##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-29946
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 QIAO XING UNIVERSAL TELEPHONE, INC.
  QIAO XING UNIVERSAL TELEPHONE, INC.
  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)
  Title of each 
class
    
    Name of each exchange
on which registered$.001 Par Value Common Stock
    
    NASDAQ(Common Stock)
  (Title of Class)
  (Title of Class)
    o þ
  o þ
  þ o
  o þ o
  o þ
  o þ




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##### Table of Contents



SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
   
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions
    -2-




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##### Table of Contents



RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
     Over (Understatement)2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000In-process research and development
    
    
    (13,437
    )
    
    
    
    
    
    
    Amortization of acquired intangible assets
    
    
    (3,936
    )
    
    
    (836
    )
    
    
    (1,721
    )Impairment of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    3,852Gain on disposal of equity investee
    
    
    
    
    
    
    30,068
    
    
    
    Gain on disposal of other equity investments
    
    
    
    
    
    
    
    
    
    
    5,035Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (7,348
    )Provision for income tax
    
    
    (5,862
    )
    
    
    3,007
    
    
    
    2,327Minority interests
    
    
    6,948
    
    
    
    5,618
    
    
    
    2,842Extraordinary gain on acquisition of minority interests
    
    
    
    
    
    
    
    
    
    
    (2,106
    )Net income
    
    
    16,287
    
    
    
    22,279
    
    
    
    2,977
 -3-




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##### Table of Contents



Over (Understatement)2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    59,522
    
    
    
    263,121
    
    
    
    239,152Cost of goods sold
    
    
    59,522
    
    
    
    263,121
    
    
    
    239,152
  -4-




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##### Table of Contents



Over (Understatement)2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000Gain on disposal of equity investee
    
    
    
    
    
    
    
    
    
    
    1,579Equity in earnings of equity investee
    
    
    
    
    
    
    (1,579
    )
    
    
    Net income
    
    
    
    
    
    
    (821
    )
    
    
    821
  Consolidated Balance Sheet as of December 31, 2005
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    2,155,818
    
    
    
    
    
    
    
    4,061
    
    
    
    2,159,879Investments at cost
    
    
    7,634
    
    
    
    169
    
    
    
    
    
    
    
    7,803Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    48,227
    
    
    
    4,712
    
    
    
    
    
    
    
    52,939Other non-current assets
    
    
    297,273
    
    
    
    
    
    
    
    (4,061
    )
    
    
    293,212Total assets
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547Total liabilities
    
    
    1,310,999
    
    
    
    5,419
    
    
    
    
    
    
    
    1,316,418Minority interests
    
    
    231,201
    
    
    
    (10,369
    )
    
    
    
    
    
    
    220,832Total shareholders equity
    
    
    1,038,840
    
    
    
    (41,543
    )
    
    
    
    
    
    
    997,297Total liabilities,
minority interests and
shareholders equity
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547
 -5-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2005
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,874,336
    
    
    
    (239,152
    )
    
    
    
    
    
    
    2,635,184Cost of goods sold
    
    
    (2,385,287
    )
    
    
    239,152
    
    
    
    (10,663
    )
    
    
    (2,156,798
    )Gross profit
    
    
    489,049
    
    
    
    
    
    
    
    (10,663
    )
    
    
    478,386Operating expenses
    
    
    (125,435
    )
    
    
    2,131
    
    
    
    10,663
    
    
    
    (112,641
    )Income from operations
    
    
    363,614
    
    
    
    2,131
    
    
    
    
    
    
    
    365,745Other income and
expenses
    
    
    (19,720
    )
    
    
    (13,962
    )
    
    
    
    
    
    
    (33,682
    )Income before income tax
    
    
    343,894
    
    
    
    (11,831
    )
    
    
    
    
    
    
    332,063Provision for income tax
    
    
    (27,813
    )
    
    
    2,327
    
    
    
    
    
    
    
    (25,486
    )Income before minority
interests
    
    
    316,081
    
    
    
    (9,504
    )
    
    
    
    
    
    
    306,577Minority interests
    
    
    (102,870
    )
    
    
    3,600
    
    
    
    
    
    
    
    (99,270
    )Net income before
extraordinary gain
    
    
    213,211
    
    
    
    (5,904
    )
    
    
    
    
    
    
    207,307Extraordinary gain on
acquisition of minority
interests net of nil
tax
    
    
    35,486
    
    
    
    2,106
    
    
    
    
    
    
    
    37,592Net income
    
    
    248,697
    
    
    
    (3,798
    )
    
    
    
    
    
    
    244,899
 Consolidated Balance Sheet as of December 31, 2004
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,563,091
    
    
    
    
    
    
    
    3,090
    
    
    
    1,566,181Investment at equity
    
    
    3,321
    
    
    
    (3,321
    )
    
    
    
    
    
    
    Investments at cost
    
    
    22,599
    
    
    
    17,452
    
    
    
    
    
    
    
    40,051Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    62,238
    
    
    
    2,581
    
    
    
    
    
    
    
    64,819Other non-current assets
    
    
    353,373
    
    
    
    
    
    
    
    (3,090
    )
    
    
    350,283Total assets
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048Total liabilities
    
    
    1,147,356
    
    
    
    10,337
    
    
    
    
    
    
    
    1,157,693Minority interests
    
    
    250,137
    
    
    
    (7,254
    )
    
    
    
    
    
    
    242,883Total shareholders equity
    
    
    679,217
    
    
    
    (37,745
    )
    
    
    
    
    
    
    641,472Total liabilities,
minority interests and
shareholders equity
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048
 -6-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2004
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,019,081
    
    
    
    (263,121
    )
    
    
    (35,571
    )
    
    
    1,720,389Cost of goods sold
    
    
    (1,795,482
    )
    
    
    263,121
    
    
    
    35,184
    
    
    
    (1,497,177
    )Gross profit
    
    
    223,599
    
    
    
    
    
    
    
    (387
    )
    
    
    223,212Operating expenses
    
    
    (149,428
    )
    
    
    (836
    )
    
    
    387
    
    
    
    (149,877
    )Income from operations
    
    
    74,171
    
    
    
    (836
    )
    
    
    
    
    
    
    73,335Other income and
expenses
    
    
    16,494
    
    
    
    (30,068
    )
    
    
    
    
    
    
    (13,574
    )Income before income tax
    
    
    90,665
    
    
    
    (30,904
    )
    
    
    
    
    
    
    59,761Provision for income tax
    
    
    (10,404
    )
    
    
    3,007
    
    
    
    
    
    
    
    (7,397
    )Income before minority
interests
    
    
    80,261
    
    
    
    (27,897
    )
    
    
    
    
    
    
    52,364Minority interests
    
    
    (56,763
    )
    
    
    4,860
    
    
    
    
    
    
    
    (51,903
    )Equity in earnings of
equity investees
    
    
    (624
    )
    
    
    1,579
    
    
    
    
    
    
    
    955Net income
    
    
    22,874
    
    
    
    (21,458
    )
    
    
    
    
    
    
    1,416
 Consolidated Balance Sheet as of December 31, 2003
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,043,531
    
    
    
    138
    
    
    
    4,126
    
    
    
    1,047,795Investment at equity
    
    
    37,214
    
    
    
    37,586
    
    
    
    
    
    
    
    74,800Investments at cost
    
    
    14,965
    
    
    
    5,035
    
    
    
    
    
    
    
    20,000Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    73,282
    
    
    
    3,417
    
    
    
    
    
    
    
    76,699Other non-current assets
    
    
    287,422
    
    
    
    
    
    
    
    (4,126
    )
    
    
    283,296Total assets
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304Total liabilities
    
    
    757,707
    
    
    
    13,482
    
    
    
    
    
    
    
    771,189Minority interests
    
    
    193,374
    
    
    
    (2,393
    )
    
    
    
    
    
    
    190,981Total shareholders equity
    
    
    577,421
    
    
    
    (16,287
    )
    
    
    
    
    
    
    561,134Total liabilities,
minority interests and
shareholders equity
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304
 -7-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2003
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    1,843,282
    
    
    
    (59,522
    )
    
    
    
    
    
    
    1,783,760Cost of goods sold
    
    
    (1,598,615
    )
    
    
    59,522
    
    
    
    (4,703
    )
    
    
    (1,543,796
    )Gross profit
    
    
    244,667
    
    
    
    
    
    
    
    (4,703
    )
    
    
    239,964Operating expenses
    
    
    (209,599
    )
    
    
    (17,373
    )
    
    
    2,740
    
    
    
    (224,232
    )Income from operations
    
    
    35,068
    
    
    
    (17,373
    )
    
    
    (1,963
    )
    
    
    15,732Other income and
expenses
    
    
    (13,852
    )
    
    
    
    
    
    
    1,963
    
    
    
    (11,889
    )Income before income tax
    
    
    21,216
    
    
    
    (17,373
    )
    
    
    
    
    
    
    3,843Provision for income tax
    
    
    
    
    
    
    (5,862
    )
    
    
    
    
    
    
    (5,862
    )Income before minority
interests
    
    
    21,216
    
    
    
    (23,235
    )
    
    
    
    
    
    
    (2,019
    )Minority interests
    
    
    (35,748
    )
    
    
    6,948
    
    
    
    
    
    
    
    (28,800
    )Equity in earnings of
equity investees
    
    
    6,802
    
    
    
    
    
    
    
    
    
    
    
    6,802Net loss
    
    
    (7,730
    )
    
    
    (16,287
    )
    
    
    
    
    
    
    (24,017
    )
 -8-




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 4A. UNRESOLVED STAFF COMMENTSITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15T. CONTROLS AND PROCEDURESITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSPART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESINDEX TO EXHIBITSNon-competition AgreementList of Significant Subsidiaries of the CompanyCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO Pursuant to Rule 13a-14(b)Certification of CFO Pursuant to Rule 13a-14(b)    Table of Contents  
 PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM
3. KEY INFORMATION
 A. SELECTED FINANCIAL DATA.
  2003
    
    2004
    
    20052002
    
    (restated)
    
    (restated)
    
    (restated)
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Net sales
    
    
    549,967
    
    
    
    1,783,760
    
    
    
    1,720,389
    
    
    
    2,635,184
    
    
    
    3,221,212
    
    
    
    412,759Cost of goods sold
    
    
    (528,149
    )
    
    
    (1,543,796
    )
    
    
    (1,497,177
    )
    
    
    (2,156,798
    )
    
    
    (2,651,392
    )
    
    
    (339,743
    )Gross profit
    
    
    21,818
    
    
    
    239,963
    
    
    
    223,212
    
    
    
    478,386
    
    
    
    569,820
    
    
    
    73,016Operating expenses:Selling expenses
    
    
    (5,286
    )
    
    
    (75,843
    )
    
    
    (29,065
    )
    
    
    (24,726
    )
    
    
    (28,401
    )
    
    
    (3,639
    )General and administrative
expensesIncluding stock-based
compensation
    
    
    (68,233
    )
    
    
    (75,115
    )
    
    
    (90,554
    )
    
    
    (55,341
    )
    
    
    (126,076
    )
    
    
    (16,155
    )Research and development
    
    
    (451
    )
    
    
    (6,649
    )
    
    
    (18,378
    )
    
    
    (20,694
    )
    
    
    (30,747
    )
    
    
    (3,940
    )In process research and
development
    
    
    
    
    
    
    (35,263
    )
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    (5,348
    )Amortization of acquired
intangible assets
    
    
    
    
    
    
    (31,361
    )
    
    
    (11,880
    )
    
    
    (11,880
    )
    
    
    (15,178
    )
    
    
    (1,945
    )
 -9-




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##### Table of Contents



2003
    
    2004
    
    20052002
    
    (restated)
    
    (restated)
    
    (restated)
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000(Loss) Income from operations
    
    
    (52,152
    )
    
    
    15,732
    
    
    
    73,335
    
    
    
    365,745
    
    
    
    327,679
    
    
    
    41,989Interest income
    
    
    1,070
    
    
    
    3,045
    
    
    
    492
    
    
    
    7,130
    
    
    
    8,108
    
    
    
    1,039Exchange (loss) gain, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,659
    )
    
    
    3,225
    
    
    
    413Interest expense
    
    
    (17,867
    )
    
    
    (17,022
    )
    
    
    (27,060
    )
    
    
    (41,752
    )
    
    
    (100,432
    )
    
    
    (12,869
    )Loss on re-measurement of
embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,439
    )
    
    
    (17,227
    )Gain on sale of a subsidiary
    
    
    79,050
    
    
    
    
    
    
    
    
    
    
    
    10,307
    
    
    
    
    
    
    
    Gain on sale of equity investee
    
    
    
    
    
    
    
    
    
    
    11,397
    
    
    
    
    
    
    
    
    
    
    
    Impairment of investment at
cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,348
    )
    
    
    
    
    
    
    Other income (expenses) , net
    
    
    124
    
    
    
    2,088
    
    
    
    1,597
    
    
    
    640
    
    
    
    4,453
    
    
    
    571Income (Loss) before income
tax
    
    
    10,225
    
    
    
    3,843
    
    
    
    59,761
    
    
    
    332,063
    
    
    
    108,594
    
    
    
    13,916Provision for income tax
    
    
    
    
    
    
    (5,862
    )
    
    
    (7,397
    )
    
    
    (25,486
    )
    
    
    (58,192
    )
    
    
    (7,457
    )Income (Loss) before minority
interests
    
    
    10,225
    
    
    
    (2,019
    )
    
    
    52,364
    
    
    
    306,577
    
    
    
    50,402
    
    
    
    6,459Minority interests
    
    
    6,248
    
    
    
    (28,800
    )
    
    
    (51,903
    )
    
    
    (99,270
    )
    
    
    (84,473
    )
    
    
    (10,824
    )Equity in earnings of equity
investees
    
    
    
    
    
    
    6,802
    
    
    
    955
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income before
extraordinary gain
    
    
    16,473
    
    
    
    (24,017
    )
    
    
    1,416
    
    
    
    207,307
    
    
    
    (34,071
    )
    
    
    (4,365
    )Extraordinary gain on
acquisition of minority
interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,592
    
    
    
    14,237
    
    
    
    1,824Net Income (Loss)
    
    
    16,473
    
    
    
    (24,017
    )
    
    
    1,416
    
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    (2,541
    )Other comprehensive (loss)
incomeTranslation adjustments
    
    
    (61
    )
    
    
    (746
    )
    
    
    70
    
    
    
    1,821
    
    
    
    7,203
    
    
    
    923Comprehensive income
(loss)
    
    
    16,412
    
    
    
    (24,763
    )
    
    
    1,486
    
    
    
    246,720
    
    
    
    (12,631
    )
    
    
    (1,618
    )Basic (loss) earnings per
common shareBefore extraordinary gain
    
    
    1.12
    
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    11.32
    
    
    
    (1.44
    )
    
    
    (0.19
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.05
    
    
    
    0.60
    
    
    
    0.08After extraordinary gain
    
    
    1.12
    
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    13.37
    
    
    
    (0.84
    )
    
    
    (0.11
    )Diluted (loss) earnings per
common shareBefore extraordinary gain
    
    
    0.95
    
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    11.32
    
    
    
    (2.03
    )
    
    
    (0.26
    )Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.05
    
    
    
    0.59
    
    
    
    0.07
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2003
    
    2004
    
    20052002
    
    (restated)
    
    (restated)
    
    (restated)
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000After extraordinary gain
    
    
    0.95
    
    
    
    (1.56
    )
    
    
    0.09
    
    
    
    13.37
    
    
    
    (1.44
    )
    
    
    (0.19
    )Weighted average number of
shares outstanding- Basic (2)
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    23,712,000- Diluted (2)
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    16,560,000
    
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    24,016,000
 2003
    
    2004
    
    20052002
    
    (restated)
    
    (restated)
    
    (restated)
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Balance Sheet DataCash and bank deposits
    
    
    10,948
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    140,500Working capital
    
    
    266,773
    
    
    
    302,027
    
    
    
    429,253
    
    
    
    856,839
    
    
    
    1,498,715
    
    
    
    192,042Property, machinery and equipment,
net
    
    
    5,112
    
    
    
    98,305
    
    
    
    107,162
    
    
    
    52,664
    
    
    
    209,542
    
    
    
    26,850Construction in progress
    
    
    
    
    
    
    1,184
    
    
    
    50,934
    
    
    
    59,105
    
    
    
    60,295
    
    
    
    7,726Lease prepayments, net
    
    
    189,405
    
    
    
    182,985
    
    
    
    178,577
    
    
    
    173,161
    
    
    
    207,206
    
    
    
    26,551Debt issuance cost, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,845
    
    
    
    4,081Total assets
    
    
    742,708
    
    
    
    1,523,303
    
    
    
    2,042,048
    
    
    
    2,534,547
    
    
    
    4,177,986
    
    
    
    535,358Short-term-debts
    
    
    40,000
    
    
    
    439,472
    
    
    
    700,186
    
    
    
    754,212
    
    
    
    1,155,290
    
    
    
    148,036Long-term-debts
    
    
    8,163
    
    
    
    11,939
    
    
    
    10,428
    
    
    
    7,959
    
    
    
    229,784
    
    
    
    29,444Total liabilities
    
    
    98,074
    
    
    
    771,189
    
    
    
    1,157,693
    
    
    
    1,316,418
    
    
    
    2,192,713
    
    
    
    280,969Minority interests (1)
    
    
    87,054
    
    
    
    190,980
    
    
    
    242,883
    
    
    
    220,832
    
    
    
    115,224
    
    
    
    14,765Shareholders equity
    
    
    557,580
    
    
    
    561,134
    
    
    
    641,471
    
    
    
    997,297
    
    
    
    1,870,049
    
    
    
    239,624Cash flows dataCash flows from operating activities
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (204,036
    )
    
    
    91,232
    
    
    
    (154,752
    )
    
    
    (19,829
    )Cash flows from investing activities
    
    
    (136,170
    )
    
    
    159,323
    
    
    
    (82,451
    )
    
    
    (3,822
    )
    
    
    (603,009
    )
    
    
    (77,268
    )Cash flows from financing activities
    
    
    195,760
    
    
    
    260,345
    
    
    
    304,841
    
    
    
    161,955
    
    
    
    1,463,569
    
    
    
    187,538
 
 (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 2002 by 14,685,000 shares, for 2003
by 15,420,000 shares, for 2004 by 16,443,000 shares, and for 2005 by 18,319,000 shares and for
2006 by 23,712,000 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 -11-




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currencies as certified for customs purposes by the Federal Reserve Bank
of New York on December 29, 2006 of US$1.00 = Rmb 7.8041. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States dollars at that
rate or at any other rate. Exchange Rate Information
   Noon Buying Rate(1)Calendar Year
    
    Average(2)(Rmb per US$)2002
    
    
    8.27712003
    
    
    8.27722004
    
    
    8.27682005
    
    
    8.19362006
    
    
    7.9723
 
 (1)
    
    The noon buying rate in New York for cable transfers payable in foreign currencies as
certified for customs purposes by the Federal Reserve Bank of New York. Since April 1994, the
noon buying rate has been based on the PBOC Rate. As a result, since April 1994, the noon
buying rate and the PBOC Rate have been substantially similar.(2)
    
    Annual averages are calculated from the month-end rates. Calendar Month
    
    High
    
    LowJanuary 2007
    
    
    7.8127
    
    
    
    7.7705February 2007
    
    
    7.7632
    
    
    
    7.7410March 2007
    
    
    7.7454
    
    
    
    7.7232April 2007
    
    
    7.7345
    
    
    
    7.7090May 2007
    
    
    7.7065
    
    
    
    7.6463June 2007
    
    
    7.6680
    
    
    
    7.6120July 2007 (through July 13)
    
    
    7.6055
    
    
    
    7.5660
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B. CAPITALIZATION AND INDEBTEDNESS.
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
  D. RISK FACTORS
 Our future revenues and operating results are inherently unpredictable, and as a result, we may
fail to meet the expectations of securities analysts or investors, which could cause our stock
price to decline.
  
    
    the current economic environment and other developments in the telecommunications
industry;
    
    the mix of our products sold, including inventory items with low product costs;
    
    our ability to control expenses;
    
    fluctuations in demand for and sales of our products, the acceptance of our products
in the marketplace, and the general level of spending in the telecommunications
industry;
    
    our ability to maintain appropriate manufacturing capacity, and particularly to
limit excess capacity commensurate with the volatile demand levels for our products;
    
    our ability to successfully complete a transition to an outsourced manufacturing
model;
    
    the ability of our outsourced manufacturers to timely produce and deliver
subcomponents, and possibly complete products in the quantity and of the quality we
require;
    
    competitive factors, including the introduction of new products and product
enhancements by competitors and potential competitors, pricing pressures, and the
competitive environment in the
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markets into which we sell our products, including
competitors with substantially greater resources than we have;
 
    
    our ability to effectively develop, introduce, manufacture, and ship new and
enhanced products in a timely manner without defects;
    
    the availability and cost of components for our products;
    
    new product introductions that may result in increased research and development
expenses and sales and marketing expenses that are incurred in one quarter, with
revenues, if any, that are not recognized until a subsequent or later quarter; and
    
    the unpredictability of consumer demand and difficulties in meeting such demand.
   Our stock price is highly volatile.
  
    
    quarterly variations in our operating results;
    
    significant developments in the businesses of other telecommunications companies;
    
    changes in financial estimates by securities analysts;
    
    changes in market valuations or financial results of telecommunications-related
companies;
    
    announcements by us or our competitors of technology innovations, new products, or
significant acquisitions, strategic partnerships or joint ventures;
    
    any deviation from projected growth rates in revenues;
    
    any loss of a major customer or a major customer order;
    
    additions or departures of key management or engineering personnel;
    
    any deviations in our net revenue or in losses from levels expected by securities
analysts;
    
    activities of short sellers and risk arbitrageurs;
    
    future sales of our common stock; and
    
    volume fluctuations, which are particularly common among highly volatile securities
of telecommunications-related companies.
  We experience intense competition with respect to our products.
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We are subject to a concentration of credit risk.
  The economy of China differs from the economies of most countries and creates significant risks.
    Our currency is not freely convertible.
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We may not maintain adequate insurance coverage for damage to our Chinese factories.
  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.
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We depend upon certain key personnel to manage our company.
  We are controlled by one of our shareholders, whose interests may differ from other shareholders.
  Our holding company structure creates restrictions on the payment of dividends.
  As a foreign private issuer, we are not subject to certain rules promulgated by Nasdaq that other
Nasdaq-listed issuers are required to comply with.
  
    
    our independent directors do not hold regularly scheduled meetings in executive
session;
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation;
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors; and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our
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stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person.
  It may be difficult to serve us with legal process or enforce judgments against us or our
management.
  
    
    judgments of United States courts against us, our directors or our officers based on
the civil liability provisions of the securities laws of the United States or any
state; or
    
    in original actions brought in the British Virgin Islands or China, liabilities
against us or non-residents based upon the securities laws of the United States or any
state.
 Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer.
  
    
    the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
    
    the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect of a security registered under the Exchange Act; and
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction.
  Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States.
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ITEM
4.INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY.
       -19-




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Sale of $40,000,000 Senior Convertible Notes
 Background
   The Transaction
   
    
    the interest rate on the notes is 3.5% per annum, payable in cash in arrears on a
calendar quarterly basis beginning June 30, 2006
    
    the date of maturity of the notes is June 13, 2009, three years from the closing
date
    
    the notes are convertible at the investors option into either:
 
    
    our common stock, $0.001 per share par value or
    
    the common stock of our significant subsidiary, Qiao Xing Mobile Communications
Co., Ltd. (QX Mobile), in the event of an initial public offering of QX Mobile
common stock
 
    
    the initial conversion price for our common stock is $8.027 per share (which
represents a 15% premium to the five day volume weighted average price (VWAP) of our
common stock as of the date of execution of the term sheet for this transaction),
subject to adjustment as provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect to
such conversion, the investors (together with their affiliates) would beneficially own
in excess of 9.99% of our common stock outstanding immediately after giving effect to
the conversion without prior written notice to us
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
    
    the conversion price for our common stock is subject to reset if the average of the
daily VWAP of our common stock for the five trading days ending on each two-month
anniversary of the closing until maturity (each a Reset Date) is less than $6.98 (or
such lower reset price as previously adjusted pursuant hereto). In that event, the
conversion price is reset to a price equal to 90% of the VWAP of our common stock
for the five trading days ending on the applicable Reset Date. In no event will the
conversion price be reset to a price less than $5.15 per share.
    
    the conversion price for QX Mobile common stock is the amount equal to (a) 7 times
year 2005 net profit for QX Mobile, divided by (b) the total number of shares of QX
Mobile common stock outstanding on a fully-diluted basis as of December 31, 2005
    
    the notes are unsecured and are guaranteed by QX Mobile
    
    the investors can require us to redeem the notes after two years in an amount equal
to the sum of (a) the outstanding principal of the notes, (b) the accrued and unpaid
interest thereon, and (c) 6% on the sum of (a) and (b)
    
    we have the right, subject to certain terms and conditions, to deliver shares of our
common stock in lieu of cash on the put date or at maturity, and the number of shares
would be determined by dividing the face amount and accrued interest by the average
closing price of our common stock for the 10 days prior to redemption, and then
multiplying that amount by 0.975
    
    we may be required to prepay the notes if certain transactions or events of default
occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of
125%, or
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 
    
    we are required by the terms of the April 06 Registration Rights Agreement entered
into concurrently with the April 06 Agreement to file after the closing date with the
Securities and Exchange Commission a registration statement to register the common
stock issuable upon conversion of the notes and exercise of the warrants to permit the
investors to resell such common stock to the public
    
    under the terms of the April 06 Agreement, we are subject to certain cash penalties
if we are unable to deliver to the investors the common stock receivable upon
conversion of the notes and exercise of the warrants in a timely manner
  
    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $8.027 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance on June 13, 2006
    
    the warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the warrants is not available for the resale of the
shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event that
the holder would beneficially own in excess of 9.99% of our common stock outstanding
immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the warrant exercise price. (This ratchet adjustment provision does
not apply in the case of certain exempt issuances.)
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Sale of $26,000,000 Senior Convertible Notes
 Background
  The Transaction
   
    
    the interest rate on the notes is 4.5% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning December 31, 2006
    
    the date of maturity of the notes is April 30, 2009
    
    the notes are convertible at the investors option into our common stock, $0.001 per
share par value
    
    the initial conversion price for our common stock is $14.30 per share (which
represents a 10% premium to the five day volume weighted average price (VWAP) of our
common stock as of the date of execution of the term sheet for this transaction),
subject to adjustment as provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect to
such conversion, the investors (together with their affiliates) would beneficially own
in excess of 9.99% of our common stock outstanding immediately after giving effect to
the conversion
    
    the conversion price for our common stock is subject to reset if the average of the
daily VWAP of our common stock for the five trading days ending on each six-month
anniversary of the closing until maturity (each a Reset Date) is less than $13.00.
In that event, the conversion price is reset to a price equal to 100% of the VWAP of
our common stock for the five trading days ending on the applicable Reset Date. In no
event will the conversion price be reset to a price less than $7.80 per share.
    
    the notes require an automatic repricing of the conversion price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the conversion price. (This ratchet adjustment provision does not
apply in the case of certain exempt issuances.)
    
    the notes are unsecured
    
    the investors can require us to redeem the notes after one year in an amount equal
to the sum of (a) the outstanding principal of the notes, (b) the accrued and unpaid
interest thereon, and (c) 3% on the sum of (a) and (b)
    
    we may be required to prepay the notes if certain transactions or events of default
occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of 125%,
or
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
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 
    
    we are required by the terms of the October 06 Registration Rights Agreement
entered into concurrently with the October 06 Agreement to file after the closing date
with the Securities and Exchange Commission a registration statement to register the
common stock issuable upon conversion of the notes and exercise of the warrants to
permit the investors to resell such common stock to the public
    
    under the terms of the October 06 Agreement, we are subject to certain cash
penalties if we are unable to deliver to the investors the common stock receivable upon
conversion of the notes and exercise of the warrants in a timely manner
  
    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $14.30 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance of October 31, 2006
    
    the warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the warrants is not available for the resale of the
shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event that
the holder would beneficially own in excess of 9.99% of our common stock outstanding
immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the warrant exercise price. (This ratchet adjustment provision does
not apply in the case of certain exempt issuances.)
 Recent Development  Initial Public Offering of QX Mobile Shares And Non-Competition
Arrangement
   (i)
    
    making investments in businesses that result in or may result in direct or indirect
competition with QX Mobiles business;(ii)
    
    soliciting any business, for itself or for other persons, from any person that has business
relationships with QX Mobile;
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(iii)
    
    soliciting the employment of, or hiring, any officer, directors or employee of QX Mobile;
and(iv)
    
    interfering with QX Mobiles business or encouraging other persons to interfere with QX
Mobiles business.
  B. BUSINESS OVERVIEW.
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2004
    
    2005(Restated)
    
    (Restated)
    
    2006Net sales:
    
    Rmb000
    
    Rmb000
    
    Rmb000Mobile phones
    
    
    1,525,287
    
    
    
    2,380,531
    
    
    
    2,985,431Indoor phones
    
    
    195,102
    
    
    
    254,653
    
    
    
    235,7801,720,389
    
    
    
    2,635,184
    
    
    
    3,221,211
 -25-




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QX Mobile and Its Subsidiary CECTs Business Overview
      -26-




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HZQXCIs Business Operations and Product Range
        (i)
    
    the design and manufacture through sub-contractors of COSUN-branded GSM mobile
phones for its own account;(ii)
    
    the development and marketing of wired and wireless telephones (indoor phones),
including telephones with special functions; and(iii)
    
    the development and sale of internet-related products and other consumer
electronics products.
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(i)
    
    Little Smart phones with removable cards;(ii)
    
    ADSL2. Compared to the first generation of ADSL, its upstream channel rate and
downstream channel rate are much faster; and(iii)
    
    Home Gateway (residential gateway). The Home Gateway is a device that acts as
a hub between the home environment and the broadband network. Under the control of the
service provider, it simplifies the user experience when utilizing broadband services.
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Production Management
  Quality Assurance System
   
    
    sampling test method is used to inspect all incoming materials on a sample basis;
    
    at each stage of production process, quality control inspectors monitor the
production flow and check the quality of the products; and
    
    finished products are checked by quality control staff on a sample basis.
  Sales and Marketing
 HZQXCIs Indoor Telephone Division
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HZQXCIs Mobile Phone Division
    -30-




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Materials and Components
   Research and Development
    -31-




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Competition
  
    
    functions and designs;
    
    performance/cost ratio;
    
    brand name recognition;
    
    distribution capability;
    
    after-sale service;
    
    short lead time in product development;
    
    product quality; and
    
    capability of mass production.
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C. ORGANIZATIONAL STRUCTURE AS OF JULY 16, 2007.
 
 -34-




---



##### Table of Contents



D. PROPERTY, PLANTS AND EQUIPMENT.
  
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  -35-




---



##### Table of Contents



ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
     Over (Understatement)2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000In-process research and development
    
    
    (13,437
    )
    
    
    
    
    
    
    Amortization of acquired intangible
assets
    
    
    (3,936
    )
    
    
    (836
    )
    
    
    (1,721
    )Impairment of acquired intangible
assets
    
    
    
    
    
    
    
    
    
    
    3,852
 -36-




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##### Table of Contents



Over (Understatement)2003
    
    2004
    
    2005Rmb'000
    
    Rmb'000
    
    Rmb'000Gain on disposal of equity investee
    
    
    
    
    
    
    30,068
    
    
    
    Gain on disposal of other equity
investments
    
    
    
    
    
    
    
    
    
    
    5,035Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (7,348
    )Provision for income tax
    
    
    (5,862
    )
    
    
    3,007
    
    
    
    2,327Minority interests
    
    
    6,948
    
    
    
    5,618
    
    
    
    2,842Extraordinary gain on acquisition of
minority interests
    
    
    
    
    
    
    
    
    
    
    (2,106
    )Net income
    
    
    16,287
    
    
    
    22,279
    
    
    
    2,977
  Over (Understatement)2003
    
    2004
    
    2005Rmb'000
    
    Rmb'000
    
    Rmb'000Net sales
    
    
    59,522
    
    
    
    263,121
    
    
    
    239,152Cost of goods sold
    
    
    59,522
    
    
    
    263,121
    
    
    
    239,152
  Over (Understatement)2003
    
    
    2004
    
    
    2005Rmb'000
    
    
    Rmb'000
    
    
    Rmb'000Gain on disposal of equity investee
    
    
    
    
    
    
    
    
    
    
    1,579Equity in earnings of equity investee
    
    
    
    
    
    
    (1,579
    )
    
    
    Net income
    
    
    
    
    
    
    (821
    )
    
    
    821
 -37-




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##### Table of Contents



Consolidated Balance Sheet as of December 31, 2005
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustment
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    2,155,818
    
    
    
    
    
    
    
    4,061
    
    
    
    2,159,879Investments at cost
    
    
    7,634
    
    
    
    169
    
    
    
    
    
    
    
    7,803Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    48,227
    
    
    
    4,712
    
    
    
    
    
    
    
    52,939Other non-current assets
    
    
    297,273
    
    
    
    
    
    
    
    (4,061
    )
    
    
    293,212Total assets
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547Total liabilities
    
    
    1,310,999
    
    
    
    5,419
    
    
    
    
    
    
    
    1,316,418Minority interests
    
    
    231,201
    
    
    
    (10,369
    )
    
    
    
    
    
    
    220,832Total shareholders equity
    
    
    1,038,840
    
    
    
    (41,543
    )
    
    
    
    
    
    
    997,297Total liabilities,
minority interests and
shareholders equity
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547
 -38-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2005
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,874,336
    
    
    
    (239,152
    )
    
    
    
    
    
    
    2,635,184Cost of goods sold
    
    
    (2,385,287
    )
    
    
    239,152
    
    
    
    (10,663
    )
    
    
    (2,156,798
    )Gross profit
    
    
    489,049
    
    
    
    
    
    
    
    (10,663
    )
    
    
    478,386Operating expenses
    
    
    (125,435
    )
    
    
    2,131
    
    
    
    10,663
    
    
    
    (112,641
    )Income from operations
    
    
    363,614
    
    
    
    2,131
    
    
    
    
    
    
    
    365,745Other income and
expenses
    
    
    (19,720
    )
    
    
    (13,962
    )
    
    
    
    
    
    
    (33,682
    )Income before income tax
    
    
    343,894
    
    
    
    (11,831
    )
    
    
    
    
    
    
    332,063Provision for income tax
    
    
    (27,813
    )
    
    
    2,327
    
    
    
    
    
    
    
    (25,486
    )Income before minority
interests
    
    
    316,081
    
    
    
    (9,504
    )
    
    
    
    
    
    
    306,577Minority interests
    
    
    (102,870
    )
    
    
    3,600
    
    
    
    
    
    
    
    (99,270
    )Net income before
extraordinary gain
    
    
    213,211
    
    
    
    (5,904
    )
    
    
    
    
    
    
    207,307Extraordinary gain on
acquisition of minority
interests net of nil
tax
    
    
    35,486
    
    
    
    2,106
    
    
    
    
    
    
    
    37,592Net income
    
    
    248,697
    
    
    
    (3,798
    )
    
    
    
    
    
    
    244,899
 Consolidated Balance Sheet as of December 31, 2004
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,563,091
    
    
    
    
    
    
    
    3,090
    
    
    
    1,566,181Investment at equity
    
    
    3,321
    
    
    
    (3,321
    )
    
    
    
    
    
    
    Investments at cost
    
    
    22,599
    
    
    
    17,452
    
    
    
    
    
    
    
    40,051Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    62,238
    
    
    
    2,581
    
    
    
    
    
    
    
    64,819Other non-current assets
    
    
    353,373
    
    
    
    
    
    
    
    (3,090
    )
    
    
    350,283Total assets
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048Total liabilities
    
    
    1,147,356
    
    
    
    10,337
    
    
    
    
    
    
    
    1,157,693Minority interests
    
    
    250,137
    
    
    
    (7,254
    )
    
    
    
    
    
    
    242,883Total shareholders equity
    
    
    679,217
    
    
    
    (37,745
    )
    
    
    
    
    
    
    641,472Total liabilities,
minority interests and
shareholders equity
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048
 -39-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2004
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,019,081
    
    
    
    (263,121
    )
    
    
    (35,571
    )
    
    
    1,720,389Cost of goods sold
    
    
    (1,795,482
    )
    
    
    263,121
    
    
    
    35,184
    
    
    
    (1,497,177
    )Gross profit
    
    
    223,599
    
    
    
    
    
    
    
    (387
    )
    
    
    223,212Operating expenses
    
    
    (149,428
    )
    
    
    (836
    )
    
    
    387
    
    
    
    (149,877
    )Income from operations
    
    
    74,171
    
    
    
    (836
    )
    
    
    
    
    
    
    73,335Other income and
expenses
    
    
    16,494
    
    
    
    (30,068
    )
    
    
    
    
    
    
    (13,574
    )Income before income tax
    
    
    90,665
    
    
    
    (30,904
    )
    
    
    
    
    
    
    59,761Provision for income tax
    
    
    (10,404
    )
    
    
    3,007
    
    
    
    
    
    
    
    (7,397
    )Income before minority
interests
    
    
    80,261
    
    
    
    (27,897
    )
    
    
    
    
    
    
    52,364Minority interests
    
    
    (56,763
    )
    
    
    4,860
    
    
    
    
    
    
    
    (51,903
    )Equity in earnings of
equity investees
    
    
    (624
    )
    
    
    1,579
    
    
    
    
    
    
    
    955Net income
    
    
    22,874
    
    
    
    (21,458
    )
    
    
    
    
    
    
    1,416
 Consolidated Balance Sheet as of December 31, 2003
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,043,531
    
    
    
    138
    
    
    
    4,126
    
    
    
    1,047,795Investment at equity
    
    
    37,214
    
    
    
    37,586
    
    
    
    
    
    
    
    74,800Investments at cost
    
    
    14,965
    
    
    
    5,035
    
    
    
    
    
    
    
    20,000Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible
assets, net
    
    
    73,282
    
    
    
    3,417
    
    
    
    
    
    
    
    76,699Other non-current assets
    
    
    287,422
    
    
    
    
    
    
    
    (4,126
    )
    
    
    283,296Total assets
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304Total liabilities
    
    
    757,707
    
    
    
    13,482
    
    
    
    
    
    
    
    771,189Minority interests
    
    
    193,374
    
    
    
    (2,393
    )
    
    
    
    
    
    
    190,981Total shareholders equity
    
    
    577,421
    
    
    
    (16,287
    )
    
    
    
    
    
    
    561,134Total liabilities,
minority interests and
shareholders equity
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304
 -40-




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2003
 As
    
    Effects of
    
    Effects oforiginally
    
    restatement
    
    reclassificationreported
    
    adjustments
    
    adjustments
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    1,843,282
    
    
    
    (59,522
    )
    
    
    
    
    
    
    1,783,760Cost of goods sold
    
    
    (1,598,615
    )
    
    
    59,522
    
    
    
    (4,703
    )
    
    
    (1,543,796
    )Gross profit
    
    
    244,667
    
    
    
    
    
    
    
    (4,703
    )
    
    
    239,964Operating expenses
    
    
    (209,599
    )
    
    
    (17,373
    )
    
    
    2,740
    
    
    
    (224,232
    )Income from operations
    
    
    35,068
    
    
    
    (17,373
    )
    
    
    (1,963
    )
    
    
    15,732Other income and
expenses
    
    
    (13,852
    )
    
    
    
    
    
    
    1,963
    
    
    
    (11,889
    )Income before income tax
    
    
    21,216
    
    
    
    (17,373
    )
    
    
    
    
    
    
    3,843Provision for income tax
    
    
    
    
    
    
    (5,862
    )
    
    
    
    
    
    
    (5,862
    )Income before minority
interests
    
    
    21,216
    
    
    
    (23,235
    )
    
    
    
    
    
    
    (2,019
    )Minority interests
    
    
    (35,748
    )
    
    
    6,948
    
    
    
    
    
    
    
    (28,800
    )Equity in earnings of
equity investees
    
    
    6,802
    
    
    
    
    
    
    
    
    
    
    
    6,802Net loss
    
    
    (7,730
    )
    
    
    (16,287
    )
    
    
    
    
    
    
    (24,017
    )
 -41-




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##### Table of Contents



A. OPERATING RESULTS.
 Fiscal 2006 compared to Fiscal 2005
   Year ended December 312005 (Restated)
    
    2006Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    2,380,531
    
    
    
    90
    
    
    
    2,985,432
    
    
    
    93Indoor telephones
    
    
    254,653
    
    
    
    10
    
    
    
    235,780
    
    
    
    7Total
    
    
    2,635,184
    
    
    
    100
    
    
    
    3,221,212
    
    
    
    100
       -42-




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##### Table of Contents



Year ended December 312005
(Restated)
    
    2006Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    1,941,313
    
    
    
    90
    
    
    
    2,457,129
    
    
    
    93Indoor telephones
    
    
    215,485
    
    
    
    10
    
    
    
    194,263
    
    
    
    7Total
    
    
    2,156,798
    
    
    
    100
    
    
    
    2,651,392
    
    
    
    100
      -43-




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##### Table of Contents



Year ended December 312005 (Restated)
    
    2006Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    439,218
    
    
    
    92
    
    
    
    528,303
    
    
    
    92Indoor telephones
    
    
    39,168
    
    
    
    8
    
    
    
    41,517
    
    
    
    8Total
    
    
    478,386
    
    
    
    100
    
    
    
    569,820
    
    
    
    100
        
    
    COSUN-branded mobile phone handsets: brand building and maintenance and the
expansion of the distribution network subsequent to the receipt of a separate
mobile phone handsets manufacturing license from the PRC government in June
2006;
 -44-




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##### Table of Contents




    
    Indoor phones: additional sales force and the establishment of provincial
offices for a stronger relationship with our telecommunication operator
clients.
    
    
    office expenses relating to new offices set up in provinces to serve clients
of the indoor phone business segment who are telecommunication operators, and
    
    increased number of after-sales service points and workshops for the
COSUN-branded mobile phone handsets.
        -45-




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-46-




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##### Table of Contents



-47-




---



##### Table of Contents



(i)
    
    increase in gross profit of Rmb 91.4 million (US$ 11.7 million);(ii)
    
    increase in general and administrative expenses of Rmb 70.7 million (US$
9.1 million);(iii)
    
    increase in research and development costs of Rmb 10.1 million (US$1.3
million);(iv)
    
    increase in in-process research and development of Rmb 41.7 million (US$
5.3 million);(v)
    
    increase in interest expense of Rmb 58.7 million (US$ 7.5 million);(vi)
    
    increase in loss on re-measurement of embedded derivative of Rmb 134.4
million (US$ 17.2 million);(vii)
    
    decrease in gain on disposal of subsidiary of Rmb 10.3 million (US$ 1.3 million);(viii)
    
    increase in provision for income tax of Rmb32.7 million (US$ 4.2 million);(ix)
    
    decrease in minority interests of Rmb 14.8 million (US$ 1.9 million); and(x)
    
    decrease in extraordinary gain on acquisition of minority interests of Rmb 23.4
million (US$ 3.0 million).
  Fiscal 2005 compared to Fiscal 2004
   Year ended December 312005
    
    2004Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    2,380,531
    
    
    
    90
    
    
    
    1,525,287
    
    
    
    89Indoor telephones
    
    
    254,653
    
    
    
    10
    
    
    
    195,102
    
    
    
    11Total
    
    
    2,635,184
    
    
    
    100
    
    
    
    1,720,389
    
    
    
    100
   -48-




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##### Table of Contents



Year ended December 312005
    
    
    2004Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    439,218
    
    
    
    92
    
    
    
    194,414
    
    
    
    87Indoor telephones
    
    
    39,168
    
    
    
    8
    
    
    
    28,798
    
    
    
    13Total
    
    
    478,386
    
    
    
    100
    
    
    
    223,212
    
    
    
    100
      -49-




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Rmb000Cash and cash equivalents
    
    
    126Other receivables
    
    
    751Property, machinery and equipment
    
    
    37,826Lease prepayments
    
    
    1,383Net assets disposed of
    
    
    40,086
  -50-




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Rmb000Fair value of investment in BJHTCL
    
    
    50,393Net assets disposed of
    
    
    (40,086
    )Gain on disposal of subsidiary
    
    
    10,307
    Settlement Date
    
    Rmb000Before July 12, 2004
    
    
    21,600Before July 15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
  Rmb000Consideration
    
    
    72,000Carrying value of CECM disposed of as of June 30, 2004
    
    
    (60,603
    )Gain on sale of an associate
    
    
    11,397
    -51-




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##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Mainland Chinese income tax- current
    
    
    10,404
    
    
    
    27,813
    
    
    
    3,446- deferred
    
    
    (3,007
    )
    
    
    (2,327
    )
    
    
    (288
    )7,397
    
    
    
    25,486
    
    
    
    3,158
     -52-




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##### Table of Contents



Rmb000(Restated)Cash and cash equivalents
    
    
    10,390Restricted cash
    
    
    44,773Bills receivable
    
    
    43,078Accounts receivable
    
    
    125,523Inventories
    
    
    73,535Prepaid expenses
    
    
    68,006Other current assets
    
    
    6,826Due from related parties
    
    
    63,634Property, machinery and equipment
    
    
    9,795
    (*)Construction-in-progress
    
    
    15
    (*)Investment at cost
    
    
    1,951Deferred income tax assets
    
    
    2,590In-process research and development
    
    
    65,237
    (*)Other acquired intangible assets
    
    
    67,617
    (*)Total assets acquired
    
    
    582,970Short-term borrowings
    
    
    167,100Accounts payable
    
    
    97,797Other payables
    
    
    4,763Accrued liabilities
    
    
    6,045Deposits received
    
    
    2,772Deferred revenues
    
    
    22,745Due to related parties
    
    
    8,375Short-term borrowings
    
    
    8,719Total liabilities assumed
    
    
    318,316Fair value of net assets acquired
    
    
    264,654Satisfied by:- Cash consideration
    
    
    4,607- Investment in CEFCL
    
    
    20,000- Investment in BJHTCL
    
    
    50,393Total purchase consideration
    
    
    75,000Excess of net assets acquired over purchase price
    
    
    189,654Less: Allocation to non-financial assets [sum of (*) above]
    
    
    (142,664
    )Extraordinary gain before minority interests
    
    
    46,990Less: Minority interests share of extraordinary gain
    
    
    (9,398
    )Extraordinary gain after minority interests
    
    
    37,592
 -53-




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##### Table of Contents



(i)
    
    increase in gross profit of Rmb 255.2 million;(ii)
    
    decrease in general and administrative expenses of Rmb 35.2 million;(iii)
    
    increase in interest expense of Rmb 14.7 million;(iv)
    
    increase in gain on disposal of subsidiary Rmb 10.3 million;(v)
    
    decrease in gain on disposal of equity investee of Rmb 11.4 million;(vi)
    
    increase in provision for income tax of Rmb 18.1 million;(vii)
    
    increase in minority interests of Rmb 47.4 million; and(viii)
    
    increase in extraordinary gain on acquisition of minority interests of Rmb 37.6
million.
  Fiscal 2004 compared to Fiscal 2003
   Year ended December 312004 (restated)
    
    2003 (restated)Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    1,525,287
    
    
    
    89
    
    
    
    1,634,524
    
    
    
    92Indoor telephones
    
    
    195,102
    
    
    
    11
    
    
    
    149,236
    
    
    
    8Total
    
    
    1,720,389
    
    
    
    100
    
    
    
    1,783,760
    
    
    
    100
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Year ended December 312004 (restated)
    
    2003 (restated)Rmb000
    
    %
    
    Rmb000
    
    %Mobile telephones
    
    
    194,414
    
    
    
    87
    
    
    
    230,340
    
    
    
    96Indoor telephones
    
    
    28,798
    
    
    
    13
    
    
    
    9,623
    
    
    
    4Total
    
    
    223,212
    
    
    
    100
    
    
    
    239,963
    
    
    
    100
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Settlement Date
    
    Rmb000Before July 12, 2004
    
    
    21,600Before July 15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
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Rmb000Consideration
    
    
    72,000Carrying value of CECM disposed of as of June 30, 2004
    
    
    (60,603
    )Gain on sale of an associate
    
    
    11,397
   (i)
    
    decrease in gross profit of Rmb 16.8 million;(ii)
    
    decrease in selling expense of Rmb 46.8 million;(iii)
    
    increase in general and administrative expenses (including stock-based
compensation expenses) of Rmb 15.4 million;(iv)
    
    increase in research and development costs of Rmb 11.7 million;(v)
    
    decrease in in-process research and development costs written off of Rmb 35.3
million;(vi)
    
    decrease in amortization of acquired intangible assets of Rmb 19.5 million;(vii)
    
    increase in interest expense of Rmb 10.0 million;(viii)
    
    increase in gain on sale of equity investee of Rmb 11.4 million; and(ix)
    
    increase in minority interests of Rmb 23.1 million.
  B.      LIQUIDITY AND CAPITAL RESOURCES.
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
    
    loss on re-measurement of embedded derivatives of Rmb 134.4 million (US$ 17.2
million) which did not involve any outflow of cash;
    
    in-process research and development of Rmb 41.7million (US$ 5.3 million) which did
not involve any outflow of cash;
    
    stock-based compensation of Rmb 58.7 million (US$ 7.5 million) which did not involve
any outflow of cash;
    
    increase in accounts receivable of Rmb 185.5 million (US$23.8 million);
    
    increase in prepaid expenses of Rmb 155.9 million (US$20.0 million); and
    
    decrease in accounts payable of Rmb 112.1 million (US$14.4 million).
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Critical Accounting Policies: Accounting Estimates
        -62-




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Critical Accounting Policies: Adoption of New Accounting Policies
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C.      RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  Year ended December 31, 2006
    
    Rmb 30,747,000Year ended December 31, 2005
    
    Rmb 20,694,000Year ended December 31, 2004
    
    Rmb 18,378,000
 D.      TREND INFORMATION.
     
    
    There was a surge in research and development activities in the second half of 2006
after a separate mobile phone handset manufacturing license for China relating to the
COSUN-branded was granted in June 2006. These efforts resulted in the development of
new models for launch in 2007.
    
    The distribution network continues to expand.
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1.
    
    The enhanced mini PDA Mobile phones2.
    
    High-end multi-media mobile phones embedded with 1.3 million or 3 million pixel
and MP3 players3.
    
    Sliding lid mobile phones and revolving camera phones4.
    
    Set-top-box products designed for digital cable TV service5.
    
    CDMA City-phones
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E. OFF-BALANCE SHEET ARRANGEMENTS.
  F.       TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
 (a)
    
    Capital commitments
  2006Rmb000
    
    
    US$000Capital expenditures authorized and contracted for:- Construction of factory premises and staff
quarters
    
    
    39,031
    
    
    
    5,001- Purchase of land and buildings
    
    
    58,700
    
    
    
    7,522- Purchase of machinery and equipment
    
    
    130
    
    
    
    1797,861
    
    
    
    12,540
 (b)
    
    Operating lease commitments
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AmountRmb000
    
    
    US$000For the years ending December 31,- 2007
    
    
    4,396
    
    
    
    563- 2008
    
    
    1,373
    
    
    
    176Total
    
    
    5,769
    
    
    
    739










AmountRmb000
    
    
    US$000For the years ending December 31,- 2007
    
    
    10,926
    
    
    
    1,400- 2008
    
    
    335,833
    
    
    
    43,033Total
    
    
    346,759
    
    
    
    44,433





ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES


A.      DIRECTORS AND SENIOR MANAGEMENT.




Name
    
    Age
    
    PositionRui Lin Wu
    
    55
    
    Chairman and Chief Executive OfficerZhi Yang Wu
    
    34
    
    Vice Chairman and SecretaryAlbert Leung
    
    50
    
    Chief Financial OfficerZe Yun Mu
    
    41
    
    Non-Executive DirectorSonny Kwok Wing Hung
    
    43
    
    Non-Executive DirectorYi Hong Zhang
    
    65
    
    Non-Executive Director




Mr. Rui Lin Wu


Mr. Zhi Yang Wu


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Mr. Albert Leung
 Mr. Ze Yun Mu
 Mr. Sonny Kwok Wing Hung
 Mr. Yi Hong Zhang
 B. COMPENSATION.
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C.      BOARD PRACTICES.
    Audit Committee
  
    
    recommend annually to our board of directors the appointment of our independent
public accountants;
    
    discuss and review the scope and the fees of the prospective annual audit and review
the results with the independent public accountants;
    
    review and approve non-audit services of the independent public accountants;
    
    review compliance with our existing accounting and financial policies;
    
    review the adequacy of our financial organization; and
    
    review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with U.S. federal and state laws relating
to financial reporting.
 Nominating Committee
  
    
    assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends;
    
    develop membership qualifications for the board of directors and all board
committees;
    
    monitor compliance with board of director and board committee membership criteria;
    
    review and recommend directors for continued service as required based on our
evolving needs;
    
    coordinate and assist management and the board of directors in recruiting new
members to the board of directors; and
    
    investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors.
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Compensation Committee
  
    
    review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers;
    
    evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors;
    
    set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors; and
    
    set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits).
 Nasdaq Requirements
   
    
    our independent directors do not hold regularly scheduled meetings in executive
session;
    
    the compensation of our executive officers is not determined by an independent
committee of the board or by the independent members of the board of directors, and our
CEO may be present and participate in the deliberations concerning his compensation;
    
    related party transactions are not required to be reviewed or approved by our audit
committee or other independent body of the board of directors; and
    
    we are not required to solicit shareholder approval of stock plans, including those
in which our officers or directors may participate; stock issuances that will result in
a change in control; the issuance of our stock in related party transactions or other
transactions in which we may issue 20% or more of our outstanding shares; or, below
market issuances of 20% or more of our outstanding shares to any person.
  D.      EMPLOYEES
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E.      SHARE OWNERSHIP.
  
    
    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.
   Number
    
    PercentName of Beneficial Holder

    
    Shares Beneficially OwnedWu Holdings Limited
    
    
    6,819,000
    (1)
    
    
    23.0Rui Lin Wu
    
    
    6,819,000
    (1)
    
    
    23.0Zhi Yang Wu
    
    
    0
    
    
    
    0Zhi Zhong Wu (2)
    
    
    275,922
    
    
    
    1.0Albert Leung
    
    
    0
    
    
    
    0Ze Yun Mu
    
    
    0
    
    
    
    0Sonny Kwok Wing Hung
    
    
    0
    
    
    
    0Yi Hong Zhang
    
    
    0
    
    
    
    0All directors and executive officers as a group (6 persons)
    
    
    7,094,922
    
    
    
    23.9Galbo Enterprises Limited (3)
    
    
    1,562,348
    
    
    
    5.3
 
 (1)
    
    Wu Holdings Limited is a British Virgin Islands corporation which is wholly owned by the Qiao
Xing Trust. The Qiao Xing Trust is a Cook Islands trust which was formed for the primary
benefit of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, our chairman. The 6,819,000 shares
of common stock owned of record and beneficially by Wu Holdings Limited may be deemed to also
be beneficially owned by Rui Lin Wu (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) since he may be deemed to have and/or share the power to
direct the voting and disposition of such shares.(2)
    
    Zhi Zhong Wu is a son of Rui Lin Wu, our chairman.(3)
    
    Their address is 8th Floor, Kat Cheung Mansion, 1 Lai Shun Street, North Point,
Hong Kong. The 2005 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors;
    
    provide additional incentive for them to promote our success and our business; and
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
    
    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.
   
    
    545,000 options            Rui Lin Wu, Chairman
    
    400,000 options            Zhi Yang Wu, Vice Chairman
    
    400,000 options            Zhi Zhong Wu, son of Chairman
    
    400,000 options            Zhi Jian Wu, son of Chairman
  Other Options and Warrants Outstanding
  
    
    warrants to purchase an aggregate of 375,000 shares of common stock at $9.86 per
share at any time until February 17, 2010 which we granted to two accredited investors
and the placement agent and finders in February 2005 in connection with a stock
purchase agreement (February 2005 SPA Warrants)
    
    warrants to purchase an aggregate of 37,494 shares of common stock at $9.86 per
share at any time until April 13, 2010 which we granted to three accredited investors
and two finders in April 2005 in connection with a stock purchase agreement (April
2005 SPA Warrants)
    
    warrants to purchase an aggregate of 400,000 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to an accredited investor in
January 2006 in connection with a stock purchase agreement (January 2006 SPA
Warrants)
    
    warrants to purchase an aggregate of 35,500 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to a financial consultant and
its employees and related parties in February 2006 in connection with certain corporate
finance consulting and advisory services rendered to the Company during 2005
(February 2006 Warrants)
 -77-




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
    
    warrants to purchase an aggregate of 18,753 shares of common stock at $7.00 per
share at any time until February 22, 2010 which we granted to an accredited investor in February 2006 in connection with a stock purchase agreement (February 2006 SPA
Warrants)
    
    warrants to purchase an aggregate of 600,000 shares of common stock at $14.30 per
share at any time until October 31, 2010 which we granted to two accredited investors
and the placement agent in October 2006 in connection with the sale of 2,000,000 shares
of our common stock at US$12.00 per share (October 2006 SPA Warrants)
    
    warrants to purchase an aggregate of 545,455 shares of common stock at $14.30 per
share at any time until October 31, 2011 which we granted to two accredited investors
and the placement agent in October 2006 in connection with the sale of $26,000,000 of
our senior convertible notes (October 2006 CB Warrants).
   1.
    
    February 2005 SPA Warrants  416,561 warrants at $8.8762 per warrant2.
    
    April 2005 SPA Warrants  41,649 warrants at $8.8762 per warrant3.
    
    January 2006 SPA Warrants  438,828 warrants at $7.4061 per warrant4.
    
    February 2006 Warrants  38,946 warrants at $7.4061 per warrant5.
    
    February 2006 SPA Warrants  19,815 warrants at $6.6249 per warrant
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS.
      B. RELATED PARTY TRANSACTIONS.
  Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiMr. Jie Shi
    
    Director (resigned on September 1, 2005)Mr. Ming Zhu
    
    Non-executive independent director (resigned on September 1, 2005)Mr. Ze Yun Mu
    
    Non-executive independent directorWu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Development Limited (QXDL)
    
    Common directorShanghai Sunplus Communication
Technology Company Limited (SSCT)
    
    Common director until September 2004Huizhou Calilee Telecommunication
Company Limited (Calilee)
    
    A company 5% owned by QXGL until March 2005Huizhou Qiaoxing Famous Science &
Technology Co., Ltd. (QFST)
    
    A company 80% owned by QXGLShenzhen Tianna I/E Trade Company
Limited (STIE)
    
    A company 90% owned by QXGLChina Electronics Corporation (CEC)
    
    Minority owner of CECT until July 29, 2005
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Name of related parties
    
    Existing relationship with the CompanyCEC Wireless R&D Limited (CECW)
    
    CEC is a shareholderBeijing China Electronics Changsheng
Investment Management Company Limited
(BCECIM)
    
    CEC is a shareholderChina Electronics Beijing Real Estate
Management Co., Ltd. (CEBREM)
    
    CEC is a shareholder
  2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals charged by CEC
    
    
    2,743
    
    
    
    1,325
    
    
    
    
    
    
    
    Property management fees paid and payable to:- CEBREM
    
    
    971
    
    
    
    852
    
    
    
    
    
    
    
    - QXGL
    
    
    68
    
    
    
    61
    
    
    
    90
    
    
    
    12Rental income from CECM
    
    
    1,110
    
    
    
    
    
    
    
    
    
    
    
    Research and development fee paid to CECW
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    Purchases from:- QXDL
    
    
    3,290
    
    
    
    
    
    
    
    
    
    
    
    - SSCT
    
    
    354,368
    
    
    
    
    
    
    
    
    
    
    
    - STIE
    
    
    103,379
    
    
    
    
    
    
    
    
    
    
    
    Sales to:- CECM
    
    
    17,536
    
    
    
    
    
    
    
    
    
    
    
    - Calilee
    
    
    293,097
    
    
    
    
    
    
    
    
    
    
    
    - QFST
    
    
    12,458
    
    
    
    41,928
    
    
    
    69,232
    
    
    
    8,871
   2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Due from:- Exquisite Jewel Limited
    
    
    6
    
    
    
    5
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    330
    
    
    
    29
    
    
    
    4Due to:- Mr. Rui Lin Wu
    
    
    2,428
    
    
    
    4,516
    
    
    
    579Accounts receivable from:- CECM
    
    
    3,323
    
    
    
    
    
    
    
    - QFST
    
    
    9,056
    
    
    
    44,443
    
    
    
    5,69512,379
    
    
    
    44,443
    
    
    
    5,695
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C. INTERESTS OF EXPERTS AND COUNSEL.
  
 ITEM 8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
     B. SIGNIFICANT CHANGES.
  -81-




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ITEM 9. THE OFFER AND LISTING
 A. OFFER AND LISTING DETAILS.
  Period
    
    High
    
    LowYear ended December 31, 2002
    
    $
    5.58
    
    
    $
    0.77Year ended December 31, 2003
    
    $
    14.33
    
    
    $
    1.90Year ended December 31, 2004
    
    $
    14.98
    
    
    $
    6.50Year ended December 31, 2005
    
    $
    8.50
    
    
    $
    5.04Year ended December 31, 2006
    
    $
    17.09
    
    
    $
    6.49Quarter ended March 31, 2005
    
    $
    8.50
    
    
    $
    5.55Quarter ended June 30, 2005
    
    $
    7.37
    
    
    $
    5.04Quarter ended September 30, 2005
    
    $
    6.11
    
    
    $
    5.13Quarter ended December 31, 2005
    
    $
    8.29
    
    
    $
    5.11Quarter ended March 31, 2006
    
    $
    8.85
    
    
    $
    6.49Quarter ended June 30, 2006
    
    $
    12.40
    
    
    $
    7.21Quarter ended September 30, 2006
    
    $
    14.15
    
    
    $
    9.81Quarter ended December 31, 2006
    
    $
    17.09
    
    
    $
    11.79Quarter ended March 31, 2007
    
    $
    19.56
    
    
    $
    12.58Quarter ended June 30, 2007
    
    $
    18.40
    
    
    $
    12.26Month ended December 31, 2006
    
    $
    13.79
    
    
    $
    11.79Month ended January 31, 2007
    
    $
    16.88
    
    
    $
    12.58Month ended February 28, 2007
    
    $
    19.56
    
    
    $
    15.81Month ended March 31, 2007
    
    $
    17.91
    
    
    $
    14.58Month ended April 30, 2007
    
    $
    18.40
    
    
    $
    16.49Month ended May 31, 2007
    
    $
    16.66
    
    
    $
    12.61Month ended June 30, 2007
    
    $
    13.61
    
    
    $
    12.26Month ended July 31, 2007*
    
    $
    12.40
    
    
    $
    12.32
 
 *
    
    Through July 9, 2007 B. PLAN OF DISTRIBUTION.
  -82-




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C. MARKETS.
  D. SELLING SHAREHOLDERS.
  E. DILUTION.
  F. EXPENSES OF THE ISSUE.
  
 ITEM 10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL.
  B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
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C. MATERIAL CONTRACTS.
  D. EXCHANGE CONTROLS.
  E. TAXATION.
  United States Federal Income Taxation
  
    
    a court within the United States is able to exercise primary supervision over its
administration; and
    
    one or more United States persons have the authority to control all of its
substantial decisions.
  -86-




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
    
    is a corporation or comes within other exempt categories; or
    
    provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules.
   British Virgin Islands Taxation
  -87-




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F. DIVIDENDS AND PAYING AGENTS.
  G. STATEMENT BY EXPERTS.
  H. DOCUMENTS ON DISPLAY.
  I. SUBSIDIARY INFORMATION.
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   -88-




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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 15T. CONTROLS AND PROCEDURES
 Disclosure controls and procedures.
   -89-




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
    
    Insufficient complement of personnel with a level of accounting knowledge, experience
and training in the application of the accounting principles generally accepted in the
United States of America commensurate with the Companys financial reporting requirements;
this insufficient complement of personnel contributed to each of the
control deficiencies discussed below:
    
    Ineffective controls to ensure that the appropriateness of valuation methods was
adequately evaluated and any significant assumptions used were properly supported and
documented (including those used by specialists engaged by the Company), and to ensure that
presentation and disclosure of fair value measurements were made in accordance with the
accounting principles generally accepted in the United States of America;
    
    Ineffective controls to identify and measure differences between the respective tax and
financial reporting bases of certain assets and liabilities and to determine the applicable
income tax rate to ensure that deferred taxes were accurately presented in the Companys
consolidated financial statements; and
    
    Ineffective controls for the revenues recognition to recognize the technical service
income in the period when the service was rendered and failed to recognize the revenue from
the sales of co-operative products in accordance with EITF 99-19, Reporting Revenue Gross
as a Principal versus Net as an Agenton a net basis as service fee income.
  -90-




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
    
    Lack of an effective enterprise risk management system;
    
    Lack of an effective anti-fraud program and whistleblower system; and
    
    Lack of an independent and effective internal audit function.
   Remediation Steps to Address Material Weaknesses in the Companys Internal Control over Financial
Reporting and Ineffectiveness of Disclosure Controls and Procedures
  
    
    Recruited in September 2006 a highly qualified accountant to increase the knowledge of
accounting and strengthen internal controls within the Company. The management is
committed to providing the accounting staff with additional support and training in order
to enable them to identify unusual or complex transactions requiring further consideration
by technical accounting experts or others within the organization;
    
    Engaged an independent registered public accounting firm other than the Companys
external auditors, as the need arises, to assist in evaluating complex transactions such as
the issuance of convertible bonds with warrants, as well as to assist in preparing and
reviewing the appropriate supporting documentation; and
    
    Committed to engage an independent international risk consulting firm to establish,
implement and monitor internal controls to ensure that sound corporate governance including
an effective enterprise risk management system, an anti-fraud program and whistleblower
system and internal audit functions is in place.
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Changes in Internal Control over Financial Reporting
 Remediation Steps
to Address Material Weaknesses in the Companys Internal Control over Financial Reporting and
Ineffectiveness of Disclosure Controls and Procedures.
 Managements Annual Report on Internal Control over Financial Reporting.
    -92-




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
    
    Insufficient complement of personnel with a level of accounting knowledge, experience
and training in the application of the accounting principles generally accepted in the
United States of America commensurate with the Companys financial reporting requirements;
this insufficient complement of personnel contributed to each of the
control deficiencies discussed below:
    
    Ineffective controls to ensure that the appropriateness of valuation methods was
adequately evaluated and any significant assumptions used were properly supported and
documented (including those used by specialists engaged by the Company), and to ensure that
presentation and disclosure of fair value measurements were made in accordance with the
accounting principles generally accepted in the United States of America;
    
    Ineffective controls to identify and measure differences between the respective tax and
financial reporting bases of certain assets and liabilities and to determine the applicable
income tax rate to ensure that deferred taxes were accurately presented in the Companys
consolidated financial statements; and
    
    Ineffective controls for the revenues recognition to recognize the technical service
income in the period when the service was rendered and failed to recognize the revenue from
the sales of co-operative products in accordance with EITF 99-19, Reporting Revenue Gross
as a Principal versus Net as an Agenton a net basis as service fee income.
   -93-




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##### Table of Contents




    
    Lack of an effective enterprise risk management system;
    
    Lack of an effective anti-fraud program and whistleblower system; and
    
    Lack of an independent and effective internal audit function.
   
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 (a) Audit Fees.
 -94-




---



##### Table of Contents



(b) Audit  Related Fees.
 (c) Tax Fees.
 (d) All Other Fees.
 (e) Audit Committee Pre-Approval Policies and Procedures.
   (f).
 -95-




---



##### Table of Contents



ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
 -96-




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##### Table of Contents



F-1




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##### Table of Contents



Note
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    US$000(Restated) (Note 2)
    
    
    
    [Note 3(v)]ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    140,500Restricted cash
    
    
    16
    
    
    
    136,206
    
    
    
    286,025
    
    
    
    36,650Restricted cash held in trust by a
director
    
    
    16
    
    
    
    13,315
    
    
    
    87,748
    
    
    
    11,244Bills receivable
    
    
    
    
    
    
    401,186
    
    
    
    403,922
    
    
    
    51,758Accounts receivable, net
    
    
    4
    
    
    
    674,017
    
    
    
    857,370
    
    
    
    109,861Inventories
    
    
    5
    
    
    
    233,721
    
    
    
    232,356
    
    
    
    29,774Prepaid expenses
    
    
    6
    
    
    
    296,289
    
    
    
    453,024
    
    
    
    58,049Other current assets
    
    
    7
    
    
    
    13,455
    
    
    
    4,182
    
    
    
    536Due from related parties
    
    
    30
    
    
    
    30
    
    
    
    29
    
    
    
    4Deferred tax assets
    
    
    23
    
    
    
    
    
    
    
    5,924
    
    
    
    759Deferred debt issuance costs, net
    
    
    19
    
    
    
    
    
    
    
    22,847
    
    
    
    2,928Total current assets
    
    
    
    
    
    
    2,159,879
    
    
    
    3,449,904
    
    
    
    442,063Property, machinery and equipment, net
    
    
    8
    
    
    
    52,664
    
    
    
    209,542
    
    
    
    26,850Construction-in-progress
    
    
    9
    
    
    
    59,105
    
    
    
    60,295
    
    
    
    7,726Lease prepayments, net
    
    
    10
    
    
    
    173,161
    
    
    
    207,206
    
    
    
    26,551Other non-current assets
    
    
    11
    
    
    
    8,282
    
    
    
    8,249
    
    
    
    1,057Investments at cost
    
    
    12
    
    
    
    7,803
    
    
    
    7,803
    
    
    
    1,000Goodwill
    
    
    14
    
    
    
    20,714
    
    
    
    110,134
    
    
    
    14,112Other acquired intangible assets, net
    
    
    15
    
    
    
    52,939
    
    
    
    93,008
    
    
    
    11,918Deferred debt issuance costs, net
    
    
    19
    
    
    
    
    
    
    
    31,845
    
    
    
    4,081Total assets
    
    
    
    
    
    
    2,534,547
    
    
    
    4,177,986
    
    
    
    535,358LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term bank borrowings
    
    
    16
    
    
    
    754,212
    
    
    
    1,155,290
    
    
    
    148,036Accounts payable
    
    
    
    
    
    
    337,780
    
    
    
    225,639
    
    
    
    28,913Other payables
    
    
    17
    
    
    
    16,949
    
    
    
    11,989
    
    
    
    1,536Accrued liabilities
    
    
    18
    
    
    
    58,614
    
    
    
    61,688
    
    
    
    7,905Deposits received
    
    
    
    
    
    
    10,729
    
    
    
    2,036
    
    
    
    261Deferred revenues
    
    
    
    
    
    
    53,442
    
    
    
    15,389
    
    
    
    1,972Due to related parties
    
    
    30
    
    
    
    2,428
    
    
    
    4,516
    
    
    
    579Taxation payable
    
    
    23
    
    
    
    68,886
    
    
    
    46,272
    
    
    
    5,929Embedded derivative liability
    
    
    19
    
    
    
    
    
    
    
    340,899
    
    
    
    43,682Convertible notes
    
    
    19
    
    
    
    
    
    
    
    87,471
    
    
    
    11,208Total current liabilities
    
    
    
    
    
    
    1,303,040
    
    
    
    1,951,189
    
    
    
    250,021Convertible notes
    
    
    19
    
    
    
    
    
    
    
    222,087
    
    
    
    28,458Shareholders loans
    
    
    20
    
    
    
    7,959
    
    
    
    7,697
    
    
    
    986Deferred tax liabilities
    
    
    23
    
    
    
    5,419
    
    
    
    11,740
    
    
    
    1,504Total liabilities
    
    
    
    
    
    
    1,316,418
    
    
    
    2,192,713
    
    
    
    280,969Minority interests
    
    
    
    
    
    
    220,832
    
    
    
    115,224
    
    
    
    14,765Commitments and Contingencies
    
    
    27Shareholders equity:Common stock, par value Rmb0.008
(equivalent of US$0.001);
authorized 50,000,000 shares;
outstanding and fully paid -
18,646,676 shares as of December
31, 2005 and 29,605,003 as of
December 31, 2006
    
    
    21
    
    
    
    154
    
    
    
    242
    
    
    
    31Additional paid-in capital
    
    
    
    
    
    
    554,178
    
    
    
    1,439,473
    
    
    
    184,451Retained earnings
    
    
    
    
    
    
    441,870
    
    
    
    422,036
    
    
    
    54,079Cumulative translation adjustments
    
    
    
    
    
    
    1,095
    
    
    
    8,298
    
    
    
    1,063Total shareholders equity
    
    
    
    
    
    
    997,297
    
    
    
    1,870,049
    
    
    
    239,624Total liabilities, minority
interests and shareholders
equity
    
    
    
    
    
    
    2,534,547
    
    
    
    4,177,986
    
    
    
    535,358
  F-2




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##### Table of Contents



Note
    
    
    2004
    
    
    2005
    
    
    2006Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000(Restated) (Note 2)
    
    
    (Restated) (Note 2)
    
    
    
    
    
    [Note 3(v)]Net sales
    
    
    
    
    
    
    1,720,389
    
    
    
    2,635,184
    
    
    
    3,221,212
    
    
    
    412,759Cost of goods sold
    
    
    
    
    
    
    (1,497,177
    )
    
    
    (2,156,798
    )
    
    
    (2,651,392
    )
    
    
    (339,743
    )Gross profit
    
    
    
    
    
    
    223,212
    
    
    
    478,386
    
    
    
    569,820
    
    
    
    73,016Operating expenses:Selling expenses
    
    
    
    
    
    
    (29,065
    )
    
    
    (24,726
    )
    
    
    (28,401
    )
    
    
    (3,639
    )General and administrative expenses
    
    
    
    
    
    
    (90,554
    )
    
    
    (55,341
    )
    
    
    (126,076
    )
    
    
    (16,155
    )Research and development
    
    
    
    
    
    
    (18,378
    )
    
    
    (20,694
    )
    
    
    (30,747
    )
    
    
    (3,940
    )In process research and development
    
    
    13
    (c)
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    (5,348
    )Amortization of acquired intangible assets
    
    
    15
    
    
    
    (11,880
    )
    
    
    (11,880
    )
    
    
    (15,178
    )
    
    
    (1,945
    )Income from operations
    
    
    
    
    
    
    73,335
    
    
    
    365,745
    
    
    
    327,679
    
    
    
    41,989Interest income
    
    
    
    
    
    
    492
    
    
    
    7,130
    
    
    
    8,108
    
    
    
    1,039Exchange loss, net
    
    
    
    
    
    
    
    
    
    
    (2,659
    )
    
    
    3,225
    
    
    
    413Interest expense
    
    
    32
    
    
    
    (27,060
    )
    
    
    (41,752
    )
    
    
    (100,432
    )
    
    
    (12,869
    )Loss on remeasurement of embedded
derivatives
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    (134,439
    )
    
    
    (17,227
    )Gain on disposal of subsidiary
    
    
    13
    (a)
    
    
    
    
    
    
    10,307
    
    
    
    
    
    
    
    Gain on disposal of equity investee
    
    
    
    
    
    
    11,397
    
    
    
    
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (7,348
    )
    
    
    
    
    
    
    Other income, net
    
    
    
    
    
    
    1,597
    
    
    
    640
    
    
    
    4,453
    
    
    
    571Income before income tax
    
    
    
    
    
    
    59,761
    
    
    
    332,063
    
    
    
    108,594
    
    
    
    13,916Provision for income tax
    
    
    23
    
    
    
    (7,397
    )
    
    
    (25,486
    )
    
    
    (58,192
    )
    
    
    (7,457
    )Income before minority interests
    
    
    
    
    
    
    52,364
    
    
    
    306,577
    
    
    
    50,402
    
    
    
    6,459Minority interests
    
    
    
    
    
    
    (51,903
    )
    
    
    (99,270
    )
    
    
    (84,473
    )
    
    
    (10,824
    )Equity in earnings of equity investees
    
    
    
    
    
    
    955
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) before
extraordinary gain
    
    
    
    
    
    
    1,416
    
    
    
    207,307
    
    
    
    (34,071
    )
    
    
    (4,365
    )Extraordinary gain on acquisition of
minority interests  net of nil tax
    
    
    13(a),
    (b)
    
    
    
    
    
    
    37,592
    
    
    
    14,237
    
    
    
    1,824Net income (loss)
    
    
    
    
    
    
    1,416
    
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    (2,541
    )Other comprehensive income  Translation
adjustments
    
    
    
    
    
    
    70
    
    
    
    1,821
    
    
    
    7,203
    
    
    
    923Comprehensive income (loss)
    
    
    
    
    
    
    1,486
    
    
    
    246,720
    
    
    
    (12,631
    )
    
    
    (1,618
    )Basic earnings (loss) per common share:Before extraordinary gain
    
    
    25
    
    
    Rmb
    0.09
    
    
    Rmb
    11.32
    
    
    Rmb
    (1.44
    )
    
    US$
    (0.19
    )Extraordinary gain
    
    
    25
    
    
    
    
    
    
    Rmb
    2.05
    
    
    Rmb
    0.60
    
    
    US$
    0.08After extraordinary gain
    
    
    25
    
    
    Rmb
    0.09
    
    
    Rmb
    13.37
    
    
    Rmb
    (0.84
    )
    
    US$
    (0.11
    )Diluted earnings (loss) per common share:Before extraordinary gain
    
    
    25
    
    
    Rmb
    0.09
    
    
    Rmb
    11.32
    
    
    Rmb
    (2.03
    )
    
    US$
    (0.26
    )Extraordinary gain
    
    
    25
    
    
    
    
    
    
    Rmb
    2.05
    
    
    Rmb
    0.59
    
    
    US$
    0.07After extraordinary gain
    
    
    25
    
    
    Rmb
    0.09
    
    
    Rmb
    13.37
    
    
    Rmb
    (1.44
    )
    
    US$
    (0.19
    )Weighted average number of shares
outstandingBasic
    
    
    25
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    23,712,000Diluted
    
    
    25
    
    
    
    16,560,000
    
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    24,016,000
  F-3




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##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000(Restated) (Note 2)
    
    (Restated) (Note 2)
    
    
    
    
    
    [Note 3(v)]Cash flows from operating activities:Net income (loss)
    
    
    1,416
    
    
    
    244,899
    
    
    
    (19,834
    )
    
    
    (2,541
    )Adjustments to reconcile net income (loss)
to net cash used in operating activities Depreciation of property, machinery and
equipment
    
    
    12,105
    
    
    
    11,831
    
    
    
    11,124
    
    
    
    1,425Amortization of other acquired intangible
assets
    
    
    11,880
    
    
    
    11,880
    
    
    
    15,178
    
    
    
    1,945Amortization of deferred debt issuance
costs
    
    
    
    
    
    
    
    
    
    
    11,339
    
    
    
    1,453Accretion of convertible note discounts
    
    
    
    
    
    
    
    
    
    
    36,880
    
    
    
    4,726Loss on remeasurement of embedded
derivatives
    
    
    
    
    
    
    
    
    
    
    134,439
    
    
    
    17,227In process research and development
    
    
    
    
    
    
    
    
    
    
    41,739
    
    
    
    5,348Bad debt expense
    
    
    5,617
    
    
    
    111
    
    
    
    2,116
    
    
    
    271Net loss (gain) on disposal of property,
machinery and equipment
    
    
    100
    
    
    
    (339
    )
    
    
    8
    
    
    
    1Stock-based compensation
    
    
    32,736
    
    
    
    700
    
    
    
    58,707
    
    
    
    7,523Foreign exchange loss (gain)
    
    
    
    
    
    
    2,659
    
    
    
    (3,225
    )
    
    
    (413
    )Interest expense on shareholders loans
    
    
    478
    
    
    
    473
    
    
    
    459
    
    
    
    59Gain on disposal of subsidiary
    
    
    
    
    
    
    (10,307
    )
    
    
    
    
    
    
    Gain on disposal of equity investee
    
    
    (11,397
    )
    
    
    
    
    
    
    
    
    
    
    Impairment of investment at cost
    
    
    
    
    
    
    7,348
    
    
    
    
    
    
    
    Deferred income tax
    
    
    (3,007
    )
    
    
    (2,327
    )
    
    
    (8,003
    )
    
    
    (1,025
    )Minority interests
    
    
    51,903
    
    
    
    99,270
    
    
    
    84,473
    
    
    
    10,824Equity in earnings of equity investees
    
    
    (955
    )
    
    
    
    
    
    
    
    
    
    
    Extraordinary gain on acquisition of
minority interests
    
    
    
    
    
    
    (37,592
    )
    
    
    (14,237
    )
    
    
    (1,824
    )Changes in operating assets and liabilities Accounts receivable
    
    
    (189,629
    )
    
    
    (230,265
    )
    
    
    (185,469
    )
    
    
    (23,766
    )Bills receivable
    
    
    (218,536
    )
    
    
    (162,814
    )
    
    
    (2,736
    )
    
    
    (351
    )Inventories
    
    
    (144,120
    )
    
    
    59,686
    
    
    
    2,418
    
    
    
    310Prepaid expenses
    
    
    107,167
    
    
    
    (12,171
    )
    
    
    (155,906
    )
    
    
    (19,977
    )Other current assets
    
    
    (64
    )
    
    
    722
    
    
    
    9,273
    
    
    
    1,188Taxation receivable
    
    
    10,310
    
    
    
    
    
    
    
    
    
    
    
    Due from related parties
    
    
    (30
    )
    
    
    155
    
    
    
    
    
    
    
    Non-current prepayments
    
    
    4,097
    
    
    
    4,062
    
    
    
    4,130
    
    
    
    529Accounts payable
    
    
    126,084
    
    
    
    34,670
    
    
    
    (112,141
    )
    
    
    (14,370
    )Other payables
    
    
    (13,065
    )
    
    
    7,348
    
    
    
    (1,286
    )
    
    
    (165
    )Accrued liabilities
    
    
    13,819
    
    
    
    24,726
    
    
    
    3,074
    
    
    
    394Deposits received
    
    
    (1,485
    )
    
    
    3,330
    
    
    
    (8,693
    )
    
    
    (1,114
    )Deferred revenues
    
    
    (7,219
    )
    
    
    (7,675
    )
    
    
    (38,053
    )
    
    
    (4,876
    )Taxation payable
    
    
    2,429
    
    
    
    66,457
    
    
    
    (22,614
    )
    
    
    (2,898
    )Due to related parties
    
    
    5,330
    
    
    
    (25,605
    )
    
    
    2,088
    
    
    
    268Net cash (used in) provided by operating
activities
    
    
    (204,036
    )
    
    
    91,232
    
    
    
    (154,752
    )
    
    
    (19,829
    )Cash flows from investing activities:Acquisitions of property, machinery and
equipment
    
    
    (27,859
    )
    
    
    (8,926
    )
    
    
    (168,461
    )
    
    
    (21,586
    )Acquisition of land use right
    
    
    (8,000
    )
    
    
    
    
    
    
    (39,004
    )
    
    
    (4,998
    )Net cash inflow from disposal of equity
investee [Note 29(b)]
    
    
    21,600
    
    
    
    50,400
    
    
    
    
    
    
    
    Net cash outflow from acquisition of
minority interests [Note 13(c) and 29(c)]
    
    
    (1,000
    )
    
    
    (126
    )
    
    
    (170,343
    )
    
    
    (21,828
    )Expenditures on construction-in-progress
    
    
    (49,750
    )
    
    
    (8,171
    )
    
    
    (1,190
    )
    
    
    (152
    )Proceeds from disposal of property,
machinery and equipment
    
    
    3,009
    
    
    
    6,882
    
    
    
    241
    
    
    
    31Increase in restricted cash
    
    
    (20,451
    )
    
    
    (43,881
    )
    
    
    (224,252
    )
    
    
    (28,735
    )Net cash (used in) provided by investing
activities
    
    
    (82,451
    )
    
    
    (3,822
    )
    
    
    (603,009
    )
    
    
    (77,268
    )
 F-4




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##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000(Restated) (Note 2)
    
    (Restated) (Note 2)
    
    
    
    
    
    [Note 3(v)]Cash flows from financing activities:New short-term borrowings
    
    
    1,353,372
    
    
    
    754,212
    
    
    
    2,541,004
    
    
    
    325,598Repayment of short-term borrowings
    
    
    (1,092,658
    )
    
    
    (700,186
    )
    
    
    (2,137,013
    )
    
    
    (273,832
    )Repayment of capital lease obligation
    
    
    (1,511
    )
    
    
    (3,775
    )
    
    
    
    
    
    
    Net proceeds from issuance of convertible
notes
    
    
    
    
    
    
    
    
    
    
    482,041
    
    
    
    61,768Net proceeds from exercise of options and
warrants
    
    
    45,638
    
    
    
    
    
    
    
    259,637
    
    
    
    33,269Net proceeds from issuance of common stock
    
    
    
    
    
    
    111,704
    
    
    
    317,900
    
    
    
    40,735Net cash provided by financing activities
    
    
    304,841
    
    
    
    161,955
    
    
    
    1,463,569
    
    
    
    187,538Effect of translation adjustments
    
    
    70
    
    
    
    1,405
    
    
    
    (991
    )
    
    
    (127
    )Net increase in cash and cash equivalents
    
    
    18,424
    
    
    
    250,770
    
    
    
    704,817
    
    
    
    90,314Cash and cash equivalents, beginning of year
    
    
    122,466
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    50,186Cash and cash equivalents, end of year
    
    
    140,890
    
    
    
    391,660
    
    
    
    1,096,477
    
    
    
    140,500Supplemental disclosure of cash flow
information (Note 29)
  F-5




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##### Table of Contents



Accumulatedothercomprehensiveincome (loss) Common stock
    
    Additional
    
    
    
    
    
    cumulativeNumber of
    
    
    
    
    
    paid-in
    
    Retained
    
    translationNote
    
    shares
    
    Amount
    
    capital
    
    earnings
    
    adjustments
    
    Total000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Balance as of December 31,
2003, as previously reported
    
    
    
    
    15,538
    
    
    
    129
    
    
    
    366,246
    
    
    
    211,842
    
    
    
    (796
    )
    
    
    577,421Aggregate impact of
restatement adjustments
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,287
    )
    
    
    
    
    
    
    (16,287
    )Balance as of December 31,
2003, as restated
    
    
    
    
    15,538
    
    
    
    129
    
    
    
    366,246
    
    
    
    195,555
    
    
    
    (796
    )
    
    
    561,134Issuance of common stock
    
    21
    
    
    1,007
    
    
    
    8
    
    
    
    45,630
    
    
    
    
    
    
    
    
    
    
    
    45,638Recognition of compensation
expense
    
    21, 22(a)
    
    
    100
    
    
    
    1
    
    
    
    32,735
    
    
    
    
    
    
    
    
    
    
    
    32,736Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,416
    
    
    
    
    
    
    
    1,416Shareholders contribution
    
    20
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    478Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    70Balance as of December 31,
2004, as restated
    
    
    
    
    16,645
    
    
    
    138
    
    
    
    445,089
    
    
    
    196,971
    
    
    
    (726
    )
    
    
    641,472Issuance of common stock
    
    21
    
    
    2,000
    
    
    
    16
    
    
    
    119,994
    
    
    
    
    
    
    
    
    
    
    
    120,010Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    (22,041
    )
    
    
    
    
    
    
    
    
    
    
    (22,041
    )Issue of stock purchase
warrants to investors and
external consultants
    
    22(b)
    
    
    
    
    
    
    
    
    
    
    9,963
    
    
    
    
    
    
    
    
    
    
    
    9,963Recognition of compensation
expense
    
    21, 22(a)
    
    
    2
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    244,899
    
    
    
    
    
    
    
    244,899Shareholders contribution
    
    20
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    
    
    
    
    473Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,821
    
    
    
    1,821Balance as of December 31,
2005, as restated
    
    
    
    
    18,647
    
    
    
    154
    
    
    
    554,178
    
    
    
    441,870
    
    
    
    1,095
    
    
    
    997,297Issuance of common stock
    
    21
    
    
    10,958
    
    
    
    88
    
    
    
    791,654
    
    
    
    
    
    
    
    
    
    
    
    791,742Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    (77,115
    )
    
    
    
    
    
    
    
    
    
    
    (77,115
    )Warrant issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    (2,562
    )
    
    
    
    
    
    
    
    
    
    
    (2,562
    )Issue of stock purchase
warrants to investors and
external consultants
    
    22(b)
    
    
    
    
    
    
    
    
    
    
    114,152
    
    
    
    
    
    
    
    
    
    
    
    114,152Recognition of compensation
expense
    
    22(a)
    
    
    
    
    
    
    
    
    
    
    58,707
    
    
    
    
    
    
    
    
    
    
    
    58,707Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,834
    )
    
    
    
    
    
    
    (19,834
    )Shareholders contribution
    
    20
    
    
    
    
    
    
    
    
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    459Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,203
    
    
    
    7,203Balance as of December 31, 2006
    
    
    
    
    29,605
    
    
    
    242
    
    
    
    1,439,473
    
    
    
    422,036
    
    
    
    8,298
    
    
    
    1,870,049Balance as of December 31,
2006 (in US$000)
    
    
    
    
    
    
    
    
    31
    
    
    
    184,451
    
    
    
    54,079
    
    
    
    1,063
    
    
    
    239,624
  F-6




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##### Table of Contents



Percentage of equityPlace of
    
    interest attributable toName
    
    incorporation
    
    the Group
    
    Principal activities2005                2006Hui Zhou Qiao Xing
Communication
Industry Limited
(QXCI)
    
    Mainland China
    
    90.0%          90.0%
Note (a)
    
    Manufacturing and sales
of mobile phones and
indoor phonesHui Zhou Qiao Xing
Property Limited
(QXPL)
    
    Mainland China
    
    90.0%          90.0%
Note (b)
    
    Property holdingQiao Xing Mobile
Communication
Company Limited
(QXMC)
    
    BVI
    
    80.0%        100.0%
Note (c)
    
    Investment holdingQiao Xing
Communication
Holdings Limited
(QXCH)
    
    BVI
    
    100.0%        100.0%  
Note (d)
    
    Investment holdingCEC Telecom Co.,
Ltd. (CECT)
    
    Mainland China
    
    72.0%          93.4%
Note (e)
    
    Manufacturing and sales
of mobile phones and
accessories
   F-7




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##### Table of Contents



Country risk
  F-8




---



##### Table of Contents



Concentration of credit risk
  Technology risk
    F-9




---



##### Table of Contents



Over (Understatement)2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000In-process research and development
    
    
    (13,437
    )
    
    
    
    
    
    
    Amortization of acquired intangible assets
    
    
    (3,936
    )
    
    
    (836
    )
    
    
    (1,721
    )Impairment of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    3,852Gain on disposal of equity investee
    
    
    
    
    
    
    30,068
    
    
    
    Gain on disposal of other equity investments
    
    
    
    
    
    
    
    
    
    
    5,035Impairment of investment at cost
    
    
    
    
    
    
    
    
    
    
    (7,348
    )Provision for income tax
    
    
    (5,862
    )
    
    
    3,007
    
    
    
    2,327Minority interests
    
    
    6,948
    
    
    
    5,618
    
    
    
    2,842Extraordinary gain on acquisition of
minority interests
    
    
    
    
    
    
    
    
    
    
    (2,106
    )Net income
    
    
    16,287
    
    
    
    22,279
    
    
    
    2,977
   F-10




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##### Table of Contents



Consolidated Balance Sheet as of December 31, 2005
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    2,155,818
    
    
    
    
    
    
    
    4,061
    
    
    
    2,159,879Investments at cost
    
    
    7,634
    
    
    
    169
    
    
    
    
    
    
    
    7,803Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible assets, net
    
    
    48,227
    
    
    
    4,712
    
    
    
    
    
    
    
    52,939Other non-current assets
    
    
    297,273
    
    
    
    
    
    
    
    (4,061
    )
    
    
    293,212Total assets
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547Total liabilities
    
    
    1,310,999
    
    
    
    5,419
    
    
    
    
    
    
    
    1,316,418Minority interests
    
    
    231,201
    
    
    
    (10,369
    )
    
    
    
    
    
    
    220,832Total shareholders equity
    
    
    1,038,840
    
    
    
    (41,543
    )
    
    
    
    
    
    
    997,297Total liabilities, minority
interests and shareholders equity
    
    
    2,581,040
    
    
    
    (46,493
    )
    
    
    
    
    
    
    2,534,547
 F-11




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2005
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,874,336
    
    
    
    (239,152
    )
    
    
    
    
    
    
    2,635,184Cost of goods sold
    
    
    (2,385,287
    )
    
    
    239,152
    
    
    
    (10,663
    )
    
    
    (2,156,798
    )Gross profit
    
    
    489,049
    
    
    
    
    
    
    
    (10,663
    )
    
    
    478,386Operating expenses
    
    
    (125,435
    )
    
    
    2,131
    
    
    
    10,663
    
    
    
    (112,641
    )Income from operations
    
    
    363,614
    
    
    
    2,131
    
    
    
    
    
    
    
    365,745Other income and expenses
    
    
    (19,720
    )
    
    
    (13,962
    )
    
    
    
    
    
    
    (33,682
    )Income before income tax
    
    
    343,894
    
    
    
    (11,831
    )
    
    
    
    
    
    
    332,063Provision for income tax
    
    
    (27,813
    )
    
    
    2,327
    
    
    
    
    
    
    
    (25,486
    )Income before minority interests
    
    
    316,081
    
    
    
    (9,504
    )
    
    
    
    
    
    
    306,577Minority interests
    
    
    (102,870
    )
    
    
    3,600
    
    
    
    
    
    
    
    (99,270
    )Net income before extraordinary gain
    
    
    213,211
    
    
    
    (5,904
    )
    
    
    
    
    
    
    207,307Extraordinary gain on acquisition
of minority interests net of nil
tax
    
    
    35,486
    
    
    
    2,106
    
    
    
    
    
    
    
    37,592Net income
    
    
    248,697
    
    
    
    (3,798
    )
    
    
    
    
    
    
    244,899
 Consolidated Balance Sheet as of December 31, 2004
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,563,091
    
    
    
    
    
    
    
    3,090
    
    
    
    1,566,181Investment at equity
    
    
    3,321
    
    
    
    (3,321
    )
    
    
    
    
    
    
    Investments at cost
    
    
    22,599
    
    
    
    17,452
    
    
    
    
    
    
    
    40,051Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible assets, net
    
    
    62,238
    
    
    
    2,581
    
    
    
    
    
    
    
    64,819Other non-current assets
    
    
    353,373
    
    
    
    
    
    
    
    (3,090
    )
    
    
    350,283Total assets
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048Total liabilities
    
    
    1,147,356
    
    
    
    10,337
    
    
    
    
    
    
    
    1,157,693Minority interests
    
    
    250,137
    
    
    
    (7,254
    )
    
    
    
    
    
    
    242,883Total shareholders equity
    
    
    679,217
    
    
    
    (37,745
    )
    
    
    
    
    
    
    641,472Total liabilities, minority
interests and shareholders equity
    
    
    2,076,710
    
    
    
    (34,662
    )
    
    
    
    
    
    
    2,042,048
 F-12




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2004
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    2,019,081
    
    
    
    (263,121
    )
    
    
    (35,571
    )
    
    
    1,720,389Cost of goods sold
    
    
    (1,795,482
    )
    
    
    263,121
    
    
    
    35,184
    
    
    
    (1,497,177
    )Gross profit
    
    
    223,599
    
    
    
    
    
    
    
    (387
    )
    
    
    223,212Operating expenses
    
    
    (149,428
    )
    
    
    (836
    )
    
    
    387
    
    
    
    (149,877
    )Income from operations
    
    
    74,171
    
    
    
    (836
    )
    
    
    
    
    
    
    73,335Other income and expenses
    
    
    16,494
    
    
    
    (30,068
    )
    
    
    
    
    
    
    (13,574
    )Income before income tax
    
    
    90,665
    
    
    
    (30,904
    )
    
    
    
    
    
    
    59,761Provision for income tax
    
    
    (10,404
    )
    
    
    3,007
    
    
    
    
    
    
    
    (7,397
    )Income before minority interests
    
    
    80,261
    
    
    
    (27,897
    )
    
    
    
    
    
    
    52,364Minority interests
    
    
    (56,763
    )
    
    
    4,860
    
    
    
    
    
    
    
    (51,903
    )Equity in earnings of equity investees
    
    
    (624
    )
    
    
    1,579
    
    
    
    
    
    
    
    955Net income
    
    
    22,874
    
    
    
    (21,458
    )
    
    
    
    
    
    
    1,416
 Consolidated Balance Sheet as of December 31, 2003
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Total current assets
    
    
    1,043,531
    
    
    
    138
    
    
    
    4,126
    
    
    
    1,047,795Investment at equity
    
    
    37,214
    
    
    
    37,586
    
    
    
    
    
    
    
    74,800Investments at cost
    
    
    14,965
    
    
    
    5,035
    
    
    
    
    
    
    
    20,000Goodwill
    
    
    72,088
    
    
    
    (51,374
    )
    
    
    
    
    
    
    20,714Other acquired intangible assets, net
    
    
    73,282
    
    
    
    3,417
    
    
    
    
    
    
    
    76,699Other non-current assets
    
    
    287,422
    
    
    
    
    
    
    
    (4,126
    )
    
    
    283,296Total assets
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304Total liabilities
    
    
    757,707
    
    
    
    13,482
    
    
    
    
    
    
    
    771,189Minority interests
    
    
    193,374
    
    
    
    (2,393
    )
    
    
    
    
    
    
    190,981Total shareholders equity
    
    
    577,421
    
    
    
    (16,287
    )
    
    
    
    
    
    
    561,134Total liabilities, minority
interests and shareholders equity
    
    
    1,528,502
    
    
    
    (5,198
    )
    
    
    
    
    
    
    1,523,304
 F-13




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2003
 Effects ofEffects of
    
    reclassificationAs originally
    
    restatement
    
    adjustmentsreported
    
    adjustments
    
    [Note 3(z)]
    
    As restatedRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000Net sales
    
    
    1,843,282
    
    
    
    (59,522
    )
    
    
    
    
    
    
    1,783,760Cost of goods sold
    
    
    (1,598,615
    )
    
    
    59,522
    
    
    
    (4,703
    )
    
    
    (1,543,796
    )Gross profit
    
    
    244,667
    
    
    
    
    
    
    
    (4,703
    )
    
    
    239,964Operating expenses
    
    
    (209,599
    )
    
    
    (17,373
    )
    
    
    2,740
    
    
    
    (224,232
    )Income from operations
    
    
    35,068
    
    
    
    (17,373
    )
    
    
    (1,963
    )
    
    
    15,732Other income and expenses
    
    
    (13,852
    )
    
    
    
    
    
    
    1,963
    
    
    
    (11,889
    )Income before income tax
    
    
    21,216
    
    
    
    (17,373
    )
    
    
    
    
    
    
    3,843Provision for income tax
    
    
    
    
    
    
    (5,862
    )
    
    
    
    
    
    
    (5,862
    )Income before minority interests
    
    
    21,216
    
    
    
    (23,235
    )
    
    
    
    
    
    
    (2,019
    )Minority interests
    
    
    (35,748
    )
    
    
    6,948
    
    
    
    
    
    
    
    (28,800
    )Equity in earnings of equity investees
    
    
    6,802
    
    
    
    
    
    
    
    
    
    
    
    6,802Net loss
    
    
    (7,730
    )
    
    
    (16,287
    )
    
    
    
    
    
    
    (24,017
    )
 F-14




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##### Table of Contents



F-15




---



##### Table of Contents



F-16




---



##### Table of Contents



F-17




---



##### Table of Contents



F-18




---



##### Table of Contents



2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Balance at beginning of year
    
    
    4,295
    
    
    
    7,712
    
    
    
    988Provision
    
    
    19,570
    
    
    
    17,393
    
    
    
    2,229Utilized
    
    
    (16,153
    )
    
    
    (15,514
    )
    
    
    (1,988
    )Balance at end of year
    
    
    7,712
    
    
    
    9,591
    
    
    
    1,229
          F-19




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##### Table of Contents



F-20




---



##### Table of Contents



F-21




---



##### Table of Contents



F-22




---



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F-23




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4.
    
    ACCOUNTS RECEIVABLEAccounts receivable consists of:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Trade receivables- related parties (Note 30)
    
    
    12,379
    
    
    
    44,443
    
    
    
    5,695- third parties
    
    
    668,138
    
    
    
    821,543
    
    
    
    105,270680,517
    
    
    
    865,986
    
    
    
    110,965Less: Allowance for doubtful accounts
    
    
    (6,500
    )
    
    
    (8,616
    )
    
    
    (1,104
    )Accounts receivable, net
    
    
    674,017
    
    
    
    857,370
    
    
    
    109,861
  2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    6,389
    
    
    
    6,500
    
    
    
    833Bad debt expense
    
    
    125
    
    
    
    2,710
    
    
    
    347Bad debt recovery
    
    
    (14
    )
    
    
    (594
    )
    
    
    (76
    )End of year
    
    
    6,500
    
    
    
    8,616
    
    
    
    1,104
 5.
    
    INVENTORIESInventories consist of:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Raw materials
    
    
    146,196
    
    
    
    166,261
    
    
    
    21,305Finished goods
    
    
    87,525
    
    
    
    66,095
    
    
    
    8,469233,721
    
    
    
    232,356
    
    
    
    29,774
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6.
    
    PREPAID EXPENSESPrepaid expenses consist of:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Advances to suppliers
    
    
    270,695
    
    
    
    395,996
    
    
    
    50,742Prepaid design, licensing and tooling fees
    
    
    20,885
    
    
    
    43,869
    
    
    
    5,621Lease prepayments (Note 10)
    
    
    4,061
    
    
    
    4,890
    
    
    
    627Deferred listing fees [Note (a)]
    
    
    
    
    
    
    7,681
    
    
    
    984Other
    
    
    648
    
    
    
    588
    
    
    
    75296,289
    
    
    
    453,024
    
    
    
    58,049
   7.
    
    OTHER CURRENT ASSETSOther current assets consist of:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Advances to staff
    
    
    4,175
    
    
    
    2,598
    
    
    
    334Advances to others
    
    
    90
    
    
    
    
    
    
    
    Interest receivable from China
Electronics Financial Co., Ltd
(CEFCL) [Note (a)]
    
    
    7,030
    
    
    
    
    
    
    
    Rental and utility deposits
    
    
    278
    
    
    
    183
    
    
    
    23Other
    
    
    1,882
    
    
    
    1,401
    
    
    
    17913,455
    
    
    
    4,182
    
    
    
    536
    F-25




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##### Table of Contents



8.
    
    PROPERTY, MACHINERY AND EQUIPMENT
  2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Buildings and improvements
    
    
    
    
    
    
    156,163
    
    
    
    20,010Machinery, equipment and software
    
    
    80,386
    
    
    
    81,054
    
    
    
    10,386Furniture and office equipment
    
    
    8,176
    
    
    
    5,892
    
    
    
    755Motor vehicles
    
    
    2,685
    
    
    
    1,466
    
    
    
    18894,445
    
    
    
    244,575
    
    
    
    31,339Less: Accumulated depreciation and
amortization
    
    
    (41,781
    )
    
    
    (35,033
    )
    
    
    (4,489
    )Property, machinery and equipment, net
    
    
    52,664
    
    
    
    209,542
    
    
    
    26,850
   9.
    
    CONSTRUCTION-IN-PROGRESS
   10.
    
    LEASE PREPAYMENTS, NETLease prepayments consist of:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Cost
    
    
    203,047
    
    
    
    242,051
    
    
    
    31,016Less: Accumulated amortization
    
    
    (25,825
    )
    
    
    (29,955
    )
    
    
    (3,838
    )Lease prepayments, net
    
    
    177,222
    
    
    
    212,096
    
    
    
    27,178Amount classified as current portion
(Note 6)
    
    
    (4,061
    )
    
    
    (4,890
    )
    
    
    (627
    )Amount classified as non-current portion
    
    
    173,161
    
    
    
    207,206
    
    
    
    26,551
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##### Table of Contents



11.
    
    OTHER NON-CURRENT ASSETS
  2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Deposits for purchase of property,
machinery and equipment
    
    
    282
    
    
    
    249
    
    
    
    32Deposit for acquisition of land [Note (a)]
    
    
    8,000
    
    
    
    8,000
    
    
    
    1,0258,282
    
    
    
    8,249
    
    
    
    1,057
   12.
    
    INVESTMENTS AT COST
  F-27




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13.
    
    ACQUISITIONS
    F-28




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##### Table of Contents



Rmb000(Restated)Cash and cash equivalents
    
    
    10,390Restricted cash
    
    
    44,773Bills receivable
    
    
    43,078Accounts receivable
    
    
    125,523Inventories
    
    
    73,535Prepaid expenses
    
    
    68,006Other current assets
    
    
    6,826Due from related parties
    
    
    63,634Property, machinery and equipment
    
    
    9,795
    (*)Construction-in-progress
    
    
    15
    (*)Investment at cost
    
    
    1,951Deferred income tax assets
    
    
    2,590In-process research and development
    
    
    65,237
    (*)Other acquired intangible assets
    
    
    67,617
    (*)Total assets acquired
    
    
    582,970Short-term borrowings
    
    
    167,100Accounts payable
    
    
    97,797Other payables
    
    
    4,763Accrued liabilities
    
    
    6,045Deposits received
    
    
    2,772Deferred revenues
    
    
    22,745Due to related parties
    
    
    8,375Short-term borrowings
    
    
    8,719Total liabilities assumed
    
    
    318,316Fair value of net assets acquired
    
    
    264,654Satisfied by:- Cash consideration
    
    
    4,607- Investment in CEFCL [Note (i)]
    
    
    20,000- Investment in BJHTCL [Note (ii)]
    
    
    50,393Total purchase consideration
    
    
    75,000Excess of net assets acquired over purchase price
    
    
    189,654Less: Allocation to non-financial assets [sum of (*) above]
    
    
    (142,664
    )Extraordinary gain before minority interests
    
    
    46,990Less: Minority interests share of extraordinary gain
    
    
    (9,398
    )Extraordinary gain after minority interests
    
    
    37,592
   F-29




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##### Table of Contents



RMB000Fair value of investment in BJHTCL
    
    
    50,393Net assets disposed of [Note 29(c)]
    
    
    (40,086
    )Gain on disposal of subsidiary
    
    
    10,307
 F-30




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##### Table of Contents



RMB000Cash and cash equivalents
    
    
    15,334Restricted cash
    
    
    1,928Bills receivable
    
    
    75Accounts receivable, net
    
    
    11,717Inventories
    
    
    6,618Prepayments
    
    
    10,214Other current assets
    
    
    1,335Amounts due from related parties
    
    
    801Property, machinery and equipment, net
    
    
    1,511
    (*)Deposits for purchase of property, machinery and equipment
    
    
    11,070Other equity investments
    
    
    266Deferred income tax assets
    
    
    598In-process research and development
    
    
    6,287
    (*)Other acquired intangible assets
    
    
    13,914
    (*)Total assets acquired
    
    
    81,668Short-term borrowings
    
    
    12,753Accounts payable
    
    
    7,149Receipts in advance
    
    
    2,224Other payables
    
    
    313Accrued liabilities
    
    
    1,045Deposits received
    
    
    45Taxation payable
    
    
    1,160Amounts due to related parties
    
    
    7,613Total liabilities assumed
    
    
    32,302Fair value of net assets acquired
    
    
    49,366Less: Deemed purchase consideration (6.59% x RMB149,600,000)
    
    
    (9,858
    )Excess of net assets acquired over purchase price
    
    
    39,508Less: Allocation to non-financial assets [sum of (*) above]
    
    
    (21,712
    )Extraordinary gain before minority interests
    
    
    17,796Less: Minority interests share of extraordinary gain
    
    
    (3,559
    )Extraordinary gain after minority interests
    
    
    14,237
 F-31




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##### Table of Contents



RMB000Cash and cash equivalents
    
    
    133,221Restricted cash
    
    
    21,707Bills receivable
    
    
    4,157Accounts receivable, net
    
    
    79,851Inventories
    
    
    28,530Prepayments
    
    
    34,104Other current assets
    
    
    13,924Deferred income tax assets
    
    
    638Non-current prepayment
    
    
    7,132Property, machinery and equipment
    
    
    36,737Other equity investments
    
    
    1,458In-process research and development
    
    
    41,739Other intangible assets
    
    
    63,656Goodwill
    
    
    94,100Total assets acquired
    
    
    560,954Short-term borrowings
    
    
    114,019Accounts payable
    
    
    33,181Receipts in advance
    
    
    3,463Other payables
    
    
    1,278Accrued liabilities
    
    
    7,832Deposits received
    
    
    282Taxation payable
    
    
    5,893Amounts due to related parties
    
    
    29,558Deferred income tax liabilities
    
    
    9,384Total liabilities assumed
    
    
    204,890Fair value of net assets acquired
    
    
    356,064Satisfied by:- Cash consideration
    
    
    170,343- Fair value of the Companys share issued (1,562,348 shares @ US$15.17 each)
    
    
    185,721Total purchase consideration
    
    
    356,064
  F-32




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##### Table of Contents



14.
    
    GOODWILLGoodwill is analyzed as follows:
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Amount arising on acquisition of
initial 65% interest in CECT by
QXMC [Note (a)]
    
    
    23,394
    
    
    
    18,714
    
    
    
    2,398Amount arising on acquisition of
the remaining 20% interest in QXMC
by the Company [Note 13(c)]
    
    
    
    
    
    
    94,100
    
    
    
    12,058Less: Excess of cash received over
share of net assets of a minority
shareholder of QXMC
    
    
    (2,680
    )
    
    
    (2,680
    )
    
    
    (344
    )20,714
    
    
    
    110,134
    
    
    
    14,112
   F-33




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##### Table of Contents



Amortizationperiod
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    US$000(Restated)Cost:- CECT brand
    
    Indefinite
    
    
    28,189
    
    
    
    39,835
    
    
    
    5,104- Customer relationship
    
    3  5 years
    
    
    19,013
    
    
    
    5,418
    
    
    
    694- Completed technology
    
    1.8  5 years
    
    
    10,802
    
    
    
    16,950
    
    
    
    2,172- Core technology
    
    4.1  5 years
    
    
    26,113
    
    
    
    24,193
    
    
    
    3,100- Backlog
    
    4  5 months
    
    
    20,417
    
    
    
    9,175
    
    
    
    1,176- License
    
    5 years
    
    
    3,472
    
    
    
    1,725
    
    
    
    221108,060
    
    
    
    97,296
    
    
    
    12,467Less: Accumulated amortization- Customer relationship
    
    
    
    
    
    
    11,092
    
    
    
    306
    
    
    
    39- Completed technology
    
    
    
    
    
    
    6,300
    
    
    
    823
    
    
    
    105- Core technology
    
    
    
    
    
    
    15,233
    
    
    
    742
    
    
    
    95- Backlog
    
    
    
    
    
    
    20,471
    
    
    
    2,294
    
    
    
    294- License
    
    
    
    
    
    
    2,025
    
    
    
    123
    
    
    
    1655,121
    
    
    
    4,288
    
    
    
    549Other acquired intangible assets, net
    
    
    
    
    
    
    52,939
    
    
    
    93,008
    
    
    
    11,918
   AmountRmb000
    
    US$000Year ending December 31,- 2007
    
    
    32,289
    
    
    
    4,137- 2008
    
    
    11,718
    
    
    
    1,502- 2009
    
    
    4,733
    
    
    
    606- 2010
    
    
    4,433
    
    
    
    568Total
    
    
    53,173
    
    
    
    6,813
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##### Table of Contents



2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Bills payable
    
    
    288,542
    
    
    
    419,778
    
    
    
    53,789Bank loans
    
    
    465,670
    
    
    
    735,512
    
    
    
    94,247754,212
    
    
    
    1,155,290
    
    
    
    148,036
             F-35




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2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Payables for purchase and
construction of property, machinery
and equipment
    
    
    5,972
    
    
    
    6,922
    
    
    
    887Payables for stock issuance costs
    
    
    3,678
    
    
    
    
    
    
    
    Payable to CEC for the acquisition
of minority interests in CECT [Note
29(c)]
    
    
    3,607
    
    
    
    
    
    
    
    Rental payable to CEC
    
    
    1,909
    
    
    
    2,067
    
    
    
    265Others
    
    
    1,783
    
    
    
    3,000
    
    
    
    38416,949
    
    
    
    11,989
    
    
    
    1,536
   2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Accruals for operating expenses- Design, licensing and toolings
    
    
    41,905
    
    
    
    38,094
    
    
    
    4,882- Salaries
    
    
    4,544
    
    
    
    4,833
    
    
    
    619- Staff benefits
    
    
    3,008
    
    
    
    2,762
    
    
    
    354- Advertising
    
    
    309
    
    
    
    515
    
    
    
    66- Warranty
    
    
    7,712
    
    
    
    9,591
    
    
    
    1,229- Interest
    
    
    
    
    
    
    1,379
    
    
    
    177- Listing fees [Note 6(a)]
    
    
    
    
    
    
    3,575
    
    
    
    458- Others
    
    
    1,136
    
    
    
    939
    
    
    
    12058,614
    
    
    
    61,688
    
    
    
    7,905
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##### Table of Contents



2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Non-current liability - 3.5%
unsecured senior convertible notes
[Note (a)]
    
    
    
    
    
    
    222,087
    
    
    
    28,458Current liability - 4.5% unsecured
senior convertible notes [Note (b)]
    
    
    
    
    
    
    87,471
    
    
    
    11,208
    
    
    
    309,558
    
    
    
    39,666
     
    
    the interest rate on the notes is 3.5% per annum, payable in cash in arrears
on a calendar quarterly basis beginning June 30, 2006
    
    the date of maturity of the notes is June 13, 2009, three years from the
closing date
    
    the notes are convertible at the investors option into either:
 
    
    our common stock, $0.001 per share par value or
    
    the common stock of our significant subsidiary, Qiao Xing Mobile
Communications Co., Ltd. (QX Mobile), in the event of an initial public
offering of QX Mobile common stock
 
    
    the initial conversion price for our common stock is $8.027 per share (which
represents a 15% premium to the five day volume weighted average price (VWAP)
of our common stock as of the date of execution of the term sheet for this
transaction), subject to adjustment as provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect
to such conversion, the investors (together with their affiliates) would
beneficially own in excess of 9.99% of our common stock outstanding immediately
after giving effect to the conversion without prior written notice to us
    
    the conversion price for our common stock is subject to reset if the average
of the daily VWAP of our common stock for the five trading days ending on each
two-month anniversary of the closing until maturity (each a Reset Date) is less
than $6.98 (or such lower reset price as previously adjusted pursuant hereto).
In that event, the conversion price is reset to a price equal to 90% of the VWAP
of our common stock for the five trading days ending on the applicable Reset
Date. In no event will the conversion price be reset to a price less than $5.15
per share.
    
    the conversion price for QX Mobile common stock is the amount equal to (a) 7
times year 2005 net profit for QX Mobile, divided by (b) the
total number of shares of QX Mobile common stock outstanding on a fully-diluted basis as of
December 31, 2005
    
    the notes are unsecured and are guaranteed by QX Mobile
    
    the investors can require us to redeem the notes after two years in an amount
equal to the sum of (a) the outstanding principal of the notes, (b) the accrued
and unpaid interest thereon, and (c) 6% on the sum of (a) and (b)
    
    we have the right, subject to certain terms and conditions, to deliver shares
of our common stock in lieu of cash on the put date or at maturity, and the
number of shares would be determined by dividing the face amount and accrued
interest by the average closing price of our common stock for the 10 days prior
to redemption, and then multiplying that amount by 0.975
    
    we may be required to prepay the notes if certain transactions or events of
default occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of
125%, or
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 
    
    we are required by the terms of the April 06 Registration Rights Agreement
entered into concurrently with the April 06 Agreement to file after the closing
date with the Securities and Exchange Commission a registration statement to
register the common stock issuable upon conversion of the notes and exercise of
the warrants to permit the investors to resell such common stock to the public
    
    under the terms of the April 06 Agreement, we are subject to certain cash
penalties if we are unable to deliver to the investors the common stock
receivable upon conversion of the notes and exercise of the warrants in a timely
manner
 F-37




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##### Table of Contents




    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $8.027 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance on June 13, 2006
    
    the warrants contain a cashless exercise feature if the registration
statement covering the shares underlying the warrants is not available for the
resale of the shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event
that the holder would beneficially own in excess of 9.99% of our common stock
outstanding immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make
certain sales of our common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price. (This
ratchet adjustment provision does not apply in the case of certain exempt
issuances.)
  Rmb000
    
    US$000Gross proceeds from 3.5% Note
    
    
    320,136
    
    
    
    41,022Discount on notes:- Equity-classified June Investor Warrants issued to
note investors [Note (i)]
    
    
    (18,519
    )
    
    
    (2,373
    )- Liability-classified embedded derivatives [Note (ii)]
    
    
    (99,969
    )
    
    
    (12,810
    )Value of debt component at date of issue
    
    
    201,648
    
    
    
    25,839Foreign currency realignment
    
    
    (5,522
    )
    
    
    (708
    )Accretion of discount [Note (iii)]
    
    
    25,961
    
    
    
    3,327Value of debt component at December 31, 2006
    
    
    222,087
    
    
    
    28,458




F-38




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Rmb000
    
    US$000Amount attributed to June Agent Warrants [Note (i)]
    
    
    18,267
    
    
    
    2,341Other cash costs
    
    
    23,622
    
    
    
    3,027Total deferred debt issuance costs on initial recognition
    
    
    41,889
    
    
    
    5,368Foreign currency realignment
    
    
    (866
    )
    
    
    (111
    )Accumulated amortization [Note (ii)]
    
    
    (9,178
    )
    
    
    (1,176
    )Net value at December 31, 2006
    
    
    31,845
    
    
    
    4,081








F-39




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##### Table of Contents




    
    the interest rate on the notes is 4.5% per annum, payable in cash in arrears
on a calendar semi-annual basis beginning December 31, 2006
    
    the date of maturity of the notes is April 30, 2009
    
    the notes are convertible at the investors option into our common stock,
$0.001 per share par value
    
    the initial conversion price for our common stock is $14.30 per share (which
represents a 10% premium to the five day volume weighted average price (VWAP)
of our common stock as of the date of execution of the term sheet for this
transaction), subject to adjustment as provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect
to such conversion, the investors (together with their affiliates) would
beneficially own in excess of 9.99% of our common stock outstanding immediately
after giving effect to the conversion
    
    the conversion price for our common stock is subject to reset if the average
of the daily VWAP of our common stock for the five trading days ending on each
six-month anniversary of the closing until maturity (each a Reset Date) is less
than $13.00. In that event, the conversion price is reset to a price equal to
100% of the VWAP of our common stock for the five trading days ending on the
applicable Reset Date. In no event will the conversion price be reset to a price
less than $7.80 per share.
    
    the notes require an automatic repricing of the conversion price if we make
certain sales of our common stock or common stock equivalents in a
capital-raising transaction at a price below the conversion price. (This
ratchet adjustment provision does not apply in the case of certain exempt
issuances.)
    
    the notes are unsecured
    
    the investors can require us to redeem the notes after one year in an amount
equal to the sum of (a) the outstanding principal of the notes, (b) the accrued
and unpaid interest thereon, and (c) 3% on the sum of (a) and (b)
    
    we may be required to prepay the notes if certain transactions or events of
default occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of
125%, or
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 
    
    we are required by the terms of the October 06 Registration Rights Agreement
entered into concurrently with the October 06 Agreement to file after the
closing date with the Securities and Exchange Commission a registration statement
to register the common stock issuable upon conversion of the notes and exercise
of the warrants to permit the investors to resell such common stock to the public
    
    under the terms of the October 06 Agreement, we are subject to certain cash
penalties if we are unable to deliver to the investors the common stock
receivable upon conversion of the notes and exercise of the warrants in a timely
manner
  
    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $14.30 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance of October 31, 2006
    
    the warrants contain a cashless exercise feature if the registration
statement covering the shares underlying the warrants is not available for the
resale of the shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event
that the holder would beneficially own in excess of 9.99% of our common stock
outstanding immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make
certain sales of our common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price. (This
ratchet adjustment provision does not apply in the case of certain exempt
issuances.)
 F-40




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##### Table of Contents



Rmb000
    
    US$000Gross proceeds from 4.5% Note
    
    
    202,475
    
    
    
    25,945Discount on notes:- Equity-classified October Investor Warrants issued
to note investors [Note (i)]
    
    
    (14,534
    )
    
    
    (1,862
    )- Liability-classified embedded derivatives [Note (ii)]
    
    
    (111,341
    )
    
    
    (14,267
    )Value of debt component at date of issue
    
    
    76,600
    
    
    
    9,816Foreign currency realignment
    
    
    (48
    )
    
    
    (7
    )Accretion of discount [Note (iii)]
    
    
    10,919
    
    
    
    1,399Value of debt component at December 31, 2006
    
    
    87,471
    
    
    
    11,208




F-41




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##### Table of Contents








Rmb000
    
    US$000Amount attributed to October Agent Warrants [Note (i)]
    
    
    10,529
    
    
    
    1,349Other cash costs
    
    
    14,385
    
    
    
    1,843Total deferred debt issuance costs on initial recognition
    
    
    24,914
    
    
    
    3,192Foreign currency realignment
    
    
    94
    
    
    
    12Accumulated amortization [Note (ii)]
    
    
    (2,161
    )
    
    
    (277
    )Net value at December 31, 2006
    
    
    22,847
    
    
    
    2,927












F-42




---



##### Table of Contents



WeightedNumber of
    
    average issueshares
    
    priceUS$Balance as of January 1, 2004
    
    
    15,537,718Issuance of shares to option holders [Note 22(a)]
    
    
    995,000
    
    
    
    5.50Issuance of shares to warrant holders [Note 22(b)]
    
    
    12,458
    
    
    
    8.49Issuance of shares as compensation for services received [Note (a)]
    
    
    100,000
    
    
    
    Balance as of December 31, 2004
    
    
    16,645,176Issuance of shares to private investors
    
    
    2,000,000
    
    
    
    7.25Issuance of shares as compensation for services received [Note (b)]
    
    
    1,500
    
    
    
    Balance as of December 31, 2005
    
    
    18,646,676Issuance of shares to private investors
    
    
    5,000,000
    
    
    
    8.70Issuance of shares to option holders [Note 22(a)]
    
    
    2,000,000
    
    
    
    7.00Issuance of shares to warrant holders [Note 22(b)]
    
    
    2,395,979
    
    
    
    7.83Issuance of shares as part consideration for the acquisition of
the remaining 20% interest in QXMC [Note 13(c)]
    
    
    1,562,348
    
    
    
    15.17Balance of December 31, 2006
    
    
    29,605,003
        F-43




---



##### Table of Contents



Number of
    
    Weightedshares under
    
    averageoptions
    
    exercise priceUS$Outstanding as of January 1, 2004
    
    
    995,000
    
    
    
    5.50Exercised [Note (i)]
    
    
    (995,000
    )
    
    
    5.50Outstanding as of December 31, 2004 and 2005
    
    
    
    
    
    
    Granted [Note (ii)]
    
    
    2,000,000
    
    
    
    7.00Exercised
    
    
    (2,000,000
    )
    
    
    7.00Outstanding as of December 31, 2006
    
    
    
    
    
    
    
 
 Note (i)
    
    For stock options issued and fully vested prior to January 1, 2006, the Company applied
the intrinsic-value-based method prescribed in APB No. 25 to account for incentive stock options
grants. Accordingly, stock-based compensation expenses of approximately Rmb23,747,000, being the
excess of the quoted market price of the Companys underlying stock on the dates of exercise of the
options over the market price of the Companys underlying stock of US$8.77 per share on December
31, 2003, was recorded as stock-based compensation expenses during the year ended December 31,
2004.(ii)
    
    In February 2006, pursuant to the Companys 2005 Stock Plan, 2,000,000 incentive stock
options, exercisable during a 10-year period commencing on February 24, 2006, were issued to
certain employees and consultants of the Company at an exercise price of US$7.00 per share,. All
the options granted were exercised during 2006. In accordance with the requirements of SFAS No.
123-R and EITF 96-18, the fair value of the options, which amounted to approximately Rmb58,707,000
(US$7,523,000) as computed using the Black-Scholes option-pricing model on the grant date, has been
recognized as share-based compensation expenses during the year ended December 31, 2006.  Risk-free interest rate
    
    
    4.63
    %Expected dividend yield
    
    
    0.00
    %Expected term
    
    5 yearsExpected stock price volatility
    
    
    55.2
    %
 F-44




---



##### Table of Contents



WeightedaverageNo. of stock
    
    exercisewarrants
    
    priceUS$Outstanding as of January 1, 2004
    
    
    1,089,000
    
    
    
    15.813Lapsed
    
    
    (668,000
    )
    
    
    20.607Exercised [Note (i)]
    
    
    (30,200
    )
    
    
    8.490Outstanding as of December 31, 2004
    
    
    390,800
    
    
    
    8.185Lapsed
    
    
    (390,800
    )
    
    
    8.185Issued:- To share investors and placement agent [Note (ii)]
    
    
    505,000
    
    
    
    9.860- To consultants for services rendered [Note (iii)]
    
    
    30,000
    
    
    
    8.500Outstanding, as of December 31, 2005
    
    
    535,000
    
    
    
    9.784Issued:- To share investors and placement agents [Note (iv)]
    
    
    1,350,000
    
    
    
    10.578- To 3.5% Note investors and placement agent [Note 19(a)]
    
    
    1,844,955
    
    
    
    8.027- To 4.5% Note investors and placement agent [Note 19(b)]
    
    
    545,455
    
    
    
    14.300- To consultant as settlement of outstanding accounts
payable [Note (v)]
    
    
    150,000
    
    
    
    8.125Repricing adjustment [Note (vi)]
    
    
    128,703
    
    
    
    Exercised
    
    
    (2,395,979
    )
    
    
    7.835Outstanding as of December 31, 2006
    
    
    2,158,134
    
    
    
    11.385Exercisable as of December 31, 2006
    
    
    2,158,134
    
    
    
    11.385Exercisable as of December 31, 2005
    
    
    535,000
    
    
    
    9.784
 
 Note (i)
    
    The Company issued 12,458 shares of common stocks to the warrant holders on the cashless
exercise of the 30,200 warrants at US$8.49 per share (Note 21).(ii)
    
    The fair value of the 505,000 warrants, which amounted to approximately Rmb9,963,000 as
computed using the Black-Scholes option-pricing model on the grant date, was debited to additional
paid-in capital as stock issuance costs during the year ended December 31, 2005.(iii)
    
    The fair value of the 30,000 warrants, which amounted to approximately Rmb595,000 as
computed using the Black-Scholes option-pricing model on the respective grant dates, was recognized
as compensation expenses during the year ended December 31, 2005. F-45




---



##### Table of Contents



(iv)
    
    The fair value of the 1,350,000 warrants, which amounted to approximately Rmb48,631,000
as computed using the Black-Scholes option-pricing model on the respective grant dates, was debited
to additional paid-in capital as stock issuance costs during the year ended December 31, 2006.(v)
    
    The fair value of the 150,000 warrants, which amounted to approximately Rmb3,674,000 as
computed using the Black-Scholes option-pricing model on the grant date, was debited to accounts
payable in settlement of the amount owing to the consultant as of December 31, 2005 of Rmb3,678,000
(Note 17).(vi)
    
    Due to the sales of common stocks and the issuance of the US$40 million 3.5% Note [note
19(a)], the exercise prices and the shares underlying certain outstanding warrants were adjusted
during the year ended December 31, 2006.  Weighted-averageWeighted average
    
    
    
    
    
    remainingexercise price per
    
    Number of
    
    contractual lifewarrant (US$)
    
    outstanding warrant
    
    (years)6.625
    
    
    
    19,815
    
    
    
    3.157.406
    
    
    
    504,653
    
    
    
    3.058.500
    
    
    
    30,000
    
    
    
    2.988.876
    
    
    
    458,211
    
    
    
    3.1514.300
    
    
    
    1,145,455
    
    
    
    4.3113.385
    
    
    
    2,158,134
    
    
    
    3.74
  2004
    
    2005
    
    2006Weighted average fair value
    
    
    
    
    

    US$2.39
    
    
 US$4.17Risk-free interest rate
    
    
    
    
    
    
    3.60
    %
    
    
    4.76
    %Expected dividend yield
    
    
    
    
    
    
    0.00
    %
    
    
    0.00
    %Expected term
    
    
    
    
    
    2.61 years
    
    3.05 yearsExpected stock price volatility
    
    
    
    
    
    
    65.71
    %
    
    
    57.41
    %
 
 F-46




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##### Table of Contents



F-47




---



##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000(Restated)
    
    (Restated)Mainland Chinese
income tax on
current years
profit- current
    
    
    10,404
    
    
    
    27,813
    
    
    
    62,904
    
    
    
    8,060- deferred
    
    
    (3,007
    )
    
    
    (2,327
    )
    
    
    (8,003
    )
    
    
    (1,025
    )Under provision of
current income tax
in respect of prior
years
    
    
    
    
    
    
    
    
    
    
    3,291
    
    
    
    4227,397
    
    
    
    25,486
    
    
    
    58,192
    
    
    
    7,457
  2004
    
    2005
    
    2006(Restated)
    
    (Restated)Mainland Chinese statutory income tax rate
    
    
    33.0
    %
    
    
    33.0
    %
    
    
    33.0
    %Tax effect of tax holidays and
preferential tax rates
    
    
    (49.8
    %)
    
    
    (28.1
    %)
    
    
    (71.1
    %)Losses of BVI companies not subject to tax
    
    
    23.6
    %
    
    
    1.1
    %
    
    
    78.5
    %Non-deductible activities
    
    
    0.6
    %
    
    
    0.4
    %
    
    
    16.2
    %Changes in valuation allowance
    
    
    5.0
    %
    
    
    1.3
    %
    
    
    (6.0
    %)Effective income tax rate
    
    
    12.4
    %
    
    
    7.7
    %
    
    
    50.6
    %
 F-48




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##### Table of Contents



Deferred tax assets  current portion
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000(Restated)Allowance for doubtful accounts
    
    
    730
    
    
    
    845
    
    
    
    108Write-off of obsolete and
slow-moving inventories
    
    
    5,596
    
    
    
    3,849
    
    
    
    493Provision for product warranties
    
    
    791
    
    
    
    1,230
    
    
    
    158Tax losses carried forward
    
    
    1,835
    
    
    
    2,451
    
    
    
    3148,952
    
    
    
    8,375
    
    
    
    1,073Valuation allowance
    
    
    (8,952
    )
    
    
    (2,451
    )
    
    
    (314
    )Deferred income tax assets
    
    
    
    
    
    
    5,924
    
    
    
    759
 Deferred tax assets (liabilities)  non-current portion
 2005
    
    2006Rmb000
    
    Rmb000
    
    US$000(Restated)Property, machinery and equipment
    
    
    2,522
    
    
    
    2,212
    
    
    
    283Other acquired intangible assets
    
    
    (7,941
    )
    
    
    (13,952
    )
    
    
    (1,787
    )Deferred income tax liabilities
    
    
    (5,419
    )
    
    
    (11,740
    )
    
    
    (1,504
    )
  2005
    
    2006Rmb000
    
    Rmb000
    
    US$000(Restated)Beginning of year
    
    
    4,627
    
    
    
    8,952
    
    
    
    1,147Increase in valuation allowance
    
    
    4,325
    
    
    
    617
    
    
    
    79Release of valuation allowance
    
    
    
    
    
    
    (7,118
    )
    
    
    (912
    )End of year
    
    
    8,952
    
    
    
    2,451
    
    
    
    314
  F-49




---



##### Table of Contents



2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Mainland Chinese enterprise income tax
    
    
    29,530
    
    
    
    32,342
    
    
    
    4,144Mainland Chinese value-added tax
    
    
    38,153
    
    
    
    12,964
    
    
    
    1,661Mainland Chinese other taxes
    
    
    1,203
    
    
    
    966
    
    
    
    12468,886
    
    
    
    46,272
    
    
    
    5,929
   
 F-50




---



##### Table of Contents



2004
    
    2005
    
    2006Rmb
    
    Rmb
    
    Rmb
    
    US$(Restated)
    
    (Restated)Net income (loss) before
extraordinary gain
    
    
    1,416,000
    
    
    
    207,307,000
    
    
    
    (34,071,000
    )
    
    
    (4,365,000
    )Extraordinary gain
    
    
    
    
    
    
    37,592,000
    
    
    
    14,237,000
    
    
    
    1,824,000Net income (loss) after extraordinary
gain
    
    
    1,416,000
    
    
    
    244,899,000
    
    
    
    (19,834,000
    )
    
    
    (2,541,000
    )Net income (loss) before extraordinary
gain
    
    
    1,416,000
    
    
    
    207,307,000
    
    
    
    (34,071,000
    )
    
    
    (4,365,000
    )Add: Interest on 4.5% Note
    
    
    
    
    
    
    
    
    
    
    14,636,000
    
    
    
    1,875,000Less: Gain on remeasurement of
embedded derivatives relating to 4.5%
Note
    
    
    
    
    
    
    
    
    
    
    (29,449,000
    )
    
    
    (3,773,000
    )Fully diluted net income (loss) before
extraordinary gain
    
    
    1,416,000
    
    
    
    207,307,000
    
    
    
    (48,884,000
    )
    
    
    (6,263,000
    )Extraordinary gain
    
    
    
    
    
    
    37,592,000
    
    
    
    14,237,000
    
    
    
    1,824,000Fully diluted net income (loss) after
extraordinary gain
    
    
    1,416,000
    
    
    
    244,899,000
    
    
    
    (34,647,000
    )
    
    
    (4,439,000
    )Weighted average common shares basic
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    23,712,000
    
    
    
    23,712,000Effect of dilutive stock options,
warrants and convertible notes
    
    
    117,000
    
    
    
    1,000
    
    
    
    304,000
    
    
    
    304,000Weighted average common shares diluted
    
    
    16,560,000
    
    
    
    18,320,000
    
    
    
    24,016,000
    
    
    
    24,016,000Basic earnings (loss) per common share:Before extraordinary gain
    
    
    0.09
    
    
    
    11.32
    
    
    
    (1.44
    )
    
    
    (0.19
    )Extraordinary gain
    
    
    
    
    
    
    2.05
    
    
    
    0.60
    
    
    
    0.08After extraordinary gain
    
    
    0.09
    
    
    
    13.37
    
    
    
    (0.84
    )
    
    
    (0.11
    )Diluted earnings(loss) per common
share:Before extraordinary gain
    
    
    0.09
    
    
    
    11.32
    
    
    
    (2.03
    )
    
    
    (0.26
    )Extraordinary gain
    
    
    
    
    
    
    2.05
    
    
    
    0.59
    
    
    
    0.07After extraordinary gain
    
    
    0.09
    
    
    
    13.37
    
    
    
    (1.44
    )
    
    
    (0.19
    )
  
 F-51




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##### Table of Contents



2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Capital expenditures authorized and
contracted for:- Construction of factory premises and
staff quarters
    
    
    39,221
    
    
    
    39,031
    
    
    
    5,001- Purchase of land and buildings
    
    
    58,700
    
    
    
    58,700
    
    
    
    7,522- Purchase of machinery and equipment
    
    
    5,562
    
    
    
    130
    
    
    
    17103,483
    
    
    
    97,861
    
    
    
    12,540
 F-52




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##### Table of Contents



AmountRmb000
    
    US$000For the years ending December 31,- 2007
    
    
    4,396
    
    
    
    563- 2008
    
    
    1,373
    
    
    
    176Total
    
    
    5,769
    
    
    
    739
     
 F-53




---



##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Interest
    
    
    26,582
    
    
    
    41,752
    
    
    
    50,374
    
    
    
    6,455Income taxes
    
    
    
    
    
    
    8,687
    
    
    
    63,383
    
    
    
    8,122
    Rmb000Cash and cash equivalents
    
    
    126Other receivables
    
    
    751Property, machinery and equipment
    
    
    37,826Lease prepayments
    
    
    1,383Net assets disposed of
    
    
    40,086
  Rmb000Cash consideration
    
    
    4,607Cash and cash equivalents disposed of
    
    
    126Less: Prepaid consideration as of December 31, 2004
    
    
    (1,000
    )Less: Unpaid consideration as at December 31, 2005 (Note 17)
    
    
    (3,607
    )Net cash outflow in respect of acquisition of minority interests
    
    
    126
 
 F-54




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##### Table of Contents



Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiMr. Jie Shi
    
    Director (resigned on September 1, 2005)Mr. Ming Zhu
    
    Non-executive independent director
(resigned on September 1, 2005)Mr. Ze Yun Mu
    
    Non-executive independent directorWu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Development Limited (QXDL)
    
    Common directorShanghai Sunplus Communication Technology Company Limited (SSCT)
    
    Common director until September 2004Huizhou Calilee Telecommunication Company Limited (Calilee)
    
    A company 5% owned by QXGL until March 2005Huizhou Qiaoxing Famous Science & Technology Co., Ltd. (QFST)
    
    A company 80% owned by QXGLShenzhen Tianna I/E Trade Company Limited (STIE)
    
    A company 90% owned by QXGLChina Electronics Corporation (CEC)
    
    Minority owner of CECT until July 29, 2005CEC Wireless R&D Limited (CECW)
    
    CEC is a shareholderBeijing China Electronics Changsheng Investment Management Company 
Limited (BCECIM)
    
    CEC is a shareholderChina Electronics Beijing Real Estate Management Co., Ltd. (CEBREM)
    
    CEC is a shareholder
 F-55




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##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals charged by CEC
    
    
    2,743
    
    
    
    1,325
    
    
    
    
    
    
    
    Property management fees paid and payable to:- CEBREM
    
    
    971
    
    
    
    852
    
    
    
    
    
    
    
    - QXGL
    
    
    68
    
    
    
    61
    
    
    
    90
    
    
    
    12Rental income from CECM
    
    
    1,110
    
    
    
    
    
    
    
    
    
    
    
    Research and development fee paid to CECW
    
    
    391
    
    
    
    
    
    
    
    
    
    
    
    Purchases from:- QXDL
    
    
    3,290
    
    
    
    
    
    
    
    
    
    
    
    - SSCT
    
    
    354,368
    
    
    
    
    
    
    
    
    
    
    
    - STIE
    
    
    103,379
    
    
    
    
    
    
    
    
    
    
    
    Sales to:- CECM
    
    
    17,536
    
    
    
    
    
    
    
    
    
    
    
    - Calilee
    
    
    293,097
    
    
    
    
    
    
    
    
    
    
    
    - QFST
    
    
    12,458
    
    
    
    41,928
    
    
    
    69,232
    
    
    
    8,871
   2005
    
    2006Rmb000
    
    Rmb000
    
    US$000Due from:- Exquisite Jewel Limited
    
    
    6
    
    
    
    5
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    330
    
    
    
    29
    
    
    
    4Due to:- Mr. Rui Lin Wu
    
    
    2,428
    
    
    
    4,516
    
    
    
    579Accounts receivable from:- CECM
    
    
    3,323
    
    
    
    
    
    
    
    - QFST
    
    
    9,056
    
    
    
    44,443
    
    
    
    5,69512,379
    
    
    
    44,443
    
    
    
    5,695
   F-56




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##### Table of Contents



Mobile Phones
    
    Indoor Phones
    
    Corporate
    
    TotalRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb0002004 (Restated)Revenue
    
    
    1,525,287
    
    
    
    195,102
    
    
    
    
    
    
    
    1,720,389Gross margin
    
    
    194,414
    
    
    
    28,798
    
    
    
    
    
    
    
    223,212Inventories
    
    
    271,428
    
    
    
    21,979
    
    
    
    
    
    
    
    293,407Property, machinery and equipment
    
    
    104,553
    
    
    
    2,581
    
    
    
    28
    
    
    
    107,162Expenditures for long-lived assets
    
    
    4,900
    
    
    
    
    
    
    
    49,750
    
    
    
    54,6502005 (Restated)Revenue
    
    
    2,380,531
    
    
    
    254,653
    
    
    
    
    
    
    
    2,635,184Gross margin
    
    
    439,218
    
    
    
    39,168
    
    
    
    
    
    
    
    478,386Inventories
    
    
    219,272
    
    
    
    16,825
    
    
    
    
    
    
    
    236,097Property, machinery and equipment
    
    
    50,506
    
    
    
    2,158
    
    
    
    
    
    
    
    52,664Expenditures for long-lived assets
    
    
    12,505
    
    
    
    265
    
    
    
    8,171
    
    
    
    20,9412006Revenue
    
    
    2,985,432
    
    
    
    235,780
    
    
    
    
    
    
    
    3,221,212Gross margin
    
    
    528,303
    
    
    
    41,517
    
    
    
    
    
    
    
    569,820Inventories
    
    
    213,688
    
    
    
    18,668
    
    
    
    
    
    
    
    232,356Property, machinery and equipment
    
    
    207,887
    
    
    
    1,645
    
    
    
    10
    
    
    
    209,542Expenditures for long-lived assets
    
    
    207,379
    
    
    
    109
    
    
    
    1,200
    
    
    
    208,688
 F-57




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##### Table of Contents



2004
    
    2005
    
    2006(Restated)
    
    (Restated)Beijing Ho.COM Electronic Co., Ltd.
    
    
    26
    %
    
    
    24
    %
    
    
    12
    %Calilee (Note 30)
    
    
    19
    %
    
    
    
    
    
    
    CECM (Note 30)
    
    
    12
    %
    
    
    
    
    
    
    Shenzhen Laidi Technical Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    24
    %Beijing Jiusheng Technology Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    14
    %Shenzhen Siecom Communication
Technology Development Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    10
    %
   2004
    
    2005
    
    2006QFST (Note 30)
    
    
    6
    %
    
    
    16
    %
    
    
    26
    %Zhong Nan Company
    
    
    7
    %
    
    
    4
    %
    
    
    1
    %
 F-58




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##### Table of Contents



2004
    
    2005
    
    2006Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Depreciation of property,
machinery and equipment
    
    
    12,105
    
    
    
    11,831
    
    
    
    11,124
    
    
    
    1,425Amortization of lease
prepayments
    
    
    4,097
    
    
    
    4,062
    
    
    
    4,130
    
    
    
    529Interest expense:- bank loans
    
    
    12,922
    
    
    
    23,489
    
    
    
    33,801
    
    
    
    4,331- other bank borrowings
    
    
    13,261
    
    
    
    17,014
    
    
    
    10,261
    
    
    
    1,315- finance lease
    
    
    399
    
    
    
    776
    
    
    
    
    
    
    
    - convertible notes
    
    
    
    
    
    
    
    
    
    
    7,692
    
    
    
    985- accretion of discounts on
convertible notes
    
    
    
    
    
    
    
    
    
    
    36,880
    
    
    
    4,726- amortization of deferred
debt issuance costs
    
    
    
    
    
    
    
    
    
    
    11,339
    
    
    
    1,453- shareholders loans
(imputed interest)
    
    
    478
    
    
    
    473
    
    
    
    459
    
    
    
    59Total interest expense
    
    
    27,060
    
    
    
    41,752
    
    
    
    100,432
    
    
    
    (12,869
    )Advertising expenses
    
    
    14,658
    
    
    
    11,800
    
    
    
    13,886
    
    
    
    1,779Shipping and handling costs
    
    
    2,923
    
    
    
    7,390
    
    
    
    10,862
    
    
    
    1,392
 F-59




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##### Table of Contents



ITEM 19. EXHIBITS
         Exhibit 1.1
    
    Memorandum of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 1.2
    
    Articles of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 4.1
    
    Securities Purchase Agreement dated as of April 27, 2006 covering the sale of $40,000,000 of our 3.5% senior
convertible notes and common stock purchase warrants*Exhibit 4.2
    
    Form of 3.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of April 27,
2006*Exhibit 4.3
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of April 27, 2006*Exhibit 4.4
    
    Form of Registration Rights Agreement entered into pursuant to the Securities Purchase Agreement dated as of April
27, 2006*Exhibit 4.5
    
    Securities Purchase Agreement dated as of October 31, 2006 covering the sale of $26,000,000 of our 4.5% senior
convertible notes and common stock purchase warrants***Exhibit 4.6
    
    Form of 4.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of October 31,
2006***Exhibit 4.7
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of October 31, 2006***
 -156-




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##### Table of Contents



Exhibit 4.8
    
    Form of Registration Rights Agreement entered into pursuant to the Securities Purchase Agreement dated as of
October 31, 2006***Exhibit 4.9
    
    Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of Ethics**Exhibit 12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Exhibit 12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Exhibit 13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350Exhibit 13.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
 
 *
    
    - incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
April 28, 2006, SEC File No. 000-29946.**
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003.***
    
    - incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
November 1, 2006, SEC File No. 0-29946 -157-




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##### Table of Contents



SIGNATURES
  QIAO XING UNIVERSAL TELEPHONE, INC.
(Registrant)Date: July 16, 2007
    
    
    
    By:
    
    /s/ RUI LIN WURui Lin WuChairman




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##### Table of Contents



INDEX TO EXHIBITS
 DESCRIPTION
 Exhibit 1.1
    
    Memorandum of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 1.2
    
    Articles of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 4.1
    
    Securities Purchase Agreement dated as of April 27, 2006 covering the sale of $40,000,000 of our 3.5% senior
convertible notes and common stock purchase warrants*Exhibit 4.2
    
    Form of 3.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of April 27,
2006*Exhibit 4.3
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of April 27, 2006*Exhibit 4.4
    
    Form of Registration Rights Agreement entered into pursuant to the Securities Purchase Agreement dated as of April
27, 2006*Exhibit 4.5
    
    Securities Purchase Agreement dated as of October 31, 2006 covering the sale of $26,000,000 of our 4.5% senior
convertible notes and common stock purchase warrants***Exhibit 4.6
    
    Form of 4.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of October 31,
2006***Exhibit 4.7
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of October 31, 2006***Exhibit 4.8
    
    Form of Registration Rights Agreement entered into pursuant to the Securities Purchase Agreement dated as of
October 31, 2006***Exhibit 4.9
    
    Non-competition Agreement, dated April 12, 2007, among Qiao Xing Universal Telephone, Inc., Huizhou Qiao Xing
Communication Industry, Ltd., Mr. Rui Lin Wu and Qiao Xing Mobile Communication Co., Ltd.Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of Ethics**Exhibit 12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Exhibit 12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Exhibit 13.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350Exhibit 13.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
 
 *
    
    - incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
April 28, 2006, SEC File No. 000-29946.**
    
    - incorporated by reference to the Exhibits to our annual report on Form 20-F for the fiscal
year ended December 31, 2003***
    
    - incorporated by reference to the Exhibits to our Report on Form 6-K filed with the SEC on
November 1, 2006, SEC File No. 0-29946