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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, 2004
 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 QIAO XING UNIVERSAL TELEPHONE, INC.  QIAO XING UNIVERSAL TELEPHONE, INC.
(Translation of Registrants name into English) British Virgin Islands
(Jurisdiction of incorporation or organization) Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,Peoples Republic of China 516023
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each
class
    
    Name of each exchange
on which registeredNone
    
    N/A
 Securities registered or to be registered pursuant to Section 12(g) of the Act. $.001 Par Value Common Stock (Common Stock)
(Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
(Title of Class) Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of December 31, 2004: 16,645,176 Shares of Common Stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 þ (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Not Applicable.




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##### Table of Contents



SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks and uncertainties.
These include statements about our expectations, plans, objectives, assumptions or future events.
In some cases, you can identify forward-looking statements by terminology such as anticipate,
estimate, plans, potential, projects, continuing, ongoing, expects, management
believes, we believe, we intend and similar expressions. These statements involve estimates,
assumptions and uncertainties that could cause actual results to differ materially from those
expressed for the reasons described in this annual report. You should not place undue reliance on
these forward-looking statements. You should be aware that our actual results could differ materially from those contained in
the forward-looking statements due to a number of factors:  
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions You should also consider carefully the statements under Risk Factors and other sections of
this annual report, which address additional factors that could cause our actual results to differ
from those set forth in the forward-looking statements and could materially and adversely affect
our business, operating results and financial condition. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the applicable cautionary statements. The forward-looking statements speak only as of the date on which they are made, and, except
to the extent required by federal securities laws, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any forward-looking
statements. We use data and industry forecasts in this annual report which we have obtained from internal
surveys, market research, publicly available information and industry publications. Industry
publications generally state that the information they provide has been obtained from sources
believed to be reliable but that the accuracy and completeness of such information is not
guaranteed. Similarly, we believe that the surveys and market research we or others have performed
are reliable, but we have not independently verified this information. -2-




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15. CONTROLS AND PROCEDURESITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERTITEM 16B. CODE OF ETHICSITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICESITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEESITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSPART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSSIGNATURESINDEX TO EXHIBITSList of Significant SubsidiariesCertification 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 Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. SELECTED FINANCIAL DATA. We prepare the consolidated financial statements in accordance with United States Generally
Accepted Accounting Principles (US GAAP). The following summary consolidated statements of
operations data for the years ended December 31, 2002, 2003 and 2004 and the consolidated balance
sheet data as of December 31, 2003 and 2004 were derived from our audited financial statements
included elsewhere in this annual report and should be read in conjunction with such financial
statements. The following summary consolidated statements of operations data for the years ended
December 31, 2000 and 2001 and the consolidated balance sheet data as of December 31, 2000, 2001
and 2002 were derived from our audited financial statements not included elsewhere in this annual
report and have been prepared in accordance with US GAAP and have been derived from audited
financial statements. The following summary financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and the notes thereto included elsewhere in this annual report. Year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Net sales
    
    
    392,529
    
    
    
    250,366
    
    
    
    549,967
    
    
    
    1,843,282
    
    
    
    2,019,081
    
    
    
    243,953Cost of goods sold
    
    
    (271,606
    )
    
    
    (212,229
    )
    
    
    (528,149
    )
    
    
    (1,598,615
    )
    
    
    (1,795,482
    )
    
    
    (216,937
    )Gross profit
    
    
    120,923
    
    
    
    38,137
    
    
    
    21,818
    
    
    
    244,667
    
    
    
    223,599
    
    
    
    27,016Operating expenses:Selling expenses
    
    
    (15,325
    )
    
    
    (6,172
    )
    
    
    (5,286
    )
    
    
    (74,885
    )
    
    
    (27,873
    )
    
    
    (3,368
    )General and administrative expenses
    
    
    (40,108
    )
    
    
    (40,598
    )
    
    
    (68,233
    )
    
    
    (51,885
    )
    
    
    (67,326
    )
    
    
    (8,135
    )
 -3-




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Year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Research and development
    
    
    (497
    )
    
    
    (3,516
    )
    
    
    (451
    )
    
    
    (6,649
    )
    
    
    (10,449
    )
    
    
    (1,262
    )In process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,579
    )
    
    
    
    
    
    
    Amortization of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,192
    )
    
    
    (16,990
    )
    
    
    (2,053
    )Impairment
loss on:- Land use
rights
    
    
    
    
    
    
    (5,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Property,
machinery and equipment
    
    
    
    
    
    
    (8,722
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,929
    )
    
    
    (32,736
    )
    
    
    (3,955
    )(Loss) Income from operations
    
    
    64,993
    
    
    
    (25,875
    )
    
    
    (52,152
    )
    
    
    8,548
    
    
    
    68,225
    
    
    
    8,243Interest income
    
    
    2,061
    
    
    
    2,000
    
    
    
    1,070
    
    
    
    3,045
    
    
    
    492
    
    
    
    59Exchange loss, net
    
    
    2,363
    
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    (23,550
    )
    
    
    (23,107
    )
    
    
    (17,867
    )
    
    
    (18,985
    )
    
    
    (27,060
    )
    
    
    (3,269
    )Gain on sale of a subsidiary
    
    
    
    
    
    
    
    
    
    
    79,050
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of equity investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,465
    
    
    
    5,010Other (expenses) income, net
    
    
    (197
    )
    
    
    (187
    )
    
    
    124
    
    
    
    2,088
    
    
    
    1,597
    
    
    
    193Income (Loss) before income tax
    
    
    45,670
    
    
    
    (47,273
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    84,719
    
    
    
    10,236Provision for income tax
    
    
    (16,599
    )
    
    
    25,687
    
    
    
    
    
    
    
    
    
    
    
    (10,404
    )
    
    
    (1,257
    )Income (Loss) before minority interests
    
    
    29,071
    
    
    
    (21,586
    )
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    74,315
    
    
    
    8,979Minority interests
    
    
    (5,600
    )
    
    
    164
    
    
    
    6,248
    
    
    
    (9,228
    )
    
    
    (50,817
    )
    
    
    (6,140
    )Equity in earnings of equity investees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,802
    
    
    
    (624
    )
    
    
    (75
    )Net Income (Loss)
    
    
    23,471
    
    
    
    (21,422
    )
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    2,764Other comprehensive (loss) incomeTranslation adjustments
    
    
    79
    
    
    
    70
    
    
    
    (61
    )
    
    
    (746
    )
    
    
    70
    
    
    
    8Comprehensive income (loss)
    
    
    23,550
    
    
    
    (21,352
    )
    
    
    16,412
    
    
    
    (8,476
    )
    
    
    22,944
    
    
    
    2,772Earnings (Loss) per common share- Basic (2)
    
    Rmb2.03
    
    Rmb(1.67)
    
    Rmb1.12
    
    Rmb(0.50)
    
    Rmb1.39
    
    US$
    0.17- Diluted (2)
    
    Rmb1.98
    
    Rmb(1.67)
    
    Rmb0.95
    
    Rmb(0.50)
    
    Rmb1.38
    
    US$
    0.17Weighted average number of shares
outstanding- Basic (2)
    
    
    11,572,000
    
    
    
    12,838,000
    
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    16,443,000- Diluted (2)
    
    
    11,878,000
    
    
    
    12,838,000
    
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    16,559,527
 -4-




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As of December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Balance Sheet DataCash and bank deposits
    
    
    33,490
    
    
    
    7,616
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    17,023Working capital
    
    
    136,616
    
    
    
    147,505
    
    
    
    266,773
    
    
    
    297,763
    
    
    
    426,163
    
    
    
    51,491Property, machinery and equipment, net
    
    
    182,140
    
    
    
    183,600
    
    
    
    5,112
    
    
    
    98,305
    
    
    
    107,162
    
    
    
    12,948Construction in progress
    
    
    17,869
    
    
    
    576
    
    
    
    
    
    
    
    1,184
    
    
    
    50,934
    
    
    
    6,154Land use rights
    
    
    226,463
    
    
    
    221,359
    
    
    
    189,405
    
    
    
    187,111
    
    
    
    182,667
    
    
    
    22,070Debt issuance cost, net
    
    
    8,234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    939,267
    
    
    
    911,238
    
    
    
    742,708
    
    
    
    1,567,961
    
    
    
    2,110,223
    
    
    
    254,965Short-term-debts
    
    
    170,443
    
    
    
    189,990
    
    
    
    40,000
    
    
    
    440,982
    
    
    
    701,696
    
    
    
    84,781Long-term-debts
    
    
    44,869
    
    
    
    8,163
    
    
    
    8,163
    
    
    
    11,939
    
    
    
    10,428
    
    
    
    1,260Total liabilities
    
    
    411,173
    
    
    
    360,689
    
    
    
    98,074
    
    
    
    757,707
    
    
    
    1,147,356
    
    
    
    138,628Minority interests (1)
    
    
    23,266
    
    
    
    23,102
    
    
    
    87,054
    
    
    
    232,833
    
    
    
    283,650
    
    
    
    34,272Shareholders equity
    
    
    504,828
    
    
    
    527,447
    
    
    
    557,580
    
    
    
    577,421
    
    
    
    679,217
    
    
    
    82,065Cash flows dataCash flows from operating activities
    
    
    (7,568
    )
    
    
    26,489
    
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (200,136
    )
    
    
    (24,181
    )Cash flows from investing activities
    
    
    (243,200
    )
    
    
    (75,145
    )
    
    
    (136,170
    )
    
    
    203,530
    
    
    
    (65,900
    )
    
    
    (7,963
    )Cash flows from financing activities
    
    
    281,315
    
    
    
    22,852
    
    
    
    195,760
    
    
    
    216,138
    
    
    
    284,390
    
    
    
    34,361
   (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 2000 by 11,572,000 shares, for 2001
by 12,838,000 shares, for 2002 by 14,685,000 shares, for 2003 by 15,420,000 shares and for
2004 by 16,443,000 shares. Diluted earnings per common share is computed by using the
weighted average number of common shares outstanding adjusted to include the potentially
dilutive effect of outstanding stock options, warrants and convertible debentures, to the
extent such instruments were dilutive during the period.  (3)
    
    Translation of amounts from Renminbi (Rmb) into United States dollars (US$) is for the
convenience of readers and has been made at the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank
of New York on December 31, 2004 of US$1.00 = Rmb 8.2765. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States dollars at that
rate or at any other rate. -5-




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Exchange Rate Information We have prepared our consolidated financial statements in accordance with United States
Generally Accepted Accounting Principles consistently applied and publish such statements in
Renminbi, the functional currency of our subsidiaries and the legal tender currency of China. All
references to Renminbi or Rmb are to Renminbi. All references to U.S. Dollars, dollars,
US$ or $ are to United States dollars. The following table sets forth certain information concerning exchange rates between Renminbi
and U.S. dollars for the periods indicated: Noon Buying Rate(1)Calendar Year
    
    Average(Rmb per US$)2000
    
    
    8.27842001
    
    
    8.27702002
    
    
    8.27712003
    
    
    8.27722004
    
    
    8.2768
 
 (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. Calendar Month
    
    High
    
    
    LowDecember 2004
    
    
    8.2767
    
    
    
    8.2765January 2005
    
    
    8.2765
    
    
    
    8.2765February 2005
    
    
    8.2765
    
    
    
    8.2765March 2005
    
    
    8.2765
    
    
    
    8.2765April 2005
    
    
    8.2765
    
    
    
    8.2765May 2005
    
    
    8.2765
    
    
    
    8.2765June 2005
    
    
    8.2765
    
    
    
    8.2765
 As of June 24, 2005, being the latest practicable date, the exchange rate was US$1.00 = Rmb 8.2765. -6-




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B. CAPITALIZATION AND INDEBTEDNESS. Not applicable. C. REASONS FOR THE OFFER AND USE OF PROCEEDS. Not applicable. D. RISK FACTORS. Technology risk The new advanced products that we are developing incorporate complex and evolving technologies
that require substantial expenditures and resources. However, these new products may fail to be
accepted at the rates or levels we anticipate and we may fail to realize the expected benefits from
our investments in these new technologies. We may experience greater variability in our operating results than in the past, particularly
depending on the general economic conditions and the pace of development and acceptance of new
technologies. Changes in the communications industry are expected to increase competition and change the
competitive landscape and may adversely affect our operating results. Operating risk We conduct our manufacturing and sales operations through joint ventures established between
us and Mainland Chinese parties. Any deterioration of these strategic relationships may have an
adverse effect on our operations. Concentration of credit risk We perform ongoing credit evaluations of each customers financial condition. We maintain
reserves for potential credit losses and such losses in the aggregate have not exceeded
managements projections. As of December 31, 2004 and 2003, our five largest accounts receivable
accounted for approximately 63% and 64% of our total accounts receivable. -7-




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The economy of China differs from the economies of most countries. Although the majority of productive assets in China are still owned by the government,
economic reform policies since 1978 have emphasized decentralization and the utilization of market
mechanisms in the development of the Chinese economy. We have significantly benefited from such
reforms, as the Ministry of Post and Telecommunications since 1994 has opened the
telecommunications equipment market of China to all kinds of manufacturers. Our management
believes that the basic principles underlying the reforms will continue to provide an acceptable
framework of the PRCs political and economic systems. In addition, we currently see no evidence
that this refinement and readjustment process may adversely affect, directly or indirectly, our
operations in the future. As substantially all of our operations are conducted in Mainland China, we are subject to
special considerations and significant risks not typically associated with companies operating in
North America and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. Our results may be
adversely affected by changes in the political and social conditions in Mainland China, and by
changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of taxation, among other things. In addition, substantially all of our revenue is denominated in Renminbi (Rmb) which must be
converted into other currencies before remittance outside Mainland China. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies abroad require the
approval of the Mainland Chinese government. Our currency is not freely convertible. The State Administration for Exchange Control (SAEC), under the authority of the Peoples
Bank of China (the PBOC), controls the conversion of Renminbi into foreign currency. The value
of the Renminbi is subject to changes in central government policies and to international economic
and political developments affecting supply and demand in the China Foreign Exchange Trading System
(CFETS) market. Since substantially all of our raw materials are provided by local suppliers
using Renminbi and the majority of our expenses are denominated in Renminbi, restrictions on
currency conversions did not materially affect our operations. Also, since we do not expect to
require any raw material that are not permitted or are limited to purchase using foreign
currencies, our management believes that such restriction will not materially affect our operations
in the future. However, our ability to pay dividends and meet other obligations depends upon the
receipt of dividends or other payments from our operating subsidiaries and our other holdings and
investments, and our operating subsidiaries located in China may be subject to restrictions on the
conversion of Renminbi to U.S. dollars and, as a result, may be restricted to make distributions to
us. -8-




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We depend on Chinese factories. We have no direct business operation, other than our ownership of our subsidiaries located in
China, and our results of operations and financial condition are currently solely dependent on our
subsidiaries factories in China. We currently maintain fire, casualty and theft insurance
aggregating approximately $7.0 million covering various of our stock in trade, goods and
merchandise, furniture and equipment, and factory buildings in China. The proceeds of this
insurance may not sufficiently cover material damage to, or the loss of, any of our factories due
to fire, severe weather, flooding or other cause, and such damage or loss would have a material
adverse effect on our financial condition, business and prospects. However, we have not materially
suffered from such damage or loss to date. Taxation Our Company and its subsidiaries are subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate. Our Company, Qiao Xing
Mobile Communication Company Limited and Qiao Xing Communication Holdings Limited were incorporated
under the International Business Companies Act of the British Virgin Islands and, accordingly, are
exempted from payment of the British Virgin Islands income taxes. Our Company also registered in
Hong Kong as a branch office and is subject to Hong Kong income taxes at a rate of 17.5%. At present, substantially all of the Groups income was generated in China by Hui Zhou Qiao
Xing Communication Industry Limited (QXCIL) and CEC Telecom Co., Ltd. (CECT). QXCIL was
exempted from state income tax and local income tax for two years starting from January 1, 2003,
and then was subject to a 50% reduction in state income tax and full exemption in local income tax
for the following three years. CECT is regarded as a Hi-tech enterprise by the Mainland Chinese
government and is subjected to the Mainland Chinese enterprise income taxes at a rate of 15%. CECT
is exempted from the PRC enterprise income tax for the period from May 22, 2000 to December 31,
2002, and then subject to a 50% reduction in state income tax and full exemption in local income
tax for the following three years. During the fiscal year ended December 31, 2002, substantially all of the Groups income was
generated in China by Qiao Xing Telecommunication Industry Company Limited (QXTI), a joint
venture enterprise established in the Coastal Economic Open Zone in China and subject to Chinese
income taxes at a rate of 27% (24% state income tax and 3% local income tax). It was exempted from
state income tax and local income tax for three years starting from January 1, 1994, and then was
subject to a 50% reduction in state income tax and full exemption in local income tax for the
following two years. The tax holiday of state income tax expired on January 1, 1999. The tax
holiday of local income tax continued for the years ended December 31, 2001 and 2002. -9-




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Pursuant to the Notice No. [1999] 52 issued by the Government of Guangdong Province, China
(the Notice [1999] 52), High and New Technology Enterprise of Guangdong Province is entitled to a
tax holiday granted by the relevant tax bureau, under which QXTI is subject to state income tax at
a rate of 15% for three years, effective from January 1, 1999. Furthermore, for a foreign owned
enterprise in Guangdong Province which is certified by Guangdong Provincial Foreign Trade and
Economic Cooperation Office (GPFTECO) as an Advanced Technology Enterprise, QXTI is entitled to
an additional tax benefit granted by the relevant tax bureau under which the state income tax rate
can be further reduced to 10% for three years. QXTI is a High and New Technology Enterprise since
1999 and it is also an Advanced Technology Enterprise of Guangdong Province since 2000 pursuant to
certificates issued by Guangdong Science and Technology Commission and GPFTECO, respectively. Prior to obtaining confirmation from the relevant tax bureau on the entitlement to the tax
holiday as stated above, QXTI provided for enterprise income tax using 24% for the years ended
December 31, 1999 and 2000. Subsequent to December 31, 2001, QXTI obtained a confirmation from the
National Tax Bureau to confirm that QXTI was able to enjoy the aforementioned tax benefit pursuant
to the Notice [1999] 52 and QXTI would be subject to a state income tax rate at 10% for each of the
years ended December 31, 2000, 2001 and 2002. Accordingly, the excess provision of Mainland
Chinese enterprise income tax in prior years was reversed in 2001, which resulted in an income tax
benefit of Rmb 25,687,000. If the tax holiday of QXTI described above had not existed, the Groups income tax expenses
(net of minority interests) for the year ended December 31, 2001 would have been increased by Rmb
18,868,000, representing the effect of no benefit of state income tax for 2000 and prior periods.
Basic loss per common share would have been approximately Rmb 2.99 for the year ended December 31,
2001, and diluted loss per common share would have been approximately Rmb 2.99 for the year ended
December 31, 2001. We depend upon certain key personnel to manage our company. Our ability to successfully carry out our business plans continues to be largely dependent
upon the efforts of our senior management and executive officers, particularly our chairman, Rui
Lin Wu. We have not entered into any employment agreement with Mr. Wu and the loss of his services
would have a material adverse effect on our ability to achieve our business objectives. Further,
we do not maintain any key-person life insurance on his life, with proceeds payable to us. We are controlled by one of our shareholders, whose interests may differ from other shareholders. Rui Lin Wu, our chief executive officer and chairman, and members of his family beneficially
own or control approximately 39.5% of our outstanding shares as of June 30, 2005. -10-




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Accordingly, he has controlling influence in determining the outcome of any corporate transaction or other matter
submitted to the shareholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, election of directors and other significant corporate actions.
He also has the power to prevent or cause a change in control. In addition, without his consent,
we could be prevented from entering into transactions that could be beneficial to us. The
interests of this shareholder may differ from the interests of the other shareholders. Our holding company structure creates restrictions on the payment of dividends. We have no direct business operations, other than our ownership of our subsidiaries. While we
have no current intention of paying dividends, should we decide in the future to do so, as a
holding company, our ability to pay dividends and meet other obligations depends upon the receipt
of dividends or other payments from our operating subsidiaries and other holdings and investments.
In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their
ability to make distributions to us, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars or other hard
currency and other regulatory restrictions. If future dividends are paid in Renminbi, fluctuations
in the exchange rate for the conversion of Renminbi into U.S. dollars may adversely affect the
amount received by U.S. shareholders upon conversion of the dividend payment into U.S. dollars. It may be difficult to serve us with legal process or enforce judgments against us or our
management. We are a British Virgin Islands holding company, and all or a substantial portion of our
assets are located in China. In addition, all of our directors and officers are non-residents of
the United States, and all or a substantial portion of the assets of such non-residents are located
outside the United States. As a result, it may not be possible to effect service of process within
the United States upon them. Moreover, there is doubt as to whether the courts of the British
Virgin Islands or China would enforce:  
    
    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. -11-




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Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer. We are a foreign private issuer within the meaning of the rules under the Exchange Act. As
such, we are exempt from certain provisions applicable to United States domestic public companies,
including:  
    
    the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
    
    the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect of a security registered under the Exchange Act; and
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction. Because of these exemptions, investors are not provided with the same information which is
generally available about public companies organized in the United States. Since we are a British Virgin Islands company, the rights of our shareholders may be more limited
than those of shareholders of a company organized in the United States. Under the laws of most jurisdictions in the United States, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith, and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. British Virgin Island law protecting the
interests of minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in U.S. jurisdictions. In addition, the circumstances in which a
shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that
may be available to the company, may result in the rights of shareholders of a BVI company being
more limited than those of shareholders of a company organized in the U.S. Furthermore, our directors have the power to take certain actions without shareholder
approval which would require shareholder approval under the laws of most U.S. jurisdictions. The
directors of a BVI corporation, subject in certain cases to court approval but without shareholder
approval, may implement a reorganization, merger or consolidation, the sale of any assets,
property, part of the business, or securities of the corporation. Our ability to amend our
Memorandum of Association and Articles of Association without shareholder approval could have the
effect of delaying, deterring or preventing a change in our control without any further -12-




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action by the shareholders, including a tender offer to purchase our common stock at a premium
over then current market prices. 
 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY. From our inception through December 31, 2002, Qiao Xing Universal Telephone, Inc. (Qiao Xing
or we) was principally engaged in the manufacturing and sales of telecommunication terminals and
equipment, including corded and cordless telephone sets, in China. Our history dates back to April
1992 when Mr. Rui Lin Wu, our founder and chief executive officer, established Qiao Xing
Telecommunication Industry Co. Ltd. in Huizhou, Peoples Republic of China (PRC or China). We
initially were engaged in the original design manufacturing of corded telephones, whereby products
are designed and manufactured to the customers requirements and instructions and are marketed
under the customers designated brand name or without designated brand name. When we commenced our
operations in August 1992, we consisted of only 100 employees and two production lines producing
telephones. In
August 1995, we were awarded the ISO 9001 certificate, which reflected our reputation as a
high quality telephone manufacturer. Our company, formerly known as Pastiche Investments Limited, was incorporated as an
international business company under the International Business Companies Act of the British Virgin
Islands on December 6, 1994. As of June 30, 2005, we owned 80% of Qiao Xing Mobile Communication
Co. Ltd. (QX Mobile), an international business company incorporated in the British Virgin
Islands on January 31, 2002. QX Mobile owns 65% of CEC Telecom Co., Ltd., a limited liability
company established in China (CECT). We also own 100% of Qiao Xing Communication Holdings, Ltd.,
an international business company incorporated in the British Virgin Islands on May 21, 2002 (QX
Communication Holdings), which owns 90% of Hui Zhou Qiao Xing Property, Ltd. (QX Property), a
PRC joint venture, and 90% of Hui Zhou Qiao Xing Communication Industry, Ltd. (HZQXCI), a PRC
joint venture. The remaining 10% of each of QX Property and HZQXCI is owned by Qiao Xing Group
Limited, a PRC company owned by Rui Lin Wu and his eldest son Zhi Yang Wu. Messrs. Wu and Wu are
two of our executive officers and directors. Refer to Item 4.B. Business Overview for a description of the important events in the
development of our business for the period from the beginning of 2002 up to the date of filing of
this report. -13-




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For 2002, our total capital expenditure was about Rmb 12.4 million, which primarily included:
1) Rmb 10.3 million for acquisition of property, machinery and equipment; and 2) Rmb 2.1 million
for payment of land use rights. For 2003, our total capital expenditure was about Rmb 233.1 million, which primarily included:
1) Rmb 44.6 million for property, machinery and equipment; and 2) Rmb 188.5 million for other
acquired intangible assets. For 2004, our total capital expenditure was about Rmb 79.0 million, which primarily included:
1) Rmb 24.0 million for property, machinery and equipment; 2) Rmb 50.0 million for construction in
progress; and 3) Rmb 5.0 million for capital contribution in an associated company. Our principal place of business and our executive office is the Qiao Xing Science Industrial
Park, Tang Quan, Huizhou City, Guangdong, Peoples Republic of China, 516023, telephone: (011)
86-752-2820-268. We have designated CT Corporation, 111 Eighth Avenue, New York, New York 10011 as
our agent for service of process in the United States. -14-




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B. BUSINESS OVERVIEW. In August 2000, we expanded our popular line of corded and cordless telephones to include a
new special-functions corded model developed by us. The special functions offered in the new
phones include an auto-pay system, usage security, interference and noise reduction, and volume
boost for the hearing-impaired or for use in noisy locations. In April 2001, we announced a new model telephone offering an enhanced vibration feature to
assist users with hearing deficiencies. In addition to the normal sound-emitting speaker in the
hand set, a special vibrating unit in the speaker also transmits the same sounds through vibration. In April 2002, we announced a new product in our line of GSM mobile phones. Our Q200-Dual
represented the worlds first folding dual-displayed mobile phone with an FM radio. Shipments of
the Q200-Dual began in the second quarter of 2002. With dimensions of 86 x 45 x 26.5 mm, the
Q200-Dual mobile phone adopts the increasingly popular folding shell with two displays. In
addition to common functions such as dual-bands, an alarm clock and IP dialing, it also possesses
an advanced inner-fixed FM radio. Through the fiscal year ended December 31, 2002, we were principally engaged in the design,
manufacture and sale of telecommunication terminals and equipment in the PRC, including primarily
in house corded and cordless telephone sets under the trademark of Qiao Xing. According to the
National Statistic Bureau of the China Technology Progress Information Centre, we were the largest
in house telephone manufacturer by number of sales units in the PRC in 1999. For 2000, 2001 and
2002, we ranked as the second largest in house telephone manufacturer by number of sales units. We
believe that we continue to be a leading player in the in house telephone market. In May and June 2002, our then-wholly owned subsidiary QX Mobile entered into two sale and
purchase agreements for acquisition of an aggregate equity interest of 65% in CECT for an aggregate
consideration of Rmb 312,750,000 (US$37,772,000) (the Acquisitions). CECT is a limited liability
company established in China and is principally engaged in production and sales of mobile phones
and accessories in China. In February 2003, the Acquisitions were approved by all the appropriate
governmental authorities, including the Ministry of Information Industry, the State Development
Planning Commission, the Ministry of Foreign Trade and Economic Cooperation and the State
Administration for Industry and Commerce. The process of obtaining new business licenses was
finally completed and a new business license for the new entity was granted. Pursuant to one agreement dated May 23, 2002, QX Mobile acquired a 25% equity interest in CECT
from Tianjin Taida Company Limited (Tianjin) for cash consideration of Rmb 108,750,000
(US$13,134,000). -15-




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Pursuant to a second agreement dated May 23, 2002 and a supplementary agreement dated May 23,
2002, QX Mobile acquired a 40% equity interest in CECT from China Electronics Corporation (CEC) and
other group companies of CEC for cash consideration of Rmb 204,000,000 (US$24,638,000). As of December 31, 2002, we had made prepayments of Rmb 180,000,000 (US$21,700,000) to the
sellers according to the payment terms prescribed in the agreements. The remaining consideration
was payable as follows: Rmb 132,750,000 (US$16,072,000) within 6 months after the completion of
shares transfers at the relevant government bureau of the PRC (date of shares transfers). We
made the final payment of Rmb 132,750,000 on August 7, 2003. As of February 8, 2003, the Acquisitions were completed because all conditions precedent as
set out in the agreements had been fulfilled. Such conditions precedent included, among others,
(i) approval from the Chinese government on the shares transfers and (ii) completion of collateral
arrangements on QX Mobiles equity interest in CECT and certain land use rights of the Group. In August 2004, we announced that our subsidiary HZQXCI was purchasing a 25% equity interest
in CECT from CEC, subject to all necessary governmental approvals. As of the date of filing of
this annual report, the required governmental approvals had not all been obtained. We expect the
acquisition of the 25% interest in CECT to be approved and completed in the near future. On August 20, 2002, QX Mobile entered into a subscription agreement for its sale of 200,000
shares representing 20% of the total outstanding equity of QX Mobile to Galbo Enterprises Limited,
a non-affiliated BVI corporation (Galbo), for Rmb 67,000,000 (US$8,092,000). The subscription
price was fully paid before December 31, 2002. The subscription price was applied by QX Mobile
toward the acquisition of its 65% interest in CECT. Upon completion of the subscription, our
controlling interest in QX Mobile was reduced to 80%. On December 31, 2002, we entered into an agreement with Central Grace Technologies Ltd., a
non-affiliated BVI corporation (Central Grace), for our sale to Central Grace of our 100%
interest in Qiao Xing Holdings Ltd. (QXHL), our intermediate holding company which held a 90%
interest in Qiao Xing Telecommunication Industry Co. Ltd. (QXTI), our former principal operating
subsidiary. On July 10 and 11, 2003, we entered into supplemental agreements with Central Grace to
amend certain provisions of the original agreement. The amended material terms of the sale provided as follows:  
    
    The total consideration for the purchase was Rmb 210,000,000 (US$25,362,000), which was
paid in full on July 16, 2003. -16-




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
    
    Central Grace assumed all disclosed and undisclosed liabilities of QXHL except:  
    
    the current liabilities of QXTI due to us of Rmb 231,585,507 (US$27,969,000)
    
    the current liabilities of QXHL due to us of Rmb 8,172,953 (US$987,000)
    
    the current assets due from us of Rmb 113,543,063 (US$13,713,000)  
    
    We retained the ownership of the following Excluded Assets of QXHL, which have been formally re-registered in the name of
subsidiaries of our subsidiary, QX Communication Holdings:  
    
    land use rights for 667,000 square meters of land at Ji Ma, Huizhou
    
    the fixed line telephone sales and distribution network
    
    the mobile phone business, which includes the GSM manufacturing, production and
sales departments and the research and development department
    
    the die cast moulds for the production of fixed line telephones and mobile phones  
    
    Central Grace executed a Share Mortgage Deed for our benefit to secure the repayment of our loan facility to Central
Grace for the payment of the purchase price by Central Grace, which was cancelled upon full payment by Central Grace.  
    
    We entered into a license agreement with QXTI and the 10% holder of QXTI by which QXTI as licensor granted to us the
exclusive and non-transferable use of its trademarks, patents applications and registered designs through December 2006
in exchange for nominal consideration.  
    
    We conveyed all rights to the technology and intellectual property for our wireless fixed telephone (wuxiangtong)
technology to Central Grace, reserving all exclusive marketing and distribution rights. Through our HZQXCI subsidiary, we have continued to conduct the business of the research and
development and distribution of mobile phones and the design and distribution of fixed line
telephones, wireless telephones and fax machines. Our major operating subsidiaries include CECT and HZQXCI. We classify our products into two
core business segments, namely mobile phones and indoor phones. In view of the fact that we
operate principally in Mainland China, no geographical segment information is presented. Sales in
the PRC market accounted for approximately 99% and 98% of our total revenues for the fiscal years
ended December 31, 2003 and 2004, respectively. -17-




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2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    

Rmb000
    
    

Rmb000Net sales:Mobile phones
    
    
    341,629
    
    
    
    1,694,046
    
    
    
    1,823,979Indoor phones
    
    
    208,338
    
    
    
    149,236
    
    
    
    195,102549,967
    
    
    
    1,843,282
    
    
    
    2,019,081
 CECTs Business Overview CECT was jointly initiated and co-established in China in May 2000 by six companies, including
China Electronics Corporation (CEC), Tianjin TEDA Investment Holding Co., Ltd., Shenzhen SED
Electronics Corporation, Wuhan Zhongyuan Electronics Group Co., Ltd., China Computer Software and
Technology Service Corporation and China National Integrated Circuit Design Center. It is one of
the few manufacturers that have been approved to manufacture both GSM and CDMA mobile phones in
China. CEC, with registered capital of Rmb 6.15 billion and 36 wholly owned companies
(www.cec.com.cn), is one of the leading companies in the domestic electronics industry in China. Since becoming a majority-owned subsidiary of Qiao Xing in February 2003, CECT has experienced
rapid growth. In 2004, CECT emerged as one of the biggest winners in Chinas mobile phone market,
while most of the local companies market shares declined in very intensive competition. CECT
moved 12 places in the league chart in terms of market share and ranked itself among the top eight
local mobile phone companies by the end of 2004. CECT has both CDMA and GSM licenses and is currently engaged mainly in the R&D and production
of 2.5G and 3G GSM and CDMA mobile phones, production of RF components, LCD moulds and other mobile
phones with entertainment and service functions like GPS messages, finance and stock e-commerce
systems, games and images download. CECT gives top priority to constantly enhancing its research, design and development capacity.
Supported by R&D and technical centers (in-house or out-sourced with suppliers/subcontractors) at
three locations in Huizhou, Shanghai and Beijing, it has mastered international advanced
communication technology to develop different types of mobile phones such as GSM, CDMA, GPRS, PDA,
and their value added services. Among these mobile phone production technologies, 2.5G and 3G of
GSM and CDMA are up to international standards. CECT attaches great importance to absorbing international advanced technology. It has
been actively developing cooperation agreements and relationships with such global mobile
telecommunications leaders as Qualcomm (Nasdaq: QCOM), Wavecomm (Nasdaq: WVCM), MiTAC, Skyworks
(Nasdaq: SWKS), BenQ and AOL. Through cooperation agreements, CECT is able to utilize
world-advanced technology to improve its own research and development -18-




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efforts. At the same time, great effort has been made within CECT to develop its own
technology and know-how to satisfy the specific situations in the China mobile market. Supported by its powerful R&D capacity and due to its better understanding of the market
pulse, CECT has launched to the market on average two new models of mobile handsets on a monthly
basis. At present, CECT has launched more than 70 types of GSM, GPRS, CDMA and GPS mobile phones,
among which the MP3 and built-in camera with over one million pixels, MP4, TV or movie viewing are
their key functions. Utilizing its R&D competitive edge, CECT has developed different product
platforms according to different mobile phone systems. It has also positioned its products to
different consumer markets such as specializing for business use, feminine style and masculine
style, etc. In the spring of 2003, CECT and MiTAC (http://mitac.mic.com.tw/), a reputable Taiwan computer
manufacturer, jointly launched the first generation of Smart Phone in China. The Smart Phone is
able to perform data interchange with computers in a swift manner, and its other functions include
MMS, digital camera/video, MP3, games, MSN messaging and even movie viewing. CECTs Mio 8380 represents the future of mobile phone development and marks the breakthrough
in the technology of the mobile phone industry in China. It was collected and displayed by the
China Telecommunication Museum on 10th June 2003. CECT has launched to the market a series of fashionable mobile phones to cater to specific
consumer groups. The T520 model, which was introduced in the winter of 2003, was specifically
designed to target the office lady customer group and is equipped with a double color monitor, 40
chord polyphonic ring tones, and state-of-the-art technology. Its exterior is in the form of a
water droplet, resembling a beetle. Its mirror function turns the monitor into a mirror, which can
help its user maintain her most presentable appearance. In the spring of 2004, CECTs T520 phone
was recognized as the most popular female mobile phone. The T688 model is embedded with handwriting recognition technology, which is only available in
mobile phones produced by brands such as Nokia and CECT. The T688 is less expensive than other
comparable products and has been well received among the working and business population. In the winter of 2004, CECT developed the smallest PDA mobile phone. Compared with similar
products under foreign brand names and other local brand names, the T868 handset is the smallest in
dimension, the lightest in terms of weight, and the highest in terms of cost performance. It has
been rated the Best Classic Business Handset of the Year in a poll organized recently by sina.com
and Beijing Youth Daily. CECT has also produced digital camera handsets with 1.3 million and 3.0 million pixels. -19-




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In the first half of 2005, CECT has launched 16 models of new mobile phones which are
classified into three categories:  (i)
    
    high-end multi-media mobile phones embedded with 1.3 million or above pixel
digital cameras and software that can play MP3, MPEG3 and 3D games;(ii)
    
    enhanced PDA mobile phones based on the T868 model; and(iii)
    
    sliding lid mobile phones and revolving camera phones. Due to our stringent cost controls and independent R&D and design ability, we believe that
CECTs products enjoy much higher performance/cost ratios when compared with similar products
produced by some foreign companies and many local companies. In 2003, CECT branded mobiles were awarded as one of the ten Outstanding Brand Name
home-made mobile phones in China. CECT has established a distribution network throughout China with more than 240 wholesale
outlets and more than 350 aftersales service centers in 31 provinces and municipalities. CECT has
reduced its national distributors and is further strengthening a direct relationship with local
distributors. CECT partners with many national retailers who own appliance supermarkets across
China, including Gome Appliance Company (HK: 0494), the biggest appliance retailer in China. CECT
is now conducting its new distribution channel strategy to deal with local distributors directly
while reducing the number of distributors at the national level. CECT launched a marketing campaign introducing 13 new models of mobile phones in September
2003, which contributed much to its fast growth in 2004. In March 2005, a new promotion activity
named Spring Passion started on a much larger scale with 16 new models of high-end mobile phones
being introduced. CECT has a production site at Huizhou of Guangdong with an annual production capacity of 2.5
million units of GSM mobile phones. CECT is now competing in the China mobile phone market with foreign and local companies,
including Nokia, MOTO, Samsung, TCL, Bird, Haier, Amoi, Konka and Lenovo. CECTs competition
strategy is to focus on research and development, market differentiation, and improved cost
performance. -20-




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HZQXCIs Business Operations and Product Range HZQXCI specializes in:  (i)
    
    the design and manufacture through sub-contractors of COSUN-branded GSM mobile
phones for its own account and GSM mobile phones for CECT;(ii)
    
    the development and marketing of wired and wireless telephones (indoor phones),
including telephones with special functions; and(iii)
    
    the development and sale of consumer electronics products. We have ceased the manufacturing of indoor telephones. Instead, we subcontract our telephone
manufacturing orders to designated manufacturers. We have produced corded telephones since our formation in 1992. In 1996, we successfully
developed the manufacture of one-channel and ten-channel cordless telephones. However, since
one-channel cordless phones can be easily interfered and create a lot of noises, we stopped
producing it in June 1997 and now concentrate on ten-channel cordless phone manufacturing. In October 1997, we introduced the smart card telephones, which is the first of many special
function corded telephones that we expect to develop and introduce to the market. In the first
quarter of 1998, we developed and introduced caller ID display telephones and coin operated
telephones. We developed the digital cordless phone in 1999 and introduced digitally enhanced
cordless telephones (DECT) in 2000. In 2002, we commenced production of GSM phones. During 2002, we developed the wuxiangtong telephone. It is a cordless and wireless phone that
employs the GSM core technology with the look, functions and dimensions of an ordinary press-key
phone. With its wireless connection to the GSM network, the service fee for using the wuxiangtong
telephone is the same as using a fixed line telephone, since only the caller and not the receiving
party pays for the call. Such phones are most suitable for those corporate, government and
residential users in the remote parts of the rural areas, where communication via fixed optical
fiber lines would be very costly. A majority of the land in China would benefit from this extended
coverage. It can also be used as mobile public phones, for outdoor users and land commuters. During 2002, we developed the short message telephone, a corded fixed line telephone that can
send and receive short messages like mobile phones. In addition to its function as an ordinary
caller ID display telephone, its other functions include the ability to send and receive short
messages, an alarm clock function, games and calendar memo options. -21-




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During 2002, we developed the web telephone model. In addition to its ordinary telephone
functions, our web phone can browse the internet, send and receive e-mail and send mobile phone
short messages. We launched the sale of the wuxiangtong and short message telephones in 2003. The wuxiangtong
and short message telephones are special telephones with much higher margins than ordinary wire and
wireless telephones. During 2003, we launched the new Little Smart phone, referred to in Chinese as XiaoLingTong.
It is a China Personal Handyphone System (PHS) service that supplements and extends China
Telecoms and China Netcoms fixed line network service in China. With Little Smart phones, users
can communicate freely within the areas covered by fixed line networks via wireless connectivity.
Because China Netcom and China Telecom subscribers could enjoy XiaoLingTong services for the cost
of a fixed line call, it was a much welcomed communication service for the average income group
within the cities and suburban areas of China. The Little Smart phone was jointly developed with
UTStarcom (Nasdaq: UTSI). However, the quality of reception of the Little Smart phone was limited due to technological
restrictions. Thus, in May 2005, we developed CDMA Cityphone handsets for supply to China Telecom
Shenzhen Branch. Like the PHS phone, the CDMA Wireless Cityphone is a mobile wireless
communication terminal product based on the landline network mainly operated by China Telecom and
China Netcom in China. However, it uses the more advanced CDMA technology instead of the PHS
technology. The advantages of CDMA technology include better communication qualities and ease in
transition to 3G. Based on the one-way charge system, the airtime charge for using Cityphone is
the same as that for the indoor telephone. In Shenzhen alone, it is estimated that there will be
two million users. During 2004, we developed and sold more than 228 corded models and 36 cordless models, seven
models of fax machines, 25 models of wireless fixed phones, and nine models of short message
telephones. The mobile phone division of HZQXCI has introduced five models of COSUN-branded GSM
mobile phones which are mainly targeted at the lower-end market segment. We have an extensive
nationwide sales network that comprises more than 5,000 retail outlets in China. In November 2004, HZQXCI launched its new generation of VOIP phones (voice over internet
protocol phones) in partnership with SOYO Group, Inc. (OTCBB: SOYO). Juniper Research has
forecasted the VOIP markets to exceed US$32 billion by 2009. We believe that the China market for
VOIP phones should follow this trend of significant growth. In the second half of 2004, HZQXCI launched the COSUN-branded GSM mobile handset while
continuing the production of CECT-branded handsets for CECT. -22-




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In the first half of 2005, HZQXCI developed a specialized cash register which can be used by
tax authorities for monitoring reporting compliance and set-top box products designed for digital
cable TV service. HZQXCI intends to seek other projects in the consumer electronics area. Production Management HZQXCI currently designs fixed line telephones and GSM mobile phones for sale to CECT and
COSUN-branded mobile phones for the benefit of our distributors. All of our products which we sell
are manufactured by unaffiliated third parties. Quality Assurance System We place significant emphasis on preventive measures in the quality control process and employ
quality control procedures at every critical manufacturing stage, with the aim of identifying,
analyzing and solving problems at the earliest possible stage of the production process. Our
subcontractors are equipped with the necessary testing facilities to handle the quality control
tests and provide in-house training for their quality control staff. Quality control tests on the production process include:  
    
    sampling test method is used to inspect all incoming materials on a sample basis;
    
    at each stage of production process, quality control inspectors monitor the
production flow and check the quality of the products; and
    
    finished products are checked by quality control staff on a sample basis. We have not received any material claims for defective products from customers for the three
years ended December 31, 2004. Sales and Marketing Regarding HZQXCIs indoor telephone division, HZQXCI currently has 40 independent regional
distributors and after-sales service centers, including [six]wholesale agencies, serving our major
customers in different provinces in the PRC. There is at least one representative assigned to each
regional distributor to make frequent visits in order to understand the business operation and
assist management. These regional distributors distribute our telecommunication products to a
network of over 5,000 retail outlets. The purchase orders for telephones from these retail outlets
are collected by the 40 regional distributors, who would then place consolidated purchase orders
with us on their own accounts. The regional distributors are each responsible for the credit risk
and settlement of their own customers. We give a settlement period of 30 days to 270 days to the
distributors. The long credit period granted is comparable to the common business practice for
household telephones. -23-




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HZQXCI has established long-term strategic partnership relationships with many of Chinas
telecommunications operators, including China Telecom, China Netcom, China Railcom, China Mobile
and China Unicom. These operators are launching various value added services such as SMS short
messages, wireless fixed telephones (wuxiangtong), and ADSL. We have become a major supplier to
these operators to provide them with numerous categories of value added service products across
China. We are the dominant supplier for more than 20 provinces in China. HZQXCI has established strategic relationships with leading distributors of telecommunications
terminal products in North America, Latin America, Southeast Asia, Europe and the Middle East.
These include Binatone, the British leader in this field, and Unisonic, a major supplier to Bell
South. We periodically hold distributor fairs in order to attract and select potential distributors

for our products at home and abroad. Our sales and marketing strategy focuses on satisfying customers with high quality product,
consistent timely delivery, competitive product pricing and efficient after-sales service. Our
staff communicates regularly with the regional distributors and their customers to obtain market
information and to ascertain their needs. We also conduct regular reviews to analyze customers
potential demands and to plan for new products. Our management believes that the provision of efficient after-sale service is an important
factor in influencing consumers choices. We offer a one-year warranty on our telephones. During
the warranty period, all repair and maintenance services are provided free of charge. After the
warranty period, customers assume the cost of repair and the components used. After-sale services
for our products are provided by the 40 regional distributors. We experience no significant
warranty expenses due to low labor costs in China. We advertise through various media, including national and regional television networks,
radio, newspapers, magazines, posters, billboards and advertising pamphlets. In addition, the
Qiao Xing and COSUN brand names are also promoted through sponsorship of sports events. In 2003, we focused on selling short message phones and wireless fixed phones, which generate
much higher margins than ordinary telephones. In addition to the established distribution network,
we sell our products to China Telecommunication, mobile network operators or their subcontractors
to promote our new products jointly. Backed up by all levels of government, these operators have
dominant influence over consumers, which is very favorable for us to introduce new products into
the market and capture market share swiftly. -24-




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Regarding HZQXCIs mobile phone division and to strengthen our marketing team for GSM mobile
phones, we have recruited professional marketing executives in 2004. For sale of its COSUN-branded
mobile phone handsets, HZQXCI now has 42 distributors at the provincial level in 24 provinces in
China and 40 after-sales service centers. Regarding HZQXCIs consumer electronics products division and to promote its newly launched
set-top box products, HZQXCI has signed a cooperation agreement with Beijing New Viewpoint Co.,
Ltd., which is directly under the Administration of Radio, Film and Television (ARFT) in the PRC.
ARFT provides policy guidance to all cable TV operators across China. We spent approximately Rmb 42,784,000 (US$5,169,000) and Rmb 14,658,000 (US$1,771,000) in 2003
and 2004, respectively, for advertising and promotion on a consolidated basis. Materials and Components We hold annual suppliers meetings at which more than 100 mobile phone components suppliers
bid for supplying us with materials and components for our GSM phones. Our management believes it
a good way to select better suppliers and would contribute to the reduction of our manufacturing
cost in the future. Research and Development As the founder of the Guangdong Communication Engineering and Technology Center, HZQXCI has
access to proven capabilities and can develop and design all types of telephones, video and audio
products that meet international advanced standards. Its research and development division also
performs work for third party clients. HZQXCIs research and development (R&D) and engineering, technical and design functions are
performed in the PRC through our own R&D, engineering, technical and design divisions and through
appointed external technology development experts. As of December 31, 2004, we employed 210 staff
in our R&D, engineering, technical and design divisions, who work closely with our sales and
marketing executives to gauge the market demand in developing new products and new models of
existing products. The R&D, engineering, technical and design divisions are currently monitoring more than 250
particular models of corded telephones, 40 particular models of cordless telephones, 15 models of
GSM cellular telephones, 30 models of wireless fixed phones (wuxiangtong), 12 models of short
message telephones, two ADSL products, two models of set-top box products, two models of its
specialized cash registers and two models of Cityphone. -25-




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In 2004, we spent Rmb 10,449,000 (US$1,262,000) on research and development activities on a
consolidated basis. Competition The market for telecommunication equipment generally and corded and cordless indoor
telephones, as well as facsimile machines, in particular in the PRC is intensely competitive. We
believe that the principal competitive factors are:  
    
    functions and designs;
    
    performance/cost ratio;
    
    brand name recognition;
    
    distribution capability;
    
    after-sale service;
    
    short lead time in product development;
    
    product quality; and
    
    capability of mass production. We consider that our products do not compete directly with imported products with similar
features, which are sold in the higher price range. We currently compete directly with domestic
manufacturers in the PRC, namely TCL and Desai in Guangdong, which are currently the second and
third sellers of indoor telephones in the PRC, according to the statistical report released by the
Trade and Foreign Economy Statistics Division of National Statistic Bureau. However, TCL and Desai
are now diversifying into home electric appliance manufacture, including televisions, air
conditioners, computers, DVD sets and Hi-Fi systems, which will likely divert some of their
resources from the telephone manufacturing business. In 2002, our telephones were granted the label of Chinese Renowned Brand Name Product by the
China Promotion Commission for Top Product Strategy. We believe that this recognition has created
a favorable marketing environment for us. HZQXCI is currently focusing on lower-end mobile phones and taking proactive measures to
explore overseas markets. -26-




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C. ORGANIZATIONAL STRUCTURE AS OF JUNE 30, 2005. (FLOW CHART) -27-




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D. PROPERTY, PLANTS AND EQUIPMENT. Our principal executive offices are located at Qiao Xing Science Industrial Park, Tang Quan,
Huizhou City, Guangdong, PRC. Our production facilities are located in Qiao Xing Science
Industrial Park in Huizhou City, Guangdong, PRC. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial Statements and notes
thereto and Item 3.A. Selected Financial Data. The amounts reflected in the following discussion
are in Renminbi (Rmb). Translation of amounts for 2003 from Renminbi into United States dollars
(US$) is for the convenience of readers and has been made at the noon buying rate in New York
City for cable transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York of US$1.00 = Rmb 8.2765 on December 31, 2004. A. OPERATING RESULTS. Fiscal 2004 compared to Fiscal 2003 (i) Net sales Analysis of our sales revenue by product category for fiscal year 2004 and 2003 is as follows: Year ended December 312004
    
    
    2003Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    1,823,979
    
    
    
    90
    
    
    
    1,694,046
    
    
    
    92Indoor telephones
    
    
    195,102
    
    
    
    10
    
    
    
    149,236
    
    
    
    8Total
    
    
    2,019,081
    
    
    
    100
    
    
    
    1,843,282
    
    
    
    100
 Net sales revenue increased by Rmb 176 million from Rmb 1,843 million for fiscal year 2003 to
Rmb 2,019 million (US$ 244 million) for fiscal year 2004, representing an increase of 9.6%. The
Mainland China phone business segment remained highly competitive in 2004. Nevertheless, by
adjusting the products sales mix, injecting more resources in developing value
added and technological advanced products and implementing proactive marketing strategies, the
Group successfully attained satisfactory growth in sales. -28-




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In the fixed line indoor phone business segment, Chinese consumers continue to demand
for value added telephone products to replace ordinary telephones. Such value added products are
more fashionable, have multiple functions and higher quality. In theory, all the in-door telephone
consumers will eventually replace their ordinary telephones with such value added products. Amidst
such market trend, we adjusted our product portfolio and injected more resources to develop higher
value added telephone products. During the year, we introduced more new models of wireless fixed
phones and saw a big jump in the sales of such products. Sales of value added telephone sets
continued to increase and were well accepted by the market. The mobile phone business segment remained highly competitive in 2004. Keen competition in
the Mainland China market led to intensive price competition across all product ranges. In order
to enhance our competitiveness within the industry, we reduced the prices of certain of our mobile
devices, especially phones with simple mobile voice functionality as well as lower resolution
camera phones. At the same time, our tireless efforts made to improve the quality, functionality
and cost performance of our products have borne fruit. CECT has managed to increase its market
share, moving ahead 12 places in the league chart designed to display the ranking of all mobile
phone players in China market in the light of sales quantity. We launched a series of high-end but
reasonably priced mobile phones in the second half of the year, including mini PDA handsets,
handsets with handwriting recognition solution and digital camera handsets with more than 1.3
million pixel. These new and unique products greatly contributed to the increase in the sales
quantity of CECT-branded mobile phone. In 2003, the revenue from the sale of mobile phones was Rmb 1,694 million, while the sale of
mobile phones amounted to Rmb 1,824 million in 2004, representing an increase of Rmb 130 million.
Net sales of indoor telephones were Rmb 195 million, representing an increase of Rmb 46 million. (ii) Gross Profit Analysis of our gross profit by product category for fiscal years 2004 and 2003 is as follows: Year ended December 312004
    
    
    2003Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    194,801
    
    
    
    87
    
    
    
    235,044
    
    
    
    96Indoor telephones
    
    
    28,798
    
    
    
    13
    
    
    
    9,623
    
    
    
    4Total
    
    
    223,599
    
    
    
    100
    
    
    
    244,667
    
    
    
    100
 -29-




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Gross profit for fiscal year 2004 was Rmb 224 million (US$ 27.0 million), representing
a decrease of Rmb 21 million from Rmb 245 million in fiscal year 2003. The decrease was mainly
due to the decreased in gross profit margin of mobile telephones. The decrease in gross profit
margin for mobile phones was mainly due to the reduction in price for the simple mobile voice
functionality as well as lower resolution camera phones. The mobile phone business segment in
Mainland China has entered into a more mature stage as compared to the years of 2002 and 2003,
resulting in an overall reduction in unit selling price within the whole industry. In addition,
the mobile telephone market in Mainland China was very competitive with the presence of both local
and overseas competitors. This has resulted in a changed mobile phone industry landscape and CECT
took initiatives to reconcile itself to the changed competition situation, including, but not
limited to, adopting corresponding pricing strategy, resulting in a decrease of approximately 17%
in gross profit margin in 2004. Moreover, gross profit for indoor telephones increased by Rmb 19.2 million from Rmb 9.6
million in fiscal year 2003 to Rmb 28.8 million (US$3.5 million) in fiscal year 2004. This was
mainly attributable to the sales of value added telephones, accounting for a much higher percentage
of the sales mix when compared with 2003. As the management expected the demand for value added
telephones such as wireless fixed telephones in the Mainland China market would continue to
increase, the Group responded to the market quickly and became focused on the supply of such
products. In 2004, the Group introduced more models of new wireless fixed telephones to the
market, which commanded higher unit prices and gross profit margin. (iii) Selling expenses Selling expenses decreased by Rmb 47.0 million from Rmb 74.9 million for fiscal year 2003 to
Rmb 27.9 million (US$ 3.4 million) for fiscal year 2004. The decrease was predominantly
attributable to: (a) Because of already much closer strategic relation with its local distributors, CECT closed
down certain representative offices, resulting in reduction of related advertising and promotion
expense, decrease in sales force, as well as other selling expenses including transportation,
travel and entertainment, samples and telecommunication expenses; and (b) reduction in the advertising expenditures for the products launched as the management
considered that their products were well penetrated into the market and reputable brand name was
established as a result of substantive marketing activities introduced in 2003. In addition, CECT
has been successful in mapping out more attractive policies to encourage distributors to promote
CECT-branded mobile phones at their own expense. Advertising
expenses in fiscal year 2004 amounted to Rmb 14.7 million, representing a decrease of Rmb 28.1
million (66%) from Rmb 42.8 million in fiscal year 2003. -30-




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(iv) General and administrative expenses General and administrative expenses increased by Rmb 15.4 million from Rmb 51.9 million in
fiscal year 2003 to Rmb 67.3 million (US$ 8.1 million) in fiscal year 2004. This increase was
mainly attributable to: (a) increase in allowance for doubtful receivables of about Rmb 5.6 million from Rmb 0.8
million in 2003 to Rmb 6.4 million in 2004; (b) increase in compliance and implementation cost for Sarbanes-Oxley Act Section 404 and
other regulatory compliance services for the first year amounting to Rmb 1.3 million; and (c) increase in staff cost of about Rmb 4.6 million from Rmb 16.5 million in fiscal year 2003
to Rmb 21.1 million (US$2.5 million) in fiscal year 2004 due to the increase in headcount mainly in
HZQXCI for the development of the indoor phone business segment; (v) Research and development Research and development increased by Rmb 3.8 million from Rmb 6.6 million for fiscal year
2003 to Rmb 10.4 million (US$ 1.3 million) for fiscal year 2004. The increase was predominantly
attributable to the full year conduction of research and development activities on new mobile phone
models by CECT. As the Group would also like to sustain their market share for indoor phones, much
more costs were incurred for the development on new models of wireless fixed phones. (vi) In process research and development There was a write-off of in process research and development expenses of Rmb 33.6 million at
the date of acquisition of CECT on February 8, 2003 in accordance with FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method. There were no such expenses incurred in fiscal year 2004. (vii) Amortization of acquired intangible assets There was a substantial decrease in the amortization of acquired intangible assets since
backlog amounting to Rmb 26.6 million was fully amortized in 2003. (viii) Stock-based compensation Stock-based compensation increased by Rmb 6.0 million from Rmb 26.9 million in 2003 to Rmb
32.9 million (US$ 4.0 million) in 2004. -31-




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The Company has elected to follow APB No. 25 to account for the incentive stock options
granted to employees, under which the Company recognized no compensation expense for the year ended
December 31, 2001 and 2002 as no employee options were granted at prices below the market price on
the grant dates. Compensation expense of Rmb 26,929,000 was recorded for the year ended December
31, 2003 based on the excess of the quoted market price of the underlying stock of US$8.77 per
share as of December 31, 2003 over the re-priced exercise price of US$5.50 per share on the date of
grant. In February and March 2004, holders of 995,000 options, with an exercise price of US$5.50 per
share, exercised their stock options. Stock-based compensation expenses of Rmb23,747,000 is
recorded for the year ended December 31, 2004 based on the excess of the quoted market price of the
underlying stock on dates of exercise over the market price of US$8.77 per share at December 31,
2003. In April 2004, the Company issued 100,000 shares of common stock to an external consultant
in connection with consulting services provided to the Group. The fair value of the 100,000 shares
of approximately Rmb 8,989,000 was recorded as stock-based compensation expenses. (ix) Interest expense Interest expenses for bank loans and shareholders loan increased by Rmb 8.1 million from Rmb
19.0 million in 2003 to Rmb 27.1 million (US$ 3.3 million) in 2004. This is mainly attributable to the increase in level of bank loans. They increased by Rmb 191
million from December 31, 2003 to December 31, 2004. The additional bank loans were used to
finance the increase in working capital. This working capital increase relates to the planned
expansion of activity in CECT which began towards the end of 2004, and to the introduction in 2004
of the COSUN brand mobile phones in HZQXCI, which handles their sales. (x) Gain on disposal of an equity investee Gain on disposal of an equity investee of Rmb 41.5 million (US$5.0 million) in 2004 represents
the gain on sale of 40% equity in CEC Mobile by CECT to an independent party. Effective on June
30, 2004, CECT has sold its 40% shareholding in CEC Mobile Co., Ltd. (CECM) to Beijing Lian
Sheng Tong Investment Management Co., Ltd, an independent third party, for cash consideration of
Rmb 72 million. Thereafter, CECTs shareholding interest in CECM has been reduced to 10%. The consideration for the sale of the 40% share was Rmb 72.0 million and the payment schedule
was as follows: -32-




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Settlement Date
    
    Rmb000Before July 12, 2004
    
    
    21,600Before July 15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
 As a result of the transaction, a gain on sale of an equity investee amounting to Rmb 41.5
million was recognized for the year ended December 31, 2004. The determination of the gain on sale of an equity investee is set out as follows: Rmb000Consideration
    
    
    72,000Share of net assets value of CECM disposed of as of June 30, 2004
    
    
    (30,535
    )Gain on sale of an equity investee
    
    
    41,465
 (xi) Equity in earnings of equity investee The Groups share in the net income of affiliates decreased by Rmb 7.4 million from Rmb 6.8
for fiscal year 2003 to a loss recorded of Rmb 0.6 million (US$0.08 million) for fiscal year 2004.
The decrease was mainly attributable by the disposal of 40% interest in an affiliate, CEC Mobile
Co, Ltd. (CECM). In addition, Suzhou Minji CEC Telecom Co., Ltd. (SMCECT) was a joint venture
set up on January 13, 2004 whereby CECT invested in Rmb 4,900,000, representing 49% of its total
registered capital of approximately Rmb 10,000,000. SMCECT was loss making for fiscal year 2004,
resulting in loss of Rmb 0.6 million recorded. (xii) Net Income (Loss) and Earnings (Loss) Per Share A net income of Rmb 22.9 million (US$2.8 million) was recorded for fiscal year 2004, while net
loss of Rmb 7.8 million was recorded for fiscal year 2003. The increase of Rmb 30.7 million
between fiscal years 2003 and 2004 was mainly due to the net effect of the following in fiscal year
2004:  (i)
    
    decrease in gross profit of Rmb 21.1 million;(ii)
    
    decrease in selling expense of Rmb 47.0 million;(iii)
    
    increase in general and administrative expenses of Rmb 15.4 million;(iv)
    
    increase in research and development costs of Rmb 3.8 million;(v)
    
    decrease in in-process research and development costs written off of Rmb 33.6
million; -33-




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(vi)
    
    decrease in amortization of acquired intangible assets of Rmb 25.2 million;(vii)
    
    increase in stock-based compensation expense of Rmb 5.8 million;(viii)
    
    decrease in interest income of Rmb 2.6 million;(ix)
    
    increase in interest expense of Rmb 8.1 million; and(x)
    
    increase in gain on sale of equity investee of Rmb 41.5 million Based on a weighted average of 16,443,000 shares outstanding during fiscal year 2004, the
Group reported an income per share of Rmb 1.39 (US$0.17), compared to net loss per share of Rmb
0.50 on 15,420,000 weighted-average shares outstanding during fiscal year 2003. The higher number
of weighted average number of outstanding shares is mainly due to additional shares issued in the
first half of 2004 in connection with the exercise of options by certain warrant holders and
100,000 shares granted to external consultants. Fiscal 2003 compared to Fiscal 2002 (i) Net sales Analysis of our sales revenue by product category for fiscal year 2003 and 2002 is as follows: Year ended December 312003
    
    
    2002Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    1,694,046
    
    
    
    92
    
    
    
    341,629
    
    
    
    62Indoor telephones
    
    
    149,236
    
    
    
    8
    
    
    
    208,338
    
    
    
    38Total
    
    
    1,843,282
    
    
    
    100
    
    
    
    549,967
    
    
    
    100
 Net sales revenue increased by Rmb 1,293 million from Rmb 550 million for fiscal year 2002 to
Rmb 1,843 million (US$222.7 million) for fiscal year 2003, representing an increase of 235%. It
was mainly attributed to the additional revenue from mobile telephones sales during the year 2003
following the completion of the acquisition of CECT on February 8, 2003. In the fixed line indoor phone business segment, Chinese consumers prefer to use value
added telephone products to replace ordinary telephones. Such value added products are more
fashionable, have multiple functions and higher quality. In theory, all the in-door telephone
consumers will eventually replace their ordinary telephones with such value added products. The
market potential for value added telephones is anticipated to be very large. In response to this
market change, we took steps in 2003 to upgrade our product line. Since it takes time to
promote new products, the sales of such value added products in 2003 were less than that of the
ordinary -34-




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telephones sold in 2002. However, with the transition period now behind us, we are well
poised in 2004 to take full advantage of the shift in consumer preference for higher value added
telephone products. During the fiscal year 2002, sales of mobile telephones to CECT totaled Rmb 342 million as the
Group was one of the major suppliers of CECT at that time. Following the completion of the
acquisition of CECT, whereby the Group effectively owns a 52% equity interest in CECT, CECT became
a subsidiary and its results and operations are consolidated in the financial statements of the
Company. Therefore, the sales of mobile telephones for the period from February 8, 2003 to
December 31, 2003 represent sales to mobile telephones distributors and dealers who will then sell
the products to the ultimate consumers. Actual sales of mobile telephones of Rmb 1,694 million for the fiscal year 2003 were slightly
lower than originally anticipated at the beginning of the year because of the outbreak of SARS in
Mainland China during 2003. The outbreak of SARS significantly affected the sales performance of
the Group for a few months in 2003 because people were afraid of being infected by SARS in public
places and spent less money purchasing mobile telephones, including the Groups products. In the
first few months after the completion of acquisition of CECT, the Group had spent substantial
resources in developing a sales network throughout China, and had conducted research on new product
development. Thereafter, upon the end of the SARS outbreak in China in June 2003, the Group
resumed its advertising and promotion efforts and was able to catch up most of the anticipated
sales volume in the second half of 2003, resulting in an overall satisfactory sales performance of
mobile telephones during fiscal year 2003. In 2002, the revenue from the sale of mobile phones was Rmb 342 million, while the sale of
mobile phones amounted to Rmb 1,694 million in 2003, representing an increase of Rmb 1,352 million.
Net sales of indoor telephones were only Rmb 149 million, representing a decrease of Rmb 59
million. (ii) Gross Profit Analysis of our gross profit by product category for fiscal years 2003 and 2002 is as follows: Year ended December 312003
    
    
    2002Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    235,044
    
    
    
    96
    
    
    
    45,538
    
    
    
    209Indoor telephones
    
    
    9,623
    
    
    
    4
    
    
    
    (23,720
    )
    
    
    (109
    )Total
    
    
    244,667
    
    
    
    100
    
    
    
    21,818
    
    
    
    100
 -35-




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Gross profit for fiscal year 2003 was Rmb 245 million (US$29.6 million), representing
an increase of Rmb 223 million from Rmb 22 million in fiscal year 2002. The increase was mainly
due to increased sales of mobile telephones which command a higher gross profit compared with
indoor telephones. This also represents an overall increase in the average gross profit margin
from 4.0% in 2002 to 13.3% in 2003. Gross profit margin of mobile phones in 2002 and 2003 was
13.4% and 13.9%, respectively, and was generally comparable. In 2002, the gross profit margin of
the Group represented the gross profit earned on the manufacturing and sale of mobile phones to
CECT, but in 2003, the gross profit margin represented the gross profit earned on the manufacturing
and sale of mobile phones to mobile phone distributors and dealers. Since the mobile telephone
market in China was very competitive with the presence of both local and overseas competitors, the
Group was not able to sell its products at a very high price, resulting in maintaining a slight
increase of 0.5% in gross profit margin in 2003. Nonetheless, the gross profit margin of indoor telephones generated a significant increase of
17.7% from a gross loss margin of 11.3% to a gross profit margin of 6.4%. The Group experienced
keen competition in the indoor telephone market in China in 2002 that caused a reduction in our
selling prices in order to maintain our market share. In 2003, the indoor telephone market was
still competitive but the Group restructured its telephone operations and shifted its focus to
research and development and distribution of value added products of higher quality, with a more
fashionable look and multiple advanced functions, while containing the cost of its products. As
such, the Group was able to sell its value added indoor telephones at a higher price to those
customers looking for a better quality of telephones, resulting in a significant improvement in
gross profit margin. (iii) Selling expenses Selling expenses increased by Rmb 69.6 million from Rmb 5.29 million for fiscal year 2002 to
Rmb 74.89 million (US$9.05 million) for fiscal year 2003. The increase was predominantly
attributable to: (a) the acquisition of CECT on February 8, 2003, which contributed to selling expenses of Rmb
65.98 million for fiscal year 2003 incurred by CECT, including advertising and promotion of Rmb
43.5 million, salaries of a sales team of 980 people with an aggregate amount of Rmb 12.3 million,
as well as other selling expenses including transportation, travel and entertainment, samples and
telecommunication expenses incurred by the sales representative offices; and (b) an increase of advertising expenditures for certain new model indoor telephones. -36-




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(iv) General and administrative expenses General and administrative expenses decreased by Rmb 14.1 million from Rmb 68.2 million in
fiscal year 2002 to Rmb 51.9 million (US$6.3 million) in fiscal year 2003. This decrease was
mainly attributable to: (a) decrease in allowance for doubtful receivables of about Rmb 34.2 million from Rmb 35.0
million in 2002 to Rmb 0.8 million in 2003. (b) disposal of business of QXTI, an ex-subsidiary, resulting in decrease of general and
administrative expenses of about Rmb 8.6 million from Rmb 27.8 million (excluding allowance for
doubtful receivables) in fiscal year 2002 to Rmb 19.2 million (excluding allowance for doubtful
receivables) in fiscal year 2003. Before December 31, 2002, the Group was engaged in the
manufacturing and selling of indoor telephones. Subsequently, the Group was engaged in trading of
indoor telephones only. This results in reduction of headcounts and business activities of the
indoor telephones segment in 2003. (c) this is partly offset by the acquisition of CECT which contributed to the substantial
increase in general and administrative expenses of Rmb 26.1 million incurred by CECT during the
period from February 8, 2003 (date of acquisition of CECT) to December 31, 2003; (v) Research and development Research and development increased by Rmb 6.2 million from Rmb 0.45 million for fiscal year
2002 to Rmb 6.65 million (US$0.8 million) for fiscal year 2003. The increase was predominantly
attributable to the acquisition of CECT on February 8, 2003, which contributed to significant
increase in research and development on new mobile phone models. (vi) In process research and development There was a write-off of in process research and development expenses of Rmb 33.6 million at
the date of acquisition of CECT on February 8, 2003 in accordance with FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method. (vii) Amortization of acquired intangible assets There was a substantial increase in the amortization of acquired intangible assets of Rmb 42.2
million in 2003, as a result of the acquisition of CECT on February 8, 2003 in accordance with SFAS
No. 142 Goodwill and Other Intangible Assets. -37-




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(viii) Stock-based compensation Stock-based compensation increased from nil in 2002 to Rmb 26.9 million in 2003. The Company has elected to follow APB No. 25 Accounting for Stock Issued to Employees to
account for the incentive stock options granted to employees, under which the Group recognized no
compensation expense in fiscal year 2002 since no employee options were granted at prices below the
market price on the grant dates. Compensation expense of Rmb 26,929,000 (US$3.25 million) is
recorded in fiscal year 2003 based on the excess of the quoted market price of the underlying stock
of US$8.77 per share as of December 31, 2003 over the re-priced exercise price of US$5.50 per
share. (ix) Interest expense Interest expenses for bank borrowings and shareholders loan increased slightly from Rmb 17.9
million in 2002 to Rmb 19.0 million (US$2.3 million) in 2003. Despite the reduction of bank borrowings to Rmb 40 million on December 31, 2002 following the
disposal of QXTI, an ex-subsidiary, the Groups short-term bank borrowings increased significantly
during fiscal year 2003 mainly because of the increase in scale of operation of CECT during 2003.
Moreover, CECTs customers are mainly distributors and dealers in various provinces and cities
which require the Group to provide extended credit terms, and are unwilling to pay pre-purchase
deposits to CECT. Hence, the Groups overall bank borrowings were increased to Rmb 439.5 million
as of December 31, 2003 resulting in an interest expense of Rmb 19.0 million during fiscal year
2003. (x) Gain on sale of a subsidiary Gain on sale of a subsidiary of Rmb 79 million in 2002 represents the gain on sale of the one
issued share of Qiao Xing Holdings Ltd. which took place on December 31, 2002. The background
information of the transaction was as follows. On December 31, 2002, an agreement for sale of the
one issued share of Qiao Xing Holdings Limited (QX Holdings) was entered into between us and
Central Grace Technologies Limited (Central Grace), a corporation incorporated under the laws of
the British Virgin Islands. The agreement was subsequently amended by the parties. The
consideration for the purchase of the one issued share was Rmb 210,000,000, which was paid in full
as of July 16, 2003. As a result of the transaction, a gain on sale of a subsidiary amounting to Rmb 79,050,000 was
recognized for the year ended December 31, 2002. -38-




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The determination of the gain on sale of a subsidiary is set out as follows: Rmb000
    
    
    US$000Consideration
    
    
    210,000
    
    
    
    25,362Net assets sold
    
    
    (125,070
    )
    
    
    (15,105
    )Minority interests sold
    
    
    (5,880
    )
    
    
    (710
    )Gain on sale of a subsidiary
    
    
    79,050
    
    
    
    9,547
 Our management believes that we can benefit from focusing our business on research and
development activities and market development of the mobile phone business segment, rather than the
production of indoor phones. Second, the indoor phone manufacturing business is not as profitable
as the mobile phone business. It was, therefore, sensible to sell off this part of our business
and concentrate on the mobile phone business. However, we still continue to develop indoor phones
with enhanced features with market potential. In that regard, the Group does not currently intend
to manufacture its enhanced indoor phones, but will rely on third parties. There was no gain/loss on sale of subsidiary in fiscal year 2003. (xi) Other income, net Other income, net, increased by Rmb 7.6 million from Rmb 0.1 million for fiscal year 2002 to
Rmb 7.7 million (US$0.9 million) for fiscal year 2003. The increase was predominantly attributable
to the acquisition of CECT during fiscal year 2003 which provides quality assurance and
technological advisory services for several mobile telephones manufacturers. (xii) Equity in earnings of equity investees The Groups share in the net income of an equity investee increased by Rmb 6.8 million from
nil for fiscal year 2002 to Rmb 6.8 million (US$0.8 million) for fiscal year 2003. The increase
was due to the acquisition of CECT during fiscal year 2003. CECT held a 50% equity interest in an
affiliate, CEC Mobile Co, Ltd. (CECM). The Groups effective ownership was a 26% equity interest
in CECM. CECM is a limited liability company established in Mainland China on January 10, 2002 and
is engaged in the production and sale of CDMA mobile phones. (xiii) Net Income (Loss) and Earnings (Loss) Per Share A net loss of Rmb 7.8 million (US$0.9 million) was recorded for fiscal year 2003, while net
income of Rmb 16.5 million was recorded for fiscal year 2002. The difference of Rmb 24.3 million
between fiscal years 2002 and 2003 was mainly due to the significant gain on sale of a subsidiary
which amounted to Rmb 79 million in fiscal year 2002, partly offset by the following in fiscal year
2003: -39-




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(i)
    
    increase in gross profit of Rmb 222.8 million and other income, net of Rmb 2.0
million;(ii)
    
    increase in selling expenses of Rmb 69.6 million;(iii)
    
    increase in in process research and development costs written off of Rmb 33.6
million;(iv)
    
    increase in amortization of acquired intangible assets of Rmb 42.2 million; and(v)
    
    increase in stock-based compensation expense of Rmb 26.9 million Based on a weighted average of 15.4 million shares outstanding in 2003, the Group reported a
loss per share of Rmb 0.50 (US$0.06), compared to net income per share of Rmb 1.12 on 14.7 million
weighted-average shares outstanding in 2002. The higher number of weighted average number of
outstanding shares is the result of additional shares issued in June and July 2003 in connection
with the exercise of warrants by certain warrant holders and external consultants. -40-




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B. LIQUIDITY AND CAPITAL RESOURCES. During fiscal year 2004, we were principally engaged in (i) the sales of
telecommunication equipment, including cord and cordless indoor telephone sets, in Mainland China;
and (ii) production and sales of mobile phones and accessories in Mainland China. We did not
declare or pay dividends in fiscal year 2004. In summary, about Rmb 200.1 million (US$ 24.2 million) was used in operating activities, about
Rmb 65.9 million (US$ 8.0 million) was provided by investing activities and about Rmb 284.4 million
(US$ 34.4 million) was provided by financing activities during the year ended December 31, 2004.
Consequently, cash and cash equivalents increased by Rmb 18.4 million (US$ 2.2 million) from Rmb
122.5 million (US$ 14.8 million) at the beginning to Rmb 140.9 million (US$ 17.0 million) at the
end of year 2004. (i) Cash flows from operating activities There was a net operating cash outflow of Rmb 200.1 million (US$ 24.2 million) despite the net
income of Rmb 22.9 million (US$ 2.8 million) for the fiscal year 2004. This was mainly
attributable to a net increase in operating assets from fiscal year 2003 to fiscal year 2004,
consisting primarily of an increase in accounts and bills receivable and inventories of Rmb 402.5
million and Rmb 144.1 million, respectively. This working capital increase relates to the planned
expansion of activity in CECT which began towards the end of 2004, and to the introduction in 2004
of the COSUN brand mobile phones in HZQXCI, which handles their sales. The operating cash outflow was then partly offset by a decrease in prepaid expenses and an
increase in accounts payable of Rmb 106.2 million and Rmb 126.1 million, respectively. (a) decrease in prepaid expenses of Rmb 106.2 million, since most of the high-end models of
mobile phones were shipped to the Group and manufactured to meet the market demand towards the end
of 2004, resulting in a decrease in prepaid expenses level accordingly; and (b) an increase in accounts payable of Rmb 126.1 million, mainly because of the planned
expansion of activity in CECT which began towards the end of 2004. (ii) Cash flows from investing activities Net cash used in investing activities amounted to Rmb 65.9 million (US$ 8.0 million) during
the year ended December 31, 2004. This was mainly due to the net cash outflow on capital
expenditures relating to acquisitions of property, machinery and equipment and
construction-in-progress amounting to Rmb 24.1 million and Rmb 49.8 million respectively during
2004. 41




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(iii) Cash flows from financing activities Net cash inflow from financing activities amounted to Rmb 284.4 million (US$ 34.4 million) for
the year ended December 31, 2004. It was mainly attributed to the net increase in short-term
borrowings during the year ended December 31, 2004 amounting to Rmb 260.7 million. As of December
31, 2004, our consolidated working capital was Rmb 426 million (US$51.5 million) as compared to Rmb
298 million (US$36.1 million) as of December 31, 2003. Historically, we have financed our operations and capital expenditures principally through
cash generated from operating activities and bank borrowings. Outstanding bank borrowings
accounted for 28% and 33% of our total assets as of December 31, 2003 and December 31, 2004,
respectively. Seasonal working capital needs have been met through short-term borrowings under
revolving lines of credit. As of December 31, 2004, the Group had banking facilities of approximately Rmb 954.3 million
(US$115.3 million) for loans and trade financing, of which Rmb 700.2 million (US$84.6 million) were
used as of that date. Contractual Obligations and Commitments The Group has operating lease agreements for office premises, which extend through November
2007. Lease expense for the years ended December 31, 2002, 2003 and 2004 was approximately Rmb
1,422,000, Rmb 4,116,000 and Rmb 4,302,000, respectively. Future minimum lease payments as of
December 31, 2004 under agreements classified as operating leases with non-cancelable terms
amounted to approximately Rmb 4,143,000 (US$501,000) within one year, and approximately Rmb
5,177,000 (US$625,000) within two to five years. Related party transactions From time to time, we may enter into transactions with parties that have relationships with
our officers or directors or entities in which we have an ownership interest. We disclose all
material transactions that, in our judgment, constitute related party transactions. Related
parties include our subsidiaries, investments accounted for under the equity method, members of our
management and owners of a significant percentage of our common stock and their family members, and
any other party that we significantly influence. Critical Accounting Policies: Accounting Estimates In preparing our consolidated financial statements in conformity with accounting principles
generally accepted in the United States, we must make a variety of estimates that affect the
reported amounts and related disclosures. The following accounting policies are currently
considered most critical to the preparation of our consolidated financial statements. 42




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Revenue Recognition. The Securities and Exchange Commissions Staff Accounting Bulletin
(SAB) No. 101: Revenue Recognition in Financial Statements, as amended by SAB No. 104 Revenue
Recognition. SAB No. 101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services
rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Based on the above criteria our revenue is recognized at the time when the merchandise is shipped
and title to the merchandise has passed to customers. Title to the merchandise may transfer to the
customer when shipped or when received by the customer based on the specific agreement. We grant
discounts or allowances on merchandise and account for these discounts and allowances as a
deduction from sales. We evaluate our provisions for estimated discounts and allowances
periodically based on historical trends. To date, we have not experienced any significant
discounts and allowances. Any material increase in the level of returns could have a material and
adverse effect on our consolidated financial statements. Allowance for Doubtful Accounts. Certain of our accounts receivable are subject to credit
losses. We have attempted to reserve for expected credit losses based on our past experience with
similar accounts receivable and believe our reserves to be adequate. It is possible, however, that
the accuracy of our estimation process could be materially impacted as the composition of this pool
of accounts receivable changes over time. We continually review and refine the estimation process
to make it as reactive to these changes as possible; however, we cannot guarantee that we will be
able to accurately estimate credit losses on these accounts receivable. Inventory Valuation. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual future demand or
market conditions are less favorable than those projected by management, additional write-downs may
be required. Valuation of Long-lived Assets. We assess the carrying value of long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger an impairment review include the following:  (1)
    
    significant under-performance relative to expected historical or projected
future operating results;(2)
    
    significant changes in the manner of our use of the asset;(3)
    
    significant negative industry or economic trends; and(4)
    
    our market capitalization relative to net book value. Upon the existence of one or more of the above indicators of impairment, we test such
assets for a potential impairment. The carrying value of such assets is considered impaired when 43




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the anticipated cash flows are less than the assets carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair market value of the
asset. Fair market value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Goodwill. We adopted Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill
and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment at
least annually, or more frequently if events or changes in circumstances indicate that it might be
impaired, using the prescribed two-step process. The first step screens for potential impairment of
goodwill if the fair value of the reporting unit is less than its carrying value, while the second
step measures the amount of goodwill impairment, if any, by comparing the implied fair value of
goodwill to its carrying value. We completed our annual goodwill impairment test during the years
ended December 31, 2003 and 2004 and determined that no adjustment to the carrying value of
goodwill was required. Identifiable Intangible Assets. We adopted SFAS No. 141, Business Combinations. In
particular, an intangible asset which is acquired in a business combination should be recognized as
an asset apart from goodwill if it satisfies either the contractual-legal or separability
criterion. SFAS No. 141 specifically excludes assembled workforce acquired in a business
combination from recognition apart from goodwill. With the adoption of SFAS No. 142, intangible assets with indefinite useful lives are no
longer amortized, while intangible assets with finite useful lives will continue to be amortized
over their useful lives. We adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets,
whereby intangible assets with finite useful lives are required to be tested for impairment if
events or changes in circumstances indicate that the asset might be impaired, using the prescribed
two-step process. The first step is a recoverability test which screens for potential impairment of
an asset based on whether the undiscounted sum of estimated future cash flows from an asset is less
than its carrying value. The second step measures the amount of impairment, if any, by comparing
the fair value of the asset to its carrying value. We completed our annual identifiable intangible
assets impairment test during the years ended December 31, 2003 and 2004 and determined that no
adjustment to the carrying value of identifiable intangible assets was required. Deferred Taxes. As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes and tax bases of assets and liabilities in
each of the jurisdictions in which we operate. This process involves us estimating our current tax
exposure together with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which are included in our consolidated balance sheet. We must then assess the likelihood that our
deferred 44




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tax assets will be recovered from future taxable income, and, to the extent we believe that
recovery is more unlikely than likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a financial reporting period, we must
include an expense with the tax provision in the statement of operations. The Company has recorded
a 100% valuation allowance since the Company could not determine that it is more likely than not
that the deferred tax asset will be realized. Income Taxes. We account for income taxes under the provision of SFAS No. 109 Accounting for
Income Taxes. Income tax liabilities are assessed based on the relevant tax rate applicable at
the time we prepare consolidated financial statements for each financial period. On this basis,
our subsidiary, QXTI, provided for the enterprise income tax in Mainland China using a 24% state
income tax rate for the years 1999 and 2000, as the tax holiday it was entitled to had not been
confirmed by the relevant tax bureau in Mainland China. In 2002, QXTI obtained a confirmation from
the relevant tax bureau on its entitlement to the tax holiday under which the state income tax
rates are 15% for 1999 and 10% for 2000 and 2001. We then applied these adjusted tax rates to
assess the income tax position for 1999 and 2000, as a result, the excess tax provision for 1999
and 2000 of Rmb 18,868,000 in total has been reversed in 2001. Convertible Debentures. We accounted for convertible debentures issued during the year ended
December 31, 2000 in accordance with Accounting Principles Board Opinion No. 14: Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants, Emerging Issues Task Force Issue
(EITF) Issue No. 98-5: Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios and EITF Issue No. 00-27: Application of EITF Issue
No. 98-5 to Certain Convertible Debentures. The proceeds obtained from the issuance of convertible debentures are allocated between the
convertible debentures and the detachable warrants based on the relative fair values of the two
securities at the time of issuance, with the portion applicable to the warrants being debited as a
discount to convertible debenture and credited to additional paid-in capital. The embedded
beneficial conversion feature of the convertible debenture is recognized and measured by allocating
a portion of the proceeds equal to the intrinsic value of that feature as a discount to convertible
debentures and as a credit to additional paid-in capital. Discounts of convertible debentures and debt issuance cost were amortized over the term of the
convertible debentures using the effective interest rate method and the amount amortized were
recognized as interest expense. Any unamortized discounts remaining at the date of conversion of
convertible debentures were recognized as interest expense in the period the conversion took place. In connection with the conversion which took place during the years ended December 31,
2000 and 2001, the relevant portion of unamortized debt issuance cost amounted to approximately Rmb
8,053,000 and Rmb 7,124,000, respectively, and unamortized discounts of 45




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convertible debentures amounted to approximately Rmb 6,335,000 and Rmb 5,580,000,
respectively, were recognized as interest expense. Critical Accounting Policies: Adoption of New Accounting Policies (i) In December 2003, the FASB issued SFAS No. 132 (Revised) Employers Disclosure About
Pensions and Other Postretirement Benefits. SFAS No. 132 (Revised) retains disclosure
requirements in original SFAS 132 and requires additional disclosures relating to assets,
obligations, cash flows and net periodic benefit cost. SFAS No. 132 (Revised) is effective for
fiscal years ending after December 15, 2003, except that certain disclosures are effective for
fiscal years ending after June 15, 2004. The Group currently does not have any broad-based pension
or postretirement benefit plans which require disclosure. Accordingly, the adoption of SFAS No.
132 (Revised) does not have a significant impact on the Groups financial statements. (ii) In July and December 2003, the EITF published EITF Issue 03-9 Interaction of Paragraphs
11 and 12 of FASB Statement No. 142 Regarding Determination of the Useful Life and Amortization of
an Intangible Asset (EITF 03-9). EITF 03-9 provides guidance in determining whether or not an
intangible asset has an indefinite useful life and, if not, the appropriate useful life for the
intangible asset. The Group has applied the provisions of EITF 03-9 in accounting for the
acquisition of CECT in 2003. (iii) In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal. In
addition, this Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. Those transition
provisions are effective for inventory costs incurred during fiscal years beginning after June 15,
2005. The adoption of SFAS No. 151 is not expected to have a material impact on the Groups
consolidated financial statements. (iv) In December 2004, the FASB issued SFAS No.152, Accounting for Real Estate
Time-Sharing Transactionsan amendment of FASB Statements No. 66 and 67. SFAS No.152 amends FASB
Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of
Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also
amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate
Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions. The accounting for
those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for
financial statements for fiscal years 46




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beginning after June 15, 2005. The adoption of SFAS No. 152 is not expected to have a
material impact on the Groups consolidated financial statements. (v) In December 2004, the FASB issued SFAS No. 153: Exchanges of Nonmonetary Assetsan
amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to change significantly as
a result of the exchange. This Statement is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have
a material impact on the Groups consolidated financial statements. (vi) In December 2004, the FASB issued SFAS No.123-R, Share-based Payment, which requires
the compensation cost relating to share-based payment transactions (including the cost of all
employee stock options) be recognized in the financial statements. That cost will be measured
based on the estimated fair value of the equity or liability instruments issued. SFAS 123-R covers
a wide range of share-based compensation arrangements including options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123-R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As
originally issued, SFAS No. 123 established as preferable a fair value based method of accounting
for share-based payment transactions with employees. However, that pronouncement permitted
entities to continue applying the intrinsic-value based model of Opinion 25, provided that the
financial statements disclosed the pro forma net income or loss based on preferable fair-value
method. Publicly held companies that are not Small Business Issuers are required to apply SFAS No.
123-R at the beginning of their next fiscal year. Thus, the Companys consolidated financial
statements will reflect an expense for (a) all share-based compensation arrangements granted after
June 30, 2004 and for any such arrangements that are modified, cancelled, or repurchased after that
date, and (b) the portion of previous share-based awards for which the requisite service has not
been rendered as of that date, based on the grant-date estimated fair value of those awards.
Management believes the adoption of this pronouncement will not have a material effect on our
consolidated financial statements. 47




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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. During each of the last three fiscal years, we spent the following amounts on
company-sponsored research and development activities: Year ended December 31, 2004
    
    Rmb
    
    
    10,449,000Year ended December 31, 2003
    
    Rmb
    
    
    6,649,000Year ended December 31, 2002
    
    Rmb
    
    
    451,000
 D. TREND INFORMATION. Sales In the mobile phone business segment, we anticipate steadfast growth in 2005 and the years to
come. With its strong in-house R&D capability and the cooperation with other top domestic and
overseas players in the industry, CECT is bringing to the market, on average, two new models a
month. In the spring of 2005, CECT launched a spring market campaign by introducing more than 16
models of new mobile phone products. We believe this could help us boost our sales revenue and
also secure a larger market share of the mobile phone market in China. CECTs proven advantage in
market differentiation and its widely recognized reputation will continue to help it achieve the
goal of being the top 5 among Chinas local mobile phone companies. In addition, in 2005, the
mobile division of HZQXCI that launched the COSUN-branded lower-end GSM mobile phone in the second
half of 2004 is expected to make big progress in sales of mobile phones for its own account. CECTs strength in R&D and production has drawn attention from outside China. We are now
discussing producing mobile phones for some foreign clients and the anticipated mobile phone orders
would also contribute to our sales growth in the subsequent years. In the indoor phone business segment, our focus in fiscal year 2005 remains to be R&D and the
launching of more satisfactory value added products to satisfy the continuously improving
consumption levels of Chinese people. We are confident that these relatively high-end phone
products can continue to achieve significant growth in fiscal year 2005. Also, our diversification into other consumer electronics products will bring in additional
revenue to the Group in the second half of 2005 and beyond. The new products launched in 2005 include the following:  1.
    
    The enhanced mini PDA Mobile phones 48




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2.
    
    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 In addition, during fiscal year 2005, we continue to expand on our partnership relationships
with international telecommunication terminal distributors, which already include Binatone,
Unisonic (supplier of BellSouth), and Wal-Mart. We are convinced that the export of indoor
telephones, especially 2.4 G and 5.8G cordless telephones, wireless fixed phones, will contribute
considerable share to our sales growth of indoor telephones. Gross Profit Our total gross profit margin percentage in fiscal year 2004 was approximately 11.1%. We
achieved a gross profit margin of approximately 10.7% and 14.8% for sales of our mobile phone
products and indoor phone products in 2004, respectively. On this basis, we anticipate that with
the increase in sales revenue, the adjustment of product mix and stringent cost control, there will
be corresponding growth in gross profit and profit ratio in both the mobile phone and the indoor
phone business segments. Production Our current total production capacity of mobile phones amounts to 2.5 million units per year.
We plan to expand our production capacity on a gradual and cautious basis. In the event that our
production cannot meet the market demand, we will apply OEM to guarantee supplying CECT brand and
COSUN brand mobile phones for our clients. In the indoor phone segment, we will continue to
subcontract all of the in-door phones orders to qualified manufacturers. Prices There is keen price competition in the market of our products, especially for basic models,
which are regarded as commodities because of the lack of difference between brands. In the indoor
phone business segment, through continuous upgrade of our products, we expect to be able to
maintain our sales price in 2005 at a level comparable to that in 2004. In the mobile phone
business segment, the trend is for lower prices. However, when costs permit, a voluntary strategy
of lower prices can sometimes be used to allow high end products to reach new segments in the
market. 49




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Inventory We forecast that our inventory value will increase in step with the increase in the scale of
our business in 2005 in both the indoor phone and mobile phone business segments. Because of their
short product life cycle, we do not want to keep huge volume of mobile phones as inventories as
they will become obsolete within a short time. On the other hand, we need to maintain a certain
level of inventories to meet customers demand of our products. We believe that our existing
inventory level in relation to the scale of our business is optimal and we will continue to apply
the existing strategy to plan our inventory level in 2005. E. OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS. As of the December 31, 2004 balance sheet, we had the following known contractual obligations: Capital commitments for purchase of property, machinery and equipment not provided for in the
consolidated financial statements were analyzed as follows: 2 0 0 4Rmb000
    
    
    US$000Capital expenditure authorized and contracted for:- Construction of factory premises and staff
quarter
    
    
    40,184
    
    
    
    4,855- Purchase of land and buildings
    
    
    63,275
    
    
    
    7,646- purchase of machinery and equipment
    
    
    930
    
    
    
    112104,389

    
    
    
    12,613
 50




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Future minimum lease payments under a capital lease are as follows: 2 0 0 4Rmb000
    
    
    US$000Payable during the following periods- 2005
    
    
    1,909
    
    
    
    231- 2006
    
    
    1,909
    
    
    
    231- 2007
    
    
    954
    
    
    
    115Total minimum lease payments
    
    
    4,772
    
    
    
    577Less: Amount representing future interest
    
    
    (997
    )
    
    
    (121
    )Present value of minimum lease payments
    
    
    3,775
    
    
    
    456Less: Current portion
    
    
    (1,510
    )
    
    
    (182
    )Non-current portion
    
    
    2,265
    
    
    
    274
 Operating lease commitments We have operating lease agreements for office premises, which extends through 2008. At
December 31, 2004, our future minimum lease payments required under non-cancelable operating leases
with terms in excess of one year are as follows: AmountRmb000
    
    
    US$000For the years ending December 31,2005
    
    
    4,143
    
    
    
    5012006
    
    
    3,753
    
    
    
    4532007
    
    
    837
    
    
    
    1012008
    
    
    587
    
    
    
    71Total
    
    
    9,320
    
    
    
    1,126
 Lease expenses for the years ended December 31, 2002, 2003 and 2004 were approximately
Rmb 1,422,000, Rmb 4,116,000 and Rmb 4,302,000, respectively. 51




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT. Our senior management and directors are as follows: Name
    
    Age
    
    PositionRui Lin Wu
    
    
    53
    
    
    Chairman and Chief Executive OfficerZhi Yang Wu
    
    
    32
    
    
    Vice Chairman and SecretaryShi Jie
    
    
    37
    
    
    Executive DirectorAlbert Leung
    
    
    48
    
    
    Chief Financial OfficerZe Yun Mu
    
    
    39
    
    
    Non-Executive DirectorZhu Ming
    
    
    37
    
    
    Non-Executive DirectorSonny Kwok Wing Hung
    
    
    41
    
    
    Non-Executive DirectorYi Hong Zhang
    
    
    63
    
    
    Non-Executive Director
 None of our directors and officers was selected pursuant to any agreement or understanding
with any other person. There is no family relationship between any director or executive officer
and any other director or executive officer, except Rui Lin Wu and his son Zhi Yang Wu. Mr. Rui Lin Wuis our chairman and chief executive officer. He is our founder and has over 15
years of experience in the telecommunication industry. He is responsible for our overall strategic
planning, policy making and finance. Prior to his career in the telecommunications industry, he
was a general manager of a fashion and garment factory from 1980 to 1986. Currently, Mr. Wu is the
executive commissioner of the China National Association of Industry and Commerce, senior analyst
of the China National Condition and Development Research Center, and a member of the Poverty Fund
of China. Mr. Wu also serves as the chairman of Qiao Xing Mobile Communication Co. and a director
of CEC Telecom Co., Ltd. since February 2003. Mr. Zhi Yang Wuis our vice chairman and the elder son of Mr. Rui Lin Wu. Mr. Wu also serves
as our secretary. Mr. Wu received a Diploma in Business Management from Huizhou University of the
PRC. He joined us in 1992 and is responsible for our overall strategic planning, policy making and
the overseas market development. Mr. Wu also serves as the chairman of CEC Telecom Co., Ltd. and
CEC Mobile Ltd. since February 2003. Mr. Shi Jieserves as chief financial officer and a director of Qiao Xing Group Ltd.
since 2000. He also serves as a director of CEC Telecom Co., Ltd. since February 2003. Prior to
that, Mr. Shi served as our chief financial officer and controller of finance from 1997 to 2000.
He also 52




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##### Table of Contents



served as deputy general manager of QXTI from 1997 to 1999. From 1994 to 1997, Mr. Shi served
as department head of the finance department of QXTI. Mr. Albert Leungserves as our chief financial officer since his appointment in December 2003.
Mr. Leung received a Higher Diploma in Accountancy from Hong Kong Polytechnic in 1980 and a
Diploma in Advanced Commercial Studies from LEcole des Hautes Etudes Commerciales in France in
1984. He is a registered member of the Hong Kong Society of Accountants since 1988 and the
Association of Chartered Certified Accountants, Great Britain, since 1986. Prior to joining us in
December 2003, Mr. Leung served as chief financial officer of Yantai Dahua Holdings Company Limited
(YDHCF.OB) from February 2003 until December 2003. From March 2001 until February 2003, he served
as a consultant with AB Management Consulting Company, Hong Kong, providing accounting services,
tax compliance and finance for small and medium enterprises in Hong Kong. From November 1999 to
October 2000, Mr. Leung served as regional financial controller in Singapore for Euro RSCG Asia
Pacific. From December 1998 to April 1999, he served as property manager (cost control) for The
Hong Kong Jockey Club. Mr. Leung devotes his full working time to our affairs. Mr. Ze Yun Muserves as a non-executive director since September 15, 2003. Mr. Mu currently
serves as the external affairs director since 1998 for Huizhou Wei Guo Machinery Factory and served
as a technician for them from 1990 to 1998. Mr. Zhu Mingserves as a non-executive director since January 2003. Since 2001, he serves as
a director of Guangzhou Guo Wei Science & Technology Ltd. and he was a director of JiLin Zhongxin
Science & Technology Co., Ltd. during 2000 to 2001. From 1997 to 2000, he served as assistant to
the chairman of Huizhou Qiao Xing Group Ltd. From 1992 to 1997, he was a clerk of the Haikou
Branch of China Industrial and Commercial Bank. Mr. Sonny Kwok Wing Hungserves as a non-executive director since December 2004. Since
November 2002, he has served as Assistant to Chairman of Man Sang International Ltd. (MSHI.OB), a
US publicly listed jewelry company. From February 2000 to November 2002, Mr. Hung served as Vice
President of Yorkshire Capital Limited, a Hong Kong-based investment banking firm. Previously, Mr.
Hung served as Director of Corporate Development of Man Sang International from November 1996 to
March 2000. From 1991 to 1997 he was in various senior positions with Dah Sing Bank, Hong Kong
Bank. Mr. Hung received Bachelor degrees in Finance and Banking from San Francisco State
University in 1989 and an MBA from Baptist University in Hong Kong in 1999. Mr. Yi Hong Zhangserves as a non-executive director since December 2004. Since 2004,
he has served as senior advisor and independent director of Guangzhou Hualin Enterprise Group.
From 2001 through 2003, Mr. Zhang was the standing deputy director of the leadership panel for
technical assessment under the Guangdong Science and Technology Institute. From 2000 to 2001, he
served as chairman and general manager of Guangdong Zhongping Yueke 53




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##### Table of Contents



Appraisal Co., Ltd. From 1994 to 1999, Mr. Zhang served as head of the Guangdong Science and
Technology Appraisal Center. B. COMPENSATION. The aggregate compensation which we paid to all of our directors and executive officers as a
group with respect to our fiscal year ended December 31, 2004 on an accrual basis, for services in
all capacities, was Rmb 3,024,264 (US$365,399). During the fiscal year ended December 31, 2004 we
contributed an aggregate amount of Rmb 22,365 (US$2,702) toward the pension plans of our directors
and executive officers. We have not entered into an employment agreement with Mr. Rui Lin Wu. Currently, Mr. Wu
serves as our chief executive officer at an annual salary of Rmb 1,266,840 (US$153,000). Mr. Wus
remuneration package includes benefits with respect to a motor car. C. BOARD PRACTICES. Each of our current directors except Sonny Kwok Wing Hung and Yi Hong Zhang was elected at our
last annual meeting of shareholders held December 3, 2004 to serve a one-year term or until their
successor is elected and qualified. There are no directors service contracts with us or any of our subsidiaries providing for
benefits upon termination of employment. Our board of directors has established an audit committee, which currently consists of Sonny
Kwok Wing Hung (chairman of the audit committee), Yi Hong Zhang and Zhu Ming. Its functions are
to:  
    
    recommend annually to the Board of Directors the appointment of our independent
public accountants;
    
    discuss and review the scope and the fees of the prospective annual audit and review
the results thereof with the independent public accountants;
    
    review and approve non-audit services of the independent public accountants;
    
    review compliance with our existing accounting and financial policies;
    
    review the adequacy of our financial organization; and
    
    review managements procedures and policies relative to the adequacy of our internal
accounting controls and compliance with U.S. federal and state laws relating to
financial reporting. 54




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##### Table of Contents



D. EMPLOYEES. As of December 31, 2004 and giving effect to the staff of CECT, our majority owned subsidiary,
we had a total of 975 full time employees, of which 10 are key management staff, 214 are engaged in
sales and marketing, 121 are engaged in finance and administration, 380 are engaged in production
and 250 are engaged in research and development. None of our employees is represented by a labor
union and we believe that our employees relations are good. E. SHARE OWNERSHIP. The following table sets forth certain information regarding the beneficial ownership of our
shares of common stock as of June 30, 2005 by:  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    by each of our current executive officers and directors; and
    
    by all current directors and executive officers as a group. As of June 30, 2005, we had 18,646,676 shares of our common stock issued and outstanding. This information gives effect to securities deemed outstanding pursuant to Rule 13d-3(d)(l)
under the Securities Exchange Act of 1934, as amended. Name of Beneficial Holder
    
    Number
    
    
    PercentShares Beneficially OwnedWu Holdings Limited
    
    
    6,819,000
    (1)
    
    
    36.6Rui Lin Wu
    
    
    7,119,000
    (1)
    
    
    38.2Zhi Yang Wu
    
    
    250,000
    
    
    
    1.3Shi Jie
    
    
    0
    
    
    
    0Albert Leung
    
    
    0
    
    
    
    0Ze Yun Mu
    
    
    0
    
    
    
    0Zhu Ming
    
    
    0
    
    
    
    0Sonny Kwok Wing Hung
    
    
    0
    
    
    
    0Yi Hong Zhang
    
    
    0
    
    
    
    0All directors and executive officers as a group (8)
    
    
    7,369,000
    
    
    
    39.5
 
 (1)
    
    Wu Holdings Limited is a British Virgin Islands corporation which is wholly owned by the
Qiao Xing Trust. The Qiao Xing Trust is a Cook Islands trust which was formed for the primary
benefit of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, our chairman. 55




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##### Table of Contents



The 6,819,000 shares of common stock owned of record and beneficially by Wu Holdings Limited
may be deemed to also be beneficially owned by Rui Lin Wu (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934, as amended) since he may be deemed to have and/or
share the power to direct the voting and disposition of such shares. The 1999 Stock Compensation Plan Effective June 16, 1999, we adopted and approved the 1999 Stock Compensation Plan. The
purpose of the plan is to:  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors;
    
    provide additional incentive for them to promote our success and our business; and
    
    encourage them to remain in our employ by providing them an opportunity to benefit
from any appreciation of our common stock through the issuance of stock options. Options constitute either incentive stock options within the meaning of Section 422 of the
United States Internal Revenue Code of 1986, as amended, or options which constitute nonqualified
options at the time of issuance of such options. The plan provides that incentive stock options
and/or nonqualified stock options may be granted to our officers, directors, employees and advisors
selected by the compensation committee. A total of 2,000,000 shares of common stock are authorized
and reserved for issuance during the term of the plan which expires in June 2009. The compensation
committee has the sole authority to interpret the plan and make all determinations necessary or
advisable for administering the plan. The exercise price for any incentive option must be at least
equal to the fair market value of the shares as of the date of grant. Upon the exercise of the
option, the exercise price must be paid in full either in cash, shares of our stock or a
combination. If any option is not exercised for any reason, such shares shall again become
available for the purposes of the plan. As of December 31, 2004, all 2,000,000 options had been exercised and no options to purchase
shares of our common stock under the Plan remained outstanding. Other Options and Warrants Outstanding As of June 30, 2005, the following additional options and warrants to purchase shares of our
common stock were outstanding:  
    
    warrants to purchase an aggregate of 30,000 shares of common stock at $8.50 per
share at any time until December 23, 2009 which we granted to a research service firm
in December 2004 in connection with a research service agreement 56




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##### Table of Contents




    
    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
    
    warrants to purchase an aggregate of 130,000 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 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS. Please see Item 6.E. for share ownership information regarding our major shareholders. Our
major shareholders do not have different voting rights. We do not have available information as to the portion of our common stock held in the host
country and the number of record holders in the host country. To the extent known to us, we are not directly or indirectly owned or controlled by another
corporation, by any foreign government or by any other natural or legal persons severally or
jointly. To our knowledge, there are no arrangements the operation of which may at a subsequent date
result in a change in control of our company. B. RELATED PARTY TRANSACTIONS. Name and relationship of related parties: Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiMr. Jie Shi
    
    DirectorMr. Ming Zhu
    
    Non-executive independent director
(appointed on January 2, 2003)Mr. Ze Yun Mu
    
    Non-executive independent director
(appointed on September 15, 2003)Mr. Zhong Ai Li
    
    Director (resigned on January 2, 2003)Mr. Guo Liang Zhang
    
    Director (resigned on January 2, 2003)Ms. Liu Rong Yang
    
    Director (resigned on September 15, 2003)Mr. Zhi Fang Zhang
    
    Director (resigned on January 2, 2003)Mr. Zi Shu Huang
    
    Director (resigned on January 2, 2003)Wu Holdings Limited
    
    Intermediate holding company
 57




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##### Table of Contents



Exquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderJia Xing Electronic Supplies Company Limited
    
    Common directorQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Properties Limited
    
    Common directorRui Xing Electronic Development Company Limited
    
    Common directorShanghai Sunplus Communication Technology Company Limited
    
    Common director until September 2004Dalian Yu Tian Ocean Biochemistry Technology Company Limited
    
    Common directorHuizhou Calilee Telecommunication Company Limited (Calilee)
    
    A company 5% owned by QXGLShenzhen Tianna I/E Trade Company Limited
    
    A company 90% owned by QXGLCEC Wireless R&D Limited (CECW)
    
    CECT and CECW have common ownersBeijing China Electronics Changsheng Investment Management
Company Limited
    
    Minority owner of CECT is a shareholderChina Electronics Beijing Real Estate Management Co., Ltd.
    
    Minority owner of CECT is a shareholderChina Electronics Corp.
    
    Minority owner of CECTChina National Electronics Import & Export Corporation
    
    Minority owner of CECT is a shareholderGoldcellcom Co., Ltd
    
    Minority owner of CECT is a shareholderWuhan Zhongyuan Electronics Group Co., Ltd.
    
    Minority owner of CECT is a shareholderShenzhen SED Trade Co., Ltd.
    
    Common ownerWuhan Zhongyuan Qi Xing Co., Ltd.
    
    Common owner
 Summary of related party transactions is as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Operating lease rentals charged by
- China Electronics Corp
    
    
    
    
    
    
    2,049
    
    
    
    2,743
    
    
    
    331Property management fees paid and payable to
- China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    
    
    
    
    788
    
    
    
    971
    
    
    
    117- QXGL
    
    
    
    
    
    
    34
    
    
    
    68
    
    
    
    8Interest income from CEFCL
    
    
    
    
    
    
    1,851
    
    
    
    
    
    
    
    Rental income from-QXGL
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    -CECM
    
    
    
    
    
    
    1,103
    
    
    
    1,110
    
    
    
    134Research and development fee paid to CECW
    
    
    
    
    
    
    
    
    
    
    391
    
    
    
    47Commission paid and payable to CECW
    
    
    28,200
    
    
    
    5,181
    
    
    
    
    
    
    
    Purchases from-Qiao Xing Development Limited
    
    
    10,061
    
    
    
    34
    
    
    
    3,290
    
    
    
    398-Rui Xing Electronic Development Company
Limited

    
    
    9,214
    
    
    
    
    
    
    
    
    
    
    
    -Shanghai Sunplus Communication
Technology Company Limited
    
    
    
    
    
    
    24,366
    
    
    
    354,368
    
    
    
    42,816-Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    13,005
    
    
    
    103,379
    
    
    
    12,490Sales to-CECT *
    
    
    344,458
    
    
    
    26,821
    
    
    
    
    
    
    
    -CECM
    
    
    
    
    
    
    238,857
    
    
    
    17,536
    
    
    
    2,119-Calilee
    
    
    
    
    
    
    611,281
    
    
    
    293,097
    
    
    
    35,413-Goldcellcom Co., Ltd
    
    
    
    
    
    
    7,980
    
    
    
    
    
    
    
    
 
 *
    
    Sales to CECT after February 8, 2003 have been eliminated on the consolidated statement of
operations for 2003. 58




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##### Table of Contents



Summary of related party balances is as follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Due from- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1-China National Electronics Import & Export
Corporation
    
    
    1
    
    
    
    1
    
    
    
    -China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    4
    
    
    
    34
    
    
    
    4-Wuhan Zhongyuan Electronics Group Co., Ltd
    
    
    120
    
    
    
    120
    
    
    
    15-CEFCL
    
    
    7,030
    
    
    
    7,030
    
    
    
    849-Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    37,185
    
    
    
    7,215
    
    
    
    872Due to-Beijing China Electronics Changsheng
Investment Management Company Limited
    
    
    3,532
    
    
    
    3,481
    
    
    
    420-China Electronics Corp.
    
    
    969
    
    
    
    734
    
    
    
    89-Goldcellcom Co., Limited
    
    
    40
    
    
    
    5,839
    
    
    
    705-Dalian Yu Tian Ocean Biochemistry Technology
Company Limited
    
    
    10,000
    
    
    
    
    
    
    
    -QXGL
    
    
    
    
    
    
    700
    
    
    
    85-Shenzhen SED Trade Co.,Ltd
    
    
    
    
    
    
    31
    
    
    
    4-Wuhan Zhong Yuan Qi Xing Co.,Ltd
    
    
    
    
    
    
    3-Mr Rui Lin Wu
    
    
    471
    
    
    
    14,758
    
    
    
    1,783-Mr. Jie Shi
    
    
    83
    
    
    
    166
    
    
    
    20-Mr. Ming Zhu
    
    
    3
    
    
    
    7
    
    
    
    1-Mr. Ze Yun Mu
    
    
    1
    
    
    
    5
    
    
    
    1-Mr. Guo Liang Zhang
    
    
    146
    
    
    
    
    
    
    
    - Ms. Liu Rong Yang
    
    
    11
    
    
    
    
    
    
    
    -Ms. Zhi Fang Zhang
    
    
    10
    
    
    
    
    
    
    
    -Mr. Zi Shu Huang
    
    
    10
    
    
    
    
    
    
    
    -Mr. Zhong Ai Li
    
    
    218
    
    
    
    
    
    
    
    15,494
    
    
    
    25,724
    
    
    
    3,108Accounts receivable from-CECM
    
    
    32,225
    
    
    
    32,111
    
    
    
    3,880-Calilee
    
    
    40,556
    
    
    
    35,765
    
    
    
    4,32172,781
    
    
    
    67,876
    
    
    
    8,201Vendor deposits for the purchase of mobile phones
-Shanghai Sunplus Communication Technology
Company Limited
    
    
    256,856
    
    
    
    205,565
    
    
    
    24,837-Shenzhen Tianna I/E Trade Company Limited
    
    
    51,179
    
    
    
    
    
    
    
    308,035
    
    
    
    205,565
    
    
    
    24,837Deposits for the purchase of land from QXGL
    
    
    
    
    
    
    8,000
    
    
    
    967Accounts payable to Shenzhen Tianna I/E Trade
Company Limited
    
    
    
    
    
    
    7,263
    
    
    
    877
 Except for the balances with the shareholders (Note 24), all other balances with directors and
related parties were unsecured, non-interest bearing and without pre-determined repayment terms. Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi Jian Wu
Li), Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist Consultants 59




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##### Table of Contents



Limited, the Companys shareholders, and were non-interest bearing. The lenders have agreed not to
make demand on the Group for repayment before January 1, 2006. During the year ended December 31, 2003, QXGL and China Electronics Corp. provided corporate
guarantees to the Groups banking facilities to the extent of Rmb320,000,000 and Rmb 50,000,000
respectively. During the year ended December 31, 2004, QXGL and China Electronics Corp. provided corporate
guarantees to the Groups banking facilities to the extent of Rmb730,000,000 and Rmb 50,000,000
respectively. C. INTERESTS OF EXPERTS AND COUNSEL. Not applicable. 60




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##### Table of Contents



ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION. The Consolidated Financial Statements are filed in this annual report as Item 18. Export sales do not constitute a significant portion of our total sales volume. There are no legal or arbitration proceedings, including those relating to bankruptcy,
receivership or similar procedures and those involving any third party, which may have, or have had
in the recent past, significant effects on our financial position or profitability. We are not
aware of any material governmental proceedings pending or known to be contemplated. We have no direct business operations, other than the ownership of our subsidiaries. While we
have no current intention of paying dividends, should we, as a holding company, decide in the
future to do so, our ability to pay dividends and meet other obligations depends upon the receipt
of dividends or other payments from our operating subsidiaries and other holdings and investments.
In addition, our operating subsidiaries may be subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants in loan agreements,
restrictions on the conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions. B. SIGNIFICANT CHANGES. Except as otherwise disclosed herein, we do not believe that any significant change has
occurred since the date of the annual financial statements included in this annual report. 61




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS. Our common stock is listed and quoted for trading on The Nasdaq National Market under the
symbol XING. The following table sets forth, during the periods indicated, the high and low last
sale prices for the common stock since its listing on The Nasdaq National Market on February 16,
1999 as reported by Nasdaq: Period
    
    High
    
    
    LowYear ended December 31, 2000
    
    $
    52.31
    
    
    $
    3.38Year ended December 31, 2001
    
    $
    6.63
    
    
    $
    1.79Year ended December 31, 2002
    
    $
    5.58
    
    
    $
    0.77Year ended December 31, 2003
    
    $
    14.33
    
    
    $
    1.90Year ended December 31, 2004
    
    $
    14.98
    
    
    $
    6.50Quarter ended March 31, 2003
    
    $
    3.39
    
    
    $
    1.90Quarter ended June 30, 2003
    
    $
    13.03
    
    
    $
    2.19Quarter ended September 30, 2003
    
    $
    14.33
    
    
    $
    6.00Quarter ended December 31, 2003
    
    $
    10.97
    
    
    $
    8.04Quarter ended March 31, 2004
    
    $
    14.98
    
    
    $
    9.55Quarter ended June 30, 2004
    
    $
    11.95
    
    
    $
    7.88Quarter ended September 30, 2004
    
    $
    10.48
    
    
    $
    6.50Quarter ended December 31, 2004
    
    $
    11.20
    
    
    $
    7.64Quarter ended March 31, 2005
    
    $
    8.50
    
    
    $
    5.55Quarter ended June 30, 2005*
    
    $
    7.37
    
    
    $
    5.04Month ended December 31, 2004
    
    $
    9.20
    
    
    $
    8.15Month ended January 31, 2005
    
    $
    8.50
    
    
    $
    7.34Month ended February 28, 2005
    
    $
    8.21
    
    
    $
    6.66Month ended March 31, 2005
    
    $
    7.01
    
    
    $
    5.55Month ended April 30, 2005
    
    $
    6.04
    
    
    $
    5.05Month ended May 31, 2005
    
    $
    6.88
    
    
    $
    5.04Month ended June 30, 2005*
    
    $
    7.37
    
    
    $
    6.81
 
 *
    
    Through June 29, 2005 62




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B. PLAN OF DISTRIBUTION. Not applicable. C. MARKETS. Our common stock is listed and quoted for trading on The Nasdaq National Market System since
February 16, 1999. D. SELLING SHAREHOLDERS. Not applicable. E. DILUTION. Not applicable. F. EXPENSES OF THE ISSUE. Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL. Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION. Corporate Powers. We are registered in the British Virgin Islands since December 6, 1994,
under British Virgin Islands International Business Companies number 135241. Clause 4 of our
Memorandum of Association states that the objects for which we are established are to engage in any
businesses which are not prohibited by law in force in the British Virgin Islands. Directors. A director who is materially interested in any transaction with us shall
declare the material facts of and nature of his interest at the meeting of the Board of Directors.
A director may vote or be counted as the quorum on any resolution of the Board in respect of any 63




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transaction in which he is materially interested. With the prior or subsequent approval by a
resolution of members, the directors may, by a resolution of directors, fix the emoluments of
directors with respect to services to be rendered in any capacity to us. The directors may, by a
resolution of directors, exercise all the powers of the Company to borrow money. There is no age
limit requirement for retirement or non-retirement of directors. A director shall not require a
share qualification. Share Rights, Preferences and Restrictions. Our authorized share capital consists of 50
million shares of par value US$0.001 per share. All dividends unclaimed for three years after
having been declared may be forfeited by resolution of the directors for our benefit. All shares
vote as one class and each whole share has one vote. We may redeem any of our own shares for such
fair value as we by a resolution of directors determine. All shares have the same rights with
regard to dividends and distributions upon our liquidation. Changing Share Rights. The rights of each class and series of shares that we are authorized
to issue shall be fixed by the resolution of directors. If the authorized capital is divided into
different classes, the rights attached to any class may be varied with the consent in writing of
the holders of not less than three-fourths of the issued shares of that class and of the holders of
not less than three-fourths of the issued shares of any other class which may be affected by such
variation. Shareholder Meetings. The directors may convene meetings of our members at such times and in
such manner and places as the directors consider necessary or desirable. The directors shall
convene such a meeting upon the written request of members holding 10 percent or more of our
outstanding voting shares. At least seven days notice of the meeting shall be given to the
members whose name appears on the share register. Restrictions on Rights to Own Securities. There are no limitations on the rights to own our
securities. Change in Control Provisions. There are no provisions of our Memorandum of Association and
Articles of Association that would have an effect of delaying, deferring or preventing a change in
our control and that would have operate only with respect to a merger, acquisition or corporate
restructuring involving us. Disclosure of Share Ownership. There are no provisions governing the ownership threshold
above which shareholder ownership must be disclosed. Applicable Law. Under the laws of most jurisdictions in the US, majority and controlling
shareholders generally have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. BVI law protecting the interests of 64




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minority shareholders may not be as protective in all circumstances as the law protecting
minority shareholders in US jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its directors
derivatively, that is, in the name of and for the benefit of our company and to sue a company and
its directors for his benefit and for the benefit of others similarly situated, the circumstances
in which any such action may be brought, and the procedures and defenses that may be available in
respect of any such action, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the US. Our directors have the power to take certain actions without shareholder approval, including
an amendment of our Memorandum of Association or Articles of Association or an increase or
reduction in our authorized capital, which would require shareholder approval under the laws of
most US jurisdictions. In addition, the directors of a BVI corporation, subject in certain cases
to court approval but without shareholder approval, may, among other things, implement a
reorganization, certain mergers or consolidations, the sale, transfer, exchange or disposition of
any assets, property, part of the business, or securities of the corporation, or any combination,
if they determine it is in the best interests of the corporation, its creditors, or its
shareholders. Our ability to amend our Memorandum of Association and Articles of Association
without shareholder approval could have the effect of delaying, deterring or preventing a change in
our control without any further action by the shareholders, including a tender offer to purchase
our common stock at a premium over then current market prices. The International Business Companies Act of the British Virgin Islands permits the creation in
our Memorandum and Articles of Association of staggered terms of directors, cumulative voting,
shareholder approval of corporate matters by written consent, and the issuance of preferred shares.
Currently, our Memorandum and Articles of Association only provide for shareholder approval of
corporate matters by written consent, but not for staggered terms of directors, cumulative voting
or the issuance of preferred shares. As in most US jurisdictions, the board of directors of a BVI corporation is charged
with the management of the affairs of the corporation. In most US jurisdictions, directors owe a
fiduciary duty to the corporation and its shareholders, including a duty of care, under which
directors must properly apprise themselves of all reasonably available information, and a duty of
loyalty, under which they must protect the interests of the corporation and refrain from conduct
that injures the corporation or its shareholders or that deprives the corporation or its
shareholders of any profit or advantage. Many US jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated or limited. Under BVI
law, liability of a corporate director to the corporation is primarily limited to cases of willful
malfeasance in the performance of his duties or to cases where the director has not acted honestly
and in good faith and with a view to the best interests of the corporation. However, under our
Articles of Association, we are authorized to indemnify any director or officer who is made or 65




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threatened to be made a party to a legal or administrative proceeding by virtue of being one of
our directors or officers, provided such person acted honestly and in good faith and with a
view to our best interests and, in the case of a criminal proceeding, such person had no reasonable
cause to believe that his conduct was unlawful. Our Articles of Association also enable us to
indemnify any director or officer who was successful in such a proceeding against expense and
judgments, fines and amounts paid in settlement and reasonably incurred in connection with the
proceeding. The above description of certain differences between BVI and US corporate laws is only a
summary and does not purport to be complete or to address every applicable aspect of such laws.
However, we believe that all material differences are disclosed above. Changes in Capital. Requirements to effect changes in capital are not more stringent than is
required by law. C. MATERIAL CONTRACTS. None. D. EXCHANGE CONTROLS. There are no exchange control restrictions in China on the repatriation of dividends by our
subsidiaries. In addition, there are no material British Virgin Islands laws that impose foreign
exchange controls on us or that affect the payment of dividends, interest or other payments to
nonresident holders of our capital stock. British Virgin Islands law and our Memorandum of
Association and Articles of Association impose no limitations on the right of nonresident or
foreign owners to hold or vote our common stock. E. TAXATION. The following is a summary of anticipated material U.S. federal income and British Virgin
Islands tax consequences of an investment in our common stock. The summary does not deal with all
possible tax consequences relating to an investment in our common stock and does not purport to
deal with the tax consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be subject to special
rules. In particular, the discussion does not address the tax consequences under state, local and
other non-U.S. and non-British Virgin Islands tax laws. Accordingly, each prospective investor
should consult its own tax advisor regarding the particular tax consequences to it of an investment
in the common stock. The discussion below is based upon laws and relevant interpretations in
effect as of the date of this annual report, all of which are subject to change. 66




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United States Federal Income Taxation The following discussion addresses only the material U.S. federal income tax consequences to a
U.S. person, defined as a U.S. citizen or resident, a U.S. corporation, or an estate or trust
subject to U.S. federal income tax on all of its income regardless of source, making an investment
in the common stock. For taxable years beginning after December 31, 1996, a trust will be a U.S.
person only if:  
    
    a court within the United States is able to exercise primary supervision over its
administration; and
    
    one or more United States persons have the authority to control all of its
substantial decisions. In addition, the following discussion does not address the tax consequences to a person who
holds or will hold, directly or indirectly, 10% or more of our common stock, which we refer to as a
10% Shareholder. Non-U.S. persons and 10% Shareholders are advised to consult their own tax
advisors regarding the tax considerations incident to an investment in our common stock. A U.S. investor receiving a distribution of our common stock will be required to include such
distribution in gross income as a taxable dividend, to the extent of our current or accumulated
earnings and profits as determined under U.S. federal income tax principles. Any distributions in
excess of our earnings and profits will first be treated, for U.S. federal income tax purposes, as
a nontaxable return of capital, to the extent of the U.S. investors adjusted tax basis in our
common stock, and then as gain from the sale or exchange of a capital asset, provided that our
common stock constitutes a capital asset in the hands of the U.S. investor. U.S. corporate
shareholders will not be entitled to any deduction for distributions received as dividends on our
common stock. Gain or loss on the sale or exchange of our common stock will be treated as capital gain or
loss if our common stock is held as a capital asset by the U.S. investor. Such capital gain or
loss will be long-term capital gain or loss if the U.S. investor has held our common stock for more
than one year at the time of the sale or exchange. A holder of common stock may be subject to backup withholding at the rate of 31% with
respect to dividends paid on our common stock if the dividends are paid by a paying agent, broker
or other intermediary in the United States or by a U.S. broker or certain United States-related
brokers to the holder outside the United States. In addition, the proceeds of the sale, exchange
or redemption of common stock may be subject to backup withholding, if such proceeds are paid by a
paying agent, broker or other intermediary in the United States. 67




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Backup withholding may be avoided by the holder of common stock if such holder:  
    
    is a corporation or comes within other exempt categories; or
    
    provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of common stock who are not U.S. persons are generally exempt from backup
withholding, although they may be required to comply with certification and identification
procedures in order to prove their exemption. Any amounts withheld under the backup withholding rules from a payment to a holder will be
refunded or credited against the holders U.S. federal income tax liability, if any, provided that
amount withheld is claimed as federal taxes withheld on the holders U.S. federal income tax return
relating to the year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for refund or, in the case of
non-U.S. holders, an income tax return in order to claim refunds of withheld amounts. British Virgin Islands Taxation Under the International Business Companies Act of the British Virgin Islands as currently in
effect, a holder of common stock who is not a resident of BVI is exempt from BVI income tax on
dividends paid with respect to the common stock and all holders of common stock are not liable for
BVI income tax on gains realized during that year on sale or disposal of such shares; BVI does not
impose a withholding tax on dividends paid by a company incorporated under the International
Business Companies Act. There are no capital gains, gift or inheritance taxes levied by BVI on companies incorporated
under the International Business Companies Act. In addition, the common stock is not subject to
transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and
the British Virgin Islands. F. DIVIDENDS AND PAYING AGENTS. Not applicable. 68




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G.
    
    STATEMENT BY EXPERTS.Not applicable.H.
    
    DOCUMENTS ON DISPLAY. The documents concerning our company which are referred to in this annual report may be
inspected at our principal executive offices at Qiao Xing Science Industrial Park, Tang Quan,
Huizhou City, Guangdong, Peoples Republic of China 516023.  I.
    
    SUBSIDIARY INFORMATION.Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary risk exposures arise from changes in interest rates and foreign currency exchange
rates. As of December 31, 2004, our aggregate bank loans, at various fixed interest rates, amounted
to Rmb 360.8 million (US$43.6 million). Due to the stable interest rate in the PRC, we do not
believe that material risk on interest rates exists. For the year ended December 31, 2004, about 98% of our products were sold in Mainland China
and the great majority of our sales income are denominated in Rmb. Our major expenses are also
denominated in Rmb. Accordingly, we believe that we are not exposed to material risk from changing
foreign currency exchange rates. Although we cannot accurately determine the precise effect of inflation on our operations, due
to the stable economy of China, we do not believe inflation has had a material effect on our sales
or results of operations. 
 ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES  Not applicable. 69




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS Not applicable. 
 ITEM 15. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our chairman
and chief financial officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of our fiscal year pursuant to Exchange Act Rule 13(a)-14(c).
Based on this evaluation, which will be used as input for further improvement actions, they
concluded that our disclosure controls and procedures are effective in timely alerting them to
material information about Qiao Xing Universal Telephone, Inc. and its consolidated subsidiaries
required to be included in our SEC filings. Additionally, there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of this evaluation.
We have not identified any significant deficiencies or material weaknesses in our internal controls
and, therefore, there were no corrective actions taken. 
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Our Board of Directors has determined that we currently have two audit committee financial
experts serving on our audit committee, both of whom are independent as defined by the Nasdaq
Stock Market listing standards: Sonny Kwok Wing Hung and Yi Hong Zhang. 
 ITEM 16B. CODE OF ETHICS We have adopted a code of ethics that applies to all of our employees, including our chief
executive officer and our chief financial officer. 70




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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for
professional services rendered by our principal accountant for the audit of our annual financial
statements or services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years were $220,000 for the fiscal year
ended December 31, 2004 and $260,000 for the fiscal year ended December 31, 2003. (b) Audit  Related Fees. The aggregate fees billed in each of the last two fiscal
years for assurance and related services by our principal accountant that are reasonably related to
the performance of the audit or review of our financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended December 31, 2004 and $0 for the
fiscal year ended December 31, 2003. (c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for
professional services rendered by our principal accountant for tax compliance, tax advice, and tax
planning were $0 for the fiscal year ended December 31, 2004 and $0 for the fiscal year ended
December 31, 2003. (d) All Other Fees. The aggregate fees billed in each of the last two fiscal years for
products and services provided by our principal accountant, other than the services reported in
paragraphs (a) through (c) of this Item, were $6,000 for the fiscal year ended December 31, 2004
and $0 for the fiscal year ended December 31, 2003. (e) Audit Committee Pre-Approval Policies and Procedures. To ensure continuing auditor
objectivity and to safeguard the independence of our auditors, our audit committee has determined a
framework for the type and authorization of non-audit services which our auditors may provide. The
audit committee has adopted policies for the pre-approval of specific services that may be provided
by our auditors. The dual objectives of these policies are to ensure that we benefit in a cost
effective manner from the cumulative knowledge and experience of our auditors, while also ensuring
that the auditors maintain the necessary degree of independence and objectivity. Our audit committee approved the engagement of Grobstein, Horwath & Company to render audit
and non-audit services before they were engaged by us. All of the services described in each of paragraphs (b) through (d) of this Item were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f).Not applicable. 71




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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. None. 
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. None. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS 72




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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM To the Shareholders and Board of Directors Qiao Xing Universal Telephone, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Qiao Xing Universal Telephone, Inc.
and its subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations and comprehensive income, cash flows and changes in shareholders equity for each of the
years in the three-year period ended December 31, 2004. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audit included consideration of internal controls over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Qiao Xing Universal Telephone, Inc. and
its subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations
and cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. GROBSTEIN, HORWATH & COMPANY LLP Sherman Oaks, California
June 30, 2005 F-1




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QIAO XING UNIVERSAL
TELEPHONE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2004 Note
    

2 0 0 3

    
    

2 0 0 4Rmb000
    
    

Rmb000
    
    
    US$000(Note 4)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    17,023Restricted cash
    
    34
    
    
    85,189
    
    
    
    105,640
    
    
    
    12,764Bills receivable
    
    
    
    
    19,836
    
    
    
    238,372
    
    
    
    28,801Accounts receivable, net
    
    5
    
    
    254,951
    
    
    
    438,963
    
    
    
    53,037Inventories
    
    6
    
    
    149,287
    
    
    
    293,407
    
    
    
    35,451Prepaid expenses
    
    7
    
    
    387,224
    
    
    
    281,057
    
    
    
    33,958Other current assets
    
    8
    
    
    7,083
    
    
    
    7,147
    
    
    
    863Receivable from sale of an equity investee
    
    10
    
    
    
    
    
    
    50,400
    
    
    
    6,090Taxation receivable
    
    27
    
    
    10,310
    
    
    
    
    
    
    
    Due from related parties
    
    35
    
    
    7,185
    
    
    
    7,215
    
    
    
    872Total current assets
    
    
    
    
    1,043,531
    
    
    
    1,563,091
    
    
    
    188,859Property, machinery and equipment, net
    
    12
    
    
    98,305
    
    
    
    107,162
    
    
    
    12,948Construction-in-progress
    
    13
    
    
    1,184
    
    
    
    50,934
    
    
    
    6,154Land use rights, net
    
    14
    
    
    187,111
    
    
    
    182,667
    
    
    
    22,070Other non-current assets
    
    15
    
    
    822
    
    
    
    12,610
    
    
    
    1,524Investment at equity
    
    16
    
    
    37,214
    
    
    
    3,321
    
    
    
    401Investments at cost
    
    17
    
    
    14,965
    
    
    
    22,599
    
    
    
    2,730Goodwill
    
    18
    
    
    72,088
    
    
    
    72,088
    
    
    
    8,710Other acquired intangible assets, net
    
    19
    
    
    112,741
    
    
    
    95,751
    
    
    
    11,569Total assets
    
    
    
    
    1,567,961
    
    
    
    2,110,223
    
    
    
    254,965LIABILITIES, MINORITY INTERESTS AND
SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    20 & 34
    
    
    439,472
    
    
    
    700,186
    
    
    
    84,599Accounts payable
    
    
    
    
    177,373
    
    
    
    303,110
    
    
    
    36,623Other payables
    
    21
    
    
    14,630
    
    
    
    1,565
    
    
    
    189Accrued liabilities
    
    22
    
    
    20,069
    
    
    
    33,888
    
    
    
    4,094Deposits received
    
    
    
    
    8,884
    
    
    
    7,399
    
    
    
    894Deferred revenues
    
    
    
    
    68,336
    
    
    
    61,117
    
    
    
    7,384Capital lease obligations, current portion
    
    23
    
    
    1,510
    
    
    
    1,510
    
    
    
    183Due to related parties
    
    35
    
    
    15,494
    
    
    
    25,724
    
    
    
    3,108Taxation payable
    
    27
    
    
    
    
    
    
    2,429
    
    
    
    294Total current liabilities
    
    
    
    
    745,768
    
    
    
    1,136,928
    
    
    
    137,368Capital lease obligations, non-current portion
    
    23
    
    
    3,776
    
    
    
    2,265
    
    
    
    274Shareholders loans
    
    24
    
    
    8,163
    
    
    
    8,163
    
    
    
    986Total liabilities
    
    
    
    
    757,707
    
    
    
    1,147,356
    
    
    
    138,628Minority interests
    
    
    
    
    232,833
    
    
    
    283,650
    
    
    
    34,272Commitments and Contingencies (Note 31)Shareholders equity:Common stock, par value Rmb0.008
(equivalent of US$0.001); authorized
50,000,000 shares; outstanding and fully
paid - 15,537,718 shares as of December
31, 2003 and 16,645,176 shares as of
December 31, 2004
    
    26
    
    
    129
    
    
    
    138
    
    
    
    17Additional paid-in capital
    
    
    
    
    366,246
    
    
    
    445,089
    
    
    
    53,777Retained earnings
    
    
    
    
    211,842
    
    
    
    234,716
    
    
    
    28,359Cumulative translation adjustments
    
    
    
    
    (796
    )
    
    
    (726
    )
    
    
    (88
    )Total shareholders equity
    
    
    
    
    577,421
    
    
    
    679,217
    
    
    
    82,065Total liabilities, minority
interests and shareholders equity
    
    
    
    
    1,567,961
    
    
    
    2,110,223
    
    
    
    254,965
 The accompanying notes are an integral part of these consolidated financial statements. F-2




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QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS   Note
    

2 0 0 2
    
    

2 0 0 3
    
    

2 0 0 4Rmb000
    
    

Rmb000
    
    

Rmb000
    
    
    US$000(Note 4)Net sales
    
    35
    
    
    549,967
    
    
    
    1,843,282
    
    
    
    2,019,081
    
    
    
    243,953Cost of goods sold
    
    35
    
    
    (528,149
    )
    
    
    (1,598,615
    )
    
    
    (1,795,482
    )
    
    
    (216,937
    )Gross profit
    
    
    
    
    21,818
    
    
    
    244,667
    
    
    
    223,599
    
    
    
    27,016Operating expenses:Selling expenses
    
    
    
    
    (5,286
    )
    
    
    (74,885
    )
    
    
    (27,873
    )
    
    
    (3,368
    )General and administrative
expenses
    
    37
    
    
    (68,233
    )
    
    
    (51,885
    )
    
    
    (67,326
    )
    
    
    (8,135
    )Research and development
    
    
    
    
    (451
    )
    
    
    (6,649
    )
    
    
    (10,449
    )
    
    
    (1,262
    )In process research and
development
    
    
    
    
    
    
    
    
    (33,579
    )
    
    
    
    
    
    
    Amortization of acquired
intangible assets
    
    19
    
    
    
    
    
    
    (42,192
    )
    
    
    (16,990
    )
    
    
    (2,053
    )Stock-based compensation
    
    25&26.b
    
    
    
    
    
    
    (26,929
    )
    
    
    (32,736
    )
    
    
    (3,955
    )(Loss) Income from operations
    
    
    
    
    (52,152
    )
    
    
    8,548
    
    
    
    68,225
    
    
    
    8,243Interest income
    
    37
    
    
    1,070
    
    
    
    3,045
    
    
    
    492
    
    
    
    59Exchange loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    
    
    (17,867
    )
    
    
    (18,985
    )
    
    
    (27,060
    )
    
    
    (3,269
    )Gain on sale of a subsidiary
    
    9
    
    
    79,050
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of equity investee
    
    11
    
    
    
    
    
    
    
    
    
    
    41,465
    
    
    
    5,010Other income, net
    
    
    
    
    124
    
    
    
    2,088
    
    
    
    1,597
    
    
    
    193Income (Loss) before
income tax
    
    
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    84,719
    
    
    
    10,236Provision for income tax
    
    27
    
    
    
    
    
    
    
    
    
    
    (10,404
    )
    
    
    (1,257
    )Income (Loss) before
minority interests
    
    
    
    
    10,225
    
    
    
    (5,304
    )
    
    
    74,315
    
    
    
    8,979Minority interests
    
    
    
    
    6,248
    
    
    
    (9,228
    )
    
    
    (50,817
    )
    
    
    (6,140
    )Equity in earnings of equity
investees
    
    16
    
    
    
    
    
    
    6,802
    
    
    
    (624
    )
    
    
    (75
    )Net Income (Loss)
    
    
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    2,764Other comprehensive (loss)
income translation
adjustments
    
    
    
    
    (61
    )
    
    
    (746
    )
    
    
    70
    
    
    
    8Comprehensive income
(loss)
    
    
    
    
    16,412
    
    
    
    (8,476
    )
    
    
    22,944
    
    
    
    2,772Earnings (Loss) per common
share-Basic
    
    29
    

    Rmb        1.12
    
    Rmb       (0.50)
    
    Rmb      1.39
    
    US$
    0.17-Diluted
    
    29
    
    Rmb        0.95
    
    Rmb       (0.50)
    
    Rmb      1.38
    
    US$
    0.17Weighted average number of
shares outstanding-Basic
    
    29
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    16,443,000-Diluted
    
    29
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    16,559,527
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES   2 0 0 2
    
    

2 0 0 3
    
    

2 0 0 4Rmb000
    
    

Rmb000
    
    

Rmb000
    
    
    US$000(Note 4)Cash flows from operating activities:Net income (loss)
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    2,764Adjustments to reconcile net income (loss) to
net cash used in operating activities -Depreciation of property, machinery and
equipment
    
    
    13,243
    
    
    
    8,995
    
    
    
    12,105
    
    
    
    1,463Amortization of land use rights
    
    
    5,008
    
    
    
    4,094
    
    
    
    4,097
    
    
    
    495Amortization of other acquired intangible
assets
    
    
    
    
    
    
    42,192
    
    
    
    16,990
    
    
    
    2,053Bad debt
expenses
    
    
    
    
    
    
    772
    
    
    
    5,617
    
    
    
    679In process research and development
    
    
    
    
    
    
    33,579
    
    
    
    
    
    
    
    Net loss on disposal of property, machinery
and equipment
    
    
    2,660
    
    
    
    195
    
    
    
    100
    
    
    
    12Stock-based compensation
    
    
    
    
    
    
    26,929
    
    
    
    32,736
    
    
    
    3,955Interest expense on shareholders loans
    
    
    478
    
    
    
    478
    
    
    
    478
    
    
    
    58Gain on sale of a subsidiary
    
    
    (79,050
    )
    
    
    
    
    
    
    
    
    
    
    Gain on sale of equity investee
    
    
    
    
    
    
    
    
    
    
    (41,465
    )
    
    
    (5,010
    )Minority interests
    
    
    (6,248
    )
    
    
    9,228
    
    
    
    50,817
    
    
    
    6,140Equity in earnings of equity investees
    
    
    
    
    
    
    (6,802
    )
    
    
    624
    
    
    
    75(Increase) Decrease in operating assets -Accounts receivable
    
    
    (26,023
    )
    
    
    (221,466
    )
    
    
    (189,629
    )
    
    
    (22,913
    )Bills receivable
    
    
    
    
    
    
    (2,431
    )
    
    
    (218,536
    )
    
    
    (26,404
    )Inventories
    
    
    17,023
    
    
    
    172,156
    
    
    
    (144,120
    )
    
    
    (17,413
    )Prepaid expenses
    
    
    (60,156
    )
    
    
    (158,525
    )
    
    
    106,167
    
    
    
    12,828Other current assets
    
    
    (63,205
    )
    
    
    35
    
    
    
    (64
    )
    
    
    (8
    )Deferred income tax assets
    
    
    9,787
    
    
    
    
    
    
    
    
    
    
    
    Taxation receivable
    
    
    
    
    
    
    55,695
    
    
    
    10,310
    
    
    
    1,246Due from related parties
    
    
    3,338
    
    
    
    3,922
    
    
    
    (30
    )
    
    
    (4
    )(Decrease) Increase in operating liabilities -Accounts payable
    
    
    (1,334
    )
    
    
    62,436
    
    
    
    126,084
    
    
    
    15,234Other payables
    
    
    66,314
    
    
    
    (2,293
    )
    
    
    (13,065
    )
    
    
    (1,579
    )Accrued liabilities
    
    
    11,335
    
    
    
    (5,491
    )
    
    
    13,819
    
    
    
    1,670Deposits received
    
    
    
    
    
    
    
    
    
    
    (1,485
    )
    
    
    (179
    )Deferred revenues
    
    
    
    
    
    
    (294,143
    )
    
    
    (7,219
    )
    
    
    (872
    )Taxation payable
    
    
    13,754
    
    
    
    (5,264
    )
    
    
    2,429
    
    
    
    293Due to related parties
    
    
    20,406
    
    
    
    (23,965
    )
    
    
    10,230
    
    
    
    1,235Net cash used in operating activities
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (200,136
    )
    
    
    (24,181
    )
 F-4




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##### Table of Contents



2 0 0 2
    
    

2 0 0 3
    
    

2 0 0 4Rmb000
    
    

Rmb000
    
    

Rmb000
    
    
    US$000(Note 4)Cash flows from investing activities:Acquisitions of property, machinery and
equipment
    
    
    (9,759
    )
    
    
    (44,599
    )
    
    
    (24,071
    )
    
    
    (2,908
    )Decrease (Increase) in non-current assets
    
    
    4,728
    
    
    
    944
    
    
    
    (11,788
    )
    
    
    (1,425
    )Net cash (outflow) inflow from acquisition of
subsidiaries (Note 33.d)
    
    
    (180,000
    )
    
    
    38,369
    
    
    
    
    
    
    
    Net cash (outflow) inflow from sale of a
subsidiary
(Note 33.c)
    
    
    (6,927
    )
    
    
    210,000
    
    
    
    
    
    
    
    Net cash inflow from sale of equity investee
(Note
33.e)
    
    
    
    
    
    
    
    
    
    
    21,600
    
    
    
    2,610Capital contribution in an equity investee
    
    
    
    
    
    
    
    
    
    
    (4,900
    )
    
    
    (592
    )Expenditures on construction-in-progress
    
    
    
    
    
    
    (1,184
    )
    
    
    (49,750
    )
    
    
    (6,011
    )Payment of land use rights
    
    
    (2,140
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of property, machinery
and equipment
    
    
    1,628
    
    
    
    
    
    
    
    3,009
    
    
    
    363Decrease in due from related parties
    
    
    56,300
    
    
    
    
    
    
    
    
    
    
    
    Net cash (used in) provided by investing
activities
    
    
    (136,170
    )
    
    
    203,530
    
    
    
    (65,900
    )
    
    
    (7,963
    )Cash flows from financing activities:Increase in restricted cash
    
    
    (161,657
    )
    
    
    (44,207
    )
    
    
    (20,451
    )
    
    
    (2,471
    )New short-term borrowings
    
    
    585,967
    
    
    
    720,791
    
    
    
    1,353,372
    
    
    
    163,520Repayment of short-term borrowings
    
    
    (325,550
    )
    
    
    (461,319
    )
    
    
    (1,092,658
    )
    
    
    (132,019
    )Contribution from minority shareholder
    
    
    67,000
    
    
    
    1,274
    
    
    
    
    
    
    
    New long-term borrowings
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    Repayment of capital lease obligation
    
    
    
    
    
    
    (1,311
    )
    
    
    (1,511
    )
    
    
    (183
    )Net proceeds from exercise of options and
warrants
    
    
    
    
    
    
    910
    
    
    
    45,638
    
    
    
    5,514Net cash provided by financing activities
    
    
    195,760
    
    
    
    216,138
    
    
    
    284,390
    
    
    
    34,361Effect of translation adjustments
    
    
    (61
    )
    
    
    (746
    )
    
    
    70
    
    
    
    9Net increase in cash and cash equivalents
    
    
    3,332
    
    
    
    111,518
    
    
    
    18,424
    
    
    
    2,226Cash and cash equivalents, beginning of year
    
    
    7,616
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    14,797Cash and cash equivalents, end of year
    
    
    10,948
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    17,023
 Supplemental disclosure of cash flow information (Note 33.a and b) The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY  Accumulatedothercomprehensiveincome (loss) -Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    cumulativeNumber of
    
    
    
    
    
    
    Additional
    
    
    Dedicated
    
    
    Retained
    
    
    translationNote
    
    
    shares
    
    
    Amount
    
    
    paid-in capital
    
    
    reserves
    
    
    earnings
    
    
    adjustments000
    
    
    Rmb000
    
    

Rmb000
    
    

Rmb000
    
    

Rmb000
    
    

Rmb000Balance as of December
31, 2001
    
    
    
    
    
    
    14,282
    
    
    
    118
    
    
    
    324,219
    
    
    
    10,541
    
    
    
    192,558
    
    
    
    11Issue of shares to
external consultants
    
    
    25
    
    
    
    1,000
    
    
    
    9
    
    
    
    13,234
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,473
    
    
    
    Shareholders
contribution
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Transfer from
dedicated reserves to
retained earnings
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,541
    )
    
    
    10,541
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Balance as of December
31, 2002
    
    
    
    
    
    
    15,282
    
    
    
    127
    
    
    
    337,931
    
    
    
    
    
    
    
    219,572
    
    
    
    (50
    )Issue of shares to
warrant/option holders
    
    
    25
    
    
    
    256
    
    
    
    2
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    Recognition of
compensation expense
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26,929
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,730
    )
    
    
    Shareholders
contribution
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (746
    )Balance as of December
31, 2003
    
    
    
    
    
    
    15,538
    
    
    
    129
    
    
    
    366,246
    
    

    
    
    
    
    
    211,842
    
    
    
    (796
    )Issue of shares to
option holders
    
    
    26
    
    
    
    995
    
    
    
    8
    
    
    
    45,300
    
    
    
    
    
    
    
    
    
    
    
    Issue of shares to
warrant holders
    
    
    26
    
    
    
    12
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    
 F-6




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##### Table of Contents



Accumulatedothercomprehensiveincome (loss) -Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    cumulativeNumber of
    
    
    
    
    
    
    Additional
    
    
    Dedicated
    
    
    Retained
    
    
    translationNote
    
    
    shares
    
    
    Amount
    
    
    paid-in capital
    
    
    reserves
    
    
    earnings
    
    
    adjustmentsRmb000
    
    

Rmb000
    
    

Rmb000
    
    

Rmb000
    
    

Rmb000
    
    

Rmb000Recognition of
compensation expense
    
    
    25
    
    
    
    100
    
    
    
    1
    
    
    
    32,735
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,874
    
    
    
    Shareholders
contribution
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Balance as of December
31, 2004
    
    
    
    
    
    
    16,645
    
    
    
    138
    
    
    
    445,089
    
    
    
    
    
    
    
    234,716
    
    
    
    (726
    )Balance as of December
31, 2004 (in USD000)
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    53,777
    
    
    
    
    
    
    
    28,359
    
    
    
    (88
    )
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



QIAO XING UNIVERSAL TELEPHONE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1.ORGANIZATION AND NATURE OF OPERATIONS Qiao Xing Universal Telephone, Inc. (the Company) was incorporated in the British Virgin Islands
on December 6, 1994. Its shares became listed on the Nasdaq National Market in February 1999. The Company and its subsidiaries (the Group) are principally engaged in (i) the sale of
telecommunication terminals and equipment, including cord and cordless telephone sets, in Mainland
China; and (ii) production and sale of mobile phones and accessories in Mainland China. During 2002, the Group entered into the following sale and purchase agreements (the Agreements)
for the acquisition of an aggregate equity interest of 65% in CEC Telecom Co., Ltd. (CECT) for an
aggregate consideration of Rmb312,750,000. CECT is a limited liability company established in
Mainland China and is principally engaged in the production and sale of mobile phones and
accessories in Mainland China (the Acquisitions). Pursuant to an Agreement dated May 23, 2002, Qiao Xing Mobile Communication Company Limited
(QXMCCL), a subsidiary of the Company acquired a 25% equity interest in CECT from Tianjin Taida
Company Limited for cash consideration of Rmb108,750,000. Pursuant to an Agreement and a
supplementary Agreement, both dated May 23, 2002, QXMCCL acquired a 40% equity interest in CECT
from China Electronics Corporations (CEC) and other group companies of CEC for cash consideration
of Rmb204,000,000. All Agreements are governed by, and construed in accordance with, the Mainland
Chinese law. On February 8, 2003, the acquisition of CECT was finally approved by all necessary government
authorities with the new business license granted subsequently. On June 30, 2004, CECT sold its 40% shareholding in CEC Mobile Co., Ltd. (CECM) to Bejing Lian
Sheng Tong Investment Management Co., Ltd, an independent third party, for cash consideration of
Rmb 72,000,000. Thereafter, CECTs shareholding interest in CECM has been reduced to 10%. Pursuant to an Agreement dated December 10, 2003, CECT and [Minji Diantong Malaysia Co., Ltd.]
formed a sino-foreign joint venture named Suzhou Minji CEC Telecom Co., Ltd. on January 13, 2004
whereby CECT invested in Rmb 4,900,000, representing 49% shareholding interest in Suzhou Minji CEC
Telecom Co., Ltd (SMCECT). On June 30, 2004, Hui Zhou Qiao Xing Communication Industry Limited (QXCI), a subsidiary of the
Company, entered into an agreement with CEC to acquire an additional 25% of equity
interest in CECT from CEC for an aggregate consideration of Rmb 75,000,000. All Agreements F-8




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##### Table of Contents



are governed by, and constructed in accordance with, the Mainland Chinese Law. The Group is subjected to, among others, the following operating risks: Country risk As substantially all of the Groups operations are conducted in Mainland China, the Group is
subject to special considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated with, among others,
the political, economic and legal environments and foreign currency exchange. The Groups results
may be adversely affected by changes in the political and social conditions in Mainland China, and
by changes in governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of taxation, among other
things. In addition, substantially all of the Groups revenue is denominated in Renminbi (Rmb) which must
be converted into other currencies before remittance outside Mainland China. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies abroad require the
approval of the Mainland Chinese government. Concentration of credit risk The Group performs ongoing credit evaluations of each customers financial condition. It maintains
reserves for potential credit losses and such losses in the aggregate have not exceeded
managements expectations. As of December 31, 2004, the Groups five largest accounts receivable
accounted for approximately 63% of the Groups total accounts receivable. Technology risk The new advanced products that the Group is developing incorporate complex and evolving
technologies that require substantial expenditures and resources. However, these new products may
fail to be accepted at the rates or levels the Group anticipates and the Group may fail to realize
the expected benefits from its investments in these new technologies. The Group may experience greater variability in its operating results than in the past,
particularly depending on the general economic conditions and the pace of development and
acceptance of new technologies. Changes in the communication industry are expected to increase competition and change the
competitive landscape and may adversely affect the Groups operating results. F-9




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##### Table of Contents



Operating risk The Group conducts its manufacturing and sales operations through joint ventures established
between the Group and certain Mainland Chinese government state-owned enterprises. Any
deterioration of these strategic relationships may have an adverse effect on the operations of the
Group. 2. SUBSIDIARIES AND EQUITY JOINT VENTURES Details of the Companys subsidiaries and equity joint ventures as of December 31, 2004 were as
follows: Percentage ofequity interestPlace of
    
    attributable to theName
    
    incorporation
    
    Group
    
    Principal activities2003
    
    
    2004Hui Zhou Qiao Xing Communication Industry
    
    Mainland China
    
    
    90
    %
    
    90%
    
    Manufacturing of GSMLimited (QXCI)
    
    
    
    
    
    
    
    Note i
    
    mobile phones andsales of indoor phonesHui Zhou Qiao Xing Property Limited
    
    Mainland China
    
    
    90
    %
    
    90%
    
    -    Property holding(QXPL)
    
    
    
    
    
    
    
    Note iiQiao Xing Mobile Communication Company
    
    BVI
    
    
    80
    %
    
    90%
    
    Investment holdingLimited (QXMCCL)
    
    
    
    
    
    
    
    Note iiiQiao Xing Communication Holdings
    
    BVI
    
    
    100
    %
    
    100%
    
    Investment holdingLimited
    
    
    
    
    
    
    
    Note ivCEC Telecom Co., Ltd.
    
    Mainland China
    
    
    52
    %
    
    52%
    
    Production  and sales of mobile(CECT)
    
    
    
    
    
    
    
    Note v
    
    phones and accessoriesBeijing Jinxin Hengtong Technology
    
    Mainland China
    
    
    46.8
    %
    
    46.8%
    
    Production   of   mobileCompany Limited (BJHTCL)
    
    
    
    
    
    
    
    Note vi
    
    phones and accessoriesBeijing Zhongdian Songda Consumer
    
    Mainland China
    
    
    52
    %
    
    Communications Products Service
    
    
    
    
    
    
    
    Note vii
    
    Provision    of   mobileCompany Limited (BJZDSD)
    
    
    
    
    
    
    
    
    
    phone    repair    andmaintenance services
 Notes  i. Hui Zhou Qiao Xing Communication Industry Limited is an equity joint venture established in
Mainland China on December 2, 2002 between the Group and Qiao Xing Group Limited, a company
beneficially owned by Mr. Rui Lin Wu, to be operated for a term of 15 years until December 1, 2017.
Its registered capital is Rmb10,629,000 which was fully paid up on March 28, 2003. F-10




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ii. Hui Zhou Qiao Xing Property Limited is an equity joint venture established in Mainland
China on December 17, 2002 between the Group and Qiao Xing Group Limited, a company beneficially
owned by Mr. Rui Lin Wu, to be operated for a term of 15 years until December 16, 2017. Its
registered capital is Rmb2,125,800 which was fully paid up on March 28, 2003. iii. Qiao Xing Mobile Communication Company Limited was incorporated in the British Virgin Islands
on January 31, 2002 between the Group and Galbo Enterprises Ltd., an independent third party. Its
authorized capital is US$50,000, of which US$10,000 has been issued and paid up on August 28, 2002. iv. Qiao Xing Communication Holdings Limited was incorporated in the British Virgin Islands on May
21, 2002. Its authorized capital is US$50,000, of which US$1 has been issued and paid up by June 8,
2002. v. CEC Telecom Co., Ltd. was established in Mainland China on May 22, 2000 for a term of 30 years
until May 21, 2030. The Groups interest in CECT is held through QXMCCL which in turn holds 65% of
the issued capital of CECT. The remaining 35% issued capital of CECT is held by China Electronics
Corporation and Tianjin Taida Company Limited, both of which are Mainland Chinese government
state-owned enterprises. CECTs registered capital is Rmb300,000,000 which was fully paid up on May
18, 2000. vi. Beijing Jinxin Hengtong Technology Company Limited was established in Mainland China on
February 26, 2001 to be operated for a term of 30 years until February 25, 2031. The Groups
interest in BJHTCL is held through CECT which in turn holds 90% of the issued capital of BJHTCL.
BJHTCLs registered capital is Rmb1,000,000 which was fully paid up. During the years ended
December 31, 2003 and 2004, BJHTCL were dormant. vii. Beijing Zhongdian Songda Consumer Communications Products Services Company Limited was
established in Mainland China on June 4, 2001 to be operated for a term of 10 years until June 3,
2011. The Groups interest in BJZDSD was held through CECT which in turn holds 100% of the issued
capital of BJZDSD. BJZDSDs registered capital was Rmb2,000,000 which was fully paid up. BJZDSD was
de-registered in 2003. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of consolidation The consolidated financial statements include the accounts of the Company and its majority-owned
subsidiaries, including the equity joint ventures. All material intra-group balances and
transactions have been eliminated on consolidation. The consolidated financial statements were prepared in accordance with accounting principles
generally accepted in the United States (U.S. GAAP). The preparation of financial statements in F-11




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conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. U.S. GAAP differs from that
used in the statutory financial statements of the major operating subsidiaries of the Group, which
were prepared in accordance with the relevant accounting principles and financial reporting
regulations applicable to joint venture enterprises as established by the Ministry of Finance of
the PRC. Certain accounting principles stipulated under U.S. GAAP are not applicable in the PRC. b. Subsidiaries A subsidiary is a company, including the equity joint ventures, in which the Company holds,
directly or indirectly, more than a 50% equity interest, as a long-term investment and over which
it can exercise control, as defined under U.S. GAAP. c. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amount on deposits with banks and all highly liquid
investments with maturity dates of three months or less at the time of acquisition. d. Inventories Inventories are stated at the lower of cost, determined on a weighted average basis, and net
realizable value. Costs of work-in-process and finished goods are composed of direct materials,
direct labor and an attributable portion of manufacturing overhead. Net realizable value is the
estimated selling price in the ordinary course of business less the estimated cost of completion
and the estimated costs necessary to make the sale. When inventories are sold, their carrying amount is charged to expense in the year in which the
revenue is recognized. Write-downs for declines in net realizable value or for losses of
inventories are recognized as an expense in the year the impairment or loss occurs. e. Property, machinery and equipment and construction-in-progress Property, machinery and equipment are stated at cost less accumulated depreciation and accumulated
impairment losses. Gains or losses on disposals are reflected in current operations. Major
expenditures for betterments and renewals are capitalized. All ordinary repair and maintenance
costs are expensed as incurred. Depreciation for financial reporting purposes is provided using the
straight-line method over the estimated useful lives of the assets after taking into account the
assets estimated residual value. Leasehold improvements are amortized over the lease term if
shorter than the assets useful life. The estimated useful lives are as follows: leasehold
improvements  5 years (over the lease term), buildings  8 to 30 years, machinery and
equipment  5 to 12 years, furniture and office equipment  5 to 10 years, and motor vehicles  5
to 8 years. F-12




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Construction-in-progress represents land costs as well as factory and office buildings under
construction. When material, the Group capitalizes interest during the construction phase of
qualifying assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 34:
Capitalization of Interest Cost. The Group tests its investment in long-lived assets, including property, machinery and equipment
and amortizable intangible assets, for recoverability whenever events or changes in circumstances
indicate the net carrying amount may not be recoverable. Such events or circumstances include, but
are not limited to, a significant decrease in the fair value of the underlying business, a
significant decrease in the benefits realized from an acquired business. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to result from its use and eventual disposition. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized for the amount by which the carrying value of the asset exceeds its fair value. If a
readily determinable market price does not exist, fair value is estimated using discounted expected
cash flows attributable to the assets. Assets to be disposed of are separately presented on the balance sheet and reported at the lower of
their carrying amount or fair value less costs to sell, and are no longer depreciated. f. Land use rights Land use rights are stated at the amount of the prepayment less accumulated amortization. Land
use rights expense is recognized ratably over the lease term of 48 to 51 years. g. Investment at equity The Groups investment in an affiliate for which its ownership exceeds 20%, but which are not
majority-owned or controlled by the Group, is accounted for using the equity method of accounting.
Under the equity method, the Groups proportionate share of the affiliates net income or loss is
included in the consolidated statements of operations, while the Groups proportionate share of the
affiliates capital transactions is accounted for as changes in owners equity. h. Investment at cost Investments in which the Group does not have control or significant influence are carried at cost
less impairment for decline in value that are deemed other than temporary. Income from investments
is accounted for to the extent of dividends received and receivable. i. Goodwill F-13




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Goodwill represents the cost of an acquired company in excess of the fair market value of the
individual net tangible assets at the date of acquisition. The Group adopted Statement of Financial
Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill be tested for impairment upon first adoption and annually thereafter, or more
frequently if events or changes in circumstances indicate that it might be impaired, using the
prescribed two-step process. The first step screens for potential impairment of goodwill if the
fair value of the reporting unit is less than its carrying value, while the second step measures
the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its
carrying value. The Group completed its annual goodwill impairment test during the year ended December 31, 2004 and
determined that no adjustment to the carrying value of goodwill was required. j. Other acquired intangible assets Other acquired intangible assets are required to be determined separately from goodwill based on
the assets fair value. The Group adopted SFAS No. 141, Business Combinations. In particular, an
intangible asset which is acquired in a business combination should be recognized as an asset apart
from goodwill if it satisfies either the contractual-legal or separability criterion. SFAS No.
141 specifically excludes an assembled workforce acquired in a business combination from
recognition apart from goodwill. With the adoption of SFAS No. 142, intangible assets with indefinite useful lives are no longer
amortized, while intangible assets with finite useful lives will continue to be amortized over
their useful lives. The Group adopted SFAS No. 144 which requires that intangible assets to be tested for impairment if
events or changes in circumstances indicate that the asset might be impaired, using the prescribed
two-step process. The first step is a recoverability test which screens for potential impairment of
an asset based on whether the undiscounted sum of estimated future cash flows from an asset is less
than its carrying value. The second step measures the amount of impairment, if any, by comparing
the fair value of the asset to its carrying value. The Group completed its annual other acquired intangible assets impairment test during the year
ended December 31, 2004 and determined that no adjustment to the carrying value of other acquired
intangible assets was required. k. Sales recognition The Group recognizes sales in accordance with SEC Staff Accounting Bulletin
(SAB) No. 101 Revenue Recognition in Financial Statements, as amended by SAB No. 104
Revenue Recognition. Sales represent the invoiced value of goods, net of value
added tax (VAT), any discounts, returns, price guarantees supplied to customers, and are
recognized upon delivery of goods and passage of title. F-14




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Sales represent the invoiced value of goods, net of value-added tax (VAT),
supplied to customers. Sales are recognized upon delivery of goods and passage of title to
customers. The liability for sales returns and price guarantees is estimated based on historical
rates. All of the Groups sales made in Mainland China are subject to Mainland Chinese value-added
tax at a rate of 17% (output VAT). Such output VAT is payable after offsetting VAT paid by the
Group on purchases (input VAT). l. Shipping and Handling Costs The Company has adopted EITF 00-10 Accounting for Shipping and Handling Costs and has recorded
its shipping and handling costs as a component of cost of sales. m. Advertising costs Costs incurred for producing and communicating advertising are charged to expense when
incurred. n. Leases Capital leases represent those leases under which substantially all the risks and rewards of
ownership of the leased assets are transferred to the Group. Property, machinery and equipment held
under capital leases are initially recorded at the present value of the minimum payments at the
inception of the leases, with equivalent liabilities categorized as appropriate under current or
non-current liabilities. Interest expense, which represents the difference between the minimum
payments at the inception of the capital leases and the corresponding fair value of the assets
acquired, is allocated to accounting periods over the period of the leases to produce a constant
rate of charge on the outstanding balance. Operating leases represent those leases under which substantially all the risks and rewards of
ownership of the leased assets remain with the lessors. Rental payments under operating leases are
charged to expense on a straight-line basis over the period of the relevant leases. o. Research and development expenditures Research and development expenditures are charged to expenses as incurred. p. Stock-based compensation F-15




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The Company accounts for employee stock options in accordance with Accounting Principles Board
Opinion No. 25: Accounting for Stock Issued to Employees. Compensation expense related to
employee stock options is recorded only if the fair value of the underlying stock exceeds the
exercise price on the date of grant. Repriced options are accounted for as compensatory options
using variable accounting treatment. Under variable plan accounting, compensation expense is
adjusted for increases or decreases in the fair market value of the Companys common stock.
Variable plan accounting is applied to the repriced options until the options are exercised,
forfeited or expire unexercised. Pro forma disclosures were made assuming hypothetical fair value
method application as prescribed by SFAS No. 123: Accounting for Stock-Based Compensation. The Company accounts for stock options and warrants issued to external consultants in
accordance with the recognition provisions of SFAS No.123 and EITF 96-18: Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. The Company values stock options and warrants issued based on the Black-Scholes
option-pricing model and recognizes this value over the period in which the options vest. q. Debt issuance costs and borrowing costs Costs related to the issuance of debt are capitalized and amortized to interest expense using
the effective interest method over the lives of the related debt. All other borrowing costs are
recognized as an expense in the period in which they are incurred, except to the extent that they
are attributable to the acquisition, construction or production of an asset that necessarily
involves a substantial period of time before the asset is ready for its intended use or sale, in
which case the borrowing costs are capitalized as part of the costs of the asset. r. Income taxes The Group accounts for income taxes under the provisions of SFAS No. 109: Accounting for
Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated financial statements
or tax returns. Deferred income taxes are provided using the liability method and are recognized
for all significant temporary differences between the tax and financial statement bases of assets
and liabilities. A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize their benefits or
that future deductibility is uncertain. s. Segment information F-16




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The Group adopted SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 requires companies to report financial and descriptive information about
their reportable operating segments, including segment profit or loss, certain specific revenue and
expense items, and segment assets, as well as information about the revenues derived from the
Groups products and services, the countries in which the Group earns revenues and holds assets,
and major customers. SFAS No. 131 requires companies that have a single reportable segment to
disclose information about products and services, information about geographic areas, and
information about major customers. SFAS No. 131 requires the use of the management approach to
determine the information to be reported. The management approach is based on the way management
organizes the enterprise to assess performance and make operating decisions regarding the
allocation of resources. The Group classifies its products into two core business segments, namely
mobile phones and indoor phones. In view of the fact that the Group operates principally in
Mainland China, no geographical segment information is presented. t. Foreign currency translation The Companys functional currency is the United States dollar (US$) as a majority of its
financing and cash is denominated in US$. All other companies within the Group consider Renminbi
(Rmb) to be their functional currency as most of their business activities are based in Renminbi.
Aggregate (loss) gain from foreign currency transactions are included in the consolidated
statements of operations for the years ended December 31, 2002, 2003 and 2004, respectively. The translation of the Companys consolidated financial statements into Renminbi is performed
for balance sheet accounts using the closing exchange rate in effect at each of the balance sheet
dates and for revenue and expense accounts using the average exchange rate during each reporting
period. Gains and losses resulting from translation are included in shareholders equity separately
as cumulative translation adjustments. u. Comprehensive income The Group has adopted SFAS No. 130: Reporting Comprehensive Income which requires the Group
to report all changes in equity during a period, except for those resulting from investment by
owners and distribution to owners, in the consolidated financial statements as comprehensive income
for the period in which they are recognized. The Group has presented comprehensive income, which
encompasses net income and currency translation adjustments, in the consolidated statements of
operations and comprehensive income. v. Earnings (loss) per common share F-17




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Per Share by dividing the net income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common share is computed by using the
weighted average number of common shares outstanding adjusted to include the potentially dilutive
effect of outstanding stock options, warrants and convertible debentures to the extent such
instruments were dilutive during the period. w. Financial instruments The Group accounts for financial instruments under the provisions of SFAS No. 133: Accounting
for Derivative Instruments and Hedging Activities, which requires that all derivative financial
instruments be recognized in the financial statements and maintained at fair value regardless of
the purpose or intent for holding them. Changes in fair value of derivative financial instruments
are either recognized periodically in income or shareholders equity (as a component of
comprehensive income), depending on whether the derivative is being used to hedge changes in fair
value or cash flows. The adoption of SFAS 133 did not have a material impact on the Groups
financial position or its results of operations because the Group does not purchase or sell any
derivative financial instruments, and does not have any contracts with an embedded derivative. The carrying amounts for cash and bank deposits, pledged bank deposits, accounts receivable,
short-term borrowings, accounts payable, other payables, accrued liabilities and customer deposits
approximate their fair values because of the short maturity of those instruments. x. Reclassifications Certain reclassifications have been made to the prior years financial statements to conform to the
current year presentation. These reclassifications had no effect on previously reported results of
operations or retained earnings. y. Recently issued accounting standards (i) In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments (EITF 03-1) which provides new guidance
for assessing impairment losses on debt and equity investments. Additionally, EITF 03-1 includes
new disclosure requirements for investments that are deemed to be temporarily impaired. In
September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure
requirements remain effective and have been adopted by the Company (see Note 6. Short-term
investments). The Company will evaluate the effect, if any, of EITF 03-1 when final guidance is
released. (ii) In September 2004, the EITF Issue No. 04-08, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share. (EITF 04-08) was issued stating that
contingently convertible debt should be included in diluted earnings per share computations
regardless of whether the market price trigger has been met. This Issue is effective for reporting F-18




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periods ending after December 15, 2004. The Company adopted EITF 04-08 in the three months ended
December 31, 2004 and applied retroactively to all prior periods. The retroactive application of
EITF 04-08 resulted in a reduction of $0.02 to the diluted earnings per share for the quarter ended
September 30, 2004, and had no impact to the diluted earnings per share for all other prior
periods. (iii) In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal. In addition,
this Statement requires that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. Those transition provisions are
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The
adoption of SFAS No. 151 is not expected to have a material impact on the Groups consolidated
financial statements. (iv) In December 2004, the FASB issued SFAS No.152, Accounting for Real Estate Time-Sharing
Transactionsan amendment of FASB Statements No. 66 and 67. SFAS No.152 amends FASB Statement No.
66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB
Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to
state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate
projects does not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2.. This Statement is effective for
financial statements for fiscal years beginning after June 15, 2005. The adoption of SFAS No.152 is
not expected to have a material impact on the Groups consolidated financial statements. (v) In December 2004, the FASB issued SFAS No. 153: Exchanges of Nonmonetary
Assetsan amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. The guidance in that Opinion, however,
included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general
exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. This Statement
is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The adoption of SFAS No. 153 is not expected to have a material impact on the Groups consolidated
financial statements. F-19




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(vi) In December 2004, the FASB issued SFAS No.123  R, Share-based Payment,
which requires the compensation cost relating to share-based payment transactions (including the
cost of all employee stock options) be recognized in the financial statements That cost will be
measured based on the estimated fair value of the equity or liability instruments issued. SFAS
123-R covers a wide range of share-based compensation arrangements including options, restricted
share plans, performance-based awards, share appreciation rights, and employee share purchase
plans. SFAS No. 123-R replaces SFAS 123 No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. As originally
issued, SFAS No. 123 established as preferable a fair value based method of accounting for share 
based payment transactions with employees. However, that pronouncement permitted entities to
continue applying the intrinsic-value based model of Opinion 25, provided that the financial
statements disclosed the pro forma net income or loss based on preferable fair-value method. Publicly held companies that are not Small Business Issuers are required to apply SFAS No. 123-R at
the beginning of their next fiscal year. Thus, the Companys consolidated financial statements will
reflect an expense for (a) all share-based compensation arrangements granted after June 30, 2004
and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b)
the portion of previous share-based awards for which the requisite service has not been rendered as
of that date, based on the grant-date estimated fair value of those awards. Management believes the
adoption of this pronouncement will not have material effect on our consolidated financial
statements. 4.CONVENIENCE TRANSLATION Translation of amounts from Renminbi (Rmb) into United States dollars (US$) is for the
convenience of readers and has been made at the noon buying rate in New York City for cable
transfers in foreign currencies as certified for custom purposes by the Federal Reserve Bank of New
York on December 31, 2002, 2003 and 2004 of US$1.00 = Rmb 8.28, Rmb 8.2767 and Rmb 8.2765
respectively. No representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate or at any other rate. 5. ACCOUNTS RECEIVABLE Accounts receivable consists of: F-20




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2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Trade receivables- related parties (Note 33)
    
    
    72,781
    
    
    
    67,876
    
    
    
    8,201- third parties
    
    
    182,942
    
    
    
    377,476
    
    
    
    45,608255,723
    
    
    
    445,352
    
    
    
    53,809Less: Allowance for doubtful accounts
    
    
    (772
    )
    
    
    (6,389
    )
    
    
    (772
    )Accounts receivable, net
    
    
    254,951
    
    
    
    438,963
    
    
    
    53,037
 Changes in the allowance for doubtful accounts were as follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Beginning of year
    
    
    
    
    
    
    772
    
    
    
    93Increase in allowance for doubtful accounts
    
    
    772
    
    
    
    5,617
    
    
    
    679End of year
    
    
    772
    
    
    
    6,389
    
    
    
    772
 6. INVENTORIES Inventories consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Raw materials
    
    
    35,187
    
    
    
    153,952
    
    
    
    18,601Finished goods
    
    
    114,100
    
    
    
    139,455
    
    
    
    16,850149,287
    
    
    
    293,407
    
    
    
    35,451
 7. PREPAID EXPENSES Prepaid expenses consist of: F-21




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2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Vendor deposits for the purchase
of mobile phones- related parties (Note 33)
    
    
    308,035
    
    
    
    205,565
    
    
    
    6,063- third parties
    
    
    69,494
    
    
    
    50,178
    
    
    
    24,837377,529
    
    
    
    255,743
    
    
    
    30,900Prepaid design fees
    
    
    9,612
    
    
    
    23,817
    
    
    
    2,878Other
    
    
    83
    
    
    
    1,497
    
    
    
    180387,224
    
    
    
    281,057
    
    
    
    33,958
 8. OTHER CURRENT ASSETS Other current assets consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Advances to staff
    
    
    3,836
    
    
    
    2,951
    
    
    
    357Advances to others
    
    
    1,200
    
    
    
    2,039
    
    
    
    246Rental and utility deposits
    
    
    395
    
    
    
    422
    
    
    
    51Other
    
    
    1,652
    
    
    
    1,735
    
    
    
    2097,083
    
    
    
    7,147
    
    
    
    863
 9. SALE OF A SUBSIDIARY On December 31, 2002, an agreement for sale of the one issued share of Qiao Xing Holdings Limited
(QXHL) was entered into between Qiao Xing Universal Telephone, Inc. (the Vendor) and Central
Grace Technologies Limited (the Purchaser), a corporation incorporated under the laws of the
British Virgin Islands. The consideration for the sale of the one issued share was Rmb210,000,000
and the payment schedule was as follows: F-22




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Settlement Date
    
    Rmb000March 20, 2003
    
    
    11,470June 5, 2003
    
    
    52,000July 11, 2003
    
    
    31,435July 11, 2003
    
    
    44,661July 12, 2003
    
    
    10,434July 16, 2003
    
    
    60,000210,000
 
 *
    
    The amount was offset with a payable to QXTI of the same amount pursuant to an
agreement dated June 5, 2003. The Purchaser further represented, undertook, warranted and covenanted to make reciprocal
warranties, undertakings, covenants and indemnities to the Vendor and to assume all disclosed and
undisclosed liabilities of QXHL excluding : (i) the settlement of the current liabilities due to the Vendor in the sum of RMB231,585,507

by QXTI (ii) the settlement of the current liabilities due to the Vendor in the sum of RMB8,172,953 by
QXHL (iii) the settlement of current assets due from QXMC in the sum of RMB113,543,063 by QXTI
Although the form of the sale of the one issued share of QXHL represents a sale of stock, the
economic substance of the transaction is the sale of QXHLs indoor phone manufacturing assets and
related liabilities. As of December 31, 2002, the condensed historical balances of QXHLs assets and liabilities that
were sold consisted of: Rmb000Total current assets
    
    
    592,305Property, plant and equipment
    
    
    171,292Land use rights
    
    
    29,086Total current liabilities
    
    
    (637,613
    )Long term borrowings
    
    
    (30,000
    )Minority interests
    
    
    5,880130,950
 Certain assets of QXHL were excluded from the sale transaction. Excluded assets were certain
land use rights, fixed line telephone sales network, mobile telephone business including but not
limited to the research and development and manufacturing facilities, and die cast moulds. The
excluded assets were retained by the Group. The Group would continue to engage in the sale of
indoor phones as a core business segment of its ongoing operations, but intends to outsource the
manufacturing of indoor phones. Therefore the sale of a subsidiary has not been accounted for as a
discontinued operation. F-23




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As a result of the sale transaction, a gain on disposal of RMB79,050,000 was recognized for the
year ended December 31, 2002. The calculation of the gain on sale of a subsidiary is set out as
follows: Rmb000Consideration
    
    
    210,000Net book value of assets sold and
liabilities assumed
    
    
    (125,070
    )Minority interests sold
    
    
    (5,880
    )Gain on sale of a subsidiary
    
    
    79,050
 10. RECEIVABLE FROM SALE OF AN EQUITY INVESTEE Receivable from sale of an equity investee consists of: 2 0 0 4Rmb000
    
    
    US$000Consideration receivable from Beijing Lian Sheng TongInvestment Management Ltd., the purchaser
    
    
    50,400
    
    
    
    6,090
 The outstanding consideration receivable has not been settled as of the date of issuance of
the consolidated financial statements as it is not yet due for settlement (Note 11). F-24




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##### Table of Contents



11. SALE OF AN EQUITY INVESTEE Effective on June 30, 2004, CECT has sold its 40% shareholding in CEC Mobile Co., Ltd. (CECM) to
Beijing Lian Sheng Tong Investment Management Co., Ltd, an independent third party, for cash
consideration of Rmb 72,000,000. Thereafter, CECTs shareholding interest in CECM has been reduced
to 10%. The consideration for the sale of the 40% share was Rmb72,000,000 and the payment schedule was as
follows: Settlement Date
    
    Rmb000Before
July 12, 2004
    
    
    21,600Before July
15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
 As a result of the sale transaction, a gain on sale of RMB 41,465,000 was recognized during
the year ended December 31, 2004. The calculation of the gain on sale of an associate is set out as
follows: Rmb000Consideration
    
    
    72,000Share of net assets value of CECM disposed of as of June 30, 2004
    
    
    (30,535
    )Gain on sale of an associate
    
    
    41,465
 As of June 30, 2004, the condensed historical balances of CECMs assets and liabilities that
were sold consisted of: (unaudited)Rmb000Total current assets
    
    
    256,531Property, plant and equipment
    
    
    2,246Total current liabilities
    
    
    (182,439
    )Total net assets
    
    
    76,338Percentage of CECM disposed of
    
    
    40
    %Share of net assets value of CECM disposed of as of June 30, 2004
    
    
    30,535
 F-25




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##### Table of Contents



12. PROPERTY, MACHINERY AND EQUIPMENT Property, machinery and equipment consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Buildings
    
    
    39,110
    
    
    
    39,352
    
    
    
    4,755Leasehold improvements
    
    
    6,728
    
    
    
    8,375
    
    
    
    1,012Machinery, equipment and software
    
    
    72,506
    
    
    
    89,666
    
    
    
    10,834Furniture and office equipment
    
    
    7,309
    
    
    
    7,655
    
    
    
    925Motor vehicles
    
    
    3,936
    
    
    
    3,397
    
    
    
    410129,589
    
    
    
    148,445
    
    
    
    17,936Less: Accumulated depreciation and amortization
    
    
    (31,284
    )
    
    
    (41,283
    )
    
    
    (4,988
    )Property, machinery and equipment, net
    
    
    98,305
    
    
    
    107,162
    
    
    
    12,948
 Machinery, equipment and software with cost of Rmb7,551,000 (US$912,000) and accumulated
depreciation and amortization of Rmb2,743,000 (US$331,000) as of December 31, 2004 were held under
capital lease obligations. 13. CONSTRUCTION-IN-PROGRESS Construction-in-progress represents leasehold land, construction costs for factory and staff
quarters and machinery pending installation. 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Construction costs for factory and staff quarters
    
    
    1,184
    
    
    
    50,934
    
    
    
    6,154
 No interest has been capitalized in the construction-in-progress as of December 31, 2003 and 2004. 14. LAND USE RIGHTS, NET Land use rights consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Land use rights
    
    
    204,847
    
    
    
    204,500
    
    
    
    24,709Less: Accumulated amortization
    
    
    (17,736
    )
    
    
    (21,833
    )
    
    
    (2,639
    )Land use rights, net
    
    
    187,111
    
    
    
    182,667
    
    
    
    22,070
 F-26




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##### Table of Contents



Private ownership of land is not allowed in Mainland China. Rather, entities acquire the
right to use land for a designated term. As of December 31, 2003 and 2004, the land use rights
consisted of certain parcels of land located in Mainland China with a net book value of
approximately Rmb 133,900,000 and Rmb 130,966,000, respectively, held under land use rights ranging
from 42 to 47 years and expiring in June 2042, July 2048, August 2049 and March 2050. In addition, as of December 31, 2003 and 2004, the Group also recorded land use rights with a net
book value of approximately Rmb 53,211,000 and Rmb 51,701,000, respectively, in respect of certain
parcels of land which the Group has not yet obtained the land use right certificates. The Group has
obtained a legal opinion from its Mainland Chinese lawyer that it is virtually assured of success
in obtaining the land use right certificates for the remaining portion of land of Rmb 51,701,000
with no current land use right certificates. Land use rights with a net book value of approximately Rmb133,900,000 as of December 31, 2003 were
vested with QXTI, the Groups ex-subsidiary. The ownership of these recorded land use rights were
transferred from QXTI to the Group in January 2004. 15. OTHER NON-CURRENT ASSETS Other non-current assets consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Deposits for purchase of property, machinery and equipment
    
    
    822
    
    
    
    4,610
    
    
    
    557Deposits paid for acquisition of land by QXPL (a)
    
    
    
    
    
    
    8,000
    
    
    
    967822
    
    
    
    12,610
    
    
    

    1,524
 
 (a)
    
    On March 27, 2004, QXPL signed an agreement with Qiao Xing Group Limited for acquisition
of the land use right of a parcel of land located in Mainland China at a consideration of
Rmb66,700,000, of which Rmb8,000,000 was paid as deposits as of December 31, 2004. F-27




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##### Table of Contents



16. INVESTMENT AT EQUITY 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Beginning of year
    
    
    
    
    
    
    37,214
    
    
    
    4,496Share of profit of CECM from January 1, 2004 to June 30, 2004
    
    
    
    
    
    
    955
    
    
    
    115Disposal of CECM (Note 11)
    
    
    
    
    
    
    (38,169
    )
    
    
    (4,611
    )Share of net assets as of February 8, 2003
    
    
    30,412
    
    
    
    
    
    
    
    Share of profit of CECM from February 8, 2003 to December
31, 2003
    
    
    6,802
    
    
    
    
    
    
    
    Purchase of SMCECT on January 13, 2004
    
    
    
    
    
    
    4,900
    
    
    
    592Share of loss of SMCECT from January 13, 2004 to December
31, 2004
    
    
    
    
    
    
    (1,579
    )
    
    
    (191
    )End of year
    
    
    37,214
    
    
    
    3,321
    
    
    
    401
 
 (i)
    
    Pursuant to an Agreement dated December 10, 2003, CECT and Minji Diantong Malaysia Co.,
Ltd. formed a sino-foreign joint venture named Suzhou Minji CEC Telecom Co., Ltd. (SMCECT) on
January 13, 2004 whereby CECT invested in Rmb 4,900,000, representing 49% of its total registered
capital of approximately Rmb 10,000,000. SMCECT is a limited liability company established in Mainland China to engage in the research and
development and design of telecommunication products. The Groups 25.48% equity interest in SMCECT
is held through CECT, which in turn holds 49% of the issued capital of SMCECT. The results of operations of SMCECT for the period from January 13, 2004 to December 31, 2004 is
accounted for in the consolidated statement of operations using the equity method. Summarized condensed financial information of SMCECT as of December 31, 2004 and for the period
from January 13, 2004 (date of incorporation of SMCECT) to December 31, 2004 is as follows: 2 0 0 4Rmb000
    
    
    US$000(Unaudited)
    
    
    (Unaudited)Current and total assets
    
    
    6,863
    
    
    
    829Current liabilities
    
    
    79
    
    

    
    9Capital and reserves
    
    
    6,784
    
    
    
    820
 F-28




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##### Table of Contents



2 0 0 4Rmb000
    
    
    US$'000(Unaudited)
    
    
    (Unaudited)Total liabilities and equity
    
    
    6,863
    
    
    
    829Operating expenses
    
    
    (3,223
    )
    
    
    (389
    )Net loss
    
    
    (3,223
    )
    
    
    (389
    )The Groups equity in loss (49%)
    
    
    (1,579
    )
    
    
    (191
    )
 
 (ii)
    
    CEC Mobile Co, Ltd. (CECM) is a limited liability company established in Mainland
China to engage in the production and sale of mobile phones and accessories. The Groups 26% equity
interest in CECM at December 31, 2003 was held through CECT, which in turn held 50% of the issued
capital of CECM. CECMs registered capital of Rmb48,000,000 has been fully paid up as of December
31, 2003. The results of operations of CECM for the period from February 8, 2003 to December 31, 2003 were
accounted for in the consolidated statement of operations using the equity method. Summarized condensed financial information of CECM as of December 31, 2003 and for the period from
February 8, 2003 (date of acquisition of CECT) to December 31, 2003 was as follows: 2 0 0 3Rmb000
    
    
    US$000(Unaudited)
    
    
    (Unaudited)Current assets
    
    
    149,167
    
    
    
    18,023Non-current assets
    
    
    1,494
    
    
    
    181Total assets
    
    
    150,661
    
    
    
    18,204Current liabilities
    
    
    76,233
    
    
    
    9,212Capital and reserves
    
    
    74,428
    
    
    
    8,992Total liabilities and equity
    
    
    150,661
    
    
    
    18,204Net sales
    
    
    270,546
    
    
    
    32,688Cost of sales
    
    
    (243,403
    )
    
    
    (29,408
    )Gross profit
    
    
    27,143
    
    
    
    3,280Operating expenses
    
    
    (12,910
    )
    
    
    (1,560
    )Income from operations
    
    
    14,233
    
    
    
    1,720Other expenses
    
    
    (629
    )
    
    
    (76
    )
 F-29




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##### Table of Contents



2 0 0 3Rmb000
    
    
    US$000(Unaudited)
    
    
    (Unaudited)Net income
    
    
    13,604
    
    
    
    1,644The Groups equity in earnings (50%)
    
    
    6,802
    
    
    
    822
 Effective on June 30, 2004, CECT sold its 40% shareholding in CECM to Beijing Lian Sheng
Tong Investment Management Ltd., an independent party. Accordingly, the Groups equity interest in
CECM has been reduced to 5.2% and is held through CECT, which in turn holds 10% of the issued
capital of CECM, and the Groups interest in CECM has been recorded as investment at cost as of
December 31, 2004 (Note 17). 17. INVESTMENTS AT COST Investments at cost consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000China Electronics Financial Co., Ltd (i)
    
    
    14,965
    
    
    
    14,965
    
    
    
    1,808CECM (Note 16)
    
    
    
    
    
    
    7,634
    
    
    
    92214,965
    
    
    
    22,599
    
    
    
    2,730
 
 (i)
    
    This represents the Groups 2% equity interest in China Electronics Financial Co., Ltd
(CEFCL) which is held through CECT, which in turn holds 3.86% of the issued capital of CEFCL.
CEFCL is a limited liability company established in Mainland China to engage in the provision of
financial services. 18. GOODWILL With the acquisition of CECT, the group has obtained significant research and development
capabilities and technologies as well as licenses to sell both CDMA and GSM mobile phones in China.
The acquisition of the above mentioned economic resources further enhances the Groups capability
to penetrate the mobile phone market in China. As a result, the acquisition of the above mentioned
economic resources has contributed to the determination of a purchase price that results in the
recognition of goodwill of Rmb72,088,000 as of December 31, 2003 and 2004. The amount allocated to
goodwill has been assigned to the mobile phones segment of the Groups business. None of the
goodwill is deductible for Mainland Chinese income tax purposes. In accordance with SFAS No. 142, the Group performed an impairment test of the goodwill assigned to
the mobile phones segment of the Groups business as of December 31, 2003 and 2004. F-30




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##### Table of Contents



An income
(discounted cash flow) approach was employed to determine the fair value of the net assets of CECT.
The fair value was then allocated among all the assets of CECT at their fair values, including
previously unrecognized intangible assets. The residual value after the allocation was then
compared to the carrying value of goodwill to determine the amount of impairment loss. Based on
the impairment test performed as of December 31, 2004, no impairment charge was necessary. 19. OTHER ACQUIRED INTANGIBLE ASSETS, NET The following comprise, with the acquisition of CECT, the components of the Groups other acquired
intangible assets as of December 31, 2004 that will continue to be accounted for under SFAS No.
142: ExpectedWeighted AverageAmortization Period
    
    Gross Carrying Value
    
    
    Accumulated Amortization
    
    
    Intangible Assets, netRmb000
    
    
    US$000
    
    
    Rmb000
    
    
    US$000
    
    
    Rmb000
    
    
    US$000Trademarks
    
    Indefinite
    
    
    43,368
    
    
    
    5,240
    
    
    
    
    
    
    
    
    
    
    
    43,368
    
    
    
    5,240Intangible assets
subject to
amortizationCustomer relationship
    
    5 years
    
    
    29,250
    
    
    
    3,534
    
    
    
    11,213
    
    
    
    1,355
    
    
    
    18,037
    
    
    
    2,179Completed technology
    
    5 years
    
    
    4,564
    
    
    
    551
    
    
    
    1,750
    
    
    
    211
    
    
    
    2,814
    
    
    
    340Core technology
    
    5 years
    
    
    40,174
    
    
    
    4,854
    
    
    
    15,400
    
    
    
    1,861
    
    
    
    24,774
    
    
    
    2,993Backlog
    
    5 months
    
    
    26,619
    
    
    
    3,216
    
    
    
    26,619
    
    
    
    3,216
    
    
    
    
    
    
    
    License
    
    5 years
    
    
    10,958
    
    
    
    1,324
    
    
    
    4,200
    
    
    
    507
    
    
    
    6,758
    
    
    
    817In process research
and development
    
    Expense off
    
    
    33,579
    
    
    
    4,057
    
    
    
    33,579
    
    
    
    4,057
    
    
    
    
    
    
    
    50 months
    
    
    145,144
    
    
    
    17,536
    
    
    
    92,761
    
    
    
    11,207
    
    
    
    52,383
    
    
    
    6,329Total
    
    
    
    
    188,512
    
    
    
    22,776
    
    
    
    92,761
    
    
    
    11,207
    
    
    
    95,751
    
    
    
    11,569
 The following table presents current and expected amortization expense of the other acquired
intangible assets for the year ended December 31, 2004 and the subsequent five years: F-31




---



##### Table of Contents



AmountRmb000
    
    
    US$000Aggregate amortization expense:For the year ended December 31, 2004
    
    
    16,990
    
    
    
    2,053Expected amortization expense:For the years ending December 31,2005
    
    
    16,990
    
    
    
    2,0532006
    
    
    16,990
    
    
    
    2,0532007
    
    
    16,990
    
    
    
    2,0532008
    
    
    1,413
    
    
    
    170Total
    
    
    52,383
    
    
    
    6,329
 20. SHORT-TERM BORROWINGS Short-term borrowings consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Bills payable
    
    
    269,472
    
    
    
    339,430
    
    
    
    41,011Bank loans
    
    
    170,000
    
    
    
    360,756
    
    
    
    43,588439,472
    
    
    
    700,186
    
    
    
    84,599
 Bills payable are a form of bank borrowing with payment terms of 180 days and are
non-interest bearing unless they become trust receipt loans which bear interest at the prevailing
interest rate of bank loans. As of December 31, 2003 and 2004, the bills payable and bank loans are secured by pledged bank
deposits of approximately Rmb85,189,000 and Rmb105,640,000, respectively. The weighted average interest rate on bank loans, all due within one year, was 5.08% per annum and
5.32% per annum, respectively, as of December 31, 2003 and 2004. 21. OTHER PAYABLES Other payables consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Payable for construction work of factories
    
    
    8,932
    
    
    
    
    
    
    
    Payable for purchase of property, machinery and equipment
    
    
    4,668
    
    
    
    478
    
    
    
    58Others
    
    
    1,030
    
    
    
    1,087
    
    
    
    13114,630
    
    
    
    1,565
    
    
    
    189
 F-32




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##### Table of Contents



22. ACCRUED LIABILITIES Accrued liabilities consist of: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Accruals for operating expenses-Commissions (Note 32)
    
    
    8,451
    
    
    
    17,859
    
    
    
    2,158-Salaries
    
    
    2,673
    
    
    
    3,447
    
    
    
    416-Advertising
    
    
    1,809
    
    
    
    
    
    
    
    -Price guarantee
    
    
    
    
    
    
    1,150
    
    
    
    139-Warranty
    
    
    2,981
    
    
    
    4,295
    
    
    
    519-Others
    
    
    1,743
    
    
    
    3,351
    
    
    
    405Provision for staff benefit (i)
    
    
    2,412
    
    
    
    3,786
    
    
    
    45720,069
    
    
    
    33,888
    
    
    
    4,094
 
 (i)
    
    Provision for staff benefit is provided at 17.5% on employees basic salaries. The
provision for staff benefit is used for employees welfare, employees education and workers
association. 23. CAPITAL LEASE OBLIGATIONS Future minimum lease payments under a capital lease are as follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Payable during the following periods-2004
    
    
    1,909
    
    
    
    
    
    
    
    -2005
    
    
    1,909
    
    
    
    1,909
    
    
    
    231-2006
    
    
    1,909
    
    
    
    1,909
    
    
    
    231-2007
    
    
    954
    
    
    
    954
    
    
    
    115Total minimum lease payments
    
    
    6,681
    
    
    
    4,772
    
    
    
    577Less: Amount representing future interest
    
    
    (1,395
    )
    
    
    (997
    )
    
    
    (121
    )
 F-33




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##### Table of Contents



2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Present value of minimum lease payments
    
    
    5,286
    
    
    
    3,775
    
    
    
    456Less: Current portion
    
    
    (1,510
    )
    
    
    (1,510
    )
    
    
    (182
    )Non-current portion
    
    
    3,776
    
    
    
    2,265
    
    
    
    274
 24. SHAREHOLDERS LOANS These represent unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi Jian Wu Li),
Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist Consultants Limited, the
Companys shareholders. The loans are denominated in United States dollars and are non-interest
bearing. The shareholders have agreed not to make demand on the Group for repayment before January
1, 2006. For financial reporting purposes, interest expense of approximately Rmb 478,000 for each
of the years ended December 31, 2002, 2003 and 2004 was imputed at a rate of 5.9% per annum
respectively according to cost of borrowings in Mainland China, and was recorded as interest
expense and shareholders contribution. 25. COMMON STOCK In August 2002, the Company issued 1,000,000 shares of common stock to an external consultant in
connection with the acquisition of CECT. The fair value of the 1,000,000 shares of approximately
Rmb 13,243,000 was recorded as an addition to the investment cost of CECT. In June 2003, holders of 300,000 warrants and 319,000 warrants, with an exercise price of US$6.6
per share and US$8.49 per share respectively, exercised their warrants. The Company issued to them,
at no consideration, an aggregate of 131,505 and 103,813 shares of common stock respectively,
representing the difference between the then quoted market price and the exercise price. In June and July 2003, an external consultant exercised 20,000 warrants and the Company issued an
aggregate of 20,000 shares of common stock to this external consultant at an exercise price of
US$5.50 per share. In February and March 2004, holders of 995,000 options, with an exercise price of US$5.50 per
share, exercised their stock options. Stock-based compensation expenses of Rmb23,747,000 is
recorded for the year ended December 31, 2004 based on the excess of the quoted market price of the
underlying stock on dates of exercise over the market price of US$8.77 per share at December 31,
2003. In April 2004, the Company issued 100,000 shares of common stock to an external consultant in
connection with consulting services provided to the Group. The fair value of the 100,000 shares of
approximately Rmb 8,989,000 was recorded as stock-based compensation expenses. In January, April and December 2004, a total of 30,200 warrants were exercised and the Company F-34




---



##### Table of Contents



issued an aggregate of 12,458 shares of common stock at an exercise price of US$8.49 per share. 26. STOCK OPTIONS AND WARRANTS a. Stock purchase options The 1999 Stock Compensation Plan of the Company (the Plan) allows for the issuance of either
incentive stock options to employees, or non-qualified options to employees, directors and external
consultants. A total of 2,000,000 common shares have been authorized and reserved for issuance
under the Plan. The Plan will expire in June 2009. b. Stock options to employees During the year ended December 31, 2000, 995,000 incentive stock options were issued to
certain employees at an exercise price of US$15 per share, exercisable during a five-year period
commencing on April 4, 2000. The Company has not granted any options since 2000. On January 2,
2002, the Company repriced the exercise price of these options to US$5.50 per share. The Company has elected to follow APB No. 25 to account for the incentive stock options
granted to employees, under which the Company recognized no compensation expense for the year ended
December 31, 2001 and 2002 as no employee options were granted at prices below the market price on
the grant dates. Compensation expense of Rmb26,929,000 was recorded for the year ended December 31,
2003 based on the excess of the quoted market price of the underlying stock of US$8.77 per share as
of December 31, 2003 over the re-priced exercise price of US$5.50 per share on the date of grant. During the year ended December 31, 2004, all the 995,000 incentive stock options were
exercised (note 25). c. Stock purchase warrants (i) In connection with the public offering of the Companys shares in February 1999, the Company
granted common stock purchase warrants (the Underwriter Warrants) to the underwriter to purchase
up to 160,000 shares of the Companys common stock at an exercise price of US$7.98 per share,
exercisable during a five-year period commencing on February 19, 1999. During the year ended
December 31, 2000, 152,000 of the Underwriter Warrants were exercised at an exercise price of
US$7.98 each. The remaining 8,000 of the Underwriter Warrants expired on February 19, 2004. (ii) On October 31, 1999, the Company issued 40,000 common stock purchase warrants to certain
external consultants, at exercisable prices ranging from US$3.25 to US$5.50 per share, exercisable
during a five-year period commencing on October 31, 1999. During the year ended December 31,
2000, 20,000 common stock purchase warrants were exercised at an exercise price of US$3.25 each. F-35




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##### Table of Contents



During the year ended December 31, 2003, 20,000 common stock purchase warrants were exercised at an
exercise price of US$5.50 each. The Company has adopted SFAS No. 123 to account for the stock purchase warrants granted to
external consultants. The fair value of these warrants amounted to approximately Rmb1,033,000
(equivalent to US$125,000), as computed using the Black-Scholes option-pricing model on the grant
date, which were recognized as consultant expense over the external consultants service period. (iii) In connection with the share placement of the Company in January 2000, the Company
granted 360,000 warrants to the private institutional investors (the Subscription Warrants I) and
300,000 warrants to external consultants (the Consultant Warrants I). Each warrant can be
exercised for one share of common stock in the Company at an exercise price of US$46.96 per share,
and is exercisable for the period from January 7, 2000 to December 31, 2004. In accordance with the
warrant agreement, the exercise price was reset to US$20.76 representing 110% of the average of the
closing bid prices of the common stock over 5 trading days prior to July 10, 2000. All the
outstanding warrants expired on December 31, 2004. (iv) In connection with the issuance of convertible debentures of the Company in June 2000, the
Company granted 360,000 warrants to the debenture holders (the Detachable Warrants) and 300,000
warrants to external consultants (the Consultant Warrants II). Each warrant can be exercised for
one share of common stock in the Company at an exercise price of US$24.38 per share, and is
exercisable for the period from June 2, 2000 to May 25, 2005. In accordance with the warrant
agreement, the exercise price was reset to US$8.49, representing 110% of the average of the closing
bid prices of the common stock over 5 trading days prior to November 29, 2000. The fair value of
the 360,000 Detachable Warrants amounted to approximately Rmb9,272,000 (equivalent to US$1,120,000)
as computed using the Black-Scholes option-pricing model on the grant date, which had been applied
for allocating the face value of the convertible debentures into the value of the Detachable
Warrants and the value of the debenture. In this connection, approximately Rmb11,250,000
(equivalent to US$1,358,000) of the face value of convertible debentures was allocated to value of
the Detachable Warrants, which was recorded as a discount to the face value of the debentures and
credited to additional paid-in capital. The fair value of 300,000 common stock Consultant Warrants II granted to financial consultants
amounted to approximately Rmb9,569,000 (equivalent to US$1,155,000), as computed using the
Black-Scholes option-pricing model on the grant date, which has been recognized as debt issuance
costs and credited to additional paid-in capital, respectively. During the year ended December 31, 2003 and 2004, 319,000 Detachable Warrants and 30,200
Detachable Warrants respectively were exercised at an exercise price of US$8.49 per share. The
remaining 305,800 warrants expired on May 25, 2005. (v) In connection with the Share Purchase Agreement entered into in September 2001, the F-36




---



##### Table of Contents



Company
granted 150,000 warrants to the private institutional investors (the Subscription Warrants II)
and 150,000 warrants to external consultants (the Consultant Warrants III). Each warrant can be
exercised for one share of common stock in the Company at an exercise price of US$6.6 per share,
and is exercisable for the period from September 14, 2001 to September 14, 2004. During the year ended December 31, 2001, the fair value of the 150,000 Subscription Warrants
II and 150,000 Consultant Warrants III amounted to approximately Rmb458,000 (equivalent to
US$55,350) as computed using the Black-Scholes option-pricing model on the grant date, which were
recognized as prepaid stock issuance costs. The prepaid stock issuance costs were written off in
the year ended December 31, 2002. During the year ended December 31, 2003, all warrants were exercised at an exercise price of
US$6.6 per share. (vi) During the year ended December 31, 2002, the Company issued 80,000 share warrants to the
Companys investor relations advisor as compensation. Each warrant can be exercised for one share
of common stock in the Company at an exercise price of US$7.00 per share and is exercisable for the
period from March 25, 2002 to March 1, 2005. The fair value amounted to approximately Rmb39,744
(equivalent to US$4,800) as computed using the Black-Scholes option-pricing model on the grant date
which has been recognized as compensation expense in the year ended December 31, 2002. All the
warrants expired on March 1, 2005. (vii) Changes in outstanding stock options and warrants during the years ended December 31, 2002,
2003 and 2004 were as follows: No. of stock options/
    
    
    Weighted averagewarrants
    
    
    exercise priceUS$Outstanding, as of January 1, 2002
    
    
    2,643,000
    
    
    
    13.77Granted in 2002
    
    
    80,000
    
    
    
    7.00Outstanding, as of January 1, 2003
    
    
    2,723,000
    
    
    
    10.10Exercised in 2003
    
    
    (639,000
    )
    
    
    7.51Outstanding, as of December 31, 2003
    
    
    2,084,000
    
    
    
    10.89Exercised in 2004
    
    
    (1,025,200
    )
    
    
    5.59Lapsed in 2004
    
    
    (668,000
    )
    
    
    20.61Outstanding, as of December 31, 2004
    
    
    390,800
    
    
    
    8.18Exercisable as of December 31, 2004
    
    
    390,800
    
    
    
    8.18Exercisable, as of December 31, 2003
    
    
    2,084,000
    
    
    
    10.89
 F-37




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##### Table of Contents



The following table summarizes information about stock options and warrants described above
that are outstanding and exercisable at December 31, 2004: Options and warrants outstanding and exercisableWeighted-average
    
    
    Weighted-averageexercise price per
    
    
    remaining contractualOptions/warrants

    
    option/warrant
    
    
    life (years)US$310,800
    

    
    8.49
    
    
    
    0.4180,000
    

    
    7.00
    
    
    
    0.17390,800
    

    
    8.18
    
    
    
    0.36
 The weighted average fair value of the common stock purchase options and warrants on the
grant dates were as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4US$
    
    
    US$
    
    
    US$Subscription Warrants II
    
    
    
    
    
    
    
    
    
    
    Consultant Warrants III
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    0.006
    
    
    
    
    
    
    
    
 The fair values were computed based on the following weighted average assumptions: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Risk-free interest rate
    
    
    4.14
    %
    
    
    
    
    
    
    Expected dividend yield
    
    
    0.00
    %
    
    
    
    
    
    
    Expected option/warrant life
    
    1.93 years
    
    
    
    
    
    
    Expected stock price volatility
    
    
    123.38
    %
    
    
    
    
    
    
    
 The weighted average fair value of common stock purchase options and warrants granted using the
Black-Scholes option-pricing model for the years ended December 31, 2002, 2003 and 2004
respectively are as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4US$
    
    
    US$
    
    
    US$Weighted average fair value of
options and warrants
    
    
    0.006
    
    
    
    
    
    
    
    
 F-38




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##### Table of Contents



27. INCOME TAXES The Company and its subsidiaries are subject to income taxes on an entity basis on income arising
in or derived from the tax jurisdictions in which they operate. The Company, Qiao Xing Holdings
Limited, Qiao Xing Mobile Communication Company Limited and Qiao Xing Communication Holdings
Limited were incorporated under the International Business Companies Act of the British Virgin
Islands and, accordingly, are exempted from payment of the British Virgin Islands income taxes. The
Company also registered in Hong Kong as a branch office and is subject to Hong Kong income taxes at
a rate of 17.5%. At present, substantially all of the Groups income was generated in Mainland China by QXCIL and
CECT. QXCIL was exempted from state income tax and local income tax for two years starting from
January 1, 2003, and then was subject to a 50% reduction in state income tax and full exemption in
local income tax for the following three years. CECT is regarded as a Hi-tech enterprise by the
Mainland Chinese government and is subjected to the Mainland Chinese enterprise income taxes at a
rate of 15%. CECT is exempted from the PRC enterprise income tax for the period from May 22, 2000
to December 31, 2002, and then subject to a 50% reduction in state income tax and full exemption in
local income tax for the following three years.
CECM is exempted from the PRC enterprise income tax for the period from January 10, 2002 to
December 31, 2004. Prior to the sale of QXTI on December 31, 2002, substantially all of the Groups income was
generated in Mainland China by QXTI, a joint venture enterprise established in the Coastal Economic
Open Zone in Mainland China and was subject to Mainland Chinese income taxes at a rate of 27% (24%
state income tax and 3% local income tax). It was exempted from state income tax and local income
tax for three years starting from January 1, 1994, and then was subject to a 50% reduction in state
income tax and full exemption in local income tax for the following two years. The tax holiday from
state income tax expired on January 1, 1999. The tax holiday from local income tax continued for
the years ended December 31, 2001 and 2002. Pursuant to the Notice No. [1999] 52 issued by the Government of Guangdong Province, Mainland China
(the Notice [1999] 52), High and New Technology Enterprise of Guangdong Province is entitled to a
tax holiday granted by the relevant tax bureau, under which QXTI is subject to state income tax at
a rate of 15% for three years, effective from January 1, 1999. Furthermore, for a foreign owned
enterprise in Guangdong Province which is certified by Guangdong Provincial Foreign Trade and
Economic Cooperation Office (GPFTECO) as an Advanced Technology Enterprise, QXTI is entitled to
an additional tax benefit granted by the relevant tax bureau under which the state income tax rate
can be further reduce to 10% for three years. QXTI is a High and New Technology Enterprise since
1999 and it is also an Advanced Technology Enterprise of F-39




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##### Table of Contents



Guangdong Province since 2000 pursuant to certificates issued by Guangdong
Science and Technology Commission and GPFTECO, respectively. Provision of income tax consists of: 2 0 0 3
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Mainland Chinese income tax-current
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    1,257-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    1,257
 The reconciliation of Mainland Chinese statutory income tax rate to the effective income tax
rate based on income before income tax stated in the consolidated statements of operations is as
follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Mainland Chinese statutory income tax rate
    
    
    33
    %
    
    
    (33
    %)
    
    
    33
    %Tax effect of tax holiday
    
    
    (6
    %)
    
    
    25.5
    %
    
    
    (44.2
    %)Net effect of disposal of a subsidiary/associate
    
    
    (44
    %)
    
    
    
    
    
    
    (16.1
    %)Loss of the Company not subject to tax
    
    
    17
    %
    
    
    16
    %
    
    
    16.6
    %Non-deductible activities
    
    
    
    
    
    
    35
    %
    
    
    21.4
    %Utilization of tax loss brought forward
    
    
    
    
    
    
    (43.5
    %)
    
    
    Deferred tax assets not recognized
    
    
    
    
    
    
    
    
    
    
    1.6
    %Effective income tax rate
    
    
    
    
    
    
    
    
    
    
    12.3
    %
 The gain on sale of a subsidiary amounting to Rmb79,050,000 as reported on the consolidated
statement of operations and comprehensive income for the year ended December 31, 2002 was not
subject to tax in the jurisdictions of Mainland China or the British Virgin Islands. The gain on sale of an equity investee amounting to Rmb41,465,000 as reported on the consolidated
statement of operations and comprehensive income for the year ended December 31, 2004 was not
subject to tax in the jurisdictions of Mainland China or the British Virgin Islands. Deferred income tax assets reflected the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of those amounts shown on the balance sheet as of
December 31, 2003 and 2004 were as follows: F-40




---



##### Table of Contents



2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Allowance for doubtful accounts
    
    
    
    
    
    
    1,141
    
    
    
    138Write-off of obsolete and slow-moving inventories
    
    
    194
    
    
    
    6,056
    
    
    
    732Loss carryforwards
    
    
    1,702
    
    
    
    2,695
    
    
    
    3261,896
    
    
    
    9,892
    
    
    
    1,196Valuation allowance
    
    
    (1,896
    )
    
    
    (9,892
    )
    
    
    (1,196
    )Deferred income tax assets
    
    
    
    
    
    
    
    
    
    
    
 Changes in the valuation allowance were as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Beginning of year
    
    
    1,055
    
    
    
    
    
    
    
    1,896
    
    
    
    229(Release) Increase in
valuation allowance
    
    
    (1,055
    )
    
    
    1,896
    
    
    
    7,996
    
    
    
    967End of year
    
    
    
    
    
    
    1,896
    
    
    
    9,892
    
    
    
    1,196
 A valuation allowance of
approximately nil and Rmb1,896,000 were established as of
December 31, 2002 and 2003, respectively, for the deferred income tax assets related mainly to
loss carryforward. A valuation allowance of approximately
Rmb7,996,000 was established as of December 31, 2004 for the deferred
income tax assets related mainly to write-off of obsolete and
slow-moving inventories. The release of the allowance in 2002 was due to the sale of the subsidiary
generating the loss carryforward. Taxation (payable)/receivable comprised: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Mainland Chinese enterprise income tax
    
    
    
    
    
    
    (10,404
    )
    
    
    (1,257
    )Mainland Chinese value-added tax
    
    
    10,462
    
    
    
    12,772
    
    
    
    1,543Mainland Chinese other taxes
    
    
    (152
    )
    
    
    (4,797
    )
    
    
    (580
    )10,310
    
    
    
    (2,429
    )
    
    
    (294
    )
 F-41




---



##### Table of Contents



28. DISTRIBUTION OF INCOME Prior to December 31, 2002, substantially all of the Groups income was contributed by QXTI, an
equity joint venture enterprise established in Mainland China. Income of QXTI as determined under
generally accepted accounting principles in Mainland China (Mainland Chinese GAAP) was
distributable to its joint venture partners after transfer to dedicated reserves (including
statutory surplus reserve and discretionary surplus reserve) and staff welfare fund as required
under Mainland Chinese Company Law and QXTIs articles of association, at rates determined by
QXTIs board of directors. Following the sale of QXHL, the dedicated reserves of QXTI were released to retained earnings prior
to December 31, 2002. For the year ended December 31, 2003 and 2004, substantially all of the Groups income were
contributed by QXCIL and CECT, equity joint venture enterprises established in Mainland China.
Income of QXCIL and CECT as determined under generally accepted accounting principles in Mainland
China (Mainland Chinese GAAP) were distributable to their joint venture partners after transfer
to dedicated reserves and staff welfare fund as required under Mainland Chinese Company Law and the
companies articles of association, at rates determined by the respective board of directors of
QXCIL and CECT. For the year ended December 31, 2003 and 2004, both boards of directors of QXCIL
and CECT did not recommend any appropriation to dedicated reserves or staff welfare funds. The Group keeps its books and records under Mainland Chinese GAAP. Adjustments between Mainland
Chinese GAAP and US GAAP consists of transfers to the staff welfare fund as required under Mainland
Chinese GAAP as well as (i) recognition of deferred tax assets, (ii) recognition of stock-based
compensation cost, (iii) amortization of debt issuance costs, (iv) amortization of discount of
convertible debentures as required under US GAAP, (v) amortization of goodwill and (vi) recognition
of identifiable intangible assets. 29. EARNINGS (LOSS) PER COMMON SHARE The following represents a reconciliation from basic earnings (loss) per common share to diluted
earnings (loss) per common share: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Net income (loss)
    
    
    16,473,000
    
    
    
    (7,730,000
    )
    
    
    22,874,000
    
    
    
    2,764,000Weighted average common shares
basic
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    16,443,000
 F-42




---



##### Table of Contents



2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb
    
    
    Rmb
    
    
    Rmb
    
    
    US$Effect of dilutive stock
options and warrants
    
    
    2,705,000
    
    
    
    
    
    
    
    116,527
    
    
    
    116,527Weighted average common shares
diluted
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    16,559,527Earnings (loss) per common share-Basic
    
    Rmb
    1.12
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.39
    
    
    US$
    0.17-Basic
    
    US$
    0.13
    
    
    US$
    (0.06
    )-Diluted
    
    Rmb
    0.95
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.38
    
    
    US$
    0.17-Diluted
    
    US$
    0.11
    
    
    US$
    (0.06
    )
 The diluted loss per common share for the year ended December 31, 2003 is the
same as the basic loss per share as all potential ordinary shares are anti-dilutive. 30. RETIREMENT PLAN Since December 1, 2000, the Group has arranged for its Hong Kong employees to join the Mandatory
Provident Fund Scheme (the MPF Scheme), a defined contribution scheme managed by an independent
trustee. Under the MPF Scheme, each company within the Group (employer) and their employees make
monthly contributions to the scheme at 5% of the employees earnings as defined under the Mandatory
Provident Fund legislation, subject to a maximum cap of HK$1,000 (equivalent to Rmb1,061) per month
and thereafter additional contributions are voluntary. Prior to December 31, 2002, the Groups employees in Mainland China were mainly employed by QXTI.
During the year ended December 31, 2003 and 2004, the Groups employees in Mainland China were
mainly employed by QXCIL and CECT. As stipulated by Mainland Chinese regulations, QXTI, QXCIL and CECT maintained defined contribution
retirement plans for all of their employees who were residents of Mainland China. All retired
employees were entitled to an annual pension equal to their basic annual salary upon retirement.
QXTI, QXCIL and CECT contributed to a state sponsored retirement plan with amounts stipulated by
the local government of Mainland China and had no further obligations for the actual pension
payments or post-retirement benefits beyond the annual contributions. The state sponsored
retirement plan is responsible for the entire pension obligations payable to all employees. The aggregate employers contributions made by the Group amounted to approximately Rmb898,000
(US$108,000), Rmb633,000 (US$76,000) and Rmb414,000 (US$50,000) for the
years ended December 31, 2002, 2003 and 2004, respectively. F-43




---



##### Table of Contents



31. COMMITMENTS a. Capital commitments Capital commitments for purchase of property, machinery and equipment not provided for in the
consolidated financial statements were analyzed as follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Capital expenditures authorized and contracted for:- Construction of factory premises and staff
quarter
    
    
    
    
    
    
    40,184
    
    
    
    4,855- Purchase of land and buildings
    
    
    
    
    
    
    63,275
    
    
    
    7,646- Purchase of machinery and equipment
    
    
    1,251
    
    
    
    930
    
    
    
    1121,251
    
    
    
    104,389
    
    
    
    12,613
 b. Operating lease commitments The Group has operating lease agreements for office premises, which extends through November
2008. At December 31, 2004, the Groups future minimum lease payments required under non-cancelable
operating leases with terms in excess of one year are as follows: AmountRmb000
    
    
    US$000For the years ending December 31,2005
    
    
    4,143
    
    
    
    5012006
    
    
    3,753
    
    
    
    4532007
    
    
    837
    
    
    
    1012008
    
    
    587
    
    
    
    71Total
    
    
    9,320
    
    
    
    1,126
 Lease expenses for the years ended December 31, 2002, 2003 and 2004 were approximately
Rmb1,422,000 (US$172,000), Rmb4,116,000 (US$497,000) and Rmb4,302,000 (US$520,000) respectively. c. Other commitments F-44




---



##### Table of Contents



Other commitments not provided for in the consolidated financial statements were analyzed as
follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Authorized and contracted for-Research and development
    
    
    3,104
    
    
    
    
    
    
    
    
 32. SUBSEQUENT EVENTS (a) The Company has a signed letter of intent with Hui Zhou Qiao Xing Communication Industry, Ltd
(QXCI) to purchase an additional shareholding in CECT from China Electronics Corporation (CEC).
The deal has not been completed, as the government has not granted its approval of the transaction
and as of June 30, 2005, the consideration for the additional investment is not determinable. (b) Subsequent to year end, the issued capital of QXCI has increased from HKD10,000,000 to
HKD22,000,000 with QXCH further invested HKD 12,000,000 to QXCI. (c) On April 12, 2005, the Company obtained binding commitments from three individual investors to
purchase 500,000 shares of its common stock at a price of US$7.25 per share, for gross proceeds of
US$3,625,000. In addition, the investors will receive 5 year warrants to purchase up to 100,000
shares of common stock at US$9.86 per share. The shares and warrants are being offered under the
Companys effective shelf registration statement previously filed with the Securities and Exchange
Commission. The Company placed these shares directly without using a placement agent for the
offering. On April 13, 2005, the investors purchased the shares. (d) On February 15, 2005, QXUT issued 1,500,000 ordinary shares and 300,000 warrants with a US$7.25
each. The warrants have a life of five years with an exercise price of US$9.86. 33. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION a. Non-cash transactions For each of the years ended December 31, 2002, 2003 and 2004, imputed interest on
shareholders loans of approximately Rmb478,000 was recorded as shareholders contribution and
credited to additional paid-in capital. For the year ended December 31, 2002, the fair value of 1,000,000 shares of common stock
issued to an external consultant in connection with the acquisition of CECT amounted to
approximately Rmb13,243,000, and has been recognized as an addition to the investment cost of CECT,
presented as another non-current asset. F-45




---



##### Table of Contents



For the year ended December 31, 2003, compensation expense of Rmb26,929,000 is recorded based
on the excess of the quoted market price of the underlying stock of US$8.77 per share as of
December 31, 2003 over the re-priced exercise price of US$5.50 per share on the date of grant of
employee stock options, and was recorded as shareholders contribution and credited to additional
paid-in capital. For the year ended December 31, 2004, compensation expense of Rmb 23,747,000 is recorded based
on the excess of then quoted market price of the underlying stock upon exercise of employee stock
options over the quoted market price of US$8.77 per share as of December 31, 2003, and was recorded
as shareholders contribution and credited to additional paid-in capital. For the year ended December 31, 2004, the fair value of 100,000 shares of common stock issued
to an external consultant amounted to approximately Rmb 8,989,000, and has been recorded as
compensation expense and credited to additional paid-in capital. b. Cash paid for interest and income taxes is as follows 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Interest
    
    
    17,389
    
    
    
    18,507
    
    
    
    26,582
    
    
    
    3,212Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 c. Gain on sale of a subsidiary On December 31, 2002, the Group disposed of its interests in a subsidiary, QXHL: Rmb000Cash and cash equivalents
    
    
    6,927Pledged bank deposits
    
    
    226,099Accounts receivables, net
    
    
    280,806Inventories
    
    
    62,591Prepaid expenses
    
    
    11,301Due from related parties
    
    
    4,581Property, plant and equipment, net
    
    
    171,292Prepaid land use rights
    
    
    29,086Accounts payable
    
    
    (30,046
    )Other payables
    
    
    (72,131
    )Accrued liabilities
    
    
    (11,072
    )Taxation payable
    
    
    (113,957
    )Long term borrowings
    
    
    (30,000
    )Short term borrowings
    
    
    (410,407
    )125,070
 F-46




---



##### Table of Contents



Rmb000Minority interests disposed
    
    
    5,880Gain on sale of a subsidiary
    
    
    79,050Total consideration
    
    
    210,000Satisfied by:Cash
    
    
    210,000
 Net cash (outflow) inflow in respect of disposal of a subsidiary was as follows: 2 0 0 2
    
    
    2 0 0 3Rmb000
    
    
    Rmb000
    
    
    US$000Cash consideration
    
    
    
    
    
    
    210,000
    
    
    
    25,372Cash and cash equivalents disposed of
    
    
    (6,927
    )
    
    
    
    
    
    
    Net cash (outflow) inflow in respect
of disposal of a subsidiary
    
    
    (6,927
    )
    
    
    210,000
    
    
    
    25,372
 d. Acquisition of CECT On February 8, 2003, the Group has completed the acquisition of CECT and its subsidiaries.
Since the Group acquired less than a 100% interest in CECT, the allocation of the purchase price
only considers the 65% portion of CECTs assets that the Group acquired. Details of the fair values
of net assets of CECT and its subsidiaries on February 8, 2003 were as follows: Rmb000Cash and cash equivalents
    
    
    171,119Pledged bank deposits
    
    
    28,499Bills receivable
    
    
    17,405Accounts receivable
    
    
    34,224Inventories
    
    
    321,194Prepaid expenses
    
    
    178,906Other current assets
    
    
    7,645Taxation receivable
    
    
    66,005Due from related parties
    
    
    10,601Property, machinery and equipment
    
    
    57,784Land use rights
    
    
    1,800
 F-47




---



##### Table of Contents



Rmb000Investment at equity
    
    
    30,412Investment at cost
    
    
    14,965Goodwill
    
    
    72,088Other acquired intangible assets
    
    
    188,512Total assets acquired
    
    
    1,201,159Short-term borrowings
    
    
    140,000Accounts payable
    
    
    185,942Other payables
    
    
    16,190Accrued liabilities
    
    
    11,670Customer deposits
    
    
    371,363Capital lease obligations
    
    
    6,597Due to related parties
    
    
    10,807Total liabilities assumed
    
    
    742,569Minority shareholders interests
    
    
    135,277Net assets acquired
    
    
    323,313Satisfied by:Cash consideration
    
    
    312,750Fair value of shares issued to
an external consultant in 2002
    
    
    13,243Excess of cash received over
share of net assets of a
minority shareholder of QXMCCL
    
    
    (2,680
    )323,313
 Net cash (outflow) inflow in respect of acquisition of CECT was as follows: 2 0 0 2
    
    
    2 0 0 3Rmb000
    
    
    Rmb000
    
    
    US$000Cash consideration
    
    
    (180,000
    )
    
    
    (132,750
    )
    
    
    (16,039
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    171,119
    
    
    
    20,675Net cash (outflow) inflow in
respect of acquisition of CECT
    
    
    (180,000
    )
    
    
    38,369
    
    
    
    4,636
 F-48




---



##### Table of Contents



e. Gain on sale of an equity investee Effective June 30, 2004, CECT has sold its 40% shareholding in CEC Mobile Co., Ltd. (CECM)
to Beijing Lian Sheng Tong Investment Management Co., Ltd, an independent third party, for cash
consideration of Rmb 72,000,000. Thereafter, CECTs shareholding interest in CECM has been reduced
to 10%. The consideration for the sale of the 40% share was Rmb72,000,000 and during the year ended
December 31, 2004, Rmb 21,600,000 of the consideration has been received. 34. BANKING FACILITIES As of December 31, 2004, the Group had banking facilities of approximately Rmb954,320,000
(US$115,305,000) for loans and trade financing, of which Rmb700,186,000 (US$84,599,000) were used
as of the same date. These banking facilities were secured by: a. the Groups pledged bank deposits of approximately Rmb105,640,000 (US$12,764,000); b. corporate guarantee provided by Qiao Xing Group Limited to the extent of Rmb624,000,000
(US$75,394,000); c. corporate guarantee provided by China Electronics Corp. to the extent of Rmb50,000,000
(US$6,040,000); d. the pledged bank deposits of a director of Rmb5,836,000 (US$705,000); e. joint guarantee by Qiao Xing Group Limited and a director to the extent of Rmb6,000,000
(US$725,000); and f. joint guarantee by Qiao Xing Group Limited and CECT to the extent of Rmb100,000,000
(US$12,082,000) 35. RELATED PARTY TRANSACTIONS Name and relationship of related parties: Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu Li
 F-49




---



##### Table of Contents



Name of related parties
    
    Existing relationship with the CompanyMr. Jie Shi
    
    DirectorMr. Ming Zhu
    
    Non-executive independent director
(appointed on January 2, 2003)Mr. Ze Yun Mu
    
    Non-executive independent director
(appointed on September 15, 2003)Mr. Zhong Ai Li
    
    Director (resigned on January 2, 2003)Mr. Guo Liang Zhang
    
    Director (resigned on January 2, 2003)Ms. Liu Rong Yang
    
    Director (resigned on September 15, 2003)Mr. Zhi Fang Zhang
    
    Director (resigned on January 2, 2003)Mr. Zi Shu Huang
    
    Director (resigned on January 2, 2003)Wu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderJia Xing Electronic Supplies Company Limited
    
    Common directorQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Properties Limited
    
    Common directorRui Xing Electronic Development Company Limited
    
    Common directorShanghai Sunplus Communication Technology Company Limited
    
    Common director until September 2004Dalian Yu Tian Ocean Biochemistry Technology Company Limited
    
    Common directorHuizhou Calilee Telecommunication Company Limited (Calilee)
    
    A company 5% owned by QXGLShenzhen Tianna I/E Trade Company Limited
    
    A company 90% owned by QXGLCEC Wireless R&D Limited (CECW)
    
    CECT and CECW have common ownersBeijing China Electronics Changsheng Investment Management
Company Limited
    
    Minority owner of CECT is a shareholderChina Electronics Beijing Real Estate Management Co., Ltd.
    
    Minority owner of CECT is a shareholderChina Electronics Corp.
    
    Minority owner of CECTChina National Electronics Import & Export Corporation
    
    Minority owner of CECT is a shareholderGoldcellcom Co., Ltd
    
    Minority owner of CECT is a shareholderWuhan Zhongyuan Electronics Group Co., Ltd.
    
    Minority owner of CECT is a shareholderShenzhen SED Trade Co., Ltd.
    
    Common ownerWuhan Zhongyuan Qi Xing Co., Ltd.
    
    Common owner
 Summary of related party transactions is as follows: F-50




---



##### Table of Contents



2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Operating lease rentals charged by- China Electronics Corp
    
    
    
    
    
    
    2,049
    
    
    
    2,743
    
    
    
    331Property management fees paid and payable to- China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    
    
    
    
    788
    
    
    
    971
    
    
    
    117- QXGL
    
    
    
    
    
    
    34
    
    
    
    68
    
    
    
    8Interest income from CEFCL
    
    
    
    
    
    
    1,851
    
    
    
    
    
    
    
    Rental income from-QXGL
    
    
    327
    
    
    
    
    
    
    
    
    
    
    
    -CECM
    
    
    
    
    
    
    1,103
    
    
    
    1,110
    
    
    
    134Research and development fee paid to CECW
    
    
    
    
    
    
    
    
    
    
    391
    
    
    
    47Commission paid and payable to CECW
    
    
    28,200
    
    
    
    5,181
    
    
    
    
    
    
    
    Purchases from-Qiao Xing Development Limited
    
    
    10,061
    
    
    
    34
    
    
    
    3,290
    
    
    
    398-Rui Xing Electronic Development Company
Limited
    
    
    9,214
    
    
    
    
    
    
    
    
    
    
    
    -Shanghai Sunplus Communication
Technology Company Limited
    
    
    
    
    
    
    24,366
    
    
    
    354,368
    
    
    
    42,816-Shenzhen Tianna I/E Trade Company Limited
    
    
    
    
    
    
    13,005
    
    
    
    103,379
    
    
    
    12,490Sales to-CECT *
    
    
    344,458
    
    
    
    26,821
    
    
    
    
    
    
    
    -CECM
    
    
    
    
    
    
    238,857
    
    
    
    17,536
    
    
    
    2,119-Calilee
    
    
    
    
    
    
    611,281
    
    
    
    293,097
    
    
    
    35,413-Goldcellcom Co., Ltd
    
    
    
    
    
    
    7,980
    
    
    
    
    
    
    
    
 
 *
    
    Sales to CECT after February 8, 2003 have been eliminated on the consolidated statement of
operations for 2003. Summary of related party balances is as follows: 2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000Due from- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1-China National Electronics Import & Export
Corporation
    
    
    1
    
    
    
    1
    
    
    
    -China Electronics Beijing Real Estate
Management Co., Ltd
    
    
    4
    
    
    
    34
    
    
    
    4
 F-51




---



##### Table of Contents



2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    US$000-Wuhan Zhongyuan Electronics Group Co., Ltd
    
    
    120
    
    
    
    120
    
    
    
    15-CEFCL
    
    
    7,030
    
    
    
    7,030
    
    
    
    849-Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    37,185
    
    
    
    7,215
    
    
    
    872Due to-Beijing China Electronics Changsheng
Investment Management Company Limited
    
    
    3,532
    
    
    
    3,481
    
    
    
    420-China Electronics Corp.
    
    
    969
    
    
    
    734
    
    
    
    89-Goldcellcom Co., Limited
    
    
    40
    
    
    
    5,839
    
    
    
    705-Dalian Yu Tian Ocean Biochemistry Technology
Company Limited
    
    
    10,000
    
    
    
    
    
    
    
    -QXGL
    
    
    
    
    
    
    700
    
    
    
    85-Shenzhen SED Trade Co.,Ltd
    
    
    
    
    
    
    31
    
    
    
    4-Wuhan Zhong Yuan Qi Xing Co.,Ltd
    
    
    
    
    
    
    3-Mr Rui Lin Wu
    
    
    471
    
    
    
    14,758
    
    
    
    1,783-Mr. Jie Shi
    
    
    83
    
    
    
    166
    
    
    
    20-Mr. Ming Zhu
    
    
    3
    
    
    
    7
    
    
    
    1-Mr. Ze Yun Mu
    
    
    1
    
    
    
    5
    
    
    
    1-Mr. Guo Liang Zhang
    
    
    146
    
    
    
    
    
    
    
    - Ms. Liu Rong Yang
    
    
    11
    
    
    
    
    
    
    
    -Ms. Zhi Fang Zhang
    
    
    10
    
    
    
    
    
    
    
    -Mr. Zi Shu Huang
    
    
    10
    
    
    
    
    
    
    
    -Mr. Zhong Ai Li
    
    
    218
    
    
    
    
    
    
    
    15,494
    
    
    
    25,724
    
    
    
    3,108Accounts receivable from-CECM
    
    
    32,225
    
    
    
    32,111
    
    
    
    3,880-Calilee
    
    
    40,556
    
    
    
    35,765
    
    
    
    4,32172,781
    
    
    
    67,876
    
    
    
    8,201Vendor deposits for the purchase of mobile phones-Shanghai Sunplus Communication Technology
Company Limited
    
    
    256,856
    
    
    
    205,565
    
    
    
    24,837-Shenzhen Tianna I/E Trade Company Limited
    
    
    51,179
    
    
    
    
    
    
    
    308,035
    
    
    
    205,565
    
    
    
    24,837Deposits for the purchase of land from QXGL
    
    
    
    
    
    
    8,000
    
    
    
    967Accounts payable to Shenzhen Tianna I/E Trade
Company Limited
    
    
    
    
    
    
    7,263
    
    
    
    877
 F-52




---



##### Table of Contents



Except for the balances with the shareholders (Note 24), all other balances with directors
and related parties were unsecured, non-interest bearing and without pre-determined repayment
terms.
Loans from shareholders were unsecured loans from Mr. Rui Lin Wu (held in trust for Mr. Zhi Jian Wu
Li), Exquisite Jewel Limited, Metrolink Holdings Limited and Specialist Consultants Limited, the
Companys shareholders, and were non-interest bearing. The lenders have agreed not to make demand
on the Group for repayment before January 1, 2006. During the year ended December 31, 2003, QXGL and China Electronics Corp. provided corporate
guarantees to the Groups banking facilities to the extent of Rmb320,000,000 and Rmb 50,000,000
respectively. During the year ended December 31, 2004, QXGL and China Electronics Corp. provided corporate
guarantees to the Groups banking facilities to the extent of Rmb730,000,000 and Rmb 50,000,000
respectively. 36. SEGMENT ANALYSIS The Group currently operates in two principal business segments. Management believes that the
following table presents the useful information to the chief operation decision makers for
measuring business performance and financing needs and preparing the corporate budget, etc. The
Groups accounting systems do not capture the total assets for each segment. As most of the Groups
customers are located in Mainland China and the Groups revenues are generated in Mainland China,
no geographical segment information is presented. F-53




---



##### Table of Contents



Mobile
    
    
    IndoorPhones
    
    
    Phones
    
    
    Corporate
    
    
    TotalRmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb0002003Revenue
    
    
    1,694,046
    
    
    
    149,236
    
    
    
    
    
    
    
    1,843,282Gross margin
    
    
    235,044
    
    
    
    9,623
    
    
    
    
    
    
    
    244,667Inventories
    
    
    148,861
    
    
    
    426
    
    
    
    
    
    
    
    149,287Property, machinery and equipment
    
    
    96,476
    
    
    
    1,701
    
    
    
    128
    
    
    
    98,305Expenditures for long-lived assets
    
    
    
    
    
    
    
    
    
    
    1,184
    
    
    
    1,1842004Revenue
    
    
    1,823,979
    
    
    
    195,102
    
    
    
    
    
    
    
    2,019,081Gross margin
    
    
    194,801
    
    
    
    28,798
    
    
    
    
    
    
    
    223,599Inventories
    
    
    271,428
    
    
    
    21,979
    
    
    
    
    
    
    
    293,407Property, machinery and equipment
    
    
    104,553
    
    
    
    2,581
    
    
    
    28
    
    
    
    107,162Expenditures for long-lived assets
    
    
    4,900
    
    
    
    
    
    
    
    49,750
    
    
    
    54,650
 F-54




---



##### Table of Contents



a. Major customers Mobile phones segment Details of individual customers accounting for more than 5% of the Groups sales of mobile
phones are as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Shanghai Cellstar International Trading Co Ltd
    
    
    
    
    
    
    4
    %
    
    
    6
    %CECT (Note 35)
    
    
    99
    %
    
    
    2
    %
    
    
    Calilee (Note 35)
    
    
    
    
    
    
    36
    %
    
    
    16
    %CECM (Note 35)
    
    
    
    
    
    
    14
    %
    
    
    10
    %Digital China
    
    
    
    
    
    
    8
    %
    
    
    Beijing Ho.COM Electronic Co Ltd
    
    
    
    
    
    
    4
    %
    
    
    22
    %BenQ Corporation
    
    
    
    
    
    
    
    
    
    
    22
    %
 Indoor phones segment Details of individual customers accounting for more than 5% of the Groups sales of indoor
phones are as follows: 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4China Mobile Co Ltd Guizhou Branch
    
    
    
    
    
    
    
    
    
    
    7
    %Zhong Nan Company
    
    
    6
    %

    
    
    13
    %
    
    
    7
    %Ji Nan Peoples Market Co., Ltd.
    
    
    5
    %
    
    
    7
    %
    
    
    9
    %Shan Xi ZhaoRui Science and Technology
Co., Ltd.
    
    
    6
    %
    
    
    6
    %
    
    
    4
    %An Hui Jiu Long Fu Communication Co., Ltd.
    
    
    6
    %
    
    
    5
    %
    
    
    2
    %ChengTeng Electronic Appliance Trading
Company of Yiwu City
    
    
    5
    %
    
    
    3
    %
    
    
    2
    %Huizhou Qiao Xing Famous Science &
Technology Co, Ltd
    
    
    
    
    
    
    
    
    
    
    6
    %
 b. Major suppliers Details of individual suppliers accounting for more than 5% of the Groups purchases are as
follows: F-55




---



##### Table of Contents



2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Flextronics Technology Co. Ltd.
    
    
    31
    %
    
    
    13
    %
    
    
    4
    %Flextronics Enterprises Co. Ltd.
    
    
    31
    %
    
    
    7
    %
    
    
    Suzhou Minji Electronics Technology Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    21
    %Shanghai Surplus Communication Technology
Co. Ltd.
    
    
    
    
    
    
    2
    %
    
    
    18
    %E28 Shanghai Ltd.
    
    
    
    
    
    
    5
    %
    
    
    7
    %QXTI
    
    
    
    
    
    
    10
    %
    
    
    9
    %YuHua TelTech (Shanghai) Co., Ltd.
    
    
    
    
    
    
    16
    %
    
    
    Telson Electronics Co. Ltd
    
    
    
    
    
    
    6
    %
    
    
    Galaxy Information Technology Inc.
    
    
    
    
    
    
    6
    %
    
    
    Leader Communication (SuZhou) Co., Ltd.
    
    
    
    
    
    
    6
    %
    
    
    4
    %
 37. OTHER ADDITIONAL INFORMATION a. The following items were included in the consolidated statements of operations and comprehensive
income (loss): 2 0 0 2
    
    
    2 0 0 3
    
    
    2 0 0 4Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Depreciation of property,
machinery and equipment
    
    
    13,243
    
    
    
    8,995
    
    
    
    12,105
    
    
    
    1,463Amortization of land use rights
    
    
    5,008
    
    
    
    4,094
    
    
    
    4,097
    
    
    
    495Interest expense for:-bank loans
    
    
    13,221
    
    
    
    7,556
    
    
    
    12,922
    
    
    
    1,561-other bank borrowings
    
    
    4,168
    
    
    
    10,353
    
    
    
    13,261
    
    
    
    1,602-finance lease
    
    
    
    
    
    
    598
    
    
    
    399
    
    
    
    48-shareholders loans
(imputed interest)
    
    
    478
    
    
    
    478
    
    
    
    478
    
    
    
    58Total interest expense
    
    
    17,867
    
    
    
    18,985
    
    
    
    27,060
    
    
    
    3,269Advertising expenses
    
    
    1,346
    
    
    
    42,784
    
    
    
    14,658
    
    
    
    1,771Shipping and handling costs
    
    
    1,469
    
    
    
    10,358
    
    
    
    2,923
    
    
    
    353
 F-56




---



##### Table of Contents



ITEM 19. EXHIBITS (a) The following financial statements are being filed as part of this annual report on Form
20-F: Report of Independent Certified Public Accountants Consolidated statements of operations for the years ended December 31, 2002, 2003 and 2004 Consolidated balance sheets at December 31, 2003 and 2004 Consolidated statements of changes in shareholders equity for the years ended December 31,
2002, 2003 and 2004 Consolidated statements of cash flows for the years ended December 31, 2002, 2003 and 2004 Notes to and forming part of the financial statements (b) The following exhibits are being filed as part of this annual report on Form
20-F: Exhibit 1.1
    
    Memorandum of Association of the Company  incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.Exhibit 1.2
    
    Articles of Association of the Company  incorporated by
reference to the Exhibits to our Registration Statement on
Form F-1, SEC File No. 333-9274, declared effective on
February 16, 1999.Exhibit 4.1
    
    Sales and Purchase Agreement on Shares of CEC Telecom Limited
dated May 23, 2002*Exhibit 4.2
    
    Sales and Purchase Agreement on Shares of CEC Telecom Ltd.
dated May 23, 2002*Exhibit 4.3
    
    Agreement for Sale of The One (1) Issued Share of Qiao Xing
Holdings Limited dated December 31, 2002 between Qiao Xing
Universal Telephone, Inc. and Central Grace Technologies Ltd.*Exhibit 4.4
    
    Supplemental Agreement for Sale of The One (1) Issued Share of
Qiao Xing Holdings Limited dated July 10, 2003 between Qiao
Xing Universal Telephone, Inc. and Central Grace Technologies
Ltd.*Exhibit 4.5
    
    Further Supplemental Agreement for Sale of The One (1) Issued
Share of Qiao Xing Holdings Limited dated July 11, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace
Technologies Ltd.*
 -130-




---



##### Table of Contents



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 annual
report on Form 20-F for the fiscal year ended December 31,
2002**
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal year ended December 31,
2003. -131-




---



##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. QIAO XING UNIVERSAL TELEPHONE, INC.(Registrant)
 Date: June 30, 2005
    
    By:
    
    /s/ RUI LIN WURui Lin WuChairman




---



##### 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
    
    Sales and Purchase Agreement on Shares of CEC Telecom Limited dated May 23, 2002*Exhibit 4.2
    
    Sales and Purchase Agreement on Shares of CEC Telecom Ltd. dated May 23, 2002*Exhibit 4.3
    
    Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated December 31, 2002 between Qiao
Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.*Exhibit 4.4
    
    Supplemental Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated July 10, 2003
between Qiao Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.*Exhibit 4.5
    
    Further Supplemental Agreement for Sale of The One (1) Issued Share of Qiao Xing Holdings Limited dated July 11,
2003 between Qiao Xing Universal Telephone, Inc. and Central Grace Technologies Ltd.*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 annual
report on Form 20-F for the fiscal
year ended December 31, 2002**
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal year ended December 31,
2003