |  | 151   | 
|smart card    |  |                        | 486 |      |  |      | 298 |      |  |      | 252 |  |  |  | 137 |  |  |  | 71    | 
|caller ID     |  |                        | 150 |      |  |      | 101 |      |  |      | 87  |  |  |  | 57  |  |  |  | 34    | 
|coin operated |  |                        | 315 |      |  |      | 568 |      |  |      | 203 |  |  |  | n/a |  |  |  | n/a   | 
|mobile        |  |                        | n/a |      |  |      | n/a |      |  |      | n/a |  |  |  | n/a |  |  |  | 1,084 | 

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Telephone Sales By Rmb

|              |  |                        |         |         |  |         |         |         |  |         |         |  |  |  |         |  |  |  |         | 
|------------- |  | ---------------------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- |  |  |  | ------- |  |  |  | ------- | 
|              |  | Year ended December 31
|              |  | 1998                   |         | 1999    |  | 2000    |         | 2001    |  | 2002   
|              |  | Rmb000                |         | Rmb000 |  | Rmb000 |         | Rmb000 |  | Rmb000
|corded        |  |                        | 184,020 |         |  |         | 190,282 |         |  |         | 161,647 |  |  |  | 56,585  |  |  |  | 38,340  | 
|cordless      |  |                        | 76,207  |         |  |         | 58,696  |         |  |         | 66,470  |  |  |  | 38,637  |  |  |  | 29,076  | 
|smart card    |  |                        | 74,100  |         |  |         | 71,739  |         |  |         | 47,866  |  |  |  | 20,689  |  |  |  | 5,694   | 
|caller ID     |  |                        | 10,887  |         |  |         | 54,476  |         |  |         | 116,134 |  |  |  | 133,360 |  |  |  | 128,419 | 
|coin operated |  |                        | 5,970   |         |  |         | 8,440   |         |  |         | 412     |  |  |  | 0       |  |  |  | 0       | 
|mobile        |  |                        | 0       |         |  |         | 0       |         |  |         | 0       |  |  |  | 0       |  |  |  | 340,360 | 
|others        |  |                        | 0       |         |  |         | 0       |         |  |         | 0       |  |  |  | 1,095   |  |  |  | 8,078   | 
|Total         |  |                        | 351,184 |         |  |         | 383,633 |         |  |         | 392,529 |  |  |  | 250,366 |  |  |  | 549,967 | 

Telephone gross profit margin

|              |  |                        |     |      |  |      |     |   |    |     |     |  
|------------- |  | ---------------------- | --- | ---- |  | ---- | --- | - | -- | --- | --- | -
|              |  | Year ended December 31
|              |  | 2000                   |     | 2001 |  | 2002
|corded        |  |                        | 28  | %    |  |      | 11  | % |    |     | -15 | %
|cordless      |  |                        | 24  | %    |  |      | 8   | % |    |     | -17 | %
|smart card    |  |                        | 57  | %    |  |      | 31  | % |    |     | 1   | %
|caller ID     |  |                        | 28  | %    |  |      | 16  | % |    |     | -15 | %
|coin operated |  |                        | -8  | %    |  |      | N/A |   |    | N/A
|mobile        |  |                        | N/A |      |  | N/A  |     |   | 13 | %  

During 2002, we developed the wuxiangtong telephone. It is a cordless and
wireless phone that employs the GSM core technology with the look, functions
and dimensions of an ordinary press-key phone. With its wireless connection to
the GSM network, the service fee for using the wuxiangtong telephone is the
same as using a fixed line telephone, since only the caller and not the
receiving party pays for the call. Such phones are most suitable for those
corporate, government and residential users in the remote parts of the rural
areas, where communication via fixed optical fiber lines would be very costly.
A majority of the land in China would benefit from this extended coverage. It
can also be used as mobile public phones, for outdoor users and land commuters.

During 2002, we developed the short message telephone, a corded fixed line
telephone that can send and receive short messages like mobile phones. In
addition to its function as an ordinary caller ID display telephone, its other
functions include the ability to send and receive short messages, an alarm
clock function, games and calendar memo options.

We launched the sale of the wuxiangtong and short message telephones in
2003. The wuxiangtong and short message telephones are special telephones with
much higher margins than ordinary wire and wireless telephones, which we expect
to leverage our growth in 2003.

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During 2002, we developed the web telephone model. In addition to its
ordinary telephone functions, our web phone can browse the internet, send and
receive e-mail and send mobile phone short messages.

Production Facilities

We currently only manufacture GSM mobile phone for sale exclusively to CEC
Telecom. All of the other products which we sell are manufactured by
unaffiliated third parties.

Manufacturing Process

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

Quality Assurance System

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

Quality control tests on the production process include:



| |  |  | sampling test method is used to inspect all incoming
materials on a sample basis;                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | at each stage of production process, quality control
inspectors monitor the production flow and check the quality of the
products; and
|
| |  |  | finished products are checked by quality control staff on a
sample basis.                                                             

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

We have not received any material claims for defective products from
customers for the three years ended December 31, 2002.

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Sales and Marketing

Substantially all of our products are sold in the PRC market and accounted
for approximately 98% of our total revenues for the years ended December 31,
2001 and 2002.

We currently have 40 independent regional distributors and after-sales
service centers, including six wholesale agencies, serving our major customers
in different provinces in the PRC. There is at least one representative
assigned to each regional distributor to make frequent visits in order to
understand the business operation and assist management. These regional
distributors distribute our telecommunication products to a network of over
3,500 retail outlets. The purchase orders for telephones from these retail
outlets are collected by the 40 regional distributors, who would then place
consolidated purchase orders with us on their own accounts. The regional
distributors are each responsible for the credit risk and settlement of their
own customers. We give a settlement period of 30 days to 270 days to the
distributors. The long credit period granted is comparable to the common
business practice in household telephones.

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

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

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

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

We spent approximately RMB 1,346,000 in 2002 for advertising and
promotion. In 2003, we focused on selling short message phones and wireless
fixed phones, which generate much higher margins than ordinary telephones. In
addition to the established distribution network, we sell our products to China
Telecommunication, mobile network operators or their subcontractors to promote
our new products jointly. Backed up by all levels of
government,

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these operators have dominant influence over consumers, which is very favorable for us to
introduce new products into the market and capture market share swiftly. To
strengthen our marketing team, we recruited 200 new associates in 2003, all of
whom are university diploma holders with IT knowledge background.

Materials and Components

We held a suppliers meeting in 2003, in which more than 100 mobile phone
components suppliers bid for supplying us with materials and components for our
GSM phones. Our management believes it a good way to select better suppliers
and would contribute to the reduction of our manufacturing cost in the future.

Research and Development

Our
research and development (R&D) and engineering functions are
performed in the PRC through our own R&D division and through appointed
external technology development experts. As of December 31, 2002, we employed
200 staff in our R&D and engineering divisions, who work closely with our sales
and marketing executives to gauge the market demand in developing new products
and new models of existing products. The R&D division is currently monitoring
180 particular models of corded telephones, 26 particular models of cordless
telephones, six models of GSM cellular telephones, four models of wireless
fixed phones (wuxiangtong) and five models of short message telephones.

In 2002, we spent Rmb 451,000 (US$54,000) on the R&D division.

Competition

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



| |  |  | functions and designs;                 
| | - |  | ---------------------------------------
|
| |  |  | brand name recognition;                
|
| |  |  | distribution capability;               
|
| |  |  | after-sale service;                    
|
| |  |  | short lead time in product development;
|
| |  |  | product quality; and                   
|
| |  |  | capability of mass production.         

We consider that our products do not compete directly with imported
products with similar features, which are sold in the higher price range. We
currently compete directly with domestic manufacturers in the PRC, namely TCL
and Desai in Guangdong, which are currently

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the first and third seller of telephones in the PRC, according to the
statistical report released by the Trade and Foreign Economy Statistics
Division of National Statistic Bureau. However, TCL and Desai are now
diversifying into home electric appliance manufacture, including DVD sets and
Hi-Fi systems, which will likely divert some of their resources from the
telephone manufacturing business.

In 2002, our telephones were granted the label of Chinese Renowned Brand
Name Product by the China Promotion Commission for Top Product Strategy. We
believe that this recognition has created a favorable marketing environment for
us.

The Common Stock Purchase Agreement

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

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

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

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

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



| |  |  | the volume weighted average price is less than the minimum
threshold price we designate;                                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | trading in our common stock is suspended for more than three
hours, in the aggregate, on any trading day or if any trading day is
shortened because of a public holiday; or                    
|
| |  |  | if sales of previously drawn down shares pursuant to the
registration statement are suspended by us because of certain
potentially material events for more than three hours, in the
aggregate.

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

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

To determine the number of shares of common stock that we can issue in
connection with a draw down, take 1/15th of the draw down amount and for each
trading day in the pricing period, divide it by 93% of the volume weighted
average daily trading price of our common stock for that day. The 7% accounts
for Brooke Bonds 7% discount. The sum of these daily calculations produces
the number of common shares that we can issue, unless, as described above, the
volume weighted average daily price for any given trading day is below the
threshold amount, trading is suspended for any given trading day or sales made
pursuant to the registration statement is suspended, in which case those days
are ignored in the calculation.

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

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| |  |  | a registration statement for the shares must be declared
effective by the Securities and Exchange Commission and must remain
effective and available as of the draw down settlement date for
making resales of the common shares purchased by Brooke Bond;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | trading in our common shares must not have been suspended by
the Securities and Exchange Commission or The Nasdaq National
Market, nor shall minimum prices have been established on securities
whose trades are reported on The Nasdaq National Market;  
|
| |  |  | we must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets to
another company, unless the acquiring company has agreed to honor
the common stock purchase agreement;                      
|
| |  |  | no statute, rule, regulation, executive order, decree, ruling
or injunction may be in effect which prohibits consummation of the
transactions contemplated by the common stock purchase agreement;
and                                                    
|
| |  |  | no material adverse event shall have occurred with respect to our
affairs.                                                                                                                                                                                

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



| |  |  | under any presently existing or future employee benefit plan,
which plan has been or may be approved by our stockholders;      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | under any compensatory plan for a full-time employee or key consultant;                                                        
|
| |  |  | in an underwritten registered public offering;                                                                                 
|
| |  |  | in connection with a strategic partnership or other business
transaction, the principal purpose of which is not to raise money;
|
| |  |  | in connection with a private placement of securities if the
purchasers do not have registration rights; or                     
|
| |  |  | a transaction to which Brooke Bond gives its prior written approval.                                                           

The equity draw down facility established by the common stock purchase
agreement will terminate 24 months from the effective date of the registration
statement covering the shares underlying the equity line of credit. The
facility shall also terminate if we file for protection from

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creditors, or if our common stock is delisted from The Nasdaq National
Market, and not promptly relisted on the Nasdaq SmallCap Market, the American
Stock Exchange or the New York Stock Exchange.

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

As of July 31, 2003, no registration statement for the shares has been
filed or declared effective by the SEC. Therefore, we cannot currently
exercise any rights under the equity line of credit facility.

Acquisition of Equity Interest in CEC Telecom Co., Ltd.

In May and June 2002, our then-wholly owned subsidiary Qiao Xing Mobile
Communication Co. Ltd. (QX Mobile) entered into two sale and purchase
agreements for acquisitions of an aggregate equity interest of 65% in CEC
Telecom Co., Ltd. (CECT) for an aggregate consideration of RMB 312,750,000
(US$37,772,000) (the Acquisitions). CECT is a limited liability company
established in China and is principally engaged in production and sales of
mobile phones and accessories in China. In February 2003, the Acquisitions
were approved by all the appropriate governmental authorities,
including the Ministry of Information Industry, the State Development Planning
Commission, the Ministry of Foreign Trade and Economic Cooperation and the
State Administration for Industry and Commerce. The process of obtaining new
business licenses was finally completed and a new business license for the new
entity was granted.

Pursuant to an agreement dated May 23, 2002, QX Mobile acquired a 25% equity interest in CECT from
Tianjin Taida Company Limited (Tianjin) for cash consideration of RMB
108,750,000 (US$13,134,000).

Pursuant to an agreement dated May 23, 2002 and a supplementary agreement
dated May 23, 2002, QX Mobile acquired a 40% equity interest in CECT from China
Electronics Corporation (CEC) and other group companies of CEC for cash
consideration of RMB 204,000,000 (US$24,638,000).

As of December 31, 2002, we had made prepayments of RMB 180,000,000
(US$21,700,000) to the sellers according to the payment terms prescribed in the
agreements. The remaining consideration is payable as follows: RMB 132,750,000
(US$16,033,000) within 6 months after the completion of shares transfers at the
relevant government bureau of the PRC (date of shares transfers). We intend
to make the final payment of RMB 132,750,000 no later than August 8, 2003.

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As of February 8, 2003, the Acquisitions were completed because all
conditions precedent as set out in the agreements had been fulfilled. Such
conditions precedent included, among others, (i) approval from the Chinese
government on the shares transfers and (ii) completion of collateral
arrangements on QX Mobiles equity interest in CECT and certain land use rights
of the Group.

On August 20, 2002, QX Mobile entered into a subscription agreement for
its sale of 200,000 shares representing 20% of the total outstanding equity of
QX Mobile to Galbo Enterprises Limited, a non-affiliated BVI corporation
(Galbo), for RMB 67,000,000 (US$8,092,000). The subscription price was fully
paid before December 31, 2002. The subscription price was applied by QX Mobile
toward the acquisition of its 65% interest in CECT. Upon completion of the
subscription, our controlling interest in QX Mobile was reduced to 80%.

CECTs Business Overview

CEC Telecom Co., Ltd. (CECT) was jointly initiated and co-established in
China in May 2000 by six companies, including China Electronics Corporation
(CEC), Tianjin TEDA Investment Holding Co., Ltd., Shenzhen SED Electronics
Corporation, Wuhan Zhongyuan Electronics Group Co., Ltd., China Computer
Software and Technology Service Corporation and China National Integrated
Circuit Design Center. It is one of the few manufacturers that have been
approved to manufacture both GSM and CDMA mobile phones in China.

China Electronics Corporation (CEC), with registered capital of RMB 6.15
billion and 36 wholly owned companies (www.cec.com.cn), is one of the leading
companies in the domestic electronics industry in China.

CECT is equipped with the most advanced mobile phone research, development
and production capability in China. Supported by three R&D centers in Huizhou,
Shanghai and Beijing, with 200, 86 and 176 staff, respectively, it has mastered
international advanced communication technology to develop different types of
mobile phones such as GSM, CDMA, GPRS, PDA, and their value added services.
Among these mobile phone production technologies, 2.5G and 3G of GSM and CDMA
are up to international standards. CECT is currently engaged mainly in the R&D
and production of 2.5G and 3G GSM and CDMA mobile phones, production of RF
components, LCD moulds and other mobile phones with entertainment and service
functions like GPS messages, finance and stock e-commerce systems, games and
images download.

At present, CECT has launched 26 types of GSM, GPRS, CDMA and GPS mobile
phones, among which the color monitor, symphony with radio, MP3 and built-in
camera are their key functions. Utilizing its R&D competitive edge, CECT has
developed different product platforms according to different mobile phone
systems. It has also positioned its products to different consumer markets
such as specializing for business use, feminine style and masculine

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style, etc. There are four major product series: basic communication,
fashionable style, functional based and high-end luxury.

CECT has a production site at Cheung Ping Technology Park in Beijing
covering 17,000 square meters. Another production site for CECT mobile phones
at Huizhou of Guangdong is expected to come into operation in August 2003.

CECT has established a distribution network throughout China with more
than 170 wholesale outlets and more than 300 aftersales service centers in more
than 27 provinces and municipalities.

CECTs Smart Phone (CECT Mio 8380), installed with the Smart Phone 2002
operating system from Microsoft and with a built-in Intel 200M X-Scale CPU, has
received the approval from China Mobile after passing the relevant software
tests. The Smart Phone is jointly launched by CECT and MiTAC
(http://mitac.mic.com.tw/), a reputable Taiwan computer manufacturer. The 2002
operating system has given this new generation of mobile phones a great variety
of internet related functions and other applications. The Smart Phone is able
to perform data interchange with computers in a swift manner, and its other
functions include MMS, digital camera/video, MP3, games, MSN messaging and even
movie viewing.

With its advanced technology worldwide, CECTs Mio 8380 represents the
future of mobile phone development and marks the breakthrough in the technology
of the mobile phone industry in China. It was collected and displayed by the
China Telecommunication Museum on 10th June 2003.

In 2003, CECT branded mobiles were awarded as one of the ten Outstanding
Brand Name home-made mobile phones in China.

Sale of Our Subsidiary, Qiao Xing Holdings Limited

On December 31, 2002, we entered into an agreement with Central Grace
Technologies Ltd., a non-affiliated BVI corporation (Central Grace) for our
sale to Central Grace of our 100% interest in Qiao Xing Holdings Ltd. (QXHL),
our intermediate holding company which held a 90% interest in Qiao Xing
Telecommunication Industry Co. Ltd. (QXTI), our former principal operating
subsidiary. On July 10 and 11, 2003, we entered into supplemental agreements
with Central Grace to amend certain provisions of the original agreement.

The amended material terms of the sale provide as follows:



| |  | The total consideration for the purchase is RMB 210,000,000
(US$25,362,000), which was paid in full on July 16, 2003
|- |  | --------------------------------------------------------------------------------------------------------------------

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| |  | Central Grace assumed all disclosed and undisclosed liabilities of QXHL except:
|- |  | -------------------------------------------------------------------------------



| |  |  | the current liabilities of QXTI due to us of RMB 231,585,507 (US$27,969,000)
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | the current liabilities of QXHL due to us of RMB 8,172,953 (US$987,000)     
|
| |  |  | the current assets due from us of RMB 113,543,063 (US$13,713,000)           



| |  | We retained the ownership of the following Excluded Assets of QXHL, which are currently being formally re-registered
in the name of subsidiaries of our subsidiary, QX Communication Holdings:
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | land use rights for 667,000 square meters of land at Ji Ma, Huizhou                                                                          
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the fixed line telephone sales and distribution network                                                                                      
|
| |  |  | the mobile phone business, which includes the GSM
manufacturing, production and sales departments and the research and
development department
|
| |  |  | the die cast moulds for the production of fixed line telephones and mobile phones                                                            



| |  | Central Grace executed a Share Mortgage Deed for our benefit to secure the repayment of our loan facility to Central Grace for
the payment of the purchase price by Central Grace, which was cancelled upon full payment by Central Grace.                                        
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | We entered into a license agreement with QXTI and the 10% holder of QXTI by which QXTI as licensor grants to us the exclusive
and non-transferable use of its trademarks, patents applications and registered designs through December 2006 in exchange for
nominal consideration.
| 
| |  | We conveyed all rights to the technology and intellectual property for our wireless fixed telephone (wuxiangtong) technology
to Central Grace, reserving all exclusive marketing and distribution rights.                                                                         

Through our QX Communication Holdings subsidiary, we will continue to
conduct the business of the research and development, production, and
distribution of mobile phones and the design and distribution of fixed line
telephones, wireless telephones and fax machines.

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C.     ORGANIZATIONAL STRUCTURE AS OF JULY 31, 2003.

(ORGANIZATIONAL STRUCTURE)

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|D. |  | PROPERTY, PLANTS AND EQUIPMENT.
|-- |  | -------------------------------

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




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and notes thereto and Item 3.A. Selected Financial Data.
The amounts reflected in the following discussion are in Renminbi (Rmb).
Translation of amounts for 2002 from Renminbi into United States dollars
(US$) is for the convenience of readers and has been made at the noon
buying rate in New York City for cable transfers in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York of
US$1.00 = Rmb 8.28 on December 31, 2002.



|A. |  | OPERATING RESULTS.
|-- |  | ------------------

Fiscal 2002 compared to Fiscal 2001



| | (i) |  | Net sales
| | --- |  | ---------

Analysis of our sales revenue by product category for fiscal year 2002 and
2001 is as follows:

|                             |  |                        |         |      |  |         |     |   |  |  |         |  |  |  |     | 
|---------------------------- |  | ---------------------- | ------- | ---- |  | ------- | --- | - |  |  | ------- |  |  |  | --- | 
|                             |  | Year ended December 31
|                             |  | 2002                   |         | 2001
|                             |  | Rmb000                |         | %    |  | Rmb000 |     | %
|Mobile telephones            |  |                        | 340,360 |      |  |         | 62  |   |  |  | 0       |  |  |  | 0   | 
|Caller ID display telephones |  |                        | 128,419 |      |  |         | 23  |   |  |  | 133,360 |  |  |  | 53  | 
|Corded telephones            |  |                        | 38,340  |      |  |         | 7   |   |  |  | 56,585  |  |  |  | 23  | 
|Cordless telephones          |  |                        | 29,076  |      |  |         | 5   |   |  |  | 38,637  |  |  |  | 15  | 
|Smart card telephones        |  |                        | 5,694   |      |  |         | 1   |   |  |  | 20,689  |  |  |  | 8   | 
|Others                       |  |                        | 8,078   |      |  |         | 2   |   |  |  | 1,095   |  |  |  | 1   | 
|                             |  |                        |         |      |  |         |     |   |  |  |         |  |  |  |     | 
|Total                        |  |                        | 549,967 |      |  |         | 100 |   |  |  | 250,366 |  |  |  | 100 | 
|                             |  |                        |         |      |  |         |     |   |  |  |         |  |  |  |     | 

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Net sales revenue increased by Rmb 300 million from Rmb 250 million for
fiscal year 2001 to Rmb 550 million (US$66.4 million) for fiscal year 2002,
representing an increase of 120%. It was mainly attributed to the additional
revenue from mobile telephones sales during the year 2002. This major shift in
the sales mix has been made because of the intense competition in the corded
phones industry as well as the general upgrade of the standard of living in
China where more corded phone or cordless phone users are adopting mobile
phones. This also led to a significant decrease in sales value of our corded,
cordless and smart card phone products. In 2002, the revenue from
manufacturing GSM mobile phones was RMB 341,000,000, while net sales of fixed
line telephones was only RMB 208,000,000, representing a decrease of RMB
42,000,000.



| | (ii) |  | Gross Profit
| | ---- |  | ------------

Analysis of our gross profit by product category for fiscal years 2002 and
2001 is as follows:

|                             |  |                        |         |      |  |         |     |   |  |  |        |  |  |  |     | 
|---------------------------- |  | ---------------------- | ------- | ---- |  | ------- | --- | - |  |  | ------ |  |  |  | --- | 
|                             |  | Year ended December 31
|                             |  | 2002                   |         | 2001
|                             |  | Rmb000                |         | %    |  | Rmb000 |     | %
|Mobile telephones            |  |                        | 45,538  |      |  |         | 209 |   |  |  | 0      |  |  |  | 0   | 
|Caller ID display telephones |  |                        | (19,450 | )    |  |         | (89 | ) |  |  | 21,071 |  |  |  | 55  | 
|Corded telephones            |  |                        | (5,616  | )    |  |         | (26 | ) |  |  | 6,356  |  |  |  | 17  | 
|Cordless telephones          |  |                        | (5,100  | )    |  |         | (23 | ) |  |  | 3,647  |  |  |  | 10  | 
|Smart card telephones        |  |                        | 33      |      |  |         |    |   |  |  | 5,968  |  |  |  | 15  | 
|Others                       |  |                        | 6,413   |      |  |         | 29  |   |  |  | 1,095  |  |  |  | 3   | 
|                             |  |                        |         |      |  |         |     |   |  |  |        |  |  |  |     | 
|Total                        |  |                        | 21,818  |      |  |         | 100 |   |  |  | 38,137 |  |  |  | 100 | 
|                             |  |                        |         |      |  |         |     |   |  |  |        |  |  |  |     | 

Gross profit for fiscal year 2002 was Rmb 22 million (US$2.6 million),
representing an decrease of Rmb 16 million from Rmb 38 million in fiscal year
2001. This also represents a decrease in the average gross profit margin from
15.2% in 2001 to 4.0% in 2002. The decrease was mainly due to keen competition
in the telephone market in China that caused a reduction in our selling prices
in order to maintain the market share.



| | (iii) |  | Selling, General and Administrative Expenses
| | ----- |  | --------------------------------------------

Selling expenses decreased by Rmb 0.89 million from Rmb 6.17 million for
fiscal year 2001 to Rmb 5.29 million (US$0.64 million) for fiscal year 2002.
The decrease was predominantly attributable to a reduction of advertising
expenditures on promotion and marketing activities. The transportation
expenses incurred in terms of percentage of sales also decreased from 0.31%
during fiscal year 2001 to 0.17% during fiscal year 2002. This was due to

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the
fact that the transportation costs for mobile phones were much lower than other
corded and cordless phones because of its production sites proximity to the
railway stations and key delivery spots.

General and administrative expenses increased by Rmb 24.6 million from Rmb
44.1 million in fiscal year 2001 to Rmb 68.7 million (US$8.3 million) in fiscal
year 2002. This increase was mainly attributable to the substantial increase
in the provision for doubtful debt (about Rmb 26 million), but partly offset by
the decrease in the research and development expenses for GSM mobile phones
(about Rmb 3 million). Other general and administrative expenses were generally
comparable between fiscal year 2002 and 2001.



| | (iv) |  | Impairment loss on land use rights and property, machinery and
equipment
| | ---- |  | ------------------------------------------------------------------------

There was an impairment loss on land use rights and property, machinery
and equipment which amounted to Rmb 5 million (US$0.6 million) and Rmb 8.7
million (US$1 million) respectively, in fiscal year 2001.

The impairment loss on land use rights related to a parcel of land in
BaiGang District, XiaoJinKou Town.

Capitalized software represented acquisition costs to obtain proprietary
software provided by a third party, which was recorded under machinery,
equipment and software. We evaluated the recoverability of the capitalized
software cost and determined to make a full provision of the carrying value of
capitalized software cost in view of the reduction of DECT sales in 2001 and
the low sales projection of DECT mobile phones.



| | (v) |  | Interest expenses
| | --- |  | -----------------

Interest expenses for bank borrowings and shareholders loan increased
from Rmb 8.4 million in 2001 to Rmb 17.9 million (US$2.2 million) in 2002 due
to the significant increase of short-term bank borrowings during the year 2002
mainly for the purpose of the CECT acquisition.

The convertible debentures had been fully converted in 2001 so that there
was no more amortization of debt issuance costs and discount of convertible
debentures incurred during 2002.



| | (vi) |  | Gain on sale of subsidiary
| | ---- |  | --------------------------

Our management believes that we can benefit from focusing our business on
the market development and R&D activities of mobile phones rather than the
production of indoor phones. Besides, the indoor phone manufacturing business
was not profitable, which also became a burden to us. It was, therefore,
sensible to sell off this part of our business and concentrate on

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the mobile
phone business. We still continue our business on the sales and development of
indoor phones, especially on their enhanced features with market potential.

Gain on sale of a subsidiary of Rmb 79 million (US$9.5 million) represents
the gain on sale of the one issued share of Qiao Xing Holdings Ltd. which took
place on December 31, 2002. The background information of the transaction was
as follows. On December 31, 2002, an agreement for sale of the one issued
share of Qiao Xing Holdings Limited (QX Holdings) was entered into between us
and Central Grace Technologies Limited (Central Grace), a corporation
incorporated under the laws of the British Virgin Islands. The agreement was
subsequently amended by the parties. The consideration for the purchase of the
sale share was RMB 210,000,000 and was paid in full as of July 16, 2003.

Central Grace made various warranties, undertakings, covenants and
indemnities to us and assumed all disclosed and undisclosed liabilities of QX
Holdings excluding:



| | (i)   |  | the settlement of the current liabilities of QXTI due to us
in the sum of RMB 231,585,507     
| | ----- |  | ----------------------------------------------------------------------------------------------
|
| | (ii)  |  | the settlement of the current liabilities of QX Holdings due
to us in the sum of RMB 8,172,953
|
| | (iii) |  | the settlement of the current assets of QXTI due from us of
RMB 113,543,063                   

Central Grace executed a Share Mortgage Deed for our benefit to secure the
repayment of our loan facility to Central Grace for the payment of the purchase
price by Central Grace, which was cancelled upon full payment by Central Grace.

All properties of QX Holdings sold in the transaction included but was not
limited to:



| | (i)   |  | factory and manufacturing equipment                   
| | ----- |  | ------------------------------------------------------
|
| | (ii)  |  | accounts receivable                                   
|
| | (iii) |  | trademarks, registered designs and patent applications
|
| | (iv)  |  | landed property                                       

but the following businesses and assets were excluded (Excluded Assets):



| | (i)   |  | certain land use rights                                                                                       
| | ----- |  | --------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | fixed line telephone sales network                                                                            
|
| | (iii) |  | mobile telephone business including but not limited to the
research and development department and manufactory
|
| | (iv)  |  | die cast moulds                                                                                               

As a result of the sale transaction, a gain on sale amounting to RMB
79,050,000 was recognized in our profit and loss account for the year ended
December 31, 2002.

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The calculation details of the gain on sale of a subsidiary is set out as
follows:

|                           |  |         |          |         |  |  |         |  
|-------------------------- |  | ------- | -------- | ------- |  |  | ------- | -
|                           |  | Rmb000 |          | US$000
|Consideration              |  |         | 210,000  |         |  |  | 25,362  |  
|Net asset value sold       |  |         | (125,070 | )       |  |  | (15,105 | )
|Minority interests sold    |  |         | (5,880   | )       |  |  | (710    | )
|                           |  |         |          |         |  |  |         |  
|Gain on sale of subsidiary |  |         | 79,050   |         |  |  | 9,547   |  
|                           |  |         |          |         |  |  |         |  



| | (vii) |  | Acquisition of equity interest in CEC Telecom Ltd. (CECT)
| | ----- |  | ---------------------------------------------------------

The execution of agreements for the acquisition of 65% of the equity of
CECT took place during year 2002, and the transaction was completed on February
8, 2003, when all the necessary approvals and documentation for closing were
obtained. The operating results of CECT were, therefore, not included in Qiao
Xings consolidated financial statements for the year ended December 31, 2002.



| | (viii) |  | Reversal of an accrual of previous
years income taxesReversal of an accrual of previous
years income taxes consists of:
| | ------ |  | -------------------------------------------------------------------------------------------------------------------------

|                            |  |         |        |         |  |         |   |  |  |  |   | 
|--------------------------- |  | ------- | ------ | ------- |  | ------- | - |  |  |  | - | 
|                            |  | 2001    |        | 2002   
|                            |  |         |        |        
|                            |  | Rmb000 |        | Rmb000 |  | US$000
|Mainland Chinese income tax |  |         |        |         |  |         |   |  |  |  |   | 
|- current                   |  |         | 18,868 |         |  |         |  |  |  |  |  | 
|- deferred                  |  |         | 6,819  |         |  |         |  |  |  |  |  | 
|                            |  |         |        |         |  |         |   |  |  |  |   | 
|                            |  |         | 25,687 |         |  |         |  |  |  |  |  | 
|                            |  |         |        |         |  |         |   |  |  |  |   | 

Pursuant to the Notice No. [1999] 52 issued by the Government of Guangdong
Province, Mainland China (the Notice [1999] 52), High and New Technology
Enterprise of Guangdong Province is entitled to a tax holiday granted by the
relevant tax bureau, under which the company is subject to state income tax at
a rate of 15% for three years, effective from January 1, 1999. Furthermore,
for a wholly foreign owned enterprise in Guangdong Province which is certified
by Guangdong Provincial Foreign Trade and Economic Cooperation Office
(GPFTECO) as an

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Advanced Technology Enterprise, the company is entitled to
additional tax benefits granted by the relevant tax bureau under which the
state income tax rate can be further reduced to 10% for three years. Qiao Xing
Telecommunication Industry Co. Ltd. (QXTI), our PRC subsidiary, is a High and
New Technology Enterprise since 1999 and it is also an Advanced Technology
Enterprise of Guangdong Province since 2000 pursuant to certificates issued by
Guangdong Science and Technology Commission and GPFTECO, respectively.

Prior to obtaining confirmation from the relevant tax bureau on the
entitlement to a tax holiday as stated above, QXTI provided for enterprise
income tax using 24% for the years ended December 31, 1999 and 2000.
Subsequent to December 31, 2001, QXTI obtained a confirmation from the National
Tax Bureau to confirm that QXTI was able to enjoy the aforementioned tax
benefit pursuant to the Notice [1999] 52 and QXTI would be subject to state
income tax rate at 15% for the year ended December 31, 1999 and 10% for each of
the years ended December 31, 2000, 2001 and 2002. Accordingly, the excess
provision of Mainland Chinese enterprise income tax in prior years was written
back in 2001.



| | (ix) |  | Net Income and Earnings Per Share
| | ---- |  | ---------------------------------

Net income of Rmb 16.5 million (US$1.99 million) was recorded for fiscal
year 2002, while a net loss of Rmb 21.4 million was recorded for fiscal year
2001. The net income for fiscal year 2002 was achieved mainly due to the
significant gain on sale of a subsidiary which amounted to Rmb 79 million
(US$9.5 million), partly offset by the following:



| | i)  |  | decrease in gross profit of Rmb 16.3 million; and                     
| | --- |  | ----------------------------------------------------------------------
|
| | ii) |  | decrease in write-back of provision for income tax of Rmb 25.7 million

Based on a weighted average of 14.7 million shares outstanding in 2002,
the Group reported an income per share of Rmb 1.12 (US$0.135), compared to loss
per share of Rmb 1.67 on 12.8 million weighted-average shares outstanding in
2001. The higher number of outstanding shares is the result of additional
shares issued in August 2002 in connection with consultant services rendered
relating to the acquisition of CECT.



|B. |  | LIQUIDITY AND CAPITAL RESOURCES.
|-- |  | --------------------------------

During fiscal year 2002, we were principally engaged in the manufacturing
and sales of telecommunication terminals and equipment, including mobile,
corded and cordless telephone sets, in Mainland China. We did not declare or
pay dividends in fiscal year 2002.

In summary, about Rmb 56 million (US$6.8 million) was used in operating
activities, about Rmb 298 million (US$36.0 million) was used in investing
activities and about Rmb 357 million (US$43.2 million) was provided by
financing activities during the year ended December

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31, 2002. Consequently,
cash and bank deposits increased by Rmb 3.3 million (US$0.4 million) from Rmb
7.6 million (US$0.9 million) at the beginning to Rmb 10.9 million (US$1.3
million) at the end of year 2002.



| | (x) |  | Cash flows from operating activities
| | --- |  | ------------------------------------

There was a net operating cash outflow of Rmb 56 million (US$6.8 million)
despite the net income of Rmb 16.5 million (US$1.99 million) for the fiscal
year 2002. This was mainly attributable to the effect of the sale of a
subsidiary, which more than offset the overall decrease in operating assets and
increase in operating liabilities.



| | (xi) |  | Cash flows from investing activities
| | ---- |  | ------------------------------------

Net cash outflow from investing activities amounted to Rmb 298 million
(US$36 million) during the year. This was mainly due to the payment of deposits
to be applied toward the purchase price of CECT with the significant drop in
the pledged bank deposits.



| | (xii) |  | Cash flows from financing activities
| | ----- |  | ------------------------------------

Net cash inflow from financing activities amounted to Rmb 357 million
(US$43 million). It was mainly attributed by the addition of short-term
borrowings, long-term borrowings and contributions from a minority shareholder
during the year. As of December 31, 2002, our consolidated working capital was
Rmb 267 million (US$32.2 million) as compared to Rmb 148 million (US$18
million) as of December 31, 2001.

Historically, we have financed our operations and capital expenditures
principally through cash generated from operating activities and bank
borrowings. Outstanding bank borrowings accounted for 21% and 5% of our total
assets as of December 31, 2001 and December 31, 2002, respectively. Seasonal
working capital needs have been met through short-term borrowings under
revolving lines of credit.

As of December 31, 2002, the Group had banking facilities of approximately
Rmb 40,000,000 (US$4,831,000) for loans and trade financing. All of the
Groups banking facilities were used as of December 31, 2002.

Contractual Obligations and Commitments

The Group has an operating lease agreement for an office premise, which
extends through September 2005. Future minimum rental payments as of December
31, 2002, under agreements classified as operating leases with non-cancelable
terms within one year, amount to Rmb 307,000 (US$37,000).

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Under the agreement for the payment of land use rights for a parcel of
land in Mainland China, the Group has committed to pay pre-determined annual
fees to the respective third-party landlord for the period of 20 years up to
December 2017. This parcel of land has been transferred to Central Grace
Technologies Ltd. as of December 31, 2002. Therefore, the Group no longer has
a contractual obligation.

Related party transactions

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

Critical Accounting Policies: Accounting Estimates

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

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

Allowance for Doubtful Accounts. Certain of our accounts receivable are
subject to credit losses. We have attempted to reserve for expected credit
losses based on our past experience with similar accounts receivable and
believe our reserves to be adequate. It is possible, however, that the
accuracy of our estimation process could be materially impacted as

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the
composition of this pool of accounts receivable changes over time. We
continually review and refine the estimation process to make it as reactive to
these changes as possible; however, we cannot guarantee that we will be able to
accurately estimate credit losses on these accounts receivable.

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

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



| | (1) |  | significant under-performance relative to expected historical
or projected future operating results;
| | --- |  | ----------------------------------------------------------------------------------------------------
|
| | (2) |  | significant changes in the manner of our use of the asset;                                          
|
| | (3) |  | significant negative industry or economic trends; and                                               
|
| | (4) |  | our market capitalization relative to net book value.                                               

Upon the existence of one or more of the above indicators of impairment,
we test such assets for a potential impairment. The carrying value of a
long-lived asset is considered impaired when the anticipated cash flows are
less than the assets carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair market value
of the long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved.

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

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

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

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

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

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

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Critical Accounting Policies: Adoption of New Accounting Policies

(i)     In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141: Business Combinations and SFAS No. 142: Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method is prohibited after that date. SFAS No.
142 changes the accounting for goodwill and intangible assets with indefinite
lives from an amortization method to an impairment-only approach and requires
intangible assets with finite lives to be amortized over their useful lives.
Thus, amortization of goodwill and intangible assets with indefinite lives will
cease upon adoption of the Statement. SFAS No. 142 is required to be applied
in fiscal years beginning after December 15, 2001. Upon the adoption of SFAS
No. 142, the Group will not amortize goodwill and instead will conduct an
annual impairment test of the remaining goodwill. The Group does not expect
that the adoption of SFAS No. 141, or SFAS No. 142 will have a significant
immediate impact on the financial condition or results of operations of the
Group.

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

(iii)     In June 2002, the FASB issued SFAS No. 146: Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This SFAS also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Group adopted the
provisions of SFAS No. 146 effective December 31, 2002.

(iv)       In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 provides interpretive guidance
on the accounting for all acquisitions of financial institutions, except
transactions between two or more mutual enterprises. Restatement of previously
issued financial statements will be required. Those transition provisions are
effective as of October 1, 2002; however, early application is permitted. The
Group does not anticipate that the adoption of SFAS No. 147 will have any
effect on its consolidated financial statements.

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(v)       In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability for
the fair market value of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of FIN 45 apply on a
prospective basis to guarantees issued or modified after December 31, 2002.

(vi)     In December 2002, the FASB issued SFAS No. 148: Accounting for
Stock-Based Compensation-Transition and Disclosure-and Amendment of FASB
Statement No.123. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Group adopted the disclosure provisions of SFAS No. 148 effective December
31, 2002. The adoption of SFAS No. 148 is not expected to have a material
impact on the Groups consolidated financial statements.

(vii)       In January 2003, the FASB issued Interpretation No. 46:
Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)
(FIN46). FIN46 addresses consolidation by business enterprises of certain
variable interest entities, commonly referred to as special purpose entities.
The Group will be required to implement the other provisions of FIN46 in 2003.
The adoption of FIN46 is not expected to have a material impact on the Groups
consolidated financial statements.

(viii)     In April 2003, the FASB issued SFAS No.149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No.149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No.133 Accounting for Derivative Instruments and
Hedging Activities. It is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. All provisions of SFAS No.149 should be applied prospectively. The
adoption of SFAS 149 is not expected to have a material impact on the Groups
consolidated financial statements.

(ix)     In May 2003, the FASB issued SFAS No.150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classifies a financial instrument that is
within its scope as a liability (or as an asset in some circumstances). It is
effective for financial

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instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. It is to be implemented by reporting the cumulative effect of a change
in an accounting principle for financial instruments created before the
issuance date of SFAS No.150 and still existing at the beginning of the interim
period of adoption. Restatement is not permitted. The adoption of SFAS No.150
is not expected to have a material impact on the Groups consolidated financial
statements.



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

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

|                             |  |              
|---------------------------- |  | -------------
|Year ended December 31, 2002 |  | Rmb 451,000  
|Year ended December 31, 2001 |  | Rmb 3,516,000
|Year ended December 31, 2000 |  | Rmb 497,000  



|D. |  | TREND INFORMATION.
|-- |  | ------------------

Sales

In light of the recent market conditions and the continuous improvement of
the living standard of the people in China, we believe that corded and cordless
telephone products will be less attractive to the public. Our focus in fiscal
year 2003 is the promotion of wireless fixed phones (wuxiangtong). We are
confident that these relatively high-end phone products can continue to achieve
significant growth in fiscal year 2003. In addition, during fiscal year 2003,
we started the production of GSM and CDMA mobile phones. Since our acquisition
of CECT in February 2003, we have achieved a major improvement in our R&D,
distribution network and the promotion of CECT brand phones. We expect that
sales revenue will continue to grow from the mobile phone products. In
addition, as China Unicom improves its service and its CDMA networks sending
and reception quality, we expect that more and more people will buy CDMA mobile
phones. Thus, we expect that CECTs CDMA sales will grow in 2003. Therefore,
we believe that we will be able to achieve a substantially greater growth in
sales revenue for fiscal year 2003 as compared to 2002.

Gross Profit

Our total gross profit margin percentage in fiscal year 2002 was
approximately 4%. However, we achieved a gross profit margin of approximately
13% for sales of our mobile phone products in 2002. On this basis, we
anticipate that with the increase in sales revenue because of the introduction
of more popular GSM and CDMA mobile phones and special-function indoor

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phones such as wuxiangtong and short message telephones with their 20% -
30% gross margins, our total gross profit in fiscal year 2003 and average
margins are expected to increase.

Production

Our total production capacity has increased substantially after the
acquisition of CECT. CECT has a production base in Beijing with a production
capacity of 1.2 million sets of mobile phones. From August 2003, we expect to
have an additional two production lines for CECT in the factory of Qiao Xing
Science Industrial Park at Huizhou, with annual production capacity of 1
million sets of mobile phones. In addition, our subsidiary, Qiao Xing
Communication Industry Co., Ltd. (QXCI) also manufactures GSM mobiles for CECT.
In the event that our production cannot meet the market demand, we will apply
OEM to guarantee supplying CECT brand mobile phones for our clients.

Prices

In 2002, we further reduced our price for some of our products. In 2003,
we launched relatively high-end telephones, including wuxiangtong and short
message telephone, which will result in higher sales prices. Due to the keen
competition in the telephone market, our new GSM and CDMA mobile phones are to
be priced at a gross profit margin of not more than 15% so as to be competitive
in the market.

Inventory

We forecast that our inventory value will increase compared with that of
December 31, 2002. This is due to the inclusion of CECTs inventory and the
purchases of high-value raw material and components for the production of GSM
and CDMA mobile phones with more features.

Acquisition of CEC Telecom Co., Ltd.

The acquisition of CEC Telecom Co., Ltd by QX Mobile, an 80% owned
subsidiary of ours, required the payment of Rmb 312,750,000 (US$37,772,000).
As of December 31, 2002, we have paid RMB 180,000,000 of the consideration. We
intend to pay the remaining balance no later than August 8, 2003. With the
sale of a subsidiary held at the end of 2002 and our sale of 20% of the equity
of QX Mobile in August 2002 and the subsequent payments received, the liquidity
of the Group is much improved. This will improve our ability to make the final
scheduled payment on the CECT acquisition and satisfy our normal operational
cash needs. We continued to use our existing loan facilities and extended our
existing short term bank loans to finance our daily operations. We believe
that our existing cash balances and funds expected to be generated from
operations and available credit facilities should be sufficient to fund our
anticipated level of operations and our current expansion plans for the
foreseeable future. There

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can be no assurance that our operations, expansion plans or capital
requirements will not change in a manner that would consume available resources
more rapidly than anticipated, or that substantial additional funding will not
be required before we can achieve and maintain profitable operations. Further,
additional funding may not be available on terms satisfactory to us, if at all.
If adequate funds are not available, we may be required to cut back or abandon
our expansion plans and curtail operations significantly, which would have a
material adverse effect on our business, financial condition and results of
operations.

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



|A. |  | DIRECTORS AND SENIOR MANAGEMENT.
|-- |  | --------------------------------

Our senior management and directors are as follows:

|              |  |     |    |          |  |                                     
|------------- |  | --- | -- | -------- |  | ------------------------------------
|Name          |  | Age |    | Position
|              |  |     |    |         
|Rui Lin Wu    |  |     | 51 |          |  | Chairman and Chief Executive Officer
|Zhi Yang Wu   |  |     | 30 |          |  | Vice Chairman and Secretary         
|Shi Jie       |  |     | 35 |          |  | Executive Director                  
|Calvin Chong  |  |     | 36 |          |  | Chief Financial Officer             
|Liu Rong Yang |  |     | 30 |          |  | Non-Executive Director              
|Zhu Ming      |  |     | 35 |          |  | Non-Executive Director              

Effective January 2, 2003, the following former directors resigned: Zhi Fang
Zhang; Zhong Ai Li; Zi Shu Huang; and Guo Liang Zhang.

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

Mr. Rui Lin Wuis our chairman and chief executive officer. He is our
founder and has over 14 years of experience in the telecommunication industry.
He is responsible for our overall strategic planning, policy making and
finance. Prior to his career in the telecommunications industry, he was a
general manager of a fashion and garment factory from 1980 to 1986. Currently,
Mr. Wu is the executive commissioner of the China National Association of
Industry and Commerce, senior analyst of the China National Condition and
Development Research Center, and a member of the Poverty Fund of China. Mr. Wu
also serves as the chairman of Qiao Xing Mobile Communication Co. and a
director of CEC Telecom Co., Ltd. since February 2003.

Mr. Zhi Yang Wuis our vice chairman and the elder son of Mr. Rui Lin Wu.
Mr. Wu also serves as our secretary. Mr. Wu received a Diploma in Business
Management from Huizhou University of the PRC. He joined us in 1992 and is
responsible for our overall strategic planning, policy making and the overseas
market development. Mr. Wu also serves as the chairman of CEC Telecom Co.,
Ltd. and CEC Mobile Ltd. since February 2003.

Mr. Shi Jieserves as chief financial officer and a director of Qiao Xing
Group Ltd. since 2000. He also serves as a director of CEC Telecom Co., Ltd.
since February 2003. Prior to that,

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Mr. Shi served as our chief financial officer and controller of finance
from 1997 to 2000. He also served as deputy general manager of QXTI from 1997
to 1999. From 1994 to 1997, Mr. Shi served as department head of the finance
department of QXTI.

Mr. Calvin Chongserves as our chief financial officer and controller of
finance since December 2002. Mr. Chong received a bachelor of business
administration degree from The Chinese University of Hong Kong in 1989 and a
master of economics in accounting and finance from Macquarie University,
Sydney, Australia in 1993. He is a registered member of the Australia Society
of Certified Practising Accountants since 1994 and the Hong Kong Society of
Accountants since 1996. Prior to joining us in December 2002, he was a
financial controller from July 2001 to November 2002 with CJ Consulting Company
Limited, providing professional accounting and advisory services. From
September 1999 to June 2001, Mr. Chong was assistant regional controller, Asia
Pacific, for InterGen (Hong Kong) Limited, a multinational green field power
plant developer based in the U.S. From May 1998 to August 1999, he was
regional audit manager, Asia Pacific, for Henkel Asia Pacific Limited, a
multinational applied chemical company based in Germany. Mr. Chong was an
internal controller manager for Motorola Asia Pacific Limited from November
1995 to April 1998. He was an audit supervisor with Coopers & Lybrand from May
1994 to November 1995. Mr. Chong devotes a majority of his working time to our
affairs.

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

Mr. Zhu Mingserves as a non-executive director since January 2003. Since
2001, he serves as a director of Guangzhou Guo Wei Science & Technology Ltd.
and he was a director of JiLin Zhongxin Science & Technology Co., Ltd. during
2000 to 2001. From 1997 to 2000, he served as assistant to the chairman of
Huizhou Qiao Xing Group Ltd. From 1992 to 1997, he was a clerk of the Haikou
Branch of China Industrial and Commercial Bank.



|B. |  | COMPENSATION.
|-- |  | -------------

The aggregate compensation which we paid to all of our directors and
executive officers as a group with respect to our fiscal year ended December
31, 2002 on an accrual basis, for services in all capacities, was Rmb 2,570,112
(US$310,000). During the fiscal year ended December 31, 2002, we contributed
an aggregate amount of Rmb 4,550 (US$550) toward the pension plans of our
directors and executive officers.

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

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

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



|C. |  | BOARD PRACTICES.
|-- |  | ----------------

Each of our current directors (other than Messrs. Shi Jie and Zhu Ming)
was elected at our last annual meeting of shareholders held December 6, 2002 to
serve a one-year term or until their successor is elected and qualified.

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

Our board of directors has established an audit committee, which currently
consists of Rui Lin Wu, Liu Rong Yang and Zhu Ming. Its functions are to:



| |  |  | recommend annually to the Board of Directors the appointment
of our independent public accountants;                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | discuss and review the scope and the fees of the prospective
annual audit and review the results thereof with the independent
public accountants;                                        
|
| |  |  | review and approve non-audit services of the independent public accountants;                                                                                                             
|
| |  |  | review compliance with our existing accounting and financial policies;                                                                                                                   
|
| |  |  | review the adequacy of our financial organization; and                                                                                                                                   
|
| |  |  | review managements procedures and policies relative to the
adequacy of our internal accounting controls and compliance with
U.S. federal and state laws relating to financial reporting.

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|D. |  | EMPLOYEES.
|-- |  | ----------

As of December 31, 2002, we had a total of 1,873 full time employees, of
which 25 are key management staff, five are engaged in sales and marketing,
three are engaged in finance and administration, and eight are engaged in
production. None of our employees is represented by a labor union and we
believe that our employees relations are good.



|E. |  | SHARE OWNERSHIP.
|-- |  | ----------------

The following table sets forth certain information regarding the
beneficial ownership of our shares of common stock as of July 31, 2003 by:



| |  |  |  each person who is known by us to own beneficially more than
5% of our outstanding common stock;
| |  |  | --------------------------------------------------------------------------------------------------
|
| |  |  |  by each of our current executive officers and directors; and                                    
|
| |  |  |  by all current directors and executive officers as a group.                                     

As of July 31, 2003, we had 15,537,718 shares of our common stock issued and
outstanding.

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

|                                                    |  |                           |           |         |  |  |      | 
|--------------------------------------------------- |  | ------------------------- | --------- | ------- |  |  | ---- | 
|                                                    |  | Number                    |           | Percent
|                                                    |  |                           |           |        
|Name of Beneficial Holder                           |  | Shares Beneficially Owned
|                                                    |  |                          
|Wu Holdings Limited                                 |  |                           | 6,819,000 | (1)     |  |  | 43.9 | 
|Rui Lin Wu                                          |  |                           | 7,119,000 | (1)(2)  |  |  | 44.9 | 
|Zhi Yang Wu                                         |  |                           | 250,000   | (3)     |  |  | 1.6  | 
|Shi Jie                                             |  |                           | 0         |         |  |  | 0    | 
|Calvin Chong                                        |  |                           | 0         |         |  |  | 0    | 
|Liu Rong Yang                                       |  |                           | 0         |         |  |  | 0    | 
|Zhu Ming                                            |  |                           | 200,000   | (4)     |  |  | 1.3  | 
|All directors and executive officers as a group (6) |  |                           | 7,569,000 | (2)(3)  |  |  | 46.5 | 



---



|(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
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | may be deemed to have and/or share the power to direct the voting and
disposition of such shares.                                    
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes options currently exercisable to acquire 300,000 shares of
common stock at $5.50 per share at any time until April 14, 2005.
|   
|(3) |  | Includes options currently exercisable to acquire 250,000 shares of
common stock at $5.50 per share at any time until April 14, 2005.
|   
|(4) |  | Includes options currently exercisable to acquire 200,000 shares of
common stock at $5.50 per share at any time until April 14, 2005.

The 1999 Stock Compensation Plan

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



| |  |  | encourage ownership of our common stock by our officers,
directors, employees and advisors;                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | provide additional incentive for them to promote our success
and our business; and                                                                                 
|
| |  |  | encourage them to remain in our employ by providing them an
opportunity to benefit from any appreciation of our common stock
through the issuance of stock options.

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

As of July 31, 2003, 1,005,000 options had been exercised and the
following options to purchase shares of our common stock under the Plan
remained outstanding:



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

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Other Options and Warrants Outstanding

As of July 31, 2003, the following additional options and warrants to
purchase shares of our common stock were outstanding:



| |  |  | stock purchase warrants to purchase 8,000 shares of common
stock at $7.975 per share through February 16, 2004 which we sold to
our IPO underwriter and/or persons related to the underwriter in
February 1999                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants to purchase an aggregate of 660,000 shares of common
stock at $20.7625 per share at any time until December 31, 2004
which we granted to two accredited investors and the placement
agents in January 2000 in connection with a common stock and
warrants purchase agreement
|
| |  |  | warrants to purchase an aggregate of 341,000 shares of common
stock at $8.49 per share at any time until May 26, 2005 which we
granted to two accredited investors and the placement agents in June
2000 in connection with a convertible debenture and warrants
purchase agreement  
|
| |  |  | warrants to purchase 80,000 shares of common stock at $7.00
per share at any time through March 1, 2005 which we granted to a
former public relations consultant in March 2002                                                                                                       




ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



|A. |  | MAJOR SHAREHOLDERS.
|-- |  | -------------------

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

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

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

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

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|B. |  | RELATED PARTY TRANSACTIONS.
|-- |  | ---------------------------

Name and relationship of related parties:

|                                                              |  |                                                                
|------------------------------------------------------------- |  | ---------------------------------------------------------------
|Name of related parties                                       |  | Existing relationship with the Company                         
|                                                              |  |                                                                
|Mr. Zhi Jian Wu Li                                            |  | The major shareholder                                          
|Mr. Rui Lin Wu                                                |  | Director and father of Mr. Zhi Jian Wu Li                      
|Mr. Zhi Yang Wu                                               |  | Director and brother of Mr. Zhi Jian Wu Li                     
|Ms. Mei Lian Li                                               |  | Wife of Mr. Zhi Yang Wu                                        
|Mr. Zhi Zhong Wu                                              |  | Brother of Mr. Zhi Jian Wu Li                                  
|Ms. Qing Li                                                   |  | Wife of Mr. Rui Lin Wu                                         
|Ms. Hong Ling Deng                                            |  | Friend of Mr. Rui Lin Wu                                       
|Ms. Zhen Yin Su                                               |  | Friend of Mr. Rui Lin Wu                                       
|Mr. Zhong Ai Li                                               |  | Director                                                       
|Mr. Guo Liang Zhang                                           |  | Director                                                       
|Ms. Liu Rong Yang                                             |  | Director                                                       
|Mr. Zhi Fang Zhang                                            |  | Director                                                       
|Mr. Zi Shu Huang                                              |  | Director                                                       
|Wu Holdings Limited                                           |  | Intermediate holding company                                   
|Exquisite Jewel Limited                                       |  | Minority shareholder                                           
|Metrolink Holdings Limited                                    |  | Minority shareholder                                           
|Specialist Consultants Limited                                |  | Minority shareholder                                           
|Jia Xing Electronic Supplies Company Limited                  |  | Common director                                                
|Qiao Xing Electronic Holdings Company Limited                 |  | Common director                                                
|Qiao Xing Group Limited                                       |  | Common director and minority shareholder                       
|Qiao Xing International Company                               |  | Common director                                                
|Qiao Xing Investment Limited                                  |  | Common director                                                
|Qiao Xing Properties Limited                                  |  | Common director                                                
|Rui Xing Electronic Development Company Limited               |  | Common director                                                
|CEC Telecom Co., Limited                                      |  | Common director                                                
|Huizhou Calilee Telecommunication Company
Limited (Calilee) |  | A director of Calilee is a brother of a director of the Company
|CEC Wireless R&D Limited
(CECW)                             |  | CECT and CECW have common owners                               

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Summary of related party transactions is as follows:

|                                                                                                                 |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |        | 
|---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------ | ------- |  |  | ----- | ------ | 
|                                                                                                                 |                                                   |  | 2000    |        | 2001    |  | 2002   
|                                                                                                                 |                                                   |  |         |        |         |  |        
|                                                                                                                 |                                                   |  | Rmb000 |        | Rmb000 |  | Rmb000 |        | US$000
|Recovery of general and administrative expenses
(at cost) in respect of factory and
office premises subleased to |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |       
|                                                                                                                 | - Jia Xing Electronic Supplies Company
Limited    |  |         | 238    |         |  |         | 139    |         |  |        |        |  |  |       |       | 
|                                                                                                                 | - Qiao Xing Properties Limited                    |  |         | 2,285  |         |  |         | 1,776  |         |  |        |        |  |  |       |       | 
|                                                                                                                 | - Rui Xing Electronic Development
Company Limited |  |         | 404    |         |  |         | 915    |         |  |        |        |  |  |       |       | 
|Interest paid to                                                                                                 |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |       
|                                                                                                                 | - Ms. Hong Ling Deng                              |  |         | 40     |         |  |         |       |         |  |        |        |  |  |       |       | 
|                                                                                                                 | - Ms. Zhen Yin Su                                 |  |         | 8      |         |  |         |       |         |  |        |        |  |  |       |       | 
|Rental income from                                                                                               |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |       
|                                                                                                                 | - Qiao Xing Group Limited                         |  |         |       |         |  |         |       |         |  |        | 327     |  |  |       | 39     | 
|Commission paid and payable to CECW                                                                              |                                                   |  |        |        |         |  |        |        |         |  | 28,200 |         |  |  | 3,406 |       
|Purchases from                                                                                                   |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |       
|                                                                                                                 | - Jia Xing Electronic Supplies Company
Limited    |  |         | 35,704 |         |  |         | 13,436 |         |  |        |        |  |  |       |       | 
|                                                                                                                 | - Qiao Xing Properties Limited                    |  |         | 22,268 |         |  |         | 20,471 |         |  |        | 10,061  |  |  |       | 1,215  | 
|                                                                                                                 | - Rui Xing Electronic Development
Company Limited |  |         | 6,289  |         |  |         | 8,033  |         |  |        | 9,214   |  |  |       | 1,113  | 
|Sales to                                                                                                         |                                                   |  |         |        |         |  |         |        |         |  |        |         |  |  |       |       
|                                                                                                                 | - CECT                                            |  |         |       |         |  |         |       |         |  |        | 344,458 |  |  |       | 41,601 | 

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Summary of related party balances is as follows:

|                                   |                                |  |         |       |         |  |         |        |  |  |       |       | 
|---------------------------------- | ------------------------------ |  | ------- | ----- | ------- |  | ------- | ------ |  |  | ----- | ----- | 
|                                   |                                |  | 2001    |       | 2002   
|                                   |                                |  |         |       |        
|                                   |                                |  | Rmb000 |       | Rmb000 |  | US$000
|Advance to Qiao Xing Group Limited |                                |  | 56,300  |       |         |  |        |        |  |  |      |      
|Due from                           |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   | - Exquisite Jewel Limited      |  |         |      |         |  |         | 6      |  |  |       | 1     | 
|                                   | - Mr. Rui Lin Wu               |  |         | 281   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Yang Wu              |  |         |      |         |  |         | 216    |  |  |       | 26    | 
|                                   | - Mr. Zhi Jian Wu Li           |  |         |      |         |  |         | 160    |  |  |       | 19    | 
|                                   | - Ms. Mei Lian Li              |  |         | 508   |         |  |         |       |  |  |       |      | 
|                                   | - Qiao Xing Group Limited      |  |         | 3,133 |         |  |         | 100    |  |  |       | 12    | 
|                                   | - Qiao Xing Investment Limited |  |         | 189   |         |  |         |       |  |  |       |      | 
|                                   | - Wu Holdings Limited          |  |         | 209   |         |  |         | 24     |  |  |       | 3     | 
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   |                                |  | 60,620  |       |         |  | 506     |        |  |  | 61    |      
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|Due to                             |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   | - CECT                         |  |         |      |         |  |         | 22,195 |  |  |       | 2,680 | 
|                                   | - Mr. Rui Lin Wu               |  |         |      |         |  |         | 5,897  |  |  |       | 713   | 
|                                   | - Mr. Zhi Zhong Wu             |  |         | 664   |         |  |         | 166    |  |  |       | 20    | 
|                                   | - Ms. Xiu Qing Li              |  |         | 1,793 |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Jian Wu Li           |  |         | 543   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Yang Wu              |  |         | 882   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Guo Liang Zhang          |  |         | 94    |         |  |         | 146    |  |  |       | 18    | 
|                                   | - Ms. Liu Rong Yang            |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Ms. Zhi Fang Zhang           |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Mr. Zi Shu Huang             |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Mr. Zhong Ai Li              |  |         | 136   |         |  |         | 218    |  |  |       | 26    | 
|                                   | - Qiao Xing Group Limited      |  |         | 7     |         |  |         |       |  |  |       |      | 
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   |                                |  | 4,140   |       |         |  | 28,652  |        |  |  | 3,460 |      
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      

Included in accrued liabilities as of December 31, 2002 was a commission
payable of Rmb11,331,000 to CECW.

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

During the year ended December 31, 2001, the Group advanced to Qiao Xing Group
Limited of approximately RMB56,300,000. The amount was unsecured, non-interest
bearing and without pre-determined repayment terms. The entire advance has
been settled during 2002.

Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in trust
for Mr. Zhi Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited
and Specialist Consultants Limited, the Companys shareholders, and were
non-interest bearing. The lenders have agreed not to make demand on the Group
for repayment before January 1, 2004.

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The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and Qiao Xing Group Limited on behalf of Qiao Xing Telecommunication
Industry Company Limited during the year ended December 31, 2001.

As of December 31, 2002, the Groups deposit of approximately Rmb 2,483,000 and
land use rights of net book value of Rmb 47,635,000 were pledged to secure the
banking facilities of an ex-subsidiary, QXTI.

During the year ended December 31, 2002, QXTI provided corporate guarantees to
the banking facilities of CECT to the extent of Rmb 50,000,000.



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

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ITEM 8. FINANCIAL INFORMATION



|A. |  | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
|-- |  | --------------------------------------------------------

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



|B. |  | SIGNIFICANT CHANGES.
|-- |  | --------------------

Except as otherwise disclosed herein, we do not believe that any
significant change has occurred since the date of the annual financial
statements included in this Annual Report.

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ITEM 9. THE OFFER AND LISTING

A.     OFFER AND LISTING DETAILS.

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

|                                 |  |      |       |     |  |   |      | 
|-------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|Period                           |  | High |       | Low
|                                 |  |      |       |    
|Year ended December 31, 1999     |  | $    | 51.00 |     |  | $ | 2.75 | 
|Year ended December 31, 2000     |  | $    | 52.31 |     |  | $ | 3.38 | 
|Year ended December 31, 2001     |  | $    | 6.63  |     |  | $ | 1.79 | 
|Year ended December 31, 2002     |  | $    | 5.58  |     |  | $ | 0.77 | 
|Quarter ended March 31, 2001     |  | $    | 6.63  |     |  | $ | 3.84 | 
|Quarter ended June 30, 2001      |  | $    | 4.72  |     |  | $ | 2.81 | 
|Quarter ended September 30, 2001 |  | $    | 3.78  |     |  | $ | 1.97 | 
|Quarter ended December 31, 2001  |  | $    | 6.10  |     |  | $ | 1.79 | 
|Quarter ended March 31, 2002     |  | $    | 5.58  |     |  | $ | 3.72 | 
|Quarter ended June 30, 2002      |  | $    | 4.85  |     |  | $ | 3.36 | 
|Quarter ended September 30, 2002 |  | $    | 2.59  |     |  | $ | 1.22 | 
|Quarter ended December 31, 2002  |  | $    | 3.71  |     |  | $ | 0.77 | 
|Quarter ended March 31, 2003     |  | $    | 3.39  |     |  | $ | 1.90 | 
|Quarter ended June 30, 2003      |  | $    | 13.03 |     |  | $ | 2.19 | 
|Month ended January 31, 2003     |  | $    | 3.39  |     |  | $ | 2.38 | 
|Month ended February 28, 2003    |  | $    | 3.07  |     |  | $ | 2.10 | 
|Month ended March 31, 2003       |  | $    | 2.43  |     |  | $ | 1.90 | 
|Month ended April 30, 2003       |  | $    | 3.73  |     |  | $ | 2.19 | 
|Month ended May 31, 2003         |  | $    | 5.35  |     |  | $ | 3.30 | 
|Month ended June 30, 2003        |  | $    | 13.03 |     |  | $ | 5.11 | 
|Month ended July 31, 2003        |  | $    | 14.33 |     |  | $ | 6.00 | 



|B. |  | PLAN OF DISTRIBUTION.
|-- |  | ---------------------
|  
|   |  | Not applicable.      

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|C. |  | MARKETS.
|-- |  | --------

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



|D. |  | SELLING SHAREHOLDERS. 
|-- |  | ----------------------
|  
|   |  | Not applicable.       
|  
|E. |  | DILUTION.             
|  
|   |  | Not applicable.       
|  
|F. |  | EXPENSES OF THE ISSUE.
|  
|   |  | Not applicable.       




ITEM 10. ADDITIONAL INFORMATION



|A. |  | SHARE CAPITAL.                         
|-- |  | ---------------------------------------
|  
|   |  | Not applicable.                        
|  
|B. |  | MEMORANDUM AND ARTICLES OF ASSOCIATION.

Corporate Powers. We are registered in the British Virgin Islands since
December 6, 1994, under British Virgin Islands International Business Companies
number 135241. Clause 4 of our Memorandum of Association states that the
objects for which we are established are to engage in any businesses which are
not prohibited by law in force in the British Virgin Islands.

Directors. A director who is materially interested in any transaction
with us shall declare the material facts of and nature of his interest at the
meeting of the Board of Directors. A director may vote or be counted as the
quorum on any resolution of the Board in respect of any transaction in which he
is materially interested. With the prior or subsequent approval by a
resolution of members, the directors may, by a resolution of directors, fix the
emoluments of directors with respect to services to be rendered in any capacity
to us. The directors may, by a resolution of directors, exercise all the
powers of the Company to borrow money. There is no

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age limit requirement for retirement or non-retirement of directors. A
director shall not require a share qualification.

Share Rights, Preferences and Restrictions. Our authorized share capital
consists of 50 million shares of par value US$0.001 per share. All dividends
unclaimed for three years after having been declared may be forfeited by
resolution of the directors for our benefit. All shares vote as one class and
each whole share has one vote. We may redeem any of our own shares for such
fair value as we by a resolution of directors determine. All shares have the
same rights with regard to dividends and distributions upon our liquidation.

Changing Share Rights. The rights of each class and series of shares that
we are authorized to issue shall be fixed by the resolution of directors. If
the authorized capital is divided into different classes, the rights attached
to any class may be varied with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class and of the holders
of not less than three-fourths of the issued shares of any other class which
may be affected by such variation.

Shareholder Meetings. The directors may convene meetings of our members
at such times and in such manner and places as the directors consider necessary
or desirable. The directors shall convene such a meeting upon the written
request of members holding 10 percent or more of our outstanding voting shares.
At least seven days notice of the meeting shall be given to the members whose
name appears on the share register.

Restrictions on Rights to Own Securities. There are no limitations on the
rights to own our securities.

Change in Control Provisions. There are no provisions of our Memorandum
of Association and Articles of Association that would have an effect of
delaying, deferring or preventing a change in our control and that would have
operate only with respect to a merger, acquisition or corporate restructuring
involving us.

Disclosure of Share Ownership. There are no provisions governing the
ownership threshold above which shareholder ownership must be disclosed.

Applicable Law. Under the laws of most jurisdictions in the US, majority
and controlling shareholders generally have certain fiduciary
responsibilities to the minority shareholders. Shareholder action must be
taken in good faith and actions by controlling shareholders which are obviously
unreasonable may be declared null and void. BVI law protecting the interests
of minority shareholders may not be as protective in all circumstances as the
law protecting minority shareholders in US jurisdictions.

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While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively, that is, in the name of and for the benefit of our
company and to sue a company and
its directors for his benefit and for the benefit of others similarly
situated, the circumstances in which any such action may be brought, and the
procedures and defenses that may be available in respect of any such action,
may result in the rights of shareholders of a BVI company being more limited
than those of shareholders of a company organized in the US.

Our directors have the power to take certain actions without shareholder
approval, including an amendment of our Memorandum of Association or Articles
of Association or an increase or reduction in our authorized capital, which
would require shareholder approval under the laws of most US jurisdictions. In
addition, the directors of a BVI corporation, subject in certain cases to court
approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange
or disposition of any assets, property, part of the business, or securities of
the corporation, or any combination, if they determine it is in the best
interests of the corporation, its creditors, or its shareholders. Our ability
to amend our Memorandum of Association and Articles of Association without
shareholder approval could have the effect of delaying, deterring or preventing
a change in our control without any further action by the shareholders,
including a tender offer to purchase our common stock at a premium over then
current market prices.

The International Business Companies Act of the British Virgin Islands
permits the creation in our Memorandum and Articles of Association of staggered
terms of directors, cumulative voting, shareholder approval of corporate
matters by written consent, and the issuance of preferred shares. Currently,
our Memorandum and Articles of Association only provide for shareholder
approval of corporate matters by written consent, but not for staggered terms
of directors, cumulative voting or the issuance of preferred shares.

As in most US jurisdictions, the board of directors of a BVI corporation
is charged with the management of the affairs of the corporation. In most US
jurisdictions, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, under which directors must properly
apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and
refrain from conduct that injures the corporation or its shareholders or that
deprives the corporation or its shareholders of any profit or advantage. Many
US jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under BVI law,
liability of a corporate director to the corporation is primarily limited to
cases of willful malfeasance in the performance of his duties or to cases where
the director has not acted honestly and in good faith and with a view to the
best interests of the corporation. However, under our Articles of Association,
we are authorized to indemnify any director or officer who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being one of our directors or officers, provided such person acted honestly
and in good faith and with a view to our best interests and, in the case of a
criminal proceeding, such person had no reasonable

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cause to believe that his
conduct was unlawful. Our Articles of Association also enable us to indemnify
any director or officer who was successful in such a proceeding against expense
and
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with the proceeding.

The above description of certain differences between BVI and US corporate
laws is only a summary and does not purport to be complete or to address every
applicable aspect of such laws. However, we believe that all material
differences are disclosed above.

Changes in Capital. Requirements to effect changes in capital are not
more stringent than is required by law.



|C. |  | MATERIAL CONTRACTS.
|-- |  | -------------------

For complete information about our material contracts (not in the ordinary
course of business) with CEC Telecom Co., Ltd. and Central Grace Technologies
Ltd., please refer to the respective subsections in Item 4.B.



|D. |  | EXCHANGE CONTROLS.
|-- |  | ------------------

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



|E. |  | TAXATION.
|-- |  | ---------

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

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United States Federal Income Taxation

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

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

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

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

Backup withholding may be avoided by the holder of common stock if such
holder (i) is a corporation or comes within certain other exempt categories or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of common stock

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who are not
U.S. persons (non-U.S. holders) are generally exempt from backup withholding,
although such holders may be required to comply with certification and
identification procedures in order to prove their exemption.

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

British Virgin Islands Taxation

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

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

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



|F. |  | DIVIDENDS AND PAYING AGENTS.
|-- |  | ----------------------------
|  
|   |  | Not applicable.             
|  
|G. |  | STATEMENT BY EXPERTS.       
|  
|   |  | Not applicable.             

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|H. |  | DOCUMENTS ON DISPLAY.
|-- |  | ---------------------

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



|I. |  | SUBSIDIARY INFORMATION.
|-- |  | -----------------------
|  
|   |  | Not applicable.        




ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

As of December 31, 2002, our aggregate bank borrowings, at various fixed
interest rates, amounted to Rmb 40,000,000 (US$4,831,000). Due to the stable
interest rate in the PRC, we do not believe that material risk on interest
rates exists.

As of December 31, 2002, about 98% of our products were sold in Mainland
China and the great majority of our sales income are denominated in Rmb. Our
major expenses are also denominated in Rmb. Accordingly, we believe that we
are not exposed to material risk from changing foreign currency exchange rates.

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




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



| |  | Not applicable.
| |  | ---------------

-62-



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PART II




ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.




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

Not applicable.




ITEM 15.  CONTROLS AND PROCEDURES

Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our chairman
and chief financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on this evaluation, which will
be used as input for further improvement actions, they concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information about Qiao Xing Universal Telephone, Inc. and its
consolidated subsidiaries.

There have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the
date of this evaluation.




PART III




ITEM 17.  FINANCIAL STATEMENTS

Not applicable.




ITEM 18.  FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated balance sheet of Qiao Xing
Universal Telephone, Inc. and its subsidiaries as of December 31, 2002, and the
related consolidated statements of operations and comprehensive income, cash
flows and changes in shareholders equity for the year then ended. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated financial statements
of Qiao Xing Universal Telephone, Inc. and subsidiaries as of December 31,
2001, were audited by other auditors, who have ceased operations and whose
report dated June 28, 2002 expressed an unqualified opinion on those
consolidated financial statements.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Qiao
Xing Universal Telephone, Inc. and its subsidiaries as of December 31, 2002,
and the consolidated results of their operations and cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States.

GROBSTEIN, HORWATH & COMPANY LLP

Sherman Oaks, California
July 19, 2003

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QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002

|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |        |        | 
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----- | ----- |  | ---- | ------- | ------- | ------- | ------- | ------- | -------- | ------- |  | ------ | ------ | ------ | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       | Note  |  | 2001 |         | 2002   
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |        
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         | Rmb000 |         | Rmb000 |         | US$000 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         | (Note 4)
|ASSETS                                                     |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|Current assets:                                            |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           | Cash and bank deposits                                                                                                                                                                                          |                                                                |       |       |  |      |         | 7,616   |         |         |         | 10,948   |         |  |        | 1,323  |       
|                                                           | Pledged bank deposits                                                                                                                                                                                           |                                                                |       | 27&28 |  |      |         | 76,925  |         |         |         | 12,483   |         |  |        | 1,507  |       
|                                                           | Accounts receivable, net                                                                                                                                                                                        |                                                                |       | 5     |  |      |         | 254,816 |         |         |         | 33       |         |  |        | 4      |       
|                                                           | Inventories                                                                                                                                                                                                     |                                                                |       | 6     |  |      |         | 79,862  |         |         |         | 249      |         |  |        | 30     |       
|                                                           | Prepaid expenses                                                                                                                                                                                                |                                                                |       | 7     |  |      |         | 938     |         |         |         | 49,793   |         |  |        | 6,014  |       
|                                                           | Receivable from sale of a subsidiary                                                                                                                                                                            |                                                                |       | 8     |  |      |         |        |         |         |         | 282,377  |         |  |        | 34,103 |       
|                                                           | Other current assets                                                                                                                                                                                            |                                                                |       |       |  |      |         | 9,467   |         |         |         | 295      |         |  |        | 36     |       
|                                                           | Deferred income tax assets                                                                                                                                                                                      |                                                                |       | 21    |  |      |         | 9,787   |         |         |         |         |         |  |        |       |       
|                                                           | Due from related parties                                                                                                                                                                                        |                                                                |       | 28    |  |      |         | 60,620  |         |         |         | 506      |         |  |        | 61     |       
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total current assets                                           |       |       |  |      |         |         | 500,031 |         |         |          | 356,684 |  |        |        | 43,078 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |        |        | 
|Deposits for purchase of property,
machinery and equipment |                                                                                                                                                                                                                 |                                                                |       |       |  |      | 5,672   |         |         |         |        |          |         |  |       |       
|Property, machinery and equipment, net                     |                                                                                                                                                                                                                 |                                                                | 10    |       |  |      | 183,600 |         |         |         | 5,112   |          |         |  | 617    |       
|Construction-in-progress                                   |                                                                                                                                                                                                                 |                                                                | 11    |       |  |      | 576     |         |         |         |        |          |         |  |       |       
|Land use rights                                            |                                                                                                                                                                                                                 |                                                                | 12&28 |       |  |      | 221,359 |         |         |         | 189,405 |          |         |  | 22,875 |       
|Other non-current assets                                   |                                                                                                                                                                                                                 |                                                                | 13    |       |  |      |        |         |         |         | 191,507 |          |         |  | 23,129 |       
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total assets                                                   |       |       |  |      |         |         | 911,238 |         |         |          | 742,708 |  |        |        | 89,699 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITY   |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|Current liabilities:                                       |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           | Short-term borrowings                                                                                                                                                                                           |                                                                |       | 15&27 |  |      |         | 189,990 |         |         |         | 40,000   |         |  |        | 4,831  |       
|                                                           | Accounts payable                                                                                                                                                                                                |                                                                |       |       |  |      |         | 32,752  |         |         |         | 1,372    |         |  |        | 166    |       
|                                                           | Other payables                                                                                                                                                                                                  |                                                                |       | 16    |  |      |         | 6,550   |         |         |         | 733      |         |  |        | 89     |       
|                                                           | Accrued liabilities                                                                                                                                                                                             |                                                                |       | 17&28 |  |      |         | 13,627  |         |         |         | 13,890   |         |  |        | 1,677  |       
|                                                           | Due to related parties                                                                                                                                                                                          |                                                                |       | 28    |  |      |         | 4,140   |         |         |         | 28,652   |         |  |        | 3,460  |       
|                                                           | Taxation payable                                                                                                                                                                                                |                                                                |       | 21    |  |      |         | 105,467 |         |         |         | 5,264    |         |  |        | 636    |       
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total current liabilities                                      |       |       |  |      |         |         | 352,526 |         |         |          | 89,911  |  |        |        | 10,859 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |        |        | 
|Shareholders loans                                        |                                                                                                                                                                                                                 |                                                                | 18    |       |  |      | 8,163   |         |         |         | 8,163   |          |         |  | 986    |       
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total liabilities                                              |       |       |  |      |         |         | 360,689 |         |         |          | 98,074  |  |        |        | 11,845 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|Minority interests                                         |                                                                                                                                                                                                                 |                                                                |       |       |  |      | 23,102  |         |         |         | 87,054  |          |         |  | 10,514 |       
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|Shareholders equity:                                      |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           | Common stock, par value Rmb0.008
(equivalent of US$0.001);
authorized - 50,000,000 shares;
outstanding and fully paid -
14,282,400 shares as of December
31, 2001 and 15,282,400 shares as
of December 31, 2002 |                                                                |       | 19    |  |      |         | 118     |         |         |         | 127      |         |  |        | 15     |       
|                                                           | Additional paid-in capital                                                                                                                                                                                      |                                                                |       |       |  |      |         | 324,219 |         |         |         | 337,931  |         |  |        | 40,813 |       
|                                                           | Dedicated reserves                                                                                                                                                                                              |                                                                |       | 22    |  |      |         | 10,541  |         |         |         |         |         |  |        |       |       
|                                                           | Retained earnings                                                                                                                                                                                               |                                                                |       |       |  |      |         | 192,558 |         |         |         | 219,572  |         |  |        | 26,518 |       
|                                                           | Cumulative translation adjustments                                                                                                                                                                              |                                                                |       |       |  |      |         | 11      |         |         |         | (50      | )       |  |        | (6     | )     
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total shareholders equity                                     |       |       |  |      |         |         | 527,447 |         |         |          | 557,580 |  |        |        | 67,340 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       
|                                                           |                                                                                                                                                                                                                 | Total liabilities, minority
interests and shareholders
equity |       |       |  |      |         |         | 911,238 |         |         |          | 742,708 |  |        |        | 89,699 | 
|                                                           |                                                                                                                                                                                                                 |                                                                |       |       |  |      |         |         |         |         |         |          |         |  |        |       

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

F-2



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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |        |            | 
|------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------- | -- | ---- | -- | ---- | -------- | -------- | ---------- | ---------- | -------- | ------------------ | ---------- | ------- | -------- | ------- | ---------- |  | ------- | ------ | ---------- | 
|                                                              |                                                      |                                         |    | Note |    | 2000 |          | 2001     |            | 2002      
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |           
|                                                              |                                                      |                                         |    |      |    |      |          | Rmb000  |            | Rmb000    |          | Rmb000            |            | US$000
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          | (Note 4)          
|Net sales                                                     |                                                      |                                         | 28 |      |    |      | 392,529  |          |            |            | 250,366  |                    |            |         | 549,967  |         |            |  | 66,421  |       
|Cost of goods sold                                            |                                                      |                                         | 28 |      |    |      | (271,606 | )        |            |            | (212,229 | )                  |            |         | (528,149 | )       |            |  | (63,786 | )     
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | Gross profit                            |    |      |    |      |          |          | 120,923    |            |          |                    | 38,137     |         |          |         | 21,818     |  |         |        | 2,635      | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |        |            | 
|Selling expenses                                              |                                                      |                                         |    |      |    |      | (15,325  | )        |            |            | (6,172   | )                  |            |         | (5,286   | )       |            |  | (638    | )     
|General and administrative
expenses                           |                                                      |                                         | 28 |      |    |      | (40,605  | )        |            |            | (44,114  | )                  |            |         | (68,684  | )       |            |  | (8,295  | )     
|Impairment loss on                                            |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              | - Land use rights                                    |                                         |    |      |    |      |          |         |            |            |          | (5,004             | )          |         |          |        |            |  |         |       |           
|                                                              | - Property, machinery and
equipment                  |                                         |    | 10   |    |      |          |         |            |            |          | (8,722             | )          |         |          |        |            |  |         |       |           
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|Income (Loss) from operations                                 |                                                      |                                         |    |      |    |      | 64,993   |          |            |            | (25,875  | )                  |            |         | (52,152  | )       |            |  | (6,298  | )     
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |        |            | 
|Interest income                                               |                                                      |                                         |    |      |    |      | 2,061    |          |            |            | 2,000    |                    |            |         | 1,070    |         |            |  | 129     |       
|Exchange gain (loss), net                                     |                                                      |                                         |    |      |    |      | 2,363    |          |            |            | (104     | )                  |            |         |         |         |            |  |        |       
|Interest expense:                                             |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              | - Amortization of debt
issuance costs                |                                         |    | 3h   |    |      |          | (9,637   | )          |            |          | (8,234             | )          |         |          |        |            |  |         |       |           
|                                                              | - Amortization of
discount on convertible
debentures |                                         |    | 3h   |    |      |          | (7,613   | )          |            |          | (6,469             | )          |         |          |        |            |  |         |       |           
|                                                              | - Other loan                                         |                                         |    |      |    |      |          | (6,300   | )          |            |          | (8,404             | )          |         |          | (17,867 | )          |  |         | (2,158 | )         
|Gain on sale of a subsidiary                                  |                                                      |                                         | 9  |      |    |      |          |          |            |            |         |                    |            |         | 79,050   |         |            |  | 9,547   |       
|Other (expenses) income, net                                  |                                                      |                                         |    |      |    |      | (197     | )        |            |            | (187     | )                  |            |         | 124      |         |            |  | 15      |       
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | Income (Loss) before
income tax         |    |      |    |      |          |          | 45,670     |            |          |                    | (47,273    | )       |          |         | 10,225     |  |         |        | 1,235      | 
|(Provision for) Reversal of
prior years accrual of
income tax |                                                      |                                         | 21 |      |    |      | (16,599  | )        |            |            | 25,687   |                    |            |         |         |         |            |  |        |       
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | Income (Loss) before
minority interests |    |      |    |      |          |          | 29,071     |            |          |                    | (21,586    | )       |          |         | 10,225     |  |         |        | 1,235      | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |        |            | 
|Minority interests                                            |                                                      |                                         |    |      |    |      | (5,600   | )        |            |            | 164      |                    |            |         | 6,248    |         |            |  | 754     |       
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | Net Income (Loss)                       |    |      |    |      |          |          | 23,471     |            |          |                    | (21,422    | )       |          |         | 16,473     |  |         |        | 1,989      | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|Other comprehensive income
(loss)- translation
adjustments    |                                                      |                                         |    |      |    |      | 79       |          |            |            | 70       |                    |            |         | (61      | )       |            |  | (7      | )     
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | Comprehensive income
(loss)             |    |      |    |      |          |          | 23,550     |            |          |                    | (21,352    | )       |          |         | 16,412     |  |         |        | 1,982      | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|Income (Loss) per common
share                                |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | - Basic                                 |    |      | 23 |      |          | Rmb 2.03 |            | Rmb (1.67) |          | Rmb           1.12 |            | US$0.14 |         
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | - Diluted                               |    |      | 23 |      |          | Rmb 1.98 |            | Rmb (1.67) |          | Rmb           0.95 |            | US$0.11 |         
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|Weighted average number of
shares outstanding                 |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | - Basic                                 |    |      | 23 |      |          |          | 11,572,000 |            |          |                    | 12,838,000 |         |          |         | 14,685,000 |  |         |        | 14,685,000 | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       
|                                                              |                                                      | - Diluted                               |    |      | 23 |      |          |          | 11,878,000 |            |          |                    | 12,838,000 |         |          |         | 17,390,000 |  |         |        | 17,390,000 | 
|                                                              |                                                      |                                         |    |      |    |      |          |          |            |            |          |                    |            |         |          |         |            |  |         |       

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

F-3



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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |        |   | 
|--------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------- | -------- | ------- | - | ------- | -------- | -------- | ----- | ------- | -------- | ------- | - |  | ------- | ------ | - | 
|                                                                                                    |                                                           |                                     |          | 2000    |   | 2001    |          | 2002    
|                                                                                                    |                                                           |                                     |          |         |   |         |          |         
|                                                                                                    |                                                           |                                     |          | Rmb000 |   | Rmb000 |          | Rmb000  |       | US$000
|                                                                                                    |                                                           |                                     |          |         |   |         |          | (Note 4)
|Cash flows from operating activities:                                                               |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Net income (loss)                                                                                   |                                                           |                                     | 23,471   |         |   |         | (21,422  | )        |       |         | 16,473   |         |   |  | 1,989   |       
|Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities - |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |        
|                                                                                                    | Depreciation of property, machinery and
equipment         |                                     |          | 9,856   |   |         |          | 16,942   |       |         |          | 13,243  |   |  |         | 1,599  |  
|                                                                                                    | Amortization of land use rights                           |                                     |          | 2,942   |   |         |          | 4,978    |       |         |          | 5,008   |   |  |         | 605    |  
|                                                                                                    | Impairment loss on                                        |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |        |  
|                                                                                                    |                                                           | - Land use rights                   |          |         |  |         |          |          | 5,004 |         |          |         |  |  |         |        |  | 
|                                                                                                    |                                                           | - Property, machinery and equipment |          |         |  |         |          |          | 8,722 |         |          |         |  |  |         |        |  | 
|                                                                                                    | Net loss on disposal of property, machinery and
equipment |                                     |          | 119     |   |         |          | 105      |       |         |          | 2,660   |   |  |         | 321    |  
|                                                                                                    | Amortization of debt issuance costs                       |                                     |          | 9,637   |   |         |          | 8,234    |       |         |          |        |   |  |         |       |  
|                                                                                                    | Amortization of discount on convertible
debentures        |                                     |          | 7,613   |   |         |          | 6,469    |       |         |          |        |   |  |         |       |  
|                                                                                                    | Compensation cost for stock options and
warrants issued   |                                     |          | 4,464   |   |         |          |         |       |         |          |        |   |  |         |       |  
|                                                                                                    | Interest expense on shareholders loans                   |                                     |          | 478     |   |         |          | 478      |       |         |          | 478     |   |  |         | 58     |  
|                                                                                                    | Gain on sale of a subsidiary                              |                                     |          |        |   |         |          |         |       |         |          | (79,050 | ) |  |         | (9,547 | )
|                                                                                                    | Minority interests                                        |                                     |          | 5,600   |   |         |          | (164     | )     |         |          | (6,248  | ) |  |         | (755   | )
|(Increase) Decrease in operating assets -                                                           |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|                                                                                                    | Accounts receivable                                       |                                     |          | (69,598 | ) |         |          | 27,811   |       |         |          | (26,023 | ) |  |         | (3,143 | )
|                                                                                                    | Inventories                                               |                                     |          | (12,813 | ) |         |          | 238      |       |         |          | 17,023  |   |  |         | 2,056  |  
|                                                                                                    | Prepaid expenses                                          |                                     |          | (7,123  | ) |         |          | 8,471    |       |         |          | (60,156 | ) |  |         | (7,265 | )
|                                                                                                    | Other current assets                                      |                                     |          | 2,158   |   |         |          | (6,167   | )     |         |          | (63,205 | ) |  |         | (7,633 | )
|                                                                                                    | Deferred income tax assets                                |                                     |          | (2,210  | ) |         |          | (6,819   | )     |         |          | 9,787   |   |  |         | 1,182  |  
|                                                                                                    | Due from related parties                                  |                                     |          | (8,161  | ) |         |          | 8,232    |       |         |          | 3,338   |   |  |         | 403    |  
|(Decrease) Increase in operating liabilities -                                                      |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|                                                                                                    | Accounts payable                                          |                                     |          | (902    | ) |         |          | (3,938   | )     |         |          | (1,334  | ) |  |         | (161   | )
|                                                                                                    | Other payables                                            |                                     |          | 661     |   |         |          | (9,548   | )     |         |          | 66,314  |   |  |         | 8,009  |  
|                                                                                                    | Accrued liabilities                                       |                                     |          | 991     |   |         |          | 1,335    |       |         |          | 11,335  |   |  |         | 1,369  |  
|                                                                                                    | Taxation payable                                          |                                     |          | 25,249  |   |         |          | (22,472  | )     |         |          | 13,754  |   |  |         | 1,661  |  
|                                                                                                    | Due to related parties                                    |                                     |          |        |   |         |          |         |       |         |          | 20,406  |   |  |         | 2,465  |  
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Net cash (used in) provided by operating activities                                                 |                                                           |                                     | (7,568   | )       |   |         | 26,489   |          |       |         | (56,197  | )       |   |  | (6,787  | )     
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Cash flows from investing activities:                                                               |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Acquisitions of property, machinery and equipment                                                   |                                                           |                                     | (12,373  | )       |   |         | (2,145   | )        |       |         | (10,335  | )       |   |  | (1,248  | )     
|Increase in non-current assets related to
acquisition of CECT                                       |                                                           |                                     |         |         |   |         |         |          |       |         | (180,944 | )       |   |  | (21,853 | )     
|Net cash outlflow from sale of a subsidiary
(Note 9)                                                |                                                           |                                     |         |         |   |         |         |          |       |         | (6,927   | )       |   |  | (837    | )     
|(Additions) Decrease of construction-in-progress                                                    |                                                           |                                     | (75,937  | )       |   |         | (7,981   | )        |       |         | 576      |         |   |  | 70      |       
|Payment of land use rights                                                                          |                                                           |                                     | (104,982 | )       |   |         | (4,878   | )        |       |         | (2,140   | )       |   |  | (258    | )     
|Proceeds from disposal of property, machinery and
equipment                                         |                                                           |                                     | 207      |         |   |         | 190      |          |       |         | 1,628    |         |   |  | 197     |       
|Increase in pledged bank deposits                                                                   |                                                           |                                     | (42,066  | )       |   |         | (1,492   | )        |       |         | (161,657 | )       |   |  | (19,524 | )     
|(Increase) Decrease in due from related parties                                                     |                                                           |                                     | (7,066   | )       |   |         | (56,300  | )        |       |         | 56,300   |         |   |  | 6,799   |       
|(Increase) Decrease in deposits for purchase of
property and equipment                              |                                                           |                                     | (983     | )       |   |         | (4,031   | )        |       |         | 5,672    |         |   |  | 685     |       
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Net cash used in investing activities                                                               |                                                           |                                     | (243,200 | )       |   |         | (76,637  | )        |       |         | (297,827 | )       |   |  | (35,969 | )     
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Cash flows from financing activities:                                                               |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|New short-term borrowings                                                                           |                                                           |                                     | 108,478  |         |   |         | 218,260  |          |       |         | 585,967  |         |   |  | 70,769  |       
|Repayment of short-term borrowings                                                                  |                                                           |                                     | (41,305  | )       |   |         | (198,713 | )        |       |         | (325,550 | )       |   |  | (39,318 | )     
|Contribution from minority shareholder                                                              |                                                           |                                     |         |         |   |         |         |          |       |         | 67,000   |         |   |  | 8,092   |       
|New long-term borrowings                                                                            |                                                           |                                     |         |         |   |         |         |          |       |         | 30,000   |         |   |  | 3,623   |       
|New advances from related parties                                                                   |                                                           |                                     |         |         |   |         | 4,797    |          |       |         |         |         |   |  |        |       
|Repayment of advances from related parties                                                          |                                                           |                                     | (493     | )       |   |         |         |          |       |         |         |         |   |  |        |       
|Net proceeds from issue of common stock                                                             |                                                           |                                     | 75,576   |         |   |         |         |          |       |         |         |         |   |  |        |       
|Net proceeds from issue of convertible debentures                                                   |                                                           |                                     | 75,958   |         |   |         |         |          |       |         |         |         |   |  |        |       
|Net proceeds from exercise of options and warrants                                                  |                                                           |                                     | 63,101   |         |   |         |         |          |       |         |         |         |   |  |        |       
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Net cash provided by financing activities                                                           |                                                           |                                     | 281,315  |         |   |         | 24,344   |          |       |         | 357,417  |         |   |  | 43,166  |       
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Effect of translation adjustments                                                                   |                                                           |                                     | 73       |         |   |         | (70      | )        |       |         | (61      | )       |   |  | (7      | )     
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Net increase (decrease) in cash and bank deposits                                                   |                                                           |                                     | 30,620   |         |   |         | (25,874  | )        |       |         | 3,332    |         |   |  | 403     |       
|Cash and bank deposits, beginning of year                                                           |                                                           |                                     | 2,870    |         |   |         | 33,490   |          |       |         | 7,616    |         |   |  | 920     |       
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       
|Cash and bank deposits, end of year                                                                 |                                                           |                                     | 33,490   |         |   |         | 7,616    |          |       |         | 10,948   |         |   |  | 1,323   |       
|                                                                                                    |                                                           |                                     |          |         |   |         |          |          |       |         |          |         |   |  |         |       

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

F-4



---



##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  |                   |     |  
|------------------------------- | ---------------------------------------------------------------------- |  | ---- | -- | ---------------- |  | ------------ | ----- | ------------------ |  | ------------------ | -- | ----------------- |  | ----------- | ------- | ------- |  | ----------- | ------- | ---------- |  | ------- | ------- | - |  | ----------------- | --- | -
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  | Accumulated other
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  | comprehensive    
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  | income
(loss) -  
|                                |                                                                        |  |      |    |                  |  | Common stock |       |                    |  |                    |    |                   |  |             |         |         |  |             |         | cumulative
|                                |                                                                        |  |      |    |                  |  |              |       | Additional paid-in |  |                    |    |                   |  |             |         |         |  | translation
|                                |                                                                        |  | Note |    | Number of shares |  | Amount       |       | capital            |  | Dedicated reserves |    | Retained earnings |  | adjustments
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |            
|                                |                                                                        |  |      |    |                  |  | 000         |       | Rmb000            |  | Rmb000            |    | Rmb000           |  | Rmb000     |         | Rmb000
|Balance as of December 31, 1999 |                                                                        |  |      |    |                  |  | 9,600        |       |                    |  | 79                 |    |                   |  | 76,256      |         |         |  | 8,609       |         |            |  | 192,441 |         |   |  | 2                 |    
|                                | Issue of common stock                                                  |  |      | 19 |                  |  |              | 833   |                    |  |                    | 7  |                   |  |             | 82,738  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Exercise of stock options                                              |  |      | 20 |                  |  |              | 1,005 |                    |  |                    | 8  |                   |  |             | 52,528  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Exercise of stock warrants                                             |  |      | 20 |                  |  |              | 172   |                    |  |                    | 2  |                   |  |             | 10,563  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Issue of shares to external
consultants                                |  |      | 19 |                  |  |              | 25    |                    |  |                    |   |                   |  |             | 7,501   |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Stock issuance costs                                                   |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             | (13,155 | )       |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Issuance of convertible
debentures                                     |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             | 14,082  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Issue of stock purchase
warrants to external
consultants               |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             | 9,569   |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Conversion of convertible
debentures                                   |  |      | 19 |                  |  |              | 503   |                    |  |                    | 4  |                   |  |             | 39,566  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Net income                                                             |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         | 23,471  |   |  |                   |    |  
|                                | Shareholders contribution                                             |  |      | 18 |                  |  |              |      |                    |  |                    |   |                   |  |             | 478     |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Transfer to dedicated
reserves                                         |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             | 1,932   |            |  |         | (1,932  | ) |  |                   |    |  
|                                | Translation adjustments                                                |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         |        |   |  |                   | 79  |  
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  |                   |    
|Balance as of December 31, 2000 |                                                                        |  |      |    |                  |  | 12,138       |       |                    |  | 100                |    |                   |  | 280,126     |         |         |  | 10,541      |         |            |  | 213,980 |         |   |  | 81                |    
|                                | Issue of stock purchase
warrants to investors and
external consultants |  |      | 19 |                  |  |              |      |                    |  |                    |   |                   |  |             | 458     |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Conversion of convertible
debentures                                   |  |      |    |                  |  |              | 2,144 |                    |  |                    | 18 |                   |  |             | 43,157  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Net loss                                                               |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         | (21,422 | ) |  |                   |    |  
|                                | Shareholders contribution                                             |  |      | 18 |                  |  |              |      |                    |  |                    |   |                   |  |             | 478     |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Translation adjustments                                                |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         |        |   |  |                   | (70 | )
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  |                   |    
|Balance as of December 31, 2001 |                                                                        |  |      |    |                  |  | 14,282       |       |                    |  | 118                |    |                   |  | 324,219     |         |         |  | 10,541      |         |            |  | 192,558 |         |   |  | 11                |    
|                                | Issue of shares to external
consultants                                |  |      | 19 |                  |  |              | 1,000 |                    |  |                    | 9  |                   |  |             | 13,234  |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Net income                                                             |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         | 16,473  |   |  |                   |    |  
|                                | Shareholders contribution                                             |  |      | 18 |                  |  |              |      |                    |  |                    |   |                   |  |             | 478     |         |  |             |        |            |  |         |        |   |  |                   |    |  
|                                | Transfer from dedicated
reserves to retained
earnings                  |  |      | 22 |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             | (10,541 | )          |  |         | 10,541  |   |  |                   |    |  
|                                | Translation adjustments                                                |  |      |    |                  |  |              |      |                    |  |                    |   |                   |  |             |        |         |  |             |        |            |  |         |        |   |  |                   | (61 | )
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  |                   |    
|Balance as of December 31, 2002 |                                                                        |  |      |    |                  |  | 15,282       |       |                    |  | 127                |    |                   |  | 337,931     |         |         |  |            |         |            |  | 219,572 |         |   |  | (50               | )  
|                                |                                                                        |  |      |    |                  |  |              |       |                    |  |                    |    |                   |  |             |         |         |  |             |         |            |  |         |         |   |  |                   |    

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

F-5



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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | ORGANIZATION AND NATURE OF OPERATIONS
|-- |  | -------------------------------------

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

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

For the year ended December 31, 2002, the Group reported a loss from operations
of approximately Rmb 52 million, before recognizing a gain on sale of a
subsidiary of approximately Rmb 79 million, and had short-term bank borrowings
of approximately Rmb 40 million as of December 31, 2002. As at December 31,
2002, the Group entered into an agreement for the sale of a subsidiary for an
aggregate cash consideration of Rmb 210 million (the Sale). Details of the
Sale have been disclosed in Note 9 to the consolidated financial statements.
The Groups ability to continue as a going concern depends on the success of
its future operations, its ability to renew or replace the short-term bank
borrowings as they fall due and its ability to obtain additional financing
from, among others, the banks, the existing shareholders, the public or the
private institutional investors.

The Companys Directors are confident that the Groups future operations will
be successful. Also, the Directors are confident that the Group will be able
to rollover the majority of its short-term bank borrowings upon maturity in the
second half of 2003. Further, the Sale transaction has provided the Company
with working capital for future development. The consolidated financial
statements have been prepared on the assumption that the Group is a going
concern and will continue in operation for the foreseeable future.

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

Country risk

As substantially all of the Groups operations are conducted in Mainland China,
the Group is subject to special considerations and significant risks not
typically associated with companies operating in North America and Western
Europe. These include risks associated with, among others, the political,
economic and legal environments and foreign currency exchange. The Groups
results may be adversely affected by changes in the political and social
conditions in Mainland China, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other things.

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##### Table of Contents





|1. |  | ORGANIZATION AND NATURE OF OPERATIONS (Contd)
|-- |  | ----------------------------------------------

Country risk (Contd)

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

Technology risk

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

The Group may experience greater variability in its operating results than in
the past, particularly depending on the general economic conditions and the
pace of development and acceptance of new technologies.

Changes in the communication industry are expected to increase competition and
change the competitive landscape and may adversely affect the Groups operating
results.

Operating risk

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

Concentration of credit risk

The Group performs ongoing credit evaluations of each customers financial
condition. It maintains reserves for potential credit losses and such losses
in the aggregate have not exceeded managements projections. As of December
31, 2001, the Groups five largest accounts receivable accounted for
approximately 31% of the Groups total accounts receivable. Total accounts
receivable as of December 31, 2002 was minimal following the Groups sale of a
subsidiary.

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##### Table of Contents





|2. |  | SUBSIDIARIES
|-- |  | ------------

Details of the Companys subsidiaries as of December 31, 2001 and 2002 were as
follows:

|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|------------------------------------------------------------------ |  | ---------------------- |  | --------------------- |  | -------------------- |  | -------------------------------------------------------------------------------------------------------------
|                                                                   |  |                        |  | Percentage of equity  |  |                     
|                                                                   |  | Place of               |  | interest attributable |  |                     
|Name                                                               |  | incorporation          |  | to the Group          |  | Principal activities
|                                                                   |  |                        |  |                       |  |                     
|                                                                   |  |                        |  | 2001                  |  | 2002                 |  |                                                                                                              
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Hui Zhou Qiao Xing Communication Industry
Limited                  |  | Mainland China         |  |                      |  | 90%
Note i           |  | Manufacturing of
GSM mobile phones
and sales of indoor
phones  in the
development stage                     
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Hui Zhou Qiao Xing Property Limited                                |  | Mainland China         |  |                      |  | 90%Note ii           |  | Real estate
development and
management  in the
development stage                                            
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Qiao Xing Mobile Communication Company Limited                     |  | British Virgin Islands |  |                      |  | 80%Note iii          |  | Investment holding                                                                                           
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Qiao Xing Communication Holdings Limited                           |  | British Virgin Islands |  |                      |  | 100%Note iv          |  | Investment holding                                                                                           
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Qiao Xing Holdings Limited (QXHL)                                |  | British Virgin Islands |  | 100%                  |  | Note v              |  | Investment holding                                                                                           
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Qiao Xing Telecommunication Industry
Company Limited (QXTI)      |  | Mainland China         |  | 90%                   |  | Note vi             |  | Manufacturing and
sales of
telecommunication
equipment  a
subsidiary of QXHL                                
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Huizhou Qiao Xing-Hyundai System
Communication Equipment Co., Ltd. |  | Mainland China         |  | 60%                   |  | Note vii            |  | Manufacturing and
sales of Code
Division Multiple
Access (CDMA)
system equipment -
in the development
stage
|                                                                   |  |                        |  |                       |  |                      |  |                                                                                                              
|Qiao Xing Mobile Telecommunication Co., Ltd.                       |  | Mainland China         |  | 60%                   |  | Note viii           |  | Manufacturing and
sales of CDMA
mobile phones  in
the development
stage                                     

Notes -



|i.  |  | Hui Zhou Qiao Xing Communication Industry Limited is an equity joint venture
established in Mainland China on December 2, 2002 to be operated for a term of
15 years until December 1, 2017. As of December 31, 2002, no capital
contribution has been made by the Group and the joint venture partner and Hui
Zhou Qiao Xing Communication Industry Limited has not begun commercial
operations.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|ii. |  | Hui Zhou Qiao Xing Property Limited is an equity joint venture established
in Mainland China on December 17, 2002 to be operated for a term of 15 years
until December 16, 2017. As of December 31, 2002, no capital contribution has
been made by the Group and the joint venture partner and Hui Zhou Qiao Xing
Property Limited has not begun commercial operations.                          

F-8



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##### Table of Contents





|2.    |  | SUBSIDIARIES (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|iii.  |  | Qiao Xing Mobile Communication Company Limited was incorporated in the
British Virgin Islands on January 31, 2002. Its authorized capital is
US$50,000, of which US$10,000 has been issued and paid up by December 31,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     
|iv.   |  | Qiao Xing Communication Holdings Limited was incorporated in the British
Virgin Islands on May 21, 2002. Its authorized capital is US$50,000, of
which US$1 has been issued and paid up by December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     
|v.    |  | Qiao Xing Holdings Limited was disposed of on 31 December 2002 (see Note
9).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     
|vi.   |  | Qiao Xing Telecommunication Industry Company Limited (QXTI) is an
equity joint venture established in Mainland China in April 1992 to
be operated for a term of 30 years until April 2022. Full capital
contribution has been made by the Group and the joint venture
partner. The Company was disposed of with its immediate holding
company, QXHL on December 31, 2002 (see Note 9).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     
|vii.  |  | Huizhou Qiao Xing-Hyundai System Communication Equipment Co., Ltd.
is an equity joint venture established in Mainland China in August
2000 for a term of 20 years until August 2020. According to the
joint venture agreement, the Group and the joint venture partner
have to make capital contributions of US$7,152,000 (equivalent to
approximately Rmb59,219,000 based on exchange rate of US$1 =
Rmb8.28) and US$4,768,000 (equivalent to approximately Rmb39,479,000
based on exchange rate of US$1 = Rmb8.28), respectively. No capital
contribution has been made by the Group and the joint venture
partner, and Huizhou Qiao Xing-Hyundai System Communication
Equiipment Co., Ltd. has not begun commercial operations. Pursuant
to the [ 2002] 295 issued by the Government of Huizhou, the
termination of the subsidiary was formally approved on August 23,
2002.
|     
|viii. |  | Qiao Xing Mobile Telecommunication Co., Ltd. is an equity joint
venture established in Mainland China in August 2000 for a term of
20 years until August 2020. According to the joint venture
agreement, the Group and the joint venture partner have to make
capital contributions of US$7,152,000 (equivalent to approximately
Rmb59,219,000 based on exchange rate of US$1 = Rmb8.28) and
US$4,768,000 (equivalent to approximately Rmb39,479,000 based on
exchange rate of US$1 = Rmb8.28), respectively. No contribution has
been made by the Group and the joint venture partner, and Qiao Xing
Mobile Telecommunication Co., Ltd. has not begun commercial
operations. Pursuant to the [ 2002] 296 issued by the Government of
Huizhou, the termination of the subsidiary was formally approved on
August 23, 2002.                                                     

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##### Table of Contents





|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|a. |  | Basis of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, including the equity joint ventures.
All material intra-group balances and transactions have been eliminated
on consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States (U.S.
GAAP). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
U.S. GAAP differs from that used in the statutory financial statements of
the major operating subsidiaries of the Group, which were prepared in
accordance with the relevant accounting principles and financial
reporting regulations applicable to joint venture enterprises as
established by the Ministry of Finance of the PRC. Certain accounting
principles stipulated under U.S. GAAP are not applicable in the PRC.
|  
|b. |  | Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its issued voting share capital as a
long-term investment and over which it can exercise control, as defined
under U.S. GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|c. |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Inventories are stated at the lower of cost, determined on a weighted
average basis, and net realizable value. Costs of work-in-process and
finished goods are composed of direct materials, direct labor and an
attributable portion of manufacturing overhead. Net realizable value is
the estimated selling price in the ordinary course of business less the
estimated cost of completion and the estimated costs necessary to make
the sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | When inventories are sold, their carrying amount is charged to expense in
the year in which the revenue is recognized. Writedowns for declines in
net realizable value or for losses of inventories are recognized as an
expense in the year the impairment or loss occurs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|d. |  | Property, machinery and equipment and construction-in-progress                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Property, machinery and equipment are stated at cost less accumulated
depreciation and accumulated impairment losses. Gains or losses on
disposals are reflected in current operations. Major expenditures for
betterments and renewals are capitalized. All ordinary repair and
maintenance costs are expensed as incurred. Depreciation for financial
reporting purposes is provided using the straight-line method over the
estimated useful lives of the assets after taking into account the
assets estimated residual value. The estimated useful lives are as
follows: buildings - 8 to 30 years, machinery and equipment
- 6 to 12
years, furniture and office equipment - 5 years, and motor
vehicles - 5
years.                                                                                                                                                                                                                                                                             

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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|d. |  | Property, machinery and equipment and construction-in-progress (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Capitalized software represents acquisition costs to obtain proprietary
software provided by a third party, which is recorded under property,
machinery and equipment. The Group has adopted Statement of Position
(SOP) 98-1: Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which requires the Group to capitalize
certain internal use software purchased from third parties. Software
costs are capitalized when they relate to products under development and
which have reached technological feasibility. Capitalization ceases as
the production of the products associated with the software has started
and thereafter, the capitalized software is amortized on a straight-line
basis over an estimated useful life of six years. Management reviews and
evaluates the recoverability of the capitalized software periodically by
reference to certain external factors, including, but not limited to,
anticipated future revenue of the product and changes in technology.
|  
|   |  | Construction-in-progress represents land costs as well as factory and
office buildings under construction. When material, the Group
capitalizes interest during the construction phase of qualifying assets
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 34: Capitalization of Interest Cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Group tests its investment in long-lived assets, including property,
machinery and equipment and amortizable intangible assets, for
recoverability whenever events or changes in circumstances indicate the
net carrying amount may not be recoverable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|e. |  | Land use rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Land use rights are stated at the amount of the prepayment less
accumulated amortization. Land use rights expense is recognized ratably
over the lease term of 50 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|f. |  | Sales recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Group recognizes sales in accordance with SEC Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Sales represent the invoiced value of goods, net of value-added tax
(VAT), supplied to customers. Sales are recognized upon delivery of
goods and passage of title to customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | All of the Groups sales made in Mainland China are subject to Mainland
Chinese value-added tax at a rate of 17% (output VAT). Such output VAT
is payable after offsetting VAT paid by the Group on purchases (input
VAT).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|g. |  | Advertising costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Costs incurred for producing and communicating advertising are generally
expensed when incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|h. |  | Debt issuance costs and borrowing costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the lives of
the related debt. All other borrowing costs are recognized as an expense
in the period in which they are incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|i. |  | Research and development expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Research and development expenditures are charged to expenses as
incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|j. |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The Group accounts for income taxes under the provisions of SFAS No. 109:
Accounting for Income Taxes, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been included in the consolidated financial statements or tax
returns. Deferred income taxes is provided using the liability method
and is recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities. A valuation
allowance is provided for deferred tax assets if it is more likely than
not these items will either expire before the Company is able to realise
their benefits or that future deductibility is uncertain.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|k. |  | Operating leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Operating leases represent those leases under which substantially all the
risks and rewards of ownership of the leased assets remain with the
lessors. Rental payments under operating leases are charged to expense
on a straight-line basis over the period of the relevant leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|l. |  | Segment information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Group adopted SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires companies to
report financial and descriptive information about their reportable
operating segments, including segment profit or loss, certain specific
revenue and expense items, and segment assets, as well as information
about the revenues derived from the Groups products and services, the
countries in which the Group earns revenues and holds assets, and major
customers. SFAS No. 131 requires companies that have a single reportable
segment to disclose information about products and services, information
about geographic areas, and information about major customers. SFAS No.
131 requires the use of the management approach to determine the
information to be reported. The management approach is based on the way
management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. The Group
classifies its products into two core business segments, namely mobile
phones and indoor phones. In view of the fact that the Group operates
principally in Mainland China, no geographical segment information is
presented.

F-12



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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|m. |  | Foreign currency translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Companys functional currency is the United States dollar (US$) as a
majority of its financing and cash is denominated in US$. All other
companies within the Group consider Renminbi (Rmb) to be their
functional currency as most of their business activities are based in
Renminbi. Aggregate (loss) gain from foreign currency transactions are
included in the consolidated statements of operations and amounted to
approximately Rmb 2,363,000, Rmb (104,000) and nil for the years ended
December 31, 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The translation of the Companys consolidated financial statements into
Renminbi is performed for balance sheet accounts using the closing
exchange rate in effect at each of the balance sheet dates and for
revenue and expense accounts using the average exchange rate during each
reporting period. Gains and losses resulting from translation are
included in shareholders equity separately as cumulative translation
adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|n. |  | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Group has adopted SFAS No. 130: Reporting Comprehensive Income
which requires the Group to report all changes in equity during a period,
except for those resulting from investment by owners and distribution to
owners, in the consolidated financial statements as comprehensive income
for the period in which they are recognized. The Group has presented
comprehensive income, which encompasses net income and currency
translation adjustments, in the consolidated statements of operations and
comprehensive income.                                                                                                                                                                                                                                                                                                                                        
|  
|o. |  | Earnings (loss) per common share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Earnings (loss) per common share is computed in accordance with SFAS No.
128: Earnings Per Share by dividing the net income by the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings (loss) per common share is computed by using the
weighted average number of common shares outstanding adjusted to include
the potentially dilutive effect of outstanding stock options, warrants
and convertible debentures to the extent such instruments were dilutive
during the period.                                                                                                                                                                                                                                                                                                                                           
|  
|p. |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25: Accounting for Stock Issued
to Employees. Compensation expense related to employee stock options is
recorded only if the fair value of the underlying stock exceeds the
exercise price on the date of grant. Repriced options are accounted for
as compensatory options using variable accounting treatment. Under
variable plan accounting, compensation expense is adjusted for increases
or decreases in the fair market value of the Companys common stock.
Variable plan accounting is applied to the repriced options until the
options are exercised, forfeited or expire unexercised. Pro forma
disclosures were made assuming hypothetical fair value method application
as prescribed by SFAS No. 123: Accounting for Stock-Based Compensation.

F-13



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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|p. |  | Stock-based compensation (Contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | The Company accounts for stock options and warrants issued to external
consultants in accordance with the recognition provisions of SFAS No.123
and EITF 96-18: Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services. The Company values stock options and warrants issued based
on the Black-Scholes option-pricing model and recognizes this value over
the period in which the options vest.                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|q. |  | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Group accounts for financial instruments under the provisions of SFAS
No. 133: Accounting for Derivative Instruments and Hedging Activities,
which requires that all derivative financial instruments be recognized in
the financial statements and maintained at fair value regardless of the
purpose or intent for holding them. Changes in fair value of derivative
financial instruments are either recognized periodically in income or
shareholders equity (as a component of comprehensive income), depending
on whether the derivative is being used to hedge changes in fair value or
cash flows. The adoption of SFAS 133 in 2002 did not have a material
impact on the Groups financial position or its results of operations
because the Group does not purchase or sell any derivative financial
instruments, and does not have any contracts with an embedded derivative.
|  
|   |  | The carrying amounts for cash and bank deposits, pledged bank deposits,
accounts receivable, short-term borrowings, accounts payable, other
payables and accrued liabilities approximate their fair values because of
the short maturity of those instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The carrying amounts and fair values of the Groups financial instruments
at December 31, 2001 and 2002 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                       |  |                 |         |            |  |         |        |         |  |         |       |         |  |  |         |  |  |  |        |  |  |  |       | 
|---------------------- |  | --------------- | ------- | ---------- |  | ------- | ------ | ------- |  | ------- | ----- | ------- |  |  | ------- |  |  |  | ------ |  |  |  | ----- | 
|                       |  | Carrying amount |         | Fair value
|                       |  |                 |         |           
|                       |  | 2001            |         | 2002       |  | 2001    |        | 2002   
|                       |  |                 |         |            |  |         |        |        
|                       |  | Rmb000         |         | Rmb000    |  | US$000 |        | Rmb000 |  | Rmb000 |       | US$000
|                       |  |                 |         |            |  |         |        |         |  |         |       |        
|Cash and bank deposits |  |                 | 7,616   |            |  |         | 10,948 |         |  |         | 1,323 |         |  |  | 7,616   |  |  |  | 10,948 |  |  |  | 1,323 | 
|Pledged bank deposits  |  |                 | 76,925  |            |  |         | 12,483 |         |  |         | 1,507 |         |  |  | 76,925  |  |  |  | 12,483 |  |  |  | 1,507 | 
|Accounts receivable    |  |                 | 254,816 |            |  |         | 33     |         |  |         | 4     |         |  |  | 254,816 |  |  |  | 33     |  |  |  | 4     | 
|Short-term borrowings  |  |                 | 189,990 |            |  |         | 40,000 |         |  |         | 4,831 |         |  |  | 189,990 |  |  |  | 40,000 |  |  |  | 4,831 | 
|Accounts payable       |  |                 | 32,752  |            |  |         | 1,372  |         |  |         | 166   |         |  |  | 32,752  |  |  |  | 1,372  |  |  |  | 166   | 
|Other payables         |  |                 | 6,550   |            |  |         | 733    |         |  |         | 89    |         |  |  | 6,550   |  |  |  | 733    |  |  |  | 89    | 
|Accrued liabilities    |  |                 | 13,627  |            |  |         | 13,890 |         |  |         | 1,677 |         |  |  | 13,627  |  |  |  | 13,890 |  |  |  | 1,677 | 



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

F-14



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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)
|-- |  | ---------------------------------------------------
|  
|s. |  | Recently issued accounting standards               



| |  | (i)     In July 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141: Business Combinations and SFAS No. 142: Goodwill
and Other Intangible Assets. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is
prohibited after that date. SFAS No. 142 changes the accounting for
goodwill and intangible assets with indefinite lives from an amortization
method to an impairment-only approach and requires intangible assets with
finite lives to be amortized over their useful lives. Thus, amortization
of goodwill and intangible assets with indefinite lives will cease upon
adoption of the Statement. SFAS No. 142 is required to be applied in
fiscal years beginning after December 15, 2001. Upon the adoption of SFAS
No. 142, the Group will not amortize goodwill and instead will conduct an
annual impairment test of the remaining goodwill. The Group expects to
apply the provisions of SFAS No. 141 and SFAS No. 142 in accounting for
the acquisition of CECT in 2003 (Note 14).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (ii)     In April 2002, the FASB issued SFAS No. 145: Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This SFAS made revisions to the accounting for
gains and losses from the extinguishment of debt, rescinded Statement No.
44, and required certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. The Group adopted the provisions
of SFAS No. 145 on January 1, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the Groups consolidated financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | (iii)     In June 2002, the FASB issued SFAS No. 146: Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This SFAS also established that fair
value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002. The Group adopted the
provisions of SFAS No. 146 effective December 31, 2002. The adoption of
SFAS No. 146 is not expected to have a material impact on the Companys
consolidated financial statements.                                                                                         
|
| |  | (iv)     In October 2002, the FASB issued SFAS No. 147, Acquisitions of
Certain Financial Institutions. SFAS No. 147 provides interpretive
guidance on the accounting for all acquisitions of financial
institutions, except transactions between two or more mutual enterprises.
Restatement of previously issued financial statements will be required.
Those transition provisions are effective as of October 1, 2002; however,
early application is permitted. The Group does not anticipate that the
adoption of SFAS No. 147 will have any effect on its consolidated
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-15



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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD)
|-- |  | ---------------------------------------------------
|  
|s. |  | Recently issued accounting standards (Contd )     



| |  | (v)     In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit. It also clarifies that at
the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes
under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of FIN 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002.                                                                                                                                                                                                                                                                          
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (vi)     In December 2002, the FASB issued SFAS No. 148: Accounting for
Stock-Based Compensation-Transition and Disclosure-and Amendment of FASB
Statement No.123. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Group adopted the disclosure
provisions of SFAS No. 148 effective December 31, 2002. The adoption of
SFAS No. 148 is not expected to have a material impact on the Groups
consolidated financial statements.                                                                                                                                                
|
| |  | (vii)     In January 2003, the FASB issued Interpretation No. 46:
Consolidation of Variable Interest Entities (an interpretation of ARB
No. 51) (FIN46). FIN46 addresses consolidation by business
enterprises of certain variable interest entities, commonly referred to
as special purpose entities. The Group will be required to implement the
other provisions of FIN46 in 2003. The adoption of FIN46 is not expected
to have a material impact on the Groups consolidated financial
statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | (viii)     In April 2003, the FASB issued SFAS No.149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities. SFAS No.149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No.133 Accounting for
Derivative Instruments and Hedging Activities. It is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of SFAS
No.149 should be applied prospectively. The adoption of SFAS 149 is not
expected to have a material impact on the Groups consolidated financial
statements.                                                                                                                                                                                                                                                                                                                 
|
| |  | (ix)     In May 2003, the FASB issued SFAS No.150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classifies a
financial instrument that is within its scope as a liability (or as an
asset in some circumstances). It is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
It is to be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before the
issuance date of SFAS No.150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. The adoption of
SFAS No.150 is not expected to have a material impact on the Groups
consolidated financial statements.

F-16



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|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Contd)                                                                                    
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|  
|t. |  | Reclassifications                                                                                                                      
|  
|   |  | Certain amounts in the fiscal 2001 consolidated financial statements
have been reclassified to conform to the fiscal 2002 presentation.
|  
|4. |  | CONVENIENCE TRANSLATION                                                                                                                

Translation of amounts from Renminbi (Rmb) into United States dollars (US$)
is for the convenience of readers and has been made at the noon buying rate in
New York City for cable transfers in foreign currencies as certified for custom
purposes by the Federal Reserve Bank of New York on December 31, 2002 of
US$1.00 = Rmb 8.28. No representation is made that the Renminbi amounts could
have been, or could be, converted into United States dollars at that rate or at
any other rate.



|5. |  | ACCOUNTS RECEIVABLE
|-- |  | -------------------

Accounts receivable consists of:

|                                      |  |         |         |         |  |         |    |  |  |  |   | 
|------------------------------------- |  | ------- | ------- | ------- |  | ------- | -- |  |  |  | - | 
|                                      |  | 2001    |         | 2002   
|                                      |  |         |         |        
|                                      |  | Rmb000 |         | Rmb000 |  | US$000
|                                      |  |         |         |         |  |        
|Trade receivables                     |  |         | 285,900 |         |  |         | 33 |  |  |  | 4 | 
|Less: Allowance for doubtful accounts |  |         | (31,084 | )       |  |         |   |  |  |  |  | 
|                                      |  |         |         |         |  |         |    |  |  |  |   | 
|Accounts receivable, net              |  |         | 254,816 |         |  |         | 33 |  |  |  | 4 | 
|                                      |  |         |         |         |  |         |    |  |  |  |   | 

Changes in the allowance for doubtful accounts were as follows:

|                                                                                        |  |         |        |         |  |         |         |   |  |  |        |  
|--------------------------------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------- | - |  |  | ------ | -
|                                                                                        |  | 2001    |        | 2002   
|                                                                                        |  |         |        |        
|                                                                                        |  | Rmb000 |        | Rmb000 |  | US$000
|                                                                                        |  |         |        |         |  |        
|Beginning of year                                                                       |  |         | 22,126 |         |  |         | 31,084  |   |  |  | 3,754  |  
|Increase in allowance for
doubtful accounts                                             |  |         | 8,958  |         |  |         | 34,997  |   |  |  | 4,227  |  
|Reduction in allowance for
doubtful accounts arising from
sale of a subsidiary (Note 9) |  |         |       |         |  |         | (66,081 | ) |  |  | (7,981 | )
|                                                                                        |  |         |        |         |  |         |         |   |  |  |        |  
|End of year                                                                             |  |         | 31,084 |         |  |         |        |   |  |  |       |  
|                                                                                        |  |         |        |         |  |         |         |   |  |  |        |  

F-17



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|6. |  | INVENTORIES
|-- |  | -----------

Inventories consist of:

|                |  |         |        |         |  |         |     |  |  |  |    | 
|--------------- |  | ------- | ------ | ------- |  | ------- | --- |  |  |  | -- | 
|                |  | 2001    |        | 2002   
|                |  |         |        |        
|                |  | Rmb000 |        | Rmb000 |  | US$000
|                |  |         |        |         |  |        
|Raw materials   |  |         | 16,706 |         |  |         | 148 |  |  |  | 18 | 
|Work-in-process |  |         | 9,377  |         |  |         |    |  |  |  |   | 
|Finished goods  |  |         | 53,779 |         |  |         | 101 |  |  |  | 12 | 
|                |  |         |        |         |  |         |     |  |  |  |    | 
|                |  |         | 79,862 |         |  |         | 249 |  |  |  | 30 | 
|                |  |         |        |         |  |         |     |  |  |  |    | 



|7. |  | PREPAID EXPENSES
|-- |  | ----------------

Prepaid expenses consist of:

|                                                  |  |         |     |         |  |         |        |  |  |  |       | 
|------------------------------------------------- |  | ------- | --- | ------- |  | ------- | ------ |  |  |  | ----- | 
|                                                  |  | 2001    |     | 2002   
|                                                  |  |         |     |        
|                                                  |  | Rmb000 |     | Rmb000 |  | US$000
|                                                  |  |         |     |         |  |        
|Vendor deposits for the purchase
of mobile phones |  |         |    |         |  |         | 44,660 |  |  |  | 5,394 | 
|Prepaid design fees                               |  |         |    |         |  |         | 4,590  |  |  |  | 554   | 
|Prepaid advertising costs                         |  |         | 150 |         |  |         |       |  |  |  |      | 
|Prepaid stock issuance costs (Note 20.c.vi)       |  |         | 458 |         |  |         |       |  |  |  |      | 
|Prepaid insurance                                 |  |         | 183 |         |  |         |       |  |  |  |      | 
|Other                                             |  |         | 147 |         |  |         | 543    |  |  |  | 66    | 
|                                                  |  |         |     |         |  |         |        |  |  |  |       | 
|                                                  |  |         | 938 |         |  |         | 49,793 |  |  |  | 6,014 | 
|                                                  |  |         |     |         |  |         |        |  |  |  |       | 



|8. |  | RECEIVABLE FROM SALE OF A SUBSIDIARY
|-- |  | ------------------------------------

Receivable from sale of a subsidiary consist of:

|                                            |  |         |   |         |  |         |         |  |  |  |        | 
|------------------------------------------- |  | ------- | - | ------- |  | ------- | ------- |  |  |  | ------ | 
|                                            |  | 2001    |   | 2002   
|                                            |  |         |   |        
|                                            |  | Rmb000 |   | Rmb000 |  | US$000
|                                            |  |         |   |         |  |        
|Consideration receivable from Central Grace |  |         |  |         |  |         | 210,000 |  |  |  | 25,362 | 
|Advances to QXTI                            |  |         |  |         |  |         | 72,377  |  |  |  | 8,741  | 
|                                            |  |         |   |         |  |         |         |  |  |  |        | 
|                                            |  |         |  |         |  |         | 282,377 |  |  |  | 34,103 | 
|                                            |  |         |   |         |  |         |         |  |  |  |        | 

The consideration receivable from sale of a subsidiary was settled between
March 20, 2003 and July 16, 2003 (Note 9).

The advances to QXTI, an ex-subsidiary, were collected subsequent to December
31, 2002.

F-18



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|9. |  | SALE OF A SUBSIDIARY
|-- |  | --------------------

On December 31, 2002, an agreement for sale of the one issued share of Qiao
Xing Holdings Limited (QXHL) was entered into between Qiao Xing
Universal Telephone, Inc. (the Vendor) and Central Grace Technologies
Limited (the Purchaser), a corporation incorporated under the laws of
the British Virgin Islands. The consideration for the sale of the one
issued share was Rmb210,000,000 and the payment schedule was as follows:

|                |  |         |         |  |  |  |   | 
|--------------- |  | ------- | ------- |  |  |  | - | 
|Settlement Date |  | Rmb000 |         |  |  | 
|                |  |         |         |  |  | 
|March 20, 2003  |  |         | 11,470  |  |  |  |   | 
|June 5, 2003    |  |         | 52,000  |  |  |  | * | 
|July 11, 2003   |  |         | 31,435  |  |  |  |   | 
|July 11, 2003   |  |         | 44,661  |  |  |  |   | 
|July 12, 2003   |  |         | 10,434  |  |  |  |   | 
|July 16, 2003   |  |         | 60,000  |  |  |  |   | 
|                |  |         |         |  |  |  |   | 
|                |  |         | 210,000 |  |  |  |   | 
|                |  |         |         |  |  |  |   | 



| |  |  | The amount was offset with a payable to QXTI of the same amount pursuant
to an agreement dated June 5, 2003.
| | - |  | ------------------------------------------------------------------------------------------------------------

The Purchaser further represented, undertook, warranted and covenanted to
make reciprocal warranties, undertakings, covenants and indemnities to the
Vendor and to assume all disclosed and undisclosed liabilities of QXHL
excluding :



| | (i)   |  | the settlement of the current liabilities due to the Vendor
in the sum of RMB231,585,507 by QXTI
| | ----- |  | ------------------------------------------------------------------------------------------------
|
| | (ii)  |  | the settlement of the current liabilities due to the Vendor
in the sum of RMB8,172,953 by QXHL  
|
| | (iii) |  | the settlement of current assets due from QXMC in the sum of
RMB113,543,063 by QXTI             

Although the form of the sale of the one issued share of QXHL represents a sale
of stock, the economic substance of the transaction is the sale of QXHLs
indoor phone manufacturing assets and related liabilities.

As of December 31, 2001 and 2002, comparative condensed historical balances
of QXHLs assets and liabilities that were sold consist of:

|                              |  |         |          |         |  |         |          |   |  |  |         |  
|----------------------------- |  | ------- | -------- | ------- |  | ------- | -------- | - |  |  | ------- | -
|                              |  |         | 2001     |         |  | 2002   
|                              |  |         |          |         |  |         |         
|                              |  | Rmb000 |          | Rmb000 |  | US$000
|                              |  |         |          |         |  |        
|Total current assets          |  |         | 494,657  |         |  |         | 592,305  |   |  |  | 71,535  |  
|Property, plant and equipment |  |         | 186,141  |         |  |         | 171,292  |   |  |  | 20,687  |  
|Land use rights               |  |         | 28,502   |         |  |         | 29,086   |   |  |  | 3,513   |  
|Total current liabilities     |  |         | (352,071 | )       |  |         | (637,613 | ) |  |  | (77,007 | )
|Long term borrowings          |  |         |         |         |  |         | (30,000  | ) |  |  | (3,623  | )
|Minority interests            |  |         | (23,102  | )       |  |         | 5,880    |   |  |  | 710     |  
|                              |  |         |          |         |  |         |          |   |  |  |         |  
|                              |  |         | 334,127  |         |  |         | 130,950  |   |  |  | 15,815  |  
|                              |  |         |          |         |  |         |          |   |  |  |         |  

F-19



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##### Table of Contents





|9. |  | SALE OF A SUBSIDIARY (Contd)
|-- |  | -----------------------------

Certain assets of QXHL were excluded from the sale transaction. Excluded assets
were certain land use rights, fixed line telephone sales network, mobile
telephone business including but not limited to the research and
development and manufactory, and die cast moulds. The excluded assets
were retained by the Group. The Group will continue to engage in the sale
of indoor phones as a core business segment of its ongoing operations, but
intends to outsource the manufacturing of indoor phones. Therefore the
sale of a subsidiary has not been accounted for as a discontinued
operation.

As a result of the sale transaction, a gain on disposal of RMB79,050,000 was
recognized for the year ended December 31, 2002. The calculation of the
gain on sale of a subsidiary is set out as follows:

|                                                      |  |         |          |         |  |  |         |  
|----------------------------------------------------- |  | ------- | -------- | ------- |  |  | ------- | -
|                                                      |  | Rmb000 |          | US$000
|                                                      |  |         |          |        
|Consideration                                         |  |         | 210,000  |         |  |  | 25,362  |  
|Net book value of assets sold and
liabilities assumed |  |         | (125,070 | )       |  |  | (15,105 | )
|Minority interests sold                               |  |         | (5,880   | )       |  |  | (710    | )
|                                                      |  |         |          |         |  |  |         |  
|Gain on sale of a subsidiary                          |  |         | 79,050   |         |  |  | 9,547   |  
|                                                      |  |         |          |         |  |  |         |  



|10. |  | PROPERTY, MACHINERY AND EQUIPMENT
|--- |  | ---------------------------------

Property, machinery and equipment consists of:

|                                                     |  |         |         |         |  |         |         |   |  |  |        |  
|---------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  |  | ------ | -
|                                                     |  | 2001    |         | 2002   
|                                                     |  |         |         |        
|                                                     |  | Rmb000 |         | Rmb000 |  | US$000
|                                                     |  |         |         |         |  |        
|Buildings                                            |  |         | 151,952 |         |  |         | 145     |   |  |  | 18     |  
|Machinery, equipment and software                    |  |         | 72,735  |         |  |         | 24,264  |   |  |  | 2,930  |  
|Furniture and office equipment                       |  |         | 15,020  |         |  |         | 709     |   |  |  | 86     |  
|Motor vehicles                                       |  |         | 14,172  |         |  |         | 123     |   |  |  | 15     |  
|                                                     |  |         |         |         |  |         |         |   |  |  |        |  
|                                                     |  |         | 253,879 |         |  |         | 25,241  |   |  |  | 3,049  |  
|                                                     |  |         |         |         |  |        
|Less: Accumulated depreciation and
impairment losses |  |         | (70,279 | )       |  |         | (20,129 | ) |  |  | (2,432 | )
|                                                     |  |         |         |         |  |         |         |   |  |  |        |  
|Property, machinery and equipment, net               |  |         | 183,600 |         |  |         | 5,112   |   |  |  | 617    |  
|                                                     |  |         |         |         |  |         |         |   |  |  |        |  

Prior to January 1, 2002, capitalized software represented the acquisition cost
to obtain proprietary software provided by a third party, which is recorded
under machinery, equipment and software. The Directors evaluated the
recoverability of the capitalized software cost and determined to make full
provision of Rmb 8,722,000 of the carrying value of capitalized software cost
as of December 31, 2001.

Certain property, machinery and equipment of the Group with a net book value of
approximately Rmb115,172,000 and nil as of December 31, 2001 and 2002,
respectively, were pledged as collateral for certain of the Groups short-term
borrowings (Note 15).

F-20



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##### Table of Contents





|11. |  | CONSTRUCTION-IN-PROGRESS
|--- |  | ------------------------

Construction-in-progress represented construction costs incurred for
construction of certain factory facilities, which was transferred to property,
machinery and equipment during 2002.



|12. |  | LAND USE RIGHTS
|--- |  | ---------------

Land use rights consist of:

|                                                     |  |         |         |         |  |         |         |   |  |  |        |  
|---------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  |  | ------ | -
|                                                     |  | 2001    |         | 2002   
|                                                     |  |         |         |        
|                                                     |  | Rmb000 |         | Rmb000 |  | US$000
|                                                     |  |         |         |         |  |        
|Land use rights                                      |  |         | 236,940 |         |  |         | 203,047 |   |  |  | 24,523 |  
|Less: Accumulated amortization and
impairment losses |  |         | (15,581 | )       |  |         | (13,642 | ) |  |  | (1,648 | )
|                                                     |  |         |         |         |  |         |         |   |  |  |        |  
|Land use rights, net                                 |  |         | 221,359 |         |  |         | 189,405 |   |  |  | 22,875 |  
|                                                     |  |         |         |         |  |         |         |   |  |  |        |  

Private ownership of land is not allowed in Mainland China. Rather, entities
acquire the right to use land for a designated term. As of December 31, 2001
and 2002, the land use rights consisted of certain parcels of land located in
Mainland China with a net book value of approximately Rmb167,211,000 and Rmb
136,826,000, respectively, held under land use rights ranging from 43 to 48
years and expiring in June 2042, July 2048, August 2049 and March 2050,
respectively.

In addition, as of December 31, 2001 and 2002, the Group also recorded prepaid
land use rights with a net book value of approximately Rmb54,148,000 and Rmb
52,579,000, respectively, in respect of certain parcels of land which QXTI has
not yet obtained the land use right certificates. QXTI has obtained a legal
opinion from its Mainland Chinese lawyer that it is virtually assured of
success in obtaining the land use right certificates for the remaining portion
of land with no current land use right certificates.

The ownership of all the recorded land use rights was still vested with QXTI,
the Groups ex-subsidiary, as of July 19, 2003. The Group has obtained a legal
opinion from its Mainland Chinese lawyer that it is virtually assured of
success in completing all the necessary statutory procedures to transfer the
ownership of all the recorded land use rights from QXTI to the Group.

Land use rights with a carrying amount
of approximately Rmb 47,635,000 (Notes 25 and 28) (2001 
Rmb 103,668,000) and Rmb 89,191,000 (Note 14) (2001  nil) as of December 31, 2002 were
pledged as collateral for certain short-term borrowings of the
ex-subsidiary and the unsettled consideration of the Groups equity
interest in CECT, respectively.

F-21



---



##### Table of Contents





|13. |  | OTHER NON-CURRENT ASSETS
|--- |  | ------------------------

Other non-current assets as of December 31, 2002 consist of:

|                                                                                    |  |         |   |         |  |         |         |   |  |  |        |  
|----------------------------------------------------------------------------------- |  | ------- | - | ------- |  | ------- | ------- | - |  |  | ------ | -
|                                                                                    |  | 2001    |   | 2002   
|                                                                                    |  |         |   |        
|                                                                                    |  | Rmb000 |   | Rmb000 |  | US$000
|                                                                                    |  |         |   |         |  |        
|Deposits paid for equity interests in CECT                                          |  |         |  |         |  |         | 180,000 |   |  |  | 21,739 |  
|Fair value of shares issued to an
external consultant (Note 19)                     |  |         |  |         |  |         | 13,243  |   |  |  | 1,599  |  
|Excess of cash received over share of net
assets of a minority shareholder of QXMCL |  |         |  |         |  |         | (2,680  | ) |  |  | (323   | )
|Other                                                                               |  |         |  |         |  |         | 944     |   |  |  | 114    |  
|                                                                                    |  |         |   |         |  |         |         |   |  |  |        |  
|                                                                                    |  |         |  |         |  |         | 191,507 |   |  |  | 23,129 |  
|                                                                                    |  |         |   |         |  |         |         |   |  |  |        |  

During the year ended December 31, 2002, the minority shareholder of Qiao Xing
Mobile Communication Company Limited (QXMCL) paid Rmb 67 million for a 20%
equity interest in QXMCL. The consideration was paid by the minority
shareholder of QXMCL directly to the sellers of CECT as part of the deposits
paid by the Group. The amount of Rmb 67 million received in excess of the
minority shareholders share of net assets of QXMCL is credited against the
deposits paid for the equity interests in CECT as of December 31, 2002.



|14. |  | PENDING ACQUISITION OF CECT
|--- |  | ---------------------------

During 2002, the Group entered into the following sale and purchase agreements
(the Agreements) for the acquisition of an aggregate equity interest of 65%
in CEC Telecom Ltd. (CECT) for an aggregate consideration of Rmb312,750,000.
CECT is a limited liability company established in Mainland China and is
principally engaged in production and sales of mobile phones and accessories in
Mainland China (the Acquisitions).

Pursuant to an Agreement dated May 23, 2002, Qiao Xing Mobile Communication
Company Limited (QXMCL), a subsidiary of the Company acquired a 25% equity
interest in CECT from Tianjin Taida Company Limited for cash consideration of
Rmb108,750,000. Pursuant to an Agreement and a supplementary Agreement, both
dated May 23, 2002, QXMCL acquired a 40% equity interest in CECT from China
Electronics Corporations (CEC) and other group companies of CEC for cash
consideration of Rmb204,000,000. All Agreements are governed by, and
construed in accordance with, the Mainland Chinese law.

As of December 31, 2002, the Group made prepayments of Rmb180,000,000 to the
sellers according to the payment terms prescribed in the Agreements. The
remaining consideration will be payable as follows: (i) Rmb85,000,000 within 3
months after the date of shares transfers and (ii) Rmb47,750,000 within 6
months after the date of shares transfers. The Group is in the process of
applying for the shares transfers as of December 31, 2002. The unsettled
consideration will be secured by, among others, QXMCLs equity interest in CECT
(after completion of shares transfers) and certain land use rights of the Group
with a net book value of Rmb89,191,000 as of December 31, 2002. There are no
material contingencies associated with the determination of the purchase price.

F-22



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##### Table of Contents



14. PENDING ACQUISITION OF CECT (Contd)

As of December 31, 2002, the Acquisitions had not been completed
because certain precedent conditions as set out in the Agreements
have not been fulfilled. Such precedent conditions include, among
others, (i) approval from the Mainland Chinese government on the shares transfers and (ii) completion of collateral arrangements on
QXMCLs equity interest in CECT and certain land use right of the
Group as described in the preceding paragraph. Any non-fulfillment
of these precedent conditions may lead to the termination of the
Acquisitions, and the refund of the Groups prepayments.

On February 8, 2003, the acquisition of CECT was finally
approved by all necessary government authorities with the new
business license granted subsequently.

The Group has obtained a third-party determination of the estimated fair
value of the assets acquired, including a valuation of certain intangible
assets. Since the Group acquired less than 100% interest in CECT, the
allocation of the purchase price only considers the 65% portion of CECTs
assets that the Group acquired.

|                                 |                                     |  |           |        |           |  |        |       |  |  |              |  | 
|-------------------------------- | ----------------------------------- |  | --------- | ------ | --------- |  | ------ | ----- |  |  | ------------ |  | 
|                                 |                                     |  |           |        |           |  |        |       |  |  | Expected    
|                                 |                                     |  |           |        |           |  |        |       |  |  | Weighted-   
|                                 |                                     |  |           |        |           |  |        |       |  |  | Average     
|                                 |                                     |  |           |        |           |  |        |       |  |  | Amortization
|                                 |                                     |  | (Rmb000) |        | (USD000) |  | Period
|                                 |                                     |  |           |        |           |  |       
|Purchase Consideration           |                                     |  | 312,750   |        |           |  | 37,774 |       |  |  |              | 
|                                 |                                     |  |           |        |           |  |        |       |  |  |              | 
|Net Working Capital              |                                     |  | 128,050   |        |           |  | 15,468 |       |  |  |              | 
|Fixed assets:                    |                                     |  |           |        |           |  |        |       |  |  |              | 
|                                 | Land and building                   |  |           | 29,800 |           |  |        | 3,599 |  |  |              |  | 
|                                 | Machinery and equipment             |  |           | 8,400  |           |  |        | 1,014 |  |  |              |  | 
|Identifiable intangible assets : |                                     |  |           |        |           |  |        |       |  |  |              | 
|                                 | Trademarks                          |  |           | 28,200 |           |  |        | 3,406 |  |  | Indefinite  
|                                 | Customer relationship               |  |           | 19,000 |           |  |        | 2,295 |  |  | 5 years     
|                                 | Completed technology                |  |           | 4,400  |           |  |        | 531   |  |  | 5 years     
|                                 | Core technology                     |  |           | 26,100 |           |  |        | 3,152 |  |  | 5 years     
|                                 | Backlog                             |  |           | 17,700 |           |  |        | 2,138 |  |  | 5 months    
|                                 | License                             |  |           | 5,900  |           |  |        | 713   |  |  | 5 years     
|                                 | In process research and
development |  |           | 25,200 |           |  |        | 3,043 |  |  |              |  | 
|                                 | Goodwill                            |  |           | 20,000 |           |  |        | 2,415 |  |  |              |  | 
|                                 |                                     |  |           |        |           |  |        |       |  |  |              | 
|                                 |                                     |  | 312,750   |        |           |  | 37,774 |       |  |  |              | 
|                                 |                                     |  |           |        |           |  |        |       |  |  |              | 

The weighted-average amortizable lives of acquired identifiable
intangible assets in total are expected to be approximately four years.
The amount assigned to in process research and development assets will be
written off at the date of acquisition in accordance with FASB
Interpretation No. 4, Applicability of FASB Statements No. 2 to Business
Combinations Accounted for by the Purchase Method. The write off is
expected be included with general and administrative expenses.

F-23



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##### Table of Contents



14. PENDING ACQUISITION OF CECT (Contd)

With the acquisition of CECT, the group will obtain significant research
and development capabilities and technologies as well as licenses to sell
both CDMA and GSM mobile phones in China. The acquisition of the above
mentioned economic resources further enhances the Groups capability to
penetrate the mobile phone market in China. As a result, the acquisition
of the above mentioned economic resources has contributed to the
determination of a purchase price that results in the recognition of
goodwill.

The amount allocated to goodwill is expected to be assigned to the mobile
phones segment of the Groups business. None of the goodwill is expected
to be deductible for Mainland Chinese income tax purposes.

15. SHORT-TERM BORROWINGS

Short-term borrowings consist of:

|                                         |  |         |         |         |  |         |        |  |  |  |       | 
|---------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------ |  |  |  | ----- | 
|                                         |  | 2001    |         | 2002   
|                                         |  |         |         |        
|                                         |  | Rmb000 |         | Rmb000 |  | US$000
|                                         |  |         |         |         |  |        
|Bills payable                            |  |         | 29,180  |         |  |         | 10,000 |  |  |  | 1,208 | 
|Bank loans                               |  |         | 127,300 |         |  |         | 30,000 |  |  |  | 3,623 | 
|Other bank borrowings - discounted bills |  |         | 33,510  |         |  |         |       |  |  |  |      | 
|                                         |  |         |         |         |  |         |        |  |  |  |       | 
|                                         |  |         | 189,990 |         |  |         | 40,000 |  |  |  | 4,831 | 
|                                         |  |         |         |         |  |         |        |  |  |  |       | 

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

Furthermore, during the year ended December 31, 2001 and 2002, the Group issued
certain bills to related companies. These related companies discounted the
bills with certain banks and remitted the cash to the Group immediately. The
Group recorded this type of financing as other bank borrowings - discounted
bills, which was repayable in 180 days and bore a weighted average interest
rate of 3.47% and 3% per annum as of December 31, 2001 and 2002, respectively.

As of December 31, 2001 and 2002, the bills payables and other bank borrowings
- discounted bills are secured by pledged bank deposits of approximately
Rmb28,062,000 and Rmb10,000,000, respectively.

The weighted average interest rate on bank loans was 6.22% per annum and 5.84%
per annum, respectively, as of December 31, 2001 and 2002.

F-24



---



##### Table of Contents



16. OTHER PAYABLES

Other payables consist of:

|                                                          |  |         |       |         |  |         |     |  |  |  |    | 
|--------------------------------------------------------- |  | ------- | ----- | ------- |  | ------- | --- |  |  |  | -- | 
|                                                          |  | 2001    |       | 2002   
|                                                          |  |         |       |        
|                                                          |  | Rmb000 |       | Rmb000 |  | US$000
|                                                          |  |         |       |         |  |        
|Payable for land use rights                               |  |         | 1,000 |         |  |         |    |  |  |  |   | 
|Payable for construction work of factories                |  |         | 4,357 |         |  |         |    |  |  |  |   | 
|Payable for purchase of machinery,
equipment and software |  |         | 731   |         |  |         | 660 |  |  |  | 80 | 
|Payable for advertising expenses                          |  |         | 455   |         |  |         |    |  |  |  |   | 
|Others                                                    |  |         | 7     |         |  |         | 73  |  |  |  | 9  | 
|                                                          |  |         |       |         |  |         |     |  |  |  |    | 
|                                                          |  |         | 6,550 |         |  |         | 733 |  |  |  | 89 | 
|                                                          |  |         |       |         |  |         |     |  |  |  |    | 

17. ACCRUED LIABILITIES

Accrued liabilities consist of:

|                                   |                         |  |         |       |         |  |         |  |  |  |        |        |  |  |       |       | 
|---------------------------------- | ----------------------- |  | ------- | ----- | ------- |  | ------- |  |  |  | ------ | ------ |  |  | ----- | ----- | 
|                                   |                         |  | 2001    |       | 2002   
|                                   |                         |  |         |       |        
|                                   |                         |  | Rmb000 |       | Rmb000 |  | US$000
|Accruals for operating expenses    |                         |  |         |       |         |  |         |  |  |  |        |        |  |  |       |      
|                                   | - Commissions (Note 28) |  |         |      |         |  |         |  |  |  |        | 11,331 |  |  |       | 1,368 | 
|                                   | - Salaries              |  |         | 2,949 |         |  |         |  |  |  |        | 738    |  |  |       | 89    | 
|                                   | - Advertising           |  |         | 2,806 |         |  |         |  |  |  |        |       |  |  |       |      | 
|                                   | - Others                |  |         | 1,199 |         |  |         |  |  |  |        | 1,659  |  |  |       | 200   | 
|Provision for staff benefit*       |                         |  | 3,030   |       |         |  |         |  |  |  | 162    |        |  |  | 20    |      
|Provision for staff welfare fund** |                         |  | 3,643   |       |         |  |         |  |  |  |       |        |  |  |      |      
|                                   |                         |  |         |       |         |  |         |  |  |  |        |        |  |  |       |      
|                                   |                         |  | 13,627  |       |         |  |         |  |  |  | 13,890 |        |  |  | 1,677 |      
|                                   |                         |  |         |       |         |  |         |  |  |  |        |        |  |  |       |      



|*  |  | Provision for staff benefit is provided at 17.5% of total salary expenses
of QXTI. The provision for staff benefit is used for employees welfare,
employees education and workers association.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Staff welfare fund is a discretionary fund provided at 1% of the
statutory after-tax profit of QXTI and is used for employees welfare
(Note 24).                                                

18. SHAREHOLDERS LOANS

These represent unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi
Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist
Consultants Limited, the Companys shareholders. The loans are denominated in
United States dollars and are non-interest bearing. The shareholders have
agreed not to make demand on the Group for repayment before January 1, 2004.
For financial reporting purposes, interest expense of approximately Rmb478,000
for each of the years ended December 31, 2000, 2001 and 2002 was imputed
according to cost of borrowings in Mainland China, and were recorded as
interest expense and shareholders contribution.

F-25



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19. COMMON STOCK

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

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

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

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

In September 2001, the Company entered into a common stock purchase agreement
(the Share Purchase Agreement) with an institutional investor (the
Investor) under which the Company may sell and issue to the Investor and the
Investor shall be obligated to purchase from the Company an aggregate of
2,000,000 shares of common stock of the Company during the 24-month period from
the date of approval of the registration of such shares with the Securities and
Exchange Commission (the SEC). According to the terms of the Share Purchase
Agreement, the common stock purchase price is being set at 93% of the daily
volume weighted average price of the common stock over the preceding 15 trading
days. As of the date of this report, the Company has not filed any
registration statement with the SEC and no shares of common stock have been
issued under the Share Purchase Agreement as of December 31, 2002.

In August 2002, the Company issued 1,000,000 shares of common stock to an
external consultant in connection with the acquisition of CECT. The fair value
of the 1,000,000 shares of approximately Rmb 13,243,000 was recorded as an
addition to the investment cost of CECT (see Note 13).

20. STOCK OPTIONS AND WARRANTS



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

F-26



---



##### Table of Contents



20. STOCK OPTIONS AND WARRANTS (Contd)



|b. | (i) |  | Stock options to employees                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |     |  | For the year ended December 31, 1999, 680,000 incentive stock
options were issued to certain employees at an exercise price of
US$6.32 per share, exercisable during a five-year period
commencing on November 2, 1999. During the year ended December
31, 2000, all of these incentive stock options were exercised at
an exercise price of US$6.32 per share and the corresponding stock
issuance costs were vested immediately as of the stock options
grant date.
|  
|   |     |  | During the year ended December 31, 2000, 995,000 incentive stock
options were issued to certain employees at an exercise price of
US$15 per share, exercisable during a five-year period commencing
on April 4, 2000. The Company did not grant any options to
employees during the years ended December 31, 2001 and 2002. On
January 2, 2002, the Company repriced the exercise price of these
options to US$5.50 per share.                                       



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

|                                    |           |  |         |  |         |       |         |   |         |  |  |       |   |  |         |   |  |      |  |  |     |  |        |      |  |  |  |  |  |  |       |  | 
|----------------------------------- | --------- |  | ------- |  | ------- | ----- | ------- | - | ------- |  |  | ----- | - |  | ------- | - |  | ---- |  |  | --- |  | ------ | ---- |  |  |  |  |  |  | ----- |  | 
|                                    |           |  | 2000    |  | 2001    |       | 2002   
|                                    |           |  |         |  |         |       |        
|                                    |           |  | Rmb000 |  | Rmb000 |       | Rmb000 |   | US$000
|                                    |           |  |         |  |         |       |         |   |        
|Net income (loss)                   |           |  |         |  |         |       | 23,471  |   |         |  |  |       |   |  | (21,422 | ) |  |      |  |  |     |  | 16,473 |      |  |  |  |  |  |  | 1,989 | 
|Earnings (loss) per
share           |           |  |         |  |         |       |         |   |         |  |  |       |   |  |         |   |  |      |  |  |     |  |        |      |  |  |  |  |  |  |       | 
|                                    | - Basic   |  | Rmb     |  |         | 2.03  |         |   | Rmb     |  |  | (1.67 | ) |  | Rmb     |   |  | 1.12 |  |  | US$ |  |        | 0.14 | 
|                                    | - Diluted |  | Rmb     |  |         | 1.98  |         |   | Rmb     |  |  | (1.67 | ) |  | Rmb     |   |  | 0.95 |  |  | US$ |  |        | 0.11 | 
|                                    |           |  |         |  |         |       |         |   |        
|Pro forma net
(loss) income         |           |  |         |  |         |       | (40,625 | ) |         |  |  |       |   |  | (21,422 | ) |  |      |  |  |     |  | 16,473 |      |  |  |  |  |  |  | 1,989 | 
|Pro forma (loss)
earnings per share |           |  |         |  |         |       |         |   |         |  |  |       |   |  |         |   |  |      |  |  |     |  |        |      |  |  |  |  |  |  |       | 
|                                    | - Basic   |  | Rmb     |  |         | (3.51 | )       |   | Rmb     |  |  | (1.67 | ) |  | Rmb     |   |  | 1.12 |  |  | US$ |  |        | 0.14 | 
|                                    | - Diluted |  | Rmb     |  |         | (3.51 | )       |   | Rmb     |  |  | (1.67 | ) |  | Rmb     |   |  | 0.95 |  |  | US$ |  |        | 0.11 | 



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

F-27



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##### Table of Contents



20. STOCK OPTIONS AND WARRANTS (Contd)



|c. |  | Stock Purchase Warrants
|-- |  | -----------------------



| | (i)   |  | In connection with the public offering of the Companys
shares in February 1999, the Company granted common stock purchase
warrants (the Underwriter Warrants) to the underwriter to purchase
up to 160,000 shares of the Company at an exercise price of $7.98
per share, exercisable during a five-year period commencing on
February 19, 1999. During the year ended December 31, 2000, 152,000
of the Underwriter Warrants were exercised at an exercise price of
US$7.98 each.                                                                                                                                                                               
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | On October 31, 1999, the Company issued 40,000 common stock
purchase warrants to certain external consultants, at exercisable
prices ranging from US$3.25 to US$5.50 per share, exercisable during
a five-year period commencing on October 31, 1999. During the year
ended December 31, 2000, 20,000 common stock purchase warrants were
exercised at an exercise price of US$3.25 each.                                                                                                                                                                                                                                                                           
|
| |       |  | The Company has adopted SFAS No. 123 to account for the stock
purchase warrants granted to external consultants. The fair value
of these warrants amounted to approximately Rmb1,033,000
(equivalent to US$125,000), as computed using the Black-Scholes
option-pricing model on the grant date, which were recognized as
consultant expense over the external consultants service period.
Approximately Rmb1,033,000 and nil were recognized as expenses for
the years ended December 31, 1999 and 2000 respectively.                                                                                                                                             
|
| | (iii) |  | In connection with the share placement of the Company in
January 2000, the Company granted 360,000 warrants to the private
institutional investors (the Subscription Warrants I) and 300,000
warrants to external consultants (the Consultant Warrants I).
Each warrant can subscribe for one common stock in the Company at an
exercise price of US$46.96 per share, and is exercisable for the
period from January 7, 2000 to December 31, 2004. In accordance
with the warrant agreement, the exercise price was reset to US$20.76
representing 110% of the average of the closing bid prices of the
common stock over 5 trading days prior to July 10, 2000.
|
| | (iv)  |  | In connection with the issuance of convertible debentures of
the Company in June 2000, the Company granted 360,000 warrants to
the debenture holders (the Detachable Warrants) and 300,000
warrants to external consultants (the Consultant Warrants II).
Each warrant can subscribe one common stock in the Company at an
exercise price of US$24.38 per share, and is exercisable for the
period from June 2, 2000 to May 25, 2005. In accordance with the
warrant agreement, the exercise price was reset to US$8.49,
representing 110% of the average of the closing bid prices of the
common stock over 5 trading days prior to November 29, 2000.         

F-28



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##### Table of Contents



20. STOCK OPTIONS AND WARRANTS (Contd)



|c. |  | Stock Purchase Warrants
|-- |  | -----------------------



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



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



| | (v)   |  | In connection with the Share Purchase Agreement entered into
in September 2001, the Company granted 150,000 warrants to the
private institutional investors (the Subscription Warrants II) and
150,000 warrants to external consultants (the Consultant Warrants
III). Each warrant can subscribe for one common share of the
Company at an exercise price of US$6.6 per share, and is exercisable
for the period from September 14, 2001 to September 14, 2004.                                                                                                         
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (vi)  |  | During the year ended December 31, 2001, the fair value of
the 150,000 Subscription Warrants II and 150,000 Consultant Warrants
III amounted to approximately Rmb458,000 (equivalent to US$55,350)
as computed using Black-Scholes option-pricing model on the grant
date, which were recognized as prepaid stock issuance cost. The
prepaid stock issuance costs were written off in the year ended
December 31, 2002.                                                                                                                                                      
|
| | (vii) |  | During the year ended December 31, 2002, the Company issued
80,000 share warrants to the Companys investor relations advisor as
compensation. Each warrant can subscribe for one common share of
the Company at an exercise price of US$7.00 per share and is
exercisable for the period from March 25, 2002 to March 1, 2005.
The fair value amounted to approximately Rmb39,744 (equivalent to
US$4,800) as computed using the Black-Scholes option-pricing model
on the grant date which has been recognized as compensation expense
in the year ended December 31, 2002.

F-29



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##### Table of Contents



20. STOCK OPTIONS AND WARRANTS (Contd)

Changes in outstanding stock options and warrants during the year ended
December 31, 2001 and 2002 were as follows:

|                                     |  |              |            |                |  |     |       | 
|------------------------------------ |  | ------------ | ---------- | -------------- |  | --- | ----- | 
|                                     |  | No. of stock |            | Weighted      
|                                     |  | options/     |            | average       
|                                     |  | warrants     |            | exercise price
|                                     |  |              |            |               
|                                     |  |              |            |                |  | US$
|Outstanding, as of December 31, 1998 |  |              |           |                |  |     |      | 
|Granted in 1999                      |  |              | 1,865,000  |                |  |     | 20.80 | 
|                                     |  |              |            |                |  |     |       | 
|Outstanding, as of December 31, 1999 |  |              | 1,865,000  |                |  |     | 20.80 | 
|Granted in 2000                      |  |              | 1,655,000  |                |  |     | 12.40 | 
|Exercised in 2000                    |  |              | (1,177,000 | )              |  |     | 6.48  | 
|                                     |  |              |            |                |  |     |       | 
|Outstanding, as of December 31, 2000 |  |              | 2,343,000  |                |  |     | 14.68 | 
|Granted in 2001                      |  |              | 300,000    |                |  |     | 6.60  | 
|                                     |  |              |            |                |  |     |       | 
|Outstanding, as of December 31, 2001 |  |              | 2,643,000  |                |  |     | 13.77 | 
|Granted in 2002                      |  |              | 80,000     |                |  |     | 7.00  | 
|                                     |  |              |            |                |  |     |       | 
|Outstanding, as of December 31, 2002 |  |              | 2,723,000  |                |  |     |       | 
|                                     |  |              |            |                |  |     |       | 
|Exercisable as of December 31, 2002  |  |              | 2,723,000  |                |  |     | 10.10 | 
|                                     |  |              |            |                |  |     |       | 
|Exercisable, as of December 31, 2001 |  |              | 2,643,000  |                |  |     | 13.77 | 
|                                     |  |              |            |                |  |     |       | 
|Exercisable, as of December 31, 2000 |  |              | 2,343,000  |                |  |     | 14.68 | 
|                                     |  |              |            |                |  |     |       | 
|Exercisable as of December 31, 1999  |  |              | 1,205,000  |                |  |     | 6.48  | 
|                                     |  |              |            |                |  |     |       | 

The following table summarizes information about stock options and warrants
described above that are outstanding and exercisable at December 31, 2002:

|                                                 |           |                          |  |         |       |                           |  |                            |      |                  |  | 
|------------------------------------------------ | --------- | ------------------------ |  | ------- | ----- | ------------------------- |  | -------------------------- | ---- | ---------------- |  | 
|Options and warrants outstanding and exercisable
|                                                
|                                                 |           |                          |  |         |       |                           |  |                            |      | Weighted-average
|                                                 |           |                          |  |         |       | Weighted-average exercise |  | remaining contractual life
|Options/warrants                                 |           | price per option/warrant |  | (years)
|                                                 |           |                          |  |        
|                                                 | 995,000   |                          |  |         | 5.50  |                           |  |                            | 2.28 |                 
|                                                 | 8,000     |                          |  |         | 7.98  |                           |  |                            | 1.13 |                 
|                                                 | 20,000    |                          |  |         | 5.50  |                           |  |                            | 1.84 |                 
|                                                 | 660,000   |                          |  |         | 20.76 |                           |  |                            | 2.00 |                 
|                                                 | 660,000   |                          |  |         | 8.49  |                           |  |                            | 2.41 |                 
|                                                 | 300,000   |                          |  |         | 6.60  |                           |  |                            | 1.79 |                 
|                                                 | 80,000    |                          |  |         | 7.00  |                           |  |                            | 2.17 |                 
|                                                 |           |                          |  |         |       |                           |  |                           
|                                                 | 2,723,000 |                          |  |         | 10.10 |                           |  |                            | 2.18 |                 
|                                                 |           |                          |  |         |       |                           |  |                           

F - 30



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##### Table of Contents



20. STOCK OPTIONS AND WARRANTS (Contd)

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

|                                     |  |      |      |      |  |      |      |  |  |  |       | 
|------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ----- | 
|                                     |  | 2000 |      | 2001 |  | 2002
|                                     |  |      |      |      |  |     
|                                     |  | US$  |      | US$  |  | US$ 
|Stock options granted under the Plan |  |      | 7.78 |      |  |      |     |  |  |  |      | 
|Subscription Warrants I              |  |      | 9.81 |      |  |      |     |  |  |  |      | 
|Subscription Warrants II             |  |      |     |      |  |      | 0.18 |  |  |  |      | 
|Detachable Warrants                  |  |      | 3.85 |      |  |      |     |  |  |  |      | 
|Consultant Warrants I                |  |      | 9.81 |      |  |      |     |  |  |  |      | 
|Consultant Warrants II               |  |      | 3.85 |      |  |      |     |  |  |  |      | 
|Consultant Warrants III              |  |      |     |      |  |      | 0.18 |  |  |  |      | 
|Warrants                             |  |      |     |      |  |      |     |  |  |  | 0.006 | 

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

|                                |  |            |       |         |  |            |       |   |  |  |        |  
|------------------------------- |  | ---------- | ----- | ------- |  | ---------- | ----- | - |  |  | ------ | -
|                                |  | 2000       |       | 2001    |  | 2002      
|                                |  |            |       |         |  |           
|Risk-free interest rate         |  |            | 5.53  | %       |  |            | 3.17  | % |  |  | 4.14   | %
|Expected dividend yield         |  |            | 0.00  | %       |  |            | 0.00  | % |  |  | 0.00   | %
|Expected option/warrant life    |  | 4.99 years |       | 3 years |  | 1.93 years
|Expected stock price volatility |  |            | 21.14 | %       |  |            | 57.21 | % |  |  | 123.38 | %

The weighted average fair value of common stock purchase options and warrants
granted using the Black-Scholes option-pricing model for the years ended
December 31, 2000, 2001 and 2002 respectively are as follows:

|                                                    |  |      |      |      |  |      |      |  |  |  |       | 
|--------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ----- | 
|                                                    |  | 2000 |      | 2001 |  | 2002
|                                                    |  |      |      |      |  |     
|                                                    |  | US$  |      | US$  |  | US$ 
|                                                    |  |      |      |      |  |     
|Weighted average fair value of options
and warrants |  |      | 7.24 |      |  |      | 0.18 |  |  |  | 0.006 | 

F-31



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##### Table of Contents



21. INCOME TAXES

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

At present, substantially all of the Groups income was generated in Mainland
China by QXTI, a joint venture enterprise established in the Coastal Economic
Open Zone in Mainland China and is subject to Mainland Chinese income taxes at
a rate of 27% (24% state income tax and 3% local income tax). It was exempted
from state income tax and local income tax for three years starting from
January 1, 1994, and then was subject to a 50% reduction in state income tax
and full exemption in local income tax for the following two years. The tax
holiday from state income tax expired on January 1, 1999. The tax holiday from
local income tax continued for the years ended December 31, 2001 and 2002.

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

Prior to obtaining confirmation from the relevant tax bureau on the entitlement
to the tax holiday as stated above, QXTI provided for enterprise income tax
using 24% for the years ended December 31, 1999 and 2000. Subsequent to
December 31, 2001, QXTI obtained a confirmation from the National Tax Bureau to
confirm that QXTI was able to enjoy the aforementioned tax benefit pursuant to
the Notice [1999] 52 and QXTIs would be subject to a state income tax rate at
10% for each of the years ended December 31, 2000, 2001 and 2002. Accordingly,
the excess provision of Mainland Chinese enterprise income tax in prior years
was reversed in 2001 which resulted in an income tax benefit of Rmb25,687,000.

If the tax holiday of QXTI described above had not existed, the Groups income
tax expenses (net of minority interests) would have been increased by
approximately Rmb2,351,000 for the year ended December 31, 2000 representing
the effect of 3% local income tax exemption . In addition, income tax expenses
(net of minority interests) for the year ended December 31, 2001 would have
been increased by Rmb18,868,000, representing the effect of no benefit of state
income tax for 2000 and prior. The tax holiday had no impact on operating
results before tax generated in 2001 and 2002 as QXTI was in a tax loss
position. Basic earnings (loss) per common share would have been approximately
Rmb1.83 and Rmb(2.99), respectively, for the years ended December 31, 2000 and
2001, and diluted earnings (loss) per common share would have been
approximately Rmb1.78 and Rmb(2.99), respectively, for the years ended December
31, 2000 and 2001.

F-32



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##### Table of Contents



21. INCOME TAXES (Contd)

Provision (benefit) of income tax consists of:

|                            |            |  |         |        |         |  |         |         |         |  |   |   |  |  |   |   | 
|--------------------------- | ---------- |  | ------- | ------ | ------- |  | ------- | ------- | ------- |  | - | - |  |  | - | - | 
|                            |            |  | 2000    |        | 2001    |  | 2002   
|                            |            |  |         |        |         |  |        
|                            |            |  | Rmb000 |        | Rmb000 |  | Rmb000 |         | US$000
|Mainland Chinese income tax |            |  |         |        |         |  |         |         |         |  |   |   |  |  |   |  
|                            | - current  |  |         | 18,809 |         |  |         | (18,868 | )       |  |   |  |  |  |   |  | 
|                            | - deferred |  |         | (2,210 | )       |  |         | (6,819  | )       |  |   |  |  |  |   |  | 
|                            |            |  |         |        |         |  |         |         |         |  |   |   |  |  |   |  
|                            |            |  | 16,599  |        |         |  | (25,687 | )       |         |  |  |   |  |  |  |  
|                            |            |  |         |        |         |  |         |         |         |  |   |   |  |  |   |  

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

|                                                          |                                                                              |  |      |      |      |  |      |      |    |  |     |    | 
|--------------------------------------------------------- | ---------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | -- |  | --- | -- | 
|                                                          |                                                                              |  | 2000 |      | 2001 |  | 2002
|                                                          |                                                                              |  |      |      |      |  |     
|Mainland Chinese statutory income tax rate                |                                                                              |  | 27.0 | %    |      |  | 27.0 | %    |    |  | 27  | % 
|Net effect of disposal of a subsidiary                    |                                                                              |  |     |      |      |  |     |      |    |  | (44 | %)
|Loss of the Company not subject to tax                    |                                                                              |  |     |      |      |  |     |      |    |  | 17  | % 
|Effect of tax holiday                                     |                                                                              |  | (6.6 | %)   |      |  |     |      |    |  |    |   
|Non-deductible (taxable) activities :                     |                                                                              |  |      |      |      |  |      |      |    |  |     |   
|                                                          | - Amortization of debt issuance
costs and discount of
convertible debentures |  |      | 14.1 | %    |  |      | (8.4 | %) |  |     |   | 
|Reversal of over-provision of Mainland
Chinese income tax |                                                                              |  |     |      |      |  | 39.9 | %    |    |  |    |   
|Others                                                    |                                                                              |  | 1.8  | %    |      |  | (4.2 | %)   |    |  |    |   
|                                                          |                                                                              |  |      |      |      |  |      |      |    |  |     |   
|Effective income tax rate                                 |                                                                              |  | 36.3 | %    |      |  | 54.3 | %    |    |  |    |   
|                                                          |                                                                              |  |      |      |      |  |      |      |    |  |     |   

The gain on sale of a subsidiary amounting to Rmb79,050,000 as reported on the
consolidated statement of operations and comprehensive income for the year
ended December 31, 2002 is not subject to tax in the jurisdictions of Mainland
China or the British Virgin Islands.

Deferred income tax assets reflected the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of those amounts shown on the balance sheet as of
December 31, 2001 and 2002 were as follows:

|                                                  |  |         |        |         |  |         |   |  |  |  |   | 
|------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | - |  |  |  | - | 
|                                                  |  | 2001    |        | 2002   
|                                                  |  |         |        |        
|                                                  |  | Rmb000 |        | Rmb000 |  | US$000
|                                                  |  |         |        |         |  |        
|Write-off of obsolete and slow-moving
inventories |  |         | 6,209  |         |  |         |  |  |  |  |  | 
|Allowance for doubtful accounts                   |  |         | 2,815  |         |  |         |  |  |  |  |  | 
|Loss carryforwards                                |  |         | 1,818  |         |  |         |  |  |  |  |  | 
|                                                  |  |         |        |         |  |         |   |  |  |  |   | 
|                                                  |  |         | 10,842 |         |  |         |  |  |  |  |  | 
|Valuation allowance                               |  |         | (1,055 | )       |  |         |  |  |  |  |  | 
|                                                  |  |         |        |         |  |         |   |  |  |  |   | 
|Deferred income tax assets                        |  |         | 9,787  |         |  |         |  |  |  |  |  | 
|                                                  |  |         |        |         |  |         |   |  |  |  |   | 

F-33



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##### Table of Contents



21. INCOME TAXES (Contd)

Movements of valuation allowance were as follows:

|                                          |  |         |     |         |  |         |       |         |  |  |        |   |  |  |      |  
|----------------------------------------- |  | ------- | --- | ------- |  | ------- | ----- | ------- |  |  | ------ | - |  |  | ---- | -
|                                          |  | 2000    |     | 2001    |  | 2002   
|                                          |  |         |     |         |  |        
|                                          |  | Rmb000 |     | Rmb000 |  | Rmb000 |       | US$000
|                                          |  |         |     |         |  |         |       |        
|Beginning of year                         |  |         | 89  |         |  |         | 670   |         |  |  | 1,055  |   |  |  | 127  |  
|Increase (Release) in
valuation allowance |  |         | 581 |         |  |         | 385   |         |  |  | (1,055 | ) |  |  | (127 | )
|                                          |  |         |     |         |  |         |       |         |  |  |        |   |  |  |      |  
|End of year                               |  |         | 670 |         |  |         | 1,055 |         |  |  |       |   |  |  |     |  
|                                          |  |         |     |         |  |         |       |         |  |  |        |   |  |  |      |  

A valuation allowance of approximately Rmb1,055,000 and nil were established as
of December 31, 2001 and 2002, respectively, for the deferred income tax assets
related to loss carryforwards. The Companys management did not believe it was
more likely than not that it would generate a sufficient level of taxable
income in the foreseeable future to utilize all the loss carryforwards of the
Company.

Taxation payable comprised:

|                                 |  |         |         |         |  |         |       |  |  |  |     | 
|-------------------------------- |  | ------- | ------- | ------- |  | ------- | ----- |  |  |  | --- | 
|                                 |  | 2001    |         | 2002   
|                                 |  |         |         |        
|                                 |  | Rmb000 |         | Rmb000 |  | US$000
|                                 |  |         |         |         |  |        
|Mainland Chinese value-added tax |  |         | 70,004  |         |  |         | 5,264 |  |  |  | 636 | 
|Mainland Chinese income tax      |  |         | 35,463  |         |  |         |      |  |  |  |    | 
|                                 |  |         |         |         |  |         |       |  |  |  |     | 
|                                 |  |         | 105,467 |         |  |         | 5,264 |  |  |  | 636 | 
|                                 |  |         |         |         |  |         |       |  |  |  |     | 

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22. DISTRIBUTION OF INCOME

Prior to December 31, 2002, substantially all of the Groups income was
contributed by QXTI, an equity joint venture enterprise established in Mainland
China. Income of QXTI as determined under generally accepted accounting
principles in Mainland China (Mainland Chinese GAAP) was distributable to its
joint venture partners after transfer to dedicated reserves and staff welfare
fund as required under Mainland Chinese Company Law and QXTIs articles of
association, at rates determined by QXTIs board of directors.

Dedicated reserves included statutory surplus reserve and discretionary surplus
reserve. Pursuant to the Notice [1995] 31 issued by Ministry of Finance on
August 24, 1995 (the Notice) and QXTIs articles of association, provision of
these reserves were recommended by QXTIs board of directors. For the years
ended December 31, 1999 and 2000, QXTI appropriated 2% of its statutory
after-tax profit to each of the statutory surplus reserve and the discretionary
surplus reserve. As QXTI recorded a net loss for the year ended December 31,
2001 and 2002, no appropriation to statutory surplus reserve and the
discretionary surplus reserve was made. The statutory surplus reserve could
only be utilized to offset prior years losses or for capitalization as paid-in
capital, whereas the discretionary surplus reserve could be utilized for QXTIs
future development or capitalization as paid-in capital. During December 31,
2002, no utilization of statutory surplus reserve was proposed by the QXTIs
management.

Pursuant to the Notice and QXTIs articles of association, QXTI appropriated 1%
of its statutory after-tax profit for the years ended December 31, 1999 and
2000 to the staff welfare fund which shall be utilized for collective staff
benefits such as building of staff quarters or housing. As QXTI recorded a net
loss for the year ended December 31, 2001 and 2002, no appropriation to the
staff welfare fund was made. No distribution should be made other than on
liquidation of QXTI. Amounts appropriated to staff welfare fund were charged
against income and the related provisions were reflected as accrued liabilities
in the consolidated balance sheets.

Following the sale of QXHL, the dedicated reserves of QXTI were released to
retained earnings of the Group.

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

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23. EARNINGS (LOSS) PER COMMON SHARE

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

|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            |  | 
|--------------------------------------------- | --------- |  | ---------- |  | ---- | --------- | ----------- | - | --------------- |  | ---------- |  | --- |  |  | ------- |  |  | ---------- |  | 
|                                              |           |  | 2000       |  | 2001 |           | 2002       
|                                              |           |  |            |  |      |           |            
|                                              |           |  | Rmb        |  | Rmb  |           | Rmb         |   |                 |  |            |  | US$
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |    
|Net income (loss)                             |           |  | 23,471,000 |  |      |           | (21,422,000 | ) |                 |  | 16,473,000 |  |     |  |  |         |  |  | 1,989,000  | 
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 
|Weighted average
common shares -
basic        |           |  | 11,572,000 |  |      |           | 12,838,000  |   |                 |  | 14,685,000 |  |     |  |  |         |  |  | 14,685,000 | 
|Effect of dilutive
stock options and
warrants |           |  | 306,000*   |  |      |           | *          |   |                 |  | 2,705,000  |  |     |  |  |         |  |  | 2,705,000  | 
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 
|Weighted average
common shares -
diluted      |           |  | 11,878,000 |  |      |           | 12,838,000  |   |                 |  | 17,390,000 |  |     |  |  |         |  |  | 17,390,000 | 
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 
|Earnings (loss) per
common share              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 
|                                              | - Basic   |  | Rmb 2.03   |  |      | Rmb (1.67 | )           |   | Rmb        1.12 |  |            |  |     |  |  | US$0.14 | 
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 
|                                              | - Diluted |  | Rmb 1.98   |  |      | Rmb (1.67 | )           |   | Rmb        0.95 |  |            |  |     |  |  | US$0.11 | 
|                                              |           |  |            |  |      |           |             |   |                 |  |            |  |     |  |  |         |  |  |            | 

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

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

24. RETIREMENT PLAN

Since December 1, 2000, the Group has arranged for its Hong Kong employees to
join the Mandatory Provident Fund Scheme (the MPF Scheme), a defined
contribution scheme managed by an independent trustee. Under the MPF Scheme,
each of the Group (employer) and its employees make monthly contributions to
the scheme at 5% of the employees earnings as defined under the Mandatory
Provident Fund legislation, subject to a maximum cap of HK$1,000 (equivalent to
Rmb1,061) per month and thereafter additional contributions are voluntary.

Prior to December 31, 2002, the Groups employees in Mainland China were mainly
employed by QXTI. As stipulated by Mainland Chinese regulations, QXTI
maintained a defined contribution retirement plan for all of its employees who
were residents of Mainland China. All retired employees of QXTI were entitled
to an annual pension equal to their basic annual salary upon retirement. QXTI
contributed to a state sponsored retirement plan with amounts stipulated by the
local government of Mainland China and had no further obligations for the
actual pension payments or post-retirement benefits beyond the annual
contributions. The state sponsored retirement plan is responsible for the
entire pension obligations payable to all employees.

The aggregate employers contributions made by the Group amounted to
approximately Rmb897,000, Rmb795,000 and Rmb898,000 for the years ended
December 31, 2000, 2001 and 2002, respectively.

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25. COMMITMENTS



|a. |  | Capital commitments                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------
|  
|   |  | Capital commitments not provided for in the consolidated financial
statements were analyzed as follows:

|                                                    |                                                                                                                       |  |         |         |         |  |         |         |  |  |        |        | 
|--------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- |  |  | ------ | ------ | 
|                                                    |                                                                                                                       |  | 2001    |         | 2002   
|                                                    |                                                                                                                       |  |         |         |        
|                                                    |                                                                                                                       |  | Rmb000 |         | Rmb000 |  | US$000
|Capital contribution authorized and
contracted for: |                                                                                                                       |  |         |         |         |  |         |         |  |  |        |       
|                                                    | - CECT                                                                                                                |  |         |        |         |  |         | 132,750 |  |  |        | 16,033 | 
|                                                    | - Huizhou Qiao Xing Property Ltd.
and Huizhou Qiao Xing Communication
Industry Ltd.                                   |  |         |        |         |  |         | 11,460  |  |  |        | 1,384  | 
|                                                    | - Huizhou Qiao Xing-Hyundai System
Communication Equipment Co., Ltd. and
Qiao Xing Mobile Telecommunication
Co., Ltd. |  |         | 118,438 |         |  |         |        |  |  |        |       | 
|                                                    |                                                                                                                       |  |         |         |         |  |         |         |  |  |        |       
|                                                    |                                                                                                                       |  | 118,438 |         |         |  | 144,210 |         |  |  | 17,417 |       
|                                                    |                                                                                                                       |  |         |         |         |  |         |         |  |  |        |       



|b. |  | Operating lease commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Group has an operating lease agreement for an office premise, which
extends through September 2005. Rental expenses for the years ended
December 31, 2000, 2001 and 2002 were approximately Rmb 2,072,000,
Rmb1,304,000 and Rmb1,422,000 respectively. Future minimum rental
payments as of December 31, 2002 under agreements classified as operating
leases with non-cancelable terms amounted to approximately Rmb 307,000
(equivalent to approximately US$37,000) within one year, approximately
Rmb537,000 (equivalent to approximately US$65,000) within two to five
years.
|  
|c. |  | Other commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Other commitments not provided for in the financial statements were
analyzed as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                              |                            |  |         |       |         |  |  |     |  |  |         |  |  |  |  |     | 
|----------------------------- | -------------------------- |  | ------- | ----- | ------- |  |  | --- |  |  | ------- |  |  |  |  | --- | 
|                              |                            |  | 2001    |       | 2002   
|                              |                            |  |         |       |        
|                              |                            |  | Rmb000 |       | Rmb000 |  |  |     |  |  | US$000
|Authorized and contracted for |                            |  |         |       |         |  |  |     |  |  |         |  |  |  |  |    
|                              | - Research and development |  |         | 3,479 |         |  |  | 828 |  |  |         |  |  |  |  | 100 | 
|                              |                            |  |         |       |         |  |  |     |  |  |         |  |  |  |  |    



|d. |  | Contingent liabilities                                                                                                                                                                                  
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | As of December 31, 2002, the Groups deposit of approximately Rmb
2,483,000 and land use rights of approximately Rmb 47,635,000 were
pledged to secure the banking facilities of an ex-subsidiary, QXTI.

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|26. |  | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|a.  |  | Non-cash transactions                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | For each of the years ended December 31, 2000, 2001 and 2002, imputed
interest on shareholders loans of approximately Rmb478,000 was recorded
as shareholders contribution and credited to additional paid-in capital.                                                                                                                                                                                                                          
|   
|    |  | For the year ended December 31, 1999, the fair value of Underwriter
Warrants amounted to approximately Rmb7,937,000 and has been recognized
as stock issuance costs, and the fair value of stock options and warrants
granted to external consultants amounted to approximately Rmb4,628,000
and Rmb4,464,000, respectively, and has been recognized as operating
expense and deferred compensation cost.                                         
|   
|    |  | For the year ended December 31, 2000, the share of the face value of
convertible debentures allocated to the Detachable Warrants and the fair
value of the intrinsic value of the beneficial conversion feature of the
convertible debentures amounted to approximately Rmb22,648,000, and has
been recognized as a discount of the carrying amount of the convertible
debentures with a respective amount credited to additional paid-in
capital.
|   
|    |  | For the year ended December 31, 2000, the aggregate fair value of
Consultants Warrants II and 8,000 bonus shares of common stock issued in
connection with the issuance of convertible debentures in June 2000
amounted to approximately Rmb15,334,000, and has been recognized as debt
issuance costs with the respective amounted credited to additional
paid-in capital.                                                                       
|   
|    |  | For the year ended December 31, 2000, a total of US$4,784,000 of
convertible debentures have been converted into common stock and in this
connection, a total of 503,198 shares of common stock has been issued to
debenture holders.                                                                                                                                                                                                             
|   
|    |  | For the year ended December 31, 2001, a total of US$5,218,000 of
convertible debentures have been converted into common stock and in this
connection, a total of 2,144,201 shares of common stock has been issued
to debenture holders.                                                                                                                                                                                                           
|   
|    |  | For the year ended December 31, 2002, the fair value of 1,000,000 shares
of common stock issued in connection with the acquisition of CECT
amounted to approximately Rmb13,243,000, and has been recognized as an
addition to the investment cost of CECT, presented as another non-current
asset.                                                                                                                                                
|   
|b.  |  | Cash paid for interest and income taxes is as follows                                                                                                                                                                                                                                                                                                                                                                                             

|             |  |         |       |         |  |         |       |         |  |  |        |  |  |  |       | 
|------------ |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  |  | ------ |  |  |  | ----- | 
|             |  | 2000    |       | 2001    |  | 2002   
|             |  |         |       |         |  |        
|             |  | Rmb000 |       | Rmb000 |  | Rmb000 |       | US$000
|             |  |         |       |         |  |         |       |        
|Interest     |  |         | 5,822 |         |  |         | 7,926 |         |  |  | 17,389 |  |  |  | 2,100 | 
|             |  |         |       |         |  |         |       |         |  |  |        |  |  |  |       | 
|Income taxes |  |         |      |         |  |         |      |         |  |  |       |  |  |  |      | 
|             |  |         |       |         |  |         |       |         |  |  |        |  |  |  |       | 

F-38



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|26. |  | SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION (Contd)                         
|--- |  | ----------------------------------------------------------------------------------
|   
|c.  |  | Gain on sale of subsidiaries                                                      
|   
|    |  | On December 31, 2002, the Group disposed of its interests in the
subsidiary, QXHL:

|                                                       |                                    |  |          |         |         |  |         |        | 
|------------------------------------------------------ | ---------------------------------- |  | -------- | ------- | ------- |  | ------- | ------ | 
|                                                       |                                    |  | 2002    
|                                                       |                                    |  |         
|                                                       |                                    |  | Rmb000  |         | US$000
|                                                       |                                    |  |          |         |        
|Cash and bank deposits                                 |                                    |  | 6,927    |         |         |  | 837     |       
|Pledged bank deposits                                  |                                    |  | 226,099  |         |         |  | 27,307  |       
|Accounts receivables, net                              |                                    |  | 280,806  |         |         |  | 33,914  |       
|Inventories                                            |                                    |  | 62,591   |         |         |  | 7,559   |       
|Prepaid expenses                                       |                                    |  | 11,301   |         |         |  | 1,365   |       
|Due from related parties                               |                                    |  | 4,581    |         |         |  | 553     |       
|Property, plant and equipment, net                     |                                    |  | 171,292  |         |         |  | 20,687  |       
|Prepaid land use rights                                |                                    |  | 29,086   |         |         |  | 3,513   |       
|Accounts payable                                       |                                    |  | (30,046  | )       |         |  | (3,629  | )     
|Other payables                                         |                                    |  | (72,131  | )       |         |  | (8,712  | )     
|Accrued liabilities                                    |                                    |  | (11,072  | )       |         |  | (1,337  | )     
|Taxation payable                                       |                                    |  | (113,957 | )       |         |  | (13,763 | )     
|Long term borrowings                                   |                                    |  | (30,000  | )       |         |  | (3,623  | )     
|Short term borrowings                                  |                                    |  | (410,407 | )       |         |  | (49,566 | )     
|                                                       |                                    |  |          |         |         |  |         |       
|                                                       |                                    |  | 125,070  |         |         |  | 15,105  |       
|                                                       |                                    |  |          |         |        
|Minority interests disposed                            |                                    |  | 5,880    |         |         |  | 710     |       
|Gain on sale of subsidiaries                           |                                    |  | 79,050   |         |         |  | 9,547   |       
|                                                       |                                    |  |          |         |         |  |         |       
|Total consideration                                    |                                    |  | 210,000  |         |         |  | 25,362  |       
|                                                       |                                    |  |          |         |         |  |         |       
|Satisfied by:                                          |                                    |  |          |         |         |  |         |       
|                                                       | Receivable from sale of subsidiary |  |          | 210,000 |         |  |         | 25,362 | 
|                                                       |                                    |  |          |         |         |  |         |       
|Net cash outflow arising from disposal of
subsidiaries |                                    |  | (6,927   | )       |         |  | (837    | )     
|                                                       |                                    |  |          |         |         |  |         |       



|27. |  | BANKING FACILITIES
|--- |  | ------------------

As of December 31, 2002, the Group had banking facilities of approximately
Rmb40,000,000 for loans and trade financing, all of which were used as of the
same date. These banking facilities were secured by:



| | a. |  | the Groups pledged bank deposits of approximately Rmb10,000,000;
| | -- |  | -----------------------------------------------------------------
|
| | b. |  | a personal guarantee provided by Mr. Rui Lin Wu; and             
|
| | c. |  | corporate guarantee provided by CECT.                            

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|28. |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------

Name and relationship of related parties:

|                                                              |  |                                                                
|------------------------------------------------------------- |  | ---------------------------------------------------------------
|Name of related parties                                       |  | Existing relationship with the Company                         
|                                                              |  |                                                                
|Mr. Zhi Jian Wu Li                                            |  | The major shareholder                                          
|Mr. Rui Lin Wu                                                |  | Director and father of Mr. Zhi Jian Wu Li                      
|Mr. Zhi Yang Wu                                               |  | Director and brother of Mr. Zhi Jian Wu Li                     
|Ms. Mei Lian Li                                               |  | Wife of Mr. Zhi Yang Wu                                        
|Mr. Zhi Zhong Wu                                              |  | Brother of Mr. Zhi Jian Wu Li                                  
|Ms. Qing Li                                                   |  | Wife of Mr. Rui Lin Wu                                         
|Ms. Hong Ling Deng                                            |  | Friend of Mr. Rui Lin Wu                                       
|Ms. Zhen Yin Su                                               |  | Friend of Mr. Rui Lin Wu                                       
|Mr. Zhong Ai Li                                               |  | Director                                                       
|Mr. Guo Liang Zhang                                           |  | Director                                                       
|Ms. Liu Rong Yang                                             |  | Director                                                       
|Mr. Zhi Fang Zhang                                            |  | Director                                                       
|Mr. Zi Shu Huang                                              |  | Director                                                       
|Wu Holdings Limited                                           |  | Intermediate holding company                                   
|Exquisite Jewel Limited                                       |  | Minority shareholder                                           
|Metrolink Holdings Limited                                    |  | Minority shareholder                                           
|Specialist Consultants Limited                                |  | Minority shareholder                                           
|Jia Xing Electronic Supplies Company Limited                  |  | Common director                                                
|Qiao Xing Electronic Holdings Company Limited                 |  | Common director                                                
|Qiao Xing Group Limited                                       |  | Common director and minority shareholder                       
|Qiao Xing International Company                               |  | Common director                                                
|Qiao Xing Investment Limited                                  |  | Common director                                                
|Qiao Xing Properties Limited                                  |  | Common director                                                
|Rui Xing Electronic Development Company Limited               |  | Common director                                                
|CEC Telecom Co., Limited                                      |  | Common director                                                
|Huizhou Calilee Telecommunication Company
Limited (Calilee) |  | A director of Calilee is a brother of a
director of the Company
|CEC Wireless R&D Limited
(CECW)                             |  | CECT and CECW have common owners                               

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|28. |  | RELATED PARTY TRANSACTIONS (Contd)
|--- |  | -----------------------------------

Summary of related party transactions is as follows:

|                                                                                                                 |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |   |       | 
|---------------------------------------------------------------------------------------------------------------- | -------------------- | ------------------------------------------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | ------- | - | ------ |  | ------ | - | ----- | 
|                                                                                                                 |                      |                                                   |   | 2000    |        | 2001    |   | 2002   
|                                                                                                                 |                      |                                                   |   |         |        |         |   |        
|                                                                                                                 |                      |                                                   |   | Rmb000 |        | Rmb000 |   | Rmb000 |        | US$000
|Recovery of general and administrative expenses
(at cost) in respect of factory and office
premises subleased to |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |  
|                                                                                                                 |                      | - Jia Xing Electronic Supplies Company
Limited    |   |         | 238    |         |   |         | 139    |         |         |   |       |  |        |   |      | 
|                                                                                                                 |                      | - Qiao Xing Properties Limited                    |   |         | 2,285  |         |   |         | 1,776  |         |         |   |       |  |        |   |      | 
|                                                                                                                 |                      | - Rui Xing Electronic Development Company
Limited |   |         | 404    |         |   |         | 915    |         |         |   |       |  |        |   |      | 
|Interest paid to                                                                                                 |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |  
|                                                                                                                 | - Ms. Hong Ling Deng |                                                   |   | 40      |        |         |   |        |        |         |         |  |        |  |        |  |      
|                                                                                                                 | - Ms. Zhen Yin Su    |                                                   |   | 8       |        |         |   |        |        |         |         |  |        |  |        |  |      
|Rental income from                                                                                               |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |  
|                                                                                                                 |                      | - Qiao Xing Group Limited                         |   |         |       |         |   |         |       |         |         |   | 327    |  |        |   | 39    | 
|Commission paid and payable to CECW                                                                              |                      |                                                   |  |         |        |         |  |         |        |         | 28,200  |   |        |  | 3,406  |  
|Purchases from                                                                                                   |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |  
|                                                                                                                 |                      | - Jia Xing Electronic Supplies Company
Limited    |   |         | 35,704 |         |   |         | 13,436 |         |         |   |       |  |        |   |      | 
|                                                                                                                 |                      | - Qiao Xing Properties Limited                    |   |         | 22,268 |         |   |         | 20,471 |         |         |   | 10,061 |  |        |   | 1,215 | 
|                                                                                                                 |                      | - Rui Xing Electronic Development Company
Limited |   |         | 6,289  |         |   |         | 8,033  |         |         |   | 9,214  |  |        |   | 1,113 | 
|Sales to                                                                                                         |                      |                                                   |   |         |        |         |   |         |        |         |         |   |        |  |        |  
|                                                                                                                 |                      | - CECT                                            |  |         |        |         |  |         |        |         | 344,458 |   |        |  | 41,601 |  

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|28. |  | RELATED PARTY TRANSACTIONS (Contd)             
|--- |  | ------------------------------------------------
|   
|    |  | Summary of related party balances is as follows:

|                                   |                                |  |         |       |         |  |         |        |  |  |       |       | 
|---------------------------------- | ------------------------------ |  | ------- | ----- | ------- |  | ------- | ------ |  |  | ----- | ----- | 
|                                   |                                |  | 2001    |       | 2002   
|                                   |                                |  |         |       |        
|                                   |                                |  | Rmb000 |       | Rmb000 |  | US$000
|                                   |                                |  |         |       |         |  |        
|Advance to Qiao Xing Group Limited |                                |  | 56,300  |       |         |  |        |        |  |  |      |      
|Due from                           |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   | - Exquisite Jewel Limited      |  |         |      |         |  |         | 6      |  |  |       | 1     | 
|                                   | - Mr. Rui Lin Wu               |  |         | 281   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Yang Wu              |  |         |      |         |  |         | 216    |  |  |       | 26    | 
|                                   | - Mr. Zhi Jian Wu Li           |  |         |      |         |  |         | 160    |  |  |       | 19    | 
|                                   | - Ms. Mei Lian Li              |  |         | 508   |         |  |         |       |  |  |       |      | 
|                                   | - Qiao Xing Group Limited      |  |         | 3,133 |         |  |         | 100    |  |  |       | 12    | 
|                                   | - Qiao Xing Investment Limited |  |         | 189   |         |  |         |       |  |  |       |      | 
|                                   | - Wu Holdings Limited          |  |         | 209   |         |  |         | 24     |  |  |       | 3     | 
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   |                                |  | 60,620  |       |         |  | 506     |        |  |  | 61    |      
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|Due to                             |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   | - CECT                         |  |         |      |         |  |         | 22,195 |  |  |       | 2,680 | 
|                                   | - Mr. Rui Lin Wu               |  |         |      |         |  |         | 5,897  |  |  |       | 713   | 
|                                   | - Mr. Zhi Zhong Wu             |  |         | 664   |         |  |         | 166    |  |  |       | 20    | 
|                                   | - Ms. Qing Li                  |  |         | 1,793 |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Jian Wu Li           |  |         | 543   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Zhi Yang Wu              |  |         | 882   |         |  |         |       |  |  |       |      | 
|                                   | - Mr. Guo Liang Zhang          |  |         | 94    |         |  |         | 146    |  |  |       | 18    | 
|                                   | - Ms. Liu Rong Yang            |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Ms. Zhi Fang Zhang           |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Mr. Zi Shu Huang             |  |         | 7     |         |  |         | 10     |  |  |       | 1     | 
|                                   | - Mr. Zhong Ai Li              |  |         | 136   |         |  |         | 218    |  |  |       | 26    | 
|                                   | - Qiao Xing Group Limited      |  |         | 7     |         |  |         |       |  |  |       |      | 
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      
|                                   |                                |  | 4,140   |       |         |  | 28,652  |        |  |  | 3,460 |      
|                                   |                                |  |         |       |         |  |         |        |  |  |       |      

Included in accrued liabilities as of December 31, 2002 was a commission
payable of Rmb11,331,000 to CECW.

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

During the year ended December 31, 2001, the Group advanced to Qiao Xing Group
Limited of approximately RMB56,300,000. The amount was unsecured, non-interest
bearing and without pre-determined repayment terms. The entire advance has
been settled during 2002.

Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in trust
for Mr. Zhi Jian Wu Li), Exquisite Jewel Limited, Metrolink Holdings Limited
and Specialist Consultants Limited, the Companys shareholders, and were
non-interest bearing. The lenders have agreed not to make demand on the Group
for repayment before January 1, 2004.

The rental agreements in Mainland China were entered into by Mr. Rui Lin Wu, a
director, and Qiao Xing Group Limited on behalf of Qiao Xing Telecommunication
Industry Company Limited during the year ended December 31, 2001.

F-42



---



##### Table of Contents





|28. |  | RELATED PARTY TRANSACTIONS (Contd)
|--- |  | -----------------------------------

As of December 31, 2002, the Groups bank deposit of approximately Rmb
2,483,000 and land use rights of net book value of Rmb 47,635,000 were pledged
to secure the banking facilities of an ex-subsidiary, QXTI.

During the year ended December 31, 2002, QXTI provided corporate guarantees to
the banking facilities of CECT to the extent of Rmb 50,000,000.



|29. |  | SEGMENT ANALYSIS
|--- |  | ----------------

The Group classifies its products into two core business segments, namely
mobile phones and indoor phones. In view of the fact that the Group operates
principally in Mainland China, no geographical segment information is
presented.

|              |  |         |         |         |  |         |         |  |  |  |         | 
|------------- |  | ------- | ------- | ------- |  | ------- | ------- |  |  |  | ------- | 
|              |  | 2000    |         | 2001    |  | 2002   
|              |  |         |         |         |  |        
|              |  | Rmb000 |         | Rmb000 |  | Rmb000
|Net sales:    |  |         |         |         |  |         |         |  |  |  |         | 
|Mobile phones |  |         |        |         |  |         |        |  |  |  | 341,629 | 
|Indoor phones |  |         | 392,529 |         |  |         | 250,366 |  |  |  | 208,338 | 
|              |  |         |         |         |  |         |         |  |  |  |         | 
|              |  |         | 392,529 |         |  |         | 250,366 |  |  |  | 549,967 | 
|              |  |         |         |         |  |         |         |  |  |  |         | 

|                               |  |         |        |         |  |         |         |   |  |  |         |  
|------------------------------ |  | ------- | ------ | ------- |  | ------- | ------- | - |  |  | ------- | -
|                               |  | 2000    |        | 2001    |  | 2002   
|                               |  |         |        |         |  |        
|                               |  | Rmb000 |        | Rmb000 |  | Rmb000
|Income (loss) from operations: |  |         |        |         |  |         |         |   |  |  |         |  
|Mobile phones                  |  |         |       |         |  |         |        |   |  |  | 41,539  |  
|Indoor phones                  |  |         | 64,993 |         |  |         | (20,994 | ) |  |  | (87,812 | )
|Others                         |  |         |       |         |  |         | (4,881  | ) |  |  | (5,879  | )
|                               |  |         |        |         |  |         |         |   |  |  |         |  
|                               |  |         | 64,993 |         |  |         | (25,875 | ) |  |  | (52,152 | )
|                               |  |         |        |         |  |         |         |   |  |  |         |  

|                     |  |         |         |         |  |         |         |  |  |  |         | 
|-------------------- |  | ------- | ------- | ------- |  | ------- | ------- |  |  |  | ------- | 
|                     |  | 2000    |         | 2001    |  | 2002   
|                     |  |         |         |         |  |        
|                     |  | Rmb000 |         | Rmb000 |  | Rmb000
|Identifiable assets: |  |         |         |         |  |         |         |  |  |  |         | 
|Mobile phones        |  |         |        |         |  |         |        |  |  |  | 3,224   | 
|Indoor phones        |  |         | 476,216 |         |  |         | 490,600 |  |  |  | 224,581 | 
|Others               |  |         | 795     |         |  |         | 795     |  |  |  | 483     | 
|                     |  |         |         |         |  |         |         |  |  |  |         | 
|                     |  |         | 477,011 |         |  |         | 491,395 |  |  |  | 228,288 | 
|                     |  |         |         |         |  |         |         |  |  |  |         | 

|                 |  |         |       |         |  |         |       |  |  |  |       | 
|---------------- |  | ------- | ----- | ------- |  | ------- | ----- |  |  |  | ----- | 
|                 |  | 2000    |       | 2001    |  | 2002   
|                 |  |         |       |         |  |        
|                 |  | Rmb000 |       | Rmb000 |  | Rmb000
|Interest income: |  |         |       |         |  |         |       |  |  |  |       | 
|Mobile phones    |  |         |      |         |  |         |      |  |  |  | 189   | 
|Indoor phones    |  |         | 2,061 |         |  |         | 1,890 |  |  |  | 879   | 
|Others           |  |         |      |         |  |         | 110   |  |  |  | 2     | 
|                 |  |         |       |         |  |         |       |  |  |  |       | 
|                 |  |         | 2,061 |         |  |         | 2,000 |  |  |  | 1,070 | 
|                 |  |         |       |         |  |         |       |  |  |  |       | 

F-43



---



##### Table of Contents





|29. |  | SEGMENT ANALYSIS (Contd)
|--- |  | -------------------------

|                  |  |         |        |         |  |         |        |  |  |  |        | 
|----------------- |  | ------- | ------ | ------- |  | ------- | ------ |  |  |  | ------ | 
|                  |  | 2000    |        | 2001    |  | 2002   
|                  |  |         |        |         |  |        
|                  |  | Rmb000 |        | Rmb000 |  | Rmb000
|Interest expense: |  |         |        |         |  |         |        |  |  |  |        | 
|Mobile phones     |  |         |       |         |  |         |       |  |  |  | 1,925  | 
|Indoor phones     |  |         | 5,822  |         |  |         | 7,926  |  |  |  | 15,464 | 
|Others            |  |         | 17,728 |         |  |         | 15,181 |  |  |  | 478    | 
|                  |  |         |        |         |  |         |        |  |  |  |        | 
|                  |  |         | 23,550 |         |  |         | 23,107 |  |  |  | 17,867 | 
|                  |  |         |        |         |  |         |        |  |  |  |        | 

|                               |  |         |        |         |  |         |        |  |  |  |        | 
|------------------------------ |  | ------- | ------ | ------- |  | ------- | ------ |  |  |  | ------ | 
|                               |  | 2000    |        | 2001    |  | 2002   
|                               |  |         |        |         |  |        
|                               |  | Rmb000 |        | Rmb000 |  | Rmb000
|Depreciation and amortization: |  |         |        |         |  |         |        |  |  |  |        | 
|Mobile phones                  |  |         |       |         |  |         |       |  |  |  | 223    | 
|Indoor phones                  |  |         | 12,798 |         |  |         | 21,535 |  |  |  | 17,873 | 
|Others                         |  |         |       |         |  |         | 385    |  |  |  | 155    | 
|                               |  |         |        |         |  |         |        |  |  |  |        | 
|                               |  |         | 12,798 |         |  |         | 21,920 |  |  |  | 18,251 | 
|                               |  |         |        |         |  |         |        |  |  |  |        | 

|                      |  |         |         |         |  |         |        |  |  |  |        | 
|--------------------- |  | ------- | ------- | ------- |  | ------- | ------ |  |  |  | ------ | 
|                      |  | 2000    |         | 2001    |  | 2002   
|                      |  |         |         |         |  |        
|                      |  | Rmb000 |         | Rmb000 |  | Rmb000
|Capital expenditures: |  |         |         |         |  |         |        |  |  |  |        | 
|Mobile phones         |  |         |        |         |  |         |       |  |  |  | 3,224  | 
|Indoor phones         |  |         | 194,274 |         |  |         | 19,035 |  |  |  | 9,251  | 
|                      |  |         |         |         |  |         |        |  |  |  |        | 
|                      |  |         | 194,274 |         |  |         | 19,035 |  |  |  | 12,475 | 
|                      |  |         |         |         |  |         |        |  |  |  |        | 



|a. |  | Major customers
|-- |  | ---------------

Details of individual customers accounting for more than 5% of the
Groups sales are as follows:

|                                                            |  |      |   |      |  |      |   |   |  |  |    |  
|----------------------------------------------------------- |  | ---- | - | ---- |  | ---- | - | - |  |  | -- | -
|                                                            |  | 2000 |   | 2001 |  | 2002
|                                                            |  |      |   |      |  |     
|CECT (Note 28)                                              |  |      |  |      |  |      |  |   |  |  | 63 | %
|Chengfeng Electronic Appliance Trading
Company of Yiwu City |  |      | 7 | %    |  |      | 7 | % |  |  | 2  | %



|b. |  | Major suppliers
|-- |  | ---------------

Details of individual suppliers accounting for more than 5% of the
Groups purchases are as follows:

|                                                       |  |      |    |      |  |      |   |   |  |  |    |  
|------------------------------------------------------ |  | ---- | -- | ---- |  | ---- | - | - |  |  | -- | -
|                                                       |  | 2000 |    | 2001 |  | 2002
|                                                       |  |      |    |      |  |     
|Flextronics Technology Co. Ltd.                        |  |      |   |      |  |      |  |   |  |  | 31 | %
|Flextronics Enterprises Co. Ltd.                       |  |      |   |      |  |      |  |   |  |  | 31 | %
|Jia Xing Electronic Supplies Company
Limited (Note 28) |  |      | 13 | %    |  |      | 8 | % |  |  | 0  | %

F-44



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##### Table of Contents





|30. |  | OTHER ADDITIONAL INFORMATION
|--- |  | ----------------------------

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

|                                                  |                                                      |  |         |       |         |  |         |       |         |  |        |        |  |  |       |       | 
|------------------------------------------------- | ---------------------------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | ------ | ------ |  |  | ----- | ----- | 
|                                                  |                                                      |  | 2000    |       | 2001    |  | 2002   
|                                                  |                                                      |  |         |       |         |  |        
|                                                  |                                                      |  | Rmb000 |       | Rmb000 |  | Rmb000 |       | US$000
|                                                  |                                                      |  |         |       |         |  |         |       |        
|Depreciation of property, machinery
and equipment |                                                      |  | 9,856   |       |         |  | 16,942  |       |         |  | 13,243 |        |  |  | 1,599 |      
|Amortization of land use rights                   |                                                      |  | 2,942   |       |         |  | 4,978   |       |         |  | 5,008  |        |  |  | 605   |      
|Interest expense for:                             |                                                      |  |         |       |         |  |         |       |         |  |        |        |  |  |       |      
|                                                  | - Amortization of debt issuance
costs                |  |         | 9,637 |         |  |         | 8,234 |         |  |        |       |  |  |       |      | 
|                                                  | - Amortization of discount of
convertible debentures |  |         | 7,613 |         |  |         | 6,469 |         |  |        |       |  |  |       |      | 
|                                                  | - bank loans                                         |  |         | 5,025 |         |  |         | 6,683 |         |  |        | 13,221 |  |  |       | 1,597 | 
|                                                  | - other bank borrowings -
discounted bills           |  |         | 749   |         |  |         | 1,243 |         |  |        | 4,168  |  |  |       | 503   | 
|                                                  | - other loans                                        |  |         | 48    |         |  |         |      |         |  |        |       |  |  |       |      | 
|                                                  | - shareholders loans (imputed
interest)             |  |         | 478   |         |  |         | 478   |         |  |        | 478    |  |  |       | 58    | 
|                                                  |                                                      |  |         |       |         |  |         |       |         |  |        |        |  |  |       |      
|Total interest expense                            |                                                      |  | 23,550  |       |         |  | 23,107  |       |         |  | 17,867 |        |  |  | 2,158 |      
|Advertising expenses                              |                                                      |  | 3,909   |       |         |  | 5,653   |       |         |  | 1,346  |        |  |  | 163   |      
|Research and development expenditures             |                                                      |  | 497     |       |         |  | 3,516   |       |         |  | 451    |        |  |  | 54    |      

F-45



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ITEM 19. EXHIBITS

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

Report of Independent Certified Public Accountants

Consolidated statements of operations for the years ended December 31,
2000, 2001 and 2002

Consolidated balance sheets at December 31, 2001 and 2002

Consolidated statements of changes in shareholders equity for the years
ended December 31, 2000, 2001 and 2002

Consolidated statements of cash flows for the years ended December 31,
2000, 2001 and 2002

Notes to and forming part of the financial statements

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

|            |  |                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 1.1 |  | Memorandum of Association of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.
|            |  |                                                                                                                                                                                                
|Exhibit 1.2 |  | Articles of Association of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.  
|            |  |                                                                                                                                                                                                
|Exhibit 2.1 |  | Common Stock and Warrants Purchase Agreement dated as of
December 30, 1999 - incorporated by reference to our Proxy
Statement filed June 16, 2000.                                             
|            |  |                                                                                                                                                                                                
|Exhibit 2.2 |  | Convertible Debenture and Warrants Purchase Agreement dated as
of May 24, 2000 - incorporated by reference to our Proxy
Statement filed June 16, 2000.                                         
|            |  |                                                                                                                                                                                                
|Exhibit 2.3 |  | Common Stock Purchase Agreement, dated as of September 14,
2001, between the Company and Brooke Bond International Inc.*                                                                       
|            |  |                                                                                                                                                                                                
|Exhibit 2.4 |  | Registration Rights Agreement, dated as of September 14, 2001,
between the Company and Brooke Bond International Inc.*                                                                         
|            |  |                                                                                                                                                                                                
|Exhibit 2.5 |  | Warrant Agreement, dated as of September 14, 2001, between the
Company and Brooke Bond International Inc.*                                                                                     
|            |  |                                                                                                                                                                                                
|Exhibit 4.1 |  | Sales and Purchase Agreement on Shares of CEC Telecom Limited
dated May 23, 2002                                                                                                               

- 64 -



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|             |  |                                                                                                                                                                                                      
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 4.2  |  | Sales and Purchase Agreement on Shares of CEC Telecom Ltd.
dated May 23, 2002                                                                                                                        
|             |  |                                                                                                                                                                                                      
|Exhibit 4.3  |  | Agreement for Sale of The One (1) Issued Share of Qiao Xing
Holdings Limited dated December 31, 2002 between Qiao Xing
Universal Telephone, Inc. and Central Grace Technologies Ltd.                 
|             |  |                                                                                                                                                                                                      
|Exhibit 4.4  |  | Supplemental Agreement for Sale of The One (1) Issued Share
of Qiao Xing Holdings Limited dated July 10, 2003 between
Qiao Xing Universal Telephone, Inc. and Central Grace
Technologies Ltd.        
|             |  |                                                                                                                                                                                                      
|Exhibit 4.5  |  | Further Supplemental Agreement for Sale of The One (1) Issued
Share of Qiao Xing Holdings Limited dated July 11, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace
Technologies Ltd.
|             |  |                                                                                                                                                                                                      
|Exhibit 8.1  |  | List of Subsidiaries of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.           
|             |  |                                                                                                                                                                                                      
|Exhibit 99.1 |  | Certification of Chief Executive Officer.                                                                                                                                                            
|             |  |                                                                                                                                                                                                      
|Exhibit 99.2 |  | Certification of Chief Financial Officer.                                                                                                                                                            



---



|* |  | - incorporated by reference to the Exhibits to our Annual Report on Form
20-F for the fiscal
year ended December 31, 2001
|- |  | -------------------------------------------------------------------------------------------------------------------------

- 65 -



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##### Table of Contents






SIGNATURES

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

| |                                    
| | -----------------------------------
| | QIAO XING UNIVERSAL TELEPHONE,
INC.
| | (Registrant)                       

|                    |                    |           
|------------------- | ------------------ | ----------
|Date: July 31, 2003 | By: /s/ RUI LIN WU
|                    |                   
|                    |                    | Rui Lin Wu
|                    |                    | Chairman  

- 66 -



---



##### Table of Contents






CERTIFICATIONS

I, Rui Lin Wu, certify that:

1.     I have reviewed this annual report on Form 20-F of Qiao Xing Universal
Telephone, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: July 31, 2003

| |                                     
| | ------------------------------------
| | /s/ RUI LIN WU                      
| |                                     
| | Rui Lin Wu,                         
| | Chairman and Chief Executive Officer

- 67 -



---



##### Table of Contents



CERTIFICATIONS

I, Calvin Chong, certify that:

1.     I have reviewed this annual report on Form 20-F of Qiao Xing Universal
Telephone, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: July 31, 2003

| |                        
| | -----------------------
| | /s/ CALVIN CHONG       
| |                        
| | Calvin Chong,          
| | Chief Financial Officer

- 68 -



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##### Table of Contents






INDEX TO EXHIBITS

DESCRIPTION

|            |  |                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 1.1 |  | Memorandum of Association of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.                                                  
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 1.2 |  | Articles of Association of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.                                                    
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 2.1 |  | Common Stock and Warrants Purchase Agreement dated as of
December 30, 1999 - incorporated by reference to the Proxy
Statement filed June 16, 2000.                                                                                               
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 2.2 |  | Convertible Debenture and Warrants Purchase Agreement dated as
of May 24, 2000 - incorporated by reference to the Proxy
Statement filed June 16, 2000.                                                                                           
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 2.3 |  | Common Stock Purchase Agreement, dated as of September 14,
2001, between the Company and Brooke Bond International Inc. -
incorporated by reference to the Exhibits to our Annual Report
on Form 20-F for the fiscal year ended December 31, 2001
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 2.4 |  | Registration Rights Agreement, dated as of September 14, 2001,
between the Company and Brooke Bond International Inc. -
incorporated by reference to the Exhibits to our Annual Report
on Form 20-F for the fiscal year ended December 31, 2001  
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 2.5 |  | Warrant Agreement, dated as of September 14, 2001, between the
Company and Brooke Bond International Inc. - incorporated by
reference to the Exhibits to our Annual Report on Form 20-F
for the fiscal year ended December 31, 2001              
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 4.1 |  | Sales and Purchase Agreement on Shares of CEC Telecom Limited
dated May 23, 2002                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 4.2 |  | Sales and Purchase Agreement on Shares of CEC Telecom Ltd.
dated May 23, 2002                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 4.3 |  | Agreement for Sale of The One (1) Issued Share of Qiao Xing
Holdings Limited dated December 31, 2002 between Qiao Xing
Universal Telephone, Inc. and Central Grace Technologies Ltd.                                                             
|            |  |                                                                                                                                                                                                                                                  
|Exhibit 4.4 |  | Supplemental Agreement for Sale of The One (1) Issued Share of
Qiao Xing Holdings Limited dated July 10, 2003 between Qiao
Xing Universal Telephone, Inc. and Central Grace Technologies
Ltd.                                                    





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##### Table of Contents



|             |  |                                                                                                                                                                                                      
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 4.5  |  | Further Supplemental Agreement for Sale of The One (1) Issued
Share of Qiao Xing Holdings Limited dated July 11, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace
Technologies Ltd.
|             |  |                                                                                                                                                                                                      
|Exhibit 8.1  |  | List of Subsidiaries of the Company - incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.           
|             |  |                                                                                                                                                                                                      
|Exhibit 99.1 |  | Certification of Chief Executive Officer.                                                                                                                                                            
|             |  |                                                                                                                                                                                                      
|Exhibit 99.2 |  | Certification of Chief Financial Officer.