##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-29946
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Date of event requiring this shell company report
 QIAO XING UNIVERSAL TELEPHONE, INC.
  QIAO XING UNIVERSAL TELEPHONE, INC.
 British Virgin Islands  (Jurisdiction of incorporation or organization)
 Qiao Xing Science Industrial Park
Tang Quan
Huizhou City, Guangdong,  Peoples Republic of China 516023
  Title of each
class
    
    Name of each exchange
on which registeredNone
    
    N/A
  $.001 Par Value Common Stock (Common Stock)
  (Title of Class)
    o þ
  o þ
  þ o
 
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ
  o þ




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 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  SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
   
    
    dependence upon certain customers
    
    dependence on key personnel
    
    control by principal shareholder
    
    competitive factors
    
    the operation of our business
    
    general economic conditions
    -2-




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##### Table of Contents



PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 A. SELECTED FINANCIAL DATA.
  Year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Net sales
    
    
    250,366
    
    
    
    549,967
    
    
    
    1,843,282
    
    
    
    2,019,081
    
    
    
    2,874,336
    
    
    
    356,166Cost of goods sold
    
    
    (212,229
    )
    
    
    (528,149
    )
    
    
    (1,598,615
    )
    
    
    (1,795,482
    )
    
    
    (2,385,287
    )
    
    
    (295,567
    )Gross profit
    
    
    38,137
    
    
    
    21,818
    
    
    
    244,667
    
    
    
    223,599
    
    
    
    489,049
    
    
    
    60,599Operating expenses:Selling expenses
    
    
    (6,172
    )
    
    
    (5,286
    )
    
    
    (74,885
    )
    
    
    (27,873
    )
    
    
    (29,227
    )
    
    
    (3,622
    )General and administrative expenses
Including stock-based compensation
    
    
    (40,598
    )
    
    
    (68,233
    )
    
    
    (78,814
    )
    
    
    (100,062
    )
    
    
    (61,503
    )
    
    
    (7,621
    )Research and development
    
    
    (3,516
    )
    
    
    (451
    )
    
    
    (6,649
    )
    
    
    (10,449
    )
    
    
    (20,694
    )
    
    
    (2,564
    )In process research and development
    
    
    
    
    
    
    
    
    
    
    (21,826
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    (27,425
    )
    
    
    (11,044
    )
    
    
    (10,159
    )
    
    
    (1,259
    )
 -3-




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Year ended December 31,2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Impairment loss on:- Land use rights
    
    
    (5,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Property, machinery and equipment
    
    
    (8,722
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,852
    )
    
    
    (477
    )(Loss) Income from operations
    
    
    (25,875
    )
    
    
    (52,152
    )
    
    
    35,068
    
    
    
    74,171
    
    
    
    363,614
    
    
    
    45,056Interest income
    
    
    2,000
    
    
    
    1,070
    
    
    
    3,045
    
    
    
    492
    
    
    
    7,130
    
    
    
    883Exchange loss, net
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,659
    )
    
    
    (329
    )Interest expense
    
    
    (23,107
    )
    
    
    (17,867
    )
    
    
    (18,985
    )
    
    
    (27,060
    )
    
    
    (41,752
    )
    
    
    (5,174
    )Gain on sale of a subsidiary
    
    
    
    
    
    
    79,050
    
    
    
    
    
    
    
    
    
    
    
    10,307
    
    
    
    1,277Gain on sale of equity investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,465
    
    
    
    1,579
    
    
    
    196Gain on disposal of other equity investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,035
    
    
    
    624Other (expenses) income, net
    
    
    (187
    )
    
    
    124
    
    
    
    2,088
    
    
    
    1,597
    
    
    
    640
    
    
    
    79Income (Loss) before income tax
    
    
    (47,273
    )
    
    
    10,225
    
    
    
    21,216
    
    
    
    90,665
    
    
    
    343,894
    
    
    
    42,612Provision for income tax
    
    
    25,687
    
    
    
    
    
    
    
    
    
    
    
    (10,404
    )
    
    
    (27,813
    )
    
    
    (3,446
    )Income (Loss) before minority interests
    
    
    (21,586
    )
    
    
    10,225
    
    
    
    21,216
    
    
    
    80,261
    
    
    
    316,081
    
    
    
    39,166Minority interests
    
    
    164
    
    
    
    6,248
    
    
    
    (35,748
    )
    
    
    (56,763
    )
    
    
    (102,870
    )
    
    
    (12,747
    )Equity in earnings of equity investees
    
    
    
    
    
    
    
    
    
    
    6,802
    
    
    
    (624
    )
    
    
    
    
    
    
    Net (loss) income before extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213,211
    
    
    
    26,419Extraordinary gain on acquisition of minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,486
    
    
    
    4,397Net Income (Loss)
    
    
    (21,422
    )
    
    
    16,473
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    248,697
    
    
    
    30,816Other comprehensive (loss) incomeTranslation adjustments
    
    
    70
    
    
    
    (61
    )
    
    
    (746
    )
    
    
    70
    
    
    
    1,821
    
    
    
    226Comprehensive income (loss)
    
    
    (21,352
    )
    
    
    16,412
    
    
    
    (8,476
    )
    
    
    22,944
    
    
    
    250,518
    
    
    
    31,042Basic (loss) earnings per common shareBefore extraordinary gain
    
    
    (1.67
    )
    
    
    1.12
    
    
    
    (0.50
    )
    
    
    1.39
    
    
    
    11.64
    
    
    
    1.44Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.94
    
    
    
    0.24After extraordinary gain
    
    
    (1.67
    )
    
    
    1.12
    
    
    
    (0.50
    )
    
    
    1.39
    
    
    
    13.58
    
    
    
    1.68Diluted (loss) earnings per common shareBefore extraordinary gain
    
    
    (1.67
    )
    
    
    0.95
    
    
    
    (0.50
    )
    
    
    1.38
    
    
    
    11.64
    
    
    
    1.44Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.94
    
    
    
    0.24After extraordinary gain
    
    
    (1.67
    )
    
    
    0.95
    
    
    
    (0.50
    )
    
    
    1.38
    
    
    
    13.58
    
    
    
    1.68Weighted average number of shares
outstanding- Basic (2)
    
    
    12,838,000
    
    
    
    14,685,000
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    18,319,000- Diluted (2)
    
    
    12,838,000
    
    
    
    17,390,000
    
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    18,320,000
    
    
    
    18,320,000
 -4-




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As of December 31,2001
    
    2002
    
    2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Balance Sheet DataCash and bank deposits
    
    
    7,616
    
    
    
    10,948
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    48,532Working capital
    
    
    147,505
    
    
    
    266,773
    
    
    
    297,763
    
    
    
    426,163
    
    
    
    852,778
    
    
    
    105,670Property, machinery and equipment, net
    
    
    183,600
    
    
    
    5,112
    
    
    
    98,305
    
    
    
    107,162
    
    
    
    52,664
    
    
    
    6,526Construction in progress
    
    
    576
    
    
    
    
    
    
    
    1,184
    
    
    
    50,934
    
    
    
    59,105
    
    
    
    7,324Land use rights
    
    
    221,359
    
    
    
    189,405
    
    
    
    187,111
    
    
    
    182,667
    
    
    
    177,222
    
    
    
    21,960Debt issuance cost, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    911,238
    
    
    
    742,708
    
    
    
    1,528,502
    
    
    
    2,076,710
    
    
    
    2,581,040
    
    
    
    319,824Short-term-debts
    
    
    189,990
    
    
    
    40,000
    
    
    
    440,982
    
    
    
    701,696
    
    
    
    754,212
    
    
    
    93,456Long-term-debts
    
    
    8,163
    
    
    
    8,163
    
    
    
    11,939
    
    
    
    10,428
    
    
    
    7,959
    
    
    
    986Total liabilities
    
    
    360,689
    
    
    
    98,074
    
    
    
    757,707
    
    
    
    1,147,356
    
    
    
    1,310,999
    
    
    
    162,450Minority interests (1)
    
    
    23,102
    
    
    
    87,054
    
    
    
    193,374
    
    
    
    250,137
    
    
    
    231,201
    
    
    
    28,649Shareholders equity
    
    
    527,447
    
    
    
    557,580
    
    
    
    577,421
    
    
    
    679,217
    
    
    
    1,038,840
    
    
    
    128,725Cash flows dataCash flows from operating activities
    
    
    26,489
    
    
    
    (56,197
    )
    
    
    (307,404
    )
    
    
    (200,136
    )
    
    
    87,299
    
    
    
    10,817Cash flows from investing activities
    
    
    (75,145
    )
    
    
    (136,170
    )
    
    
    203,530
    
    
    
    (65,900
    )
    
    
    43,992
    
    
    
    5,452Cash flows from financing activities
    
    
    22,852
    
    
    
    195,760
    
    
    
    216,138
    
    
    
    284,390
    
    
    
    118,074
    
    
    
    14,631
 
 (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 2001 by 12,838,000 shares, for 2002
by 14,685,000 shares, for 2003 by 15,420,000 shares, for 2004 by 16,443,000 shares and for
2005 by 18,319,000 shares. 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, 2005 of US$1.00 = Rmb 8.0702. 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
   Noon Buying Rate(1)Calendar Year
    
    Average(Rmb per US$)2001
    
    
    8.27702002
    
    
    8.27712003
    
    
    8.27722004
    
    
    8.27682005
    
    
    8.1936
 
 (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 2005
    
    
    8.0808
    
    
    
    8.0702January 2006
    
    
    8.0702
    
    
    
    8.0596February 2006
    
    
    8.0616
    
    
    
    8.0415March 2006
    
    
    8.0505
    
    
    
    8.0167April 2006
    
    
    8.0248
    
    
    
    8.0040May 2006
    
    
    8.0300
    
    
    
    8.0005
  -6-




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B. CAPITALIZATION AND INDEBTEDNESS.
  C. REASONS FOR THE OFFER AND USE OF PROCEEDS.
  D. RISK FACTORS.
 Technology risk
    Operating risk
  Concentration of credit risk
  The economy of China differs from the economies of most countries.
  -7-




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Our currency is not freely convertible.
  We depend on Chinese factories.
  -8-




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Taxation
    We depend upon certain key personnel to manage our company.
  We are controlled by one of our shareholders, whose interests may differ from other shareholders.
  -9-




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Our holding company structure creates restrictions on our payment of dividends.
  It may be difficult to serve us with legal process or enforce judgments against us or our
management.
  
    
    judgments of United States courts against us, our directors or our officers based on
the civil liability provisions of the securities laws of the United States or any
state; or
    
    in original actions brought in the British Virgin Islands or China, liabilities
against us or non-residents based upon the securities laws of the United States or any
state.
 Some information about us may be unavailable due to exemptions under the Exchange Act for a foreign
private issuer.
  
    
    the rules under the Exchange Act requiring the filing with the Securities and
Exchange Commission of quarterly reports on Form 10-Q or current reports on Form 8-K;
    
    the provisions of Regulation FD aimed at preventing issuers from making selective
disclosures of material information;
    
    the sections of the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect of a security registered under the Exchange Act; and
    
    the sections of the Exchange Act requiring insiders to file public reports of their
stock ownership and trading activities and establishing insider liability for profits
realized from any short-swing trading transaction.
  -10-




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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.
   
 ITEM
4. INFORMATION ON THE COMPANY
 A. HISTORY AND DEVELOPMENT OF THE COMPANY.
    -11-




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Recent Development  Sale of $40,000,000 Senior Convertible Notes
 Background
   -12-




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The Transaction
   
    
    the interest rate on the notes is 3.5% per annum, payable in cash in arrears on a
calendar quarterly basis beginning June 30, 2006
    
    the date of maturity of the notes is June 13, 2009 three years from the closing date
    
    the notes are convertible at the investors option into either:
 
    
    our common stock, $0.001 per share or
    
    the common stock, $0.01 per share, of our significant subsidiary, Qiao Xing
Mobile Communications Co. Ltd. (QX Mobile), in the event of an initial public
offering of QX Mobile common stock
 
    
    the initial conversion price for our common stock is $8.027 per share (which
represents a 15% premium to the five day volume weighted average price (VWAP) of our
common stock as of the date of execution of the term sheet for this transaction),
subject to adjustment as provided in the notes
    
    the investors cannot convert the notes to the extent that after giving effect to
such conversion, the investors (together with their affiliates) would beneficially own
in excess of 9.99% of our common stock outstanding immediately after giving effect to
the conversion without prior written notice to us
    
    the conversion price for our common stock is subject to reset if the average of the
daily VWAP of our common stock for the five trading days ending on each two-month
anniversary of the closing until maturity (each a Reset Date) is less than $6.98 (or
such lower reset price as previously adjusted pursuant hereto). In that event, the
conversion price is reset to a price equal to 90% of the VWAP of our common stock for
the five trading days ending on the applicable Reset Date. In no event will the
conversion price be reset to a price less than $5.15 per share.
    
    the conversion price for QX Mobile common stock is the amount equal to (a) 7 times
year 2005 net profit for QX Mobile, divided by (b) the total number of shares of QX
Mobile common stock outstanding on a fully-diluted basis as of December 31, 2005
    
    the notes are unsecured and are guaranteed by QX Mobile
    
    the investors can require us to redeem the notes after two years in an amount equal
to the sum of (a) the outstanding principal of the notes, (b) the accrued and unpaid
interest thereon, and (c) 6% on the sum of (a) and (b)
    
    we have the right, subject to certain terms and conditions, to deliver shares of our
common stock in lieu of cash on the put date or at maturity, and the number of shares
would be determined by dividing the face amount and accrued interest by the average
closing price of our common stock for the 10 days prior to redemption, and then
multiplying that amount by 0.975
    
    we may be required to prepay the notes if certain transactions or events of default
occur at the greater of:
 
    
    the conversion amount to be redeemed multiplied by a redemption premium of
125%, or
    
    the product of the conversion rate at the time of default and the closing bid
price on the date immediately preceding such event of default
 -13-




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
    
    we are required by the terms of the Registration Rights Agreement entered into
concurrently with the Agreement to file after the closing date with the Securities and
Exchange Commission a registration statement to register the common stock issuable upon
conversion of the notes and exercise of the warrants to permit the investors to resell
such common stock to the public
    
    under the terms of the Agreement, we are subject to certain cash penalties if we are
unable to deliver to the investors the common stock receivable upon conversion of the
notes and exercise of the warrants in a timely manner
  
    
    each warrant is exercisable to purchase one share of our common stock
    
    the initial exercise price of each warrant is $8.027 per share, subject to
adjustment as provided in the warrant
    
    the warrants are exercisable for a period of five (5) years from their date of
issuance on June 13, 2006
    
    the warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the warrants is not available for the resale of the shares upon exercise of the warrants
    
    the warrants contain certain limitations on the exercise thereof in the event that
the holder would beneficially own in excess of 9.99% of our common stock outstanding
immediately after giving effect to such exercise
    
    the warrants require an automatic repricing of the exercise price if we make certain
sales of our common stock or common stock equivalents in a capital-raising transaction
at a price below the warrant exercise price. (This ratchet adjustment provision does
not apply in the case of certain exempt issuances.)
 -14-




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B. BUSINESS OVERVIEW.
        -15-




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
    
    The total consideration for the purchase was Rmb 210,000,000 (US$25,362,000), which was paid in full on July 16, 2003.
    
    Central Grace assumed all disclosed and undisclosed liabilities of QXHL except:
 
    
    the current liabilities of QXTI due to us of Rmb 231,585,507 (US$27,969,000)
    
    the current liabilities of QXHL due to us of Rmb 8,172,953 (US$987,000)
    
    the current assets due from us of Rmb 113,543,063 (US$13,713,000)
 
    
    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
 -16-




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
    
    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.
   2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    RMBNet sales:Mobile phones
    
    
    1,694,046
    
    
    
    1,823,979
    
    
    
    2,622,302Indoor phones
    
    
    149,236
    
    
    
    195,102
    
    
    
    254,6531,843,282
    
    
    
    2,019,081
    
    
    
    2,876,955
 CECTs Business Overview
   -17-




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-18-




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(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.
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HZQXCIs Business Operations and Product Range
  (i)
    
    the design and manufacture through sub-contractors of COSUN-branded GSM mobile
phones for its own account 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.
   -20-




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-21-




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Production Management
  Quality Assurance System
   
    
    sampling test method is used to inspect all incoming materials on a sample basis;
    
    at each stage of production process, quality control inspectors monitor the
production flow and check the quality of the products; and
    
    finished products are checked by quality control staff on a sample basis.
 -22-




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Sales and Marketing
 six
       -23-




---



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Materials and Components
  Research and Development
   -24-




---



##### Table of Contents



Competition
  
    
    functions and designs;
    
    performance/cost ratio;
    
    brand name recognition;
    
    distribution capability;
    
    after-sale service;
    
    short lead time in product development;
    
    product quality; and
    
    capability of mass production.
   -25-




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C. ORGANIZATIONAL STRUCTURE AS OF JUNE 20, 2006.
 
 -26-




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##### Table of Contents



D. PROPERTY, PLANTS AND EQUIPMENT.
  
 ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  A. OPERATING RESULTS.
 Fiscal 2005 compared to Fiscal 2004
   Year ended December 312005
    
    
    2004Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    2,619,683
    
    
    
    91
    
    
    
    1,823,979
    
    
    
    90Indoor telephones
    
    
    254,653
    
    
    
    9
    
    
    
    195,102
    
    
    
    10Total
    
    
    2,874,336
    
    
    
    100
    
    
    
    2,019,081
    
    
    
    100
   -27-




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Year ended December 312005
    
    
    2004Rmb000
    
    
    %
    
    
    Rmb000
    
    
    %Mobile telephones
    
    
    449,881
    
    
    
    92
    
    
    
    194,801
    
    
    
    87Indoor telephones
    
    
    39,168
    
    
    
    8
    
    
    
    28,798
    
    
    
    13Total
    
    
    489,049
    
    
    
    100
    
    
    
    223,599
    
    
    
    100
   -28-




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##### Table of Contents



(a)
    
    A decrease in advertising expenses. As the brands of our
Group had become more established, there was less need to spend on
advertising. Advertising expenses in fiscal year 2005 amounted to
Rmb 11.8 million, representing a decrease of Rmb 2.9 million (20%) from Rmb 14.7
million in fiscal year 2004.(b)
    
    an increase in expenses relating to materials used for promotional activities
of Rmb 6.7 million in CECT.(iv)
    
    General and administrative expenses including stock-based compensation
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Agreed valuationRmb000
    
    
    US$000Cash
    
    
    4,607
    
    
    
    570Investment at cost
    
    
    20,000
    
    
    
    2,478Investment in Beijing Jinxin Hengtong
Technology Company (BJHTCL), a subsidiary
    
    
    900
    
    
    
    112Amount due from BJHTCL
    
    
    49,493
    
    
    
    6,13375,000
    
    
    
    9,293
  Rmb000
    
    
    US$000Cash and cash equivalents
    
    
    126
    
    
    
    16Other receivables
    
    
    751
    
    
    
    93Property, machinery and equipment
    
    
    37,826
    
    
    
    4,687Land use rights
    
    
    1,383
    
    
    
    171Amount due to CECT
    
    
    (49,493
    )
    
    
    (6,133
    )Net liabilities disposed of
    
    
    (9,407
    )
    
    
    (1,166
    )
 -30-




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Rmb000
    
    
    US$000Consideration
    
    
    900
    
    
    
    111Net liabilities disposed of
    
    
    9,407
    
    
    
    1,166Gain on disposal of subsidiary
    
    
    10,307
    
    
    
    1,277
     2004Rmb000
    
    
    US$000(Unaudited)
    
    
    (Unaudited)Current and total assets
    
    
    6,863
    
    
    
    829Current liabilities
    
    
    79
    
    
    
    9Capital and reserves
    
    
    6,784
    
    
    
    820Total 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
    )
 -31-




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##### Table of Contents



Rmb000Consideration
    
    
    4,900Share of net asset value of SMCECT disposed of as of January
1, 2005
    
    
    (3,321
    )Gain on disposal
    
    
    1,579
    2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Mainland Chinese income- current
    
    
    
    
    
    
    10,404
    
    
    
    27,813
    
    
    
    3,446- deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    27,813
    
    
    
    3,446
  -32-




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##### Table of Contents



2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Allowance for doubtful accounts
    
    
    1,141
    
    
    
    975
    
    
    
    121Write-off of obsolete and
slow-moving inventories
    
    
    6,056
    
    
    
    6,390
    
    
    
    792Loss carryforward
    
    
    2,695
    
    
    
    1,835
    
    
    
    2279,892
    
    
    
    9,200
    
    
    
    1,140Valuation allowance
    
    
    (9,892
    )
    
    
    (9,200
    )
    
    
    (1,140
    )Deferred income tax assets
    
    
    
    
    
    
    
    
    
    
    
  2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Beginning of year
    
    
    
    
    
    
    1,896
    
    
    
    9,892
    
    
    
    1,226Increase (release) in
valuation allowance
    
    
    1,896
    
    
    
    7,996
    
    
    
    (692
    )
    
    
    (86
    )End of year
    
    
    1,896
    
    
    
    9,892
    
    
    
    9,200
    
    
    
    1,140
     -33-




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Rmb000
    
    
    US$000Cash and cash equivalents
    
    
    10,390
    
    
    
    1,287Pledged bank deposits
    
    
    44,773
    
    
    
    5,548Bills receivable
    
    
    43,078
    
    
    
    5,338Accounts receivable
    
    
    125,523
    
    
    
    15,554Inventories
    
    
    73,535
    
    
    
    9,112Prepaid expenses
    
    
    68,006
    
    
    
    8,427Other current assets
    
    
    6,826
    
    
    
    846Due from related parties
    
    
    63,634
    
    
    
    7,885Property, machinery and equipment
    
    
    9,795
    
    
    
    1,214
    
    (*)Construction-in-progress
    
    
    15
    
    
    
    2
    
    (*)Investment at cost
    
    
    1,908
    
    
    
    236Other acquired intangible assets
    
    
    131,996
    
    
    
    16,356
    
    (*)Total assets acquired
    
    
    579,479
    
    
    
    71,805Short-term borrowings
    
    
    167,100
    
    
    
    20,706Accounts payable
    
    
    97,797
    
    
    
    12,118Other payables
    
    
    4,763
    
    
    
    590Accrued liabilities
    
    
    6,045
    
    
    
    749Deposits received
    
    
    2,772
    
    
    
    344Deferred revenues
    
    
    22,745
    
    
    
    2,818Due to related parties
    
    
    8,375
    
    
    
    1,038Taxation payable
    
    
    8,719
    
    
    
    1,081Total liabilities assumed
    
    
    318,316
    
    
    
    39,444Net assets acquired
    
    
    261,163
    
    
    
    32,361Less: Purchase price
    
    
    (75,000
    )
    
    
    (9,293
    )Excess of net assets acquired over purchase price
    
    
    186,163
    
    
    
    23,068Less: Allocation of negative goodwill to
non-financial assets
    
    
    (141,806
    )
    
    
    (17,572
    )
    [Sum of (*) above]Extraordinary gain before minority interests
    
    
    44,357
    
    
    
    5,496Less: Minority interests share of extraordinary gain
    
    
    (8,871
    )
    
    
    (1,099
    )Extraordinary gain after minority interests
    
    
    35,486
    
    
    
    4,397
   (i)
    
    increase in gross profit of Rmb 265.4 million;(ii)
    
    decrease in general and administrative expenses of Rmb 38.6 million;(iii)
    
    increase in research and development costs of Rmb 10.2 million;(iv)
    
    increase in interest expense of Rmb 14.7 million;(v)
    
    increase in gain on disposal of subsidiary Rmb 10.3 million;(vi)
    
    decrease in gain on disposal of equity investee of Rmb 39.9 million;(vii)
    
    increase in provision for income tax of Rmb17.4 million;(viii)
    
    increase in minority interests of Rmb 46.1 million; and(ix)
    
    increase in extraordinary gain on acquisition of minority interests of Rmb 35.5
million.
 -34-




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Fiscal 2004 compared to Fiscal 2003
   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
    -35-




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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
   -36-




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-38-




---



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Settlement Date
    
    Rmb000Before July 12, 2004
    
    
    21,600Before July 15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
   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
     -39-




---



##### Table of Contents



2002
    
    
    2003
    
    
    2004Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Mainland Chinese income tax-current
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    1,257-deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    1,257
  2003
    
    
    2004Rmb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
    
    
    
    
    
    
    
    
    
    
    
  2002
    
    
    2003
    
    
    2004Rmb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
  -40-




---



##### Table of Contents



(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;(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
  B. LIQUIDITY AND CAPITAL RESOURCES
   -41-




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-42-




---



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Contractual Obligations and Commitments
   2005Rmb000
    
    
    US$000Capital expenditures authorized and contracted for:- Construction of factory premises and staff
quarters
    
    
    39,221
    
    
    
    4,860- Purchase of land and buildings
    
    
    58,700
    
    
    
    7,274- Purchase of machinery and equipment
    
    
    5,562
    
    
    
    689103,483
    
    
    
    12,823
   AmountRmb000
    
    
    US$000For the years ending December 31,- 2006
    
    
    4,012
    
    
    
    497- 2007
    
    
    837
    
    
    
    104- 2008
    
    
    605
    
    
    
    75Total
    
    
    5,454
    
    
    
    676
  Related party transactions
  Critical Accounting Policies: Accounting Estimates
  -43-




---



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-44-




---



##### Table of Contents



(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.
      -45-




---



##### Table of Contents



Critical Accounting Policies: Adoption of New Accounting Policies
 (i)
    
    In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 151, Inventory Costs  an amendment of Accounting Research Bulletin (ARB) No.
43, 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). The Statement requires that
those items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal. In addition, the Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the
 -46-




---



##### Table of Contents



(ii)
    
    (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.
The 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. The 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.(iii)
    
    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. The 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.(iv)
    
    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 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.
 -47-




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##### Table of Contents



(v)
    
    (v) In March 2005, the FASB issued FASB Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47).
FIN 47 clarifies that an entity must record a liability for a conditional
asset retirement obligation if the fair value of the obligation can be
reasonably estimated. The types of asset retirement obligations that are
covered by the Interpretation are those for which an entity has a legal
obligation to perform an asset retirement activity, however the timing and
(or) method of settling the obligation are conditional on a future event
that may or may not be within the control of the entity. FIN 47 also
clarifies when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after December 15,
2005. The initial adoption of FIN 47 did not have an impact on the Groups
consolidated financial statements.(vi)
    
    In May 2005, the FASB issued SFAS No. 154, Accounting Changes
and Error Corrections. SFAS No. 154 supersedes APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 requires all voluntary changes in accounting
principle because of preferability or any change resulting from the issuance of
an accounting pronouncement that does not include detailed transition
instructions to be handled by retrospective application, unless it is
impracticable to determine the effect on prior period financial statements.
SFAS No. 154 is effective for fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 is not expected to have a material impact on the
Groups consolidated financial statements.
 -48-




---



##### Table of Contents



(vii)
    
    On September 15, 2005, the Emerging Issues Task Force (EITF)
of the FASB reached a consensus on Issue 04-13, Accounting for Purchases and
Sales of Inventory with the Same Counterparty. EITF 04-13 describes the
circumstances under which two or more inventory transactions with the same
counterparty should be viewed as a single nonmonetary transaction, and
describes the circumstances under which nonmonetary exchanges of inventory
within the same line of business should be recognized at fair value. EITF 04-13
will be effective for transactions completed in reporting periods beginning
after March 15, 2006. The Company is currently evaluating the applicability of
EITF 04-13 to the Groups inventory transactions.(viii)
    
    In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments. This standard amends the guidance in SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 155 allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account for
the whole instrument on a fair value basis. The provisions of SFAS No. 155
nullify or amend certain Derivatives Implementation Group Issues. SFAS No. 155
is effective for all financial instruments acquired or issued after the
beginning of an entitys first fiscal year that begins after September 15,
2006. The Company does not expect the adoption of this Statement to have any
material effect on its consolidated financial statements.(ix)
    
    (ix) In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets  an amendment of FASB Statement
No. 140. This standard amends the guidance in SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Among other requirements, SFAS No. 156 requires an entity to
recognize a servicing asset or servicing liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract
in any of the following situations: (a) a transfer of the servicers financial
assets that meets the requirements for sale accounting; (b) a transfer of the
servicers financial assets to a qualifying special-purpose entity in a
guaranteed mortgage securitization in which the transferor retains all of the
resulting securities and classifies them as either available-for-sale
securities or trading securities in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities; or (c) an acquisition
or assumption of an obligation to service a financial asset that does not
relate to financial assets of the servicer or its consolidated affiliates.
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-50-




---



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C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
  Year ended December 31, 2005
    
    Rmb 20,694,000Year ended December 31, 2004
    
    Rmb 10,449,000Year ended December 31, 2003
    
    Rmb 6,649,000
 D. TREND INFORMATION.
        -51-




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E. OFF-BALANCE SHEET ARRANGEMENTS.
  -52-




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F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
   2005Rmb000
    
    
    US$000Capital expenditures authorized and contracted for:- Construction of factory premises and staff
quarters
    
    
    39,221
    
    
    
    4,860- Purchase of land and buildings
    
    
    58,700
    
    
    
    7,274- Purchase of machinery and equipment
    
    
    5,562
    
    
    
    689103,483
    
    
    
    12,823
   AmountRmb000
    
    US$000For the years ending December 31,- 2006
    
    
    4,012
    
    
    
    497- 2007
    
    
    837
    
    
    
    104- 2008
    
    
    605
    
    
    
    75Total
    
    
    5,454
    
    
    
    676
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. DIRECTORS AND SENIOR MANAGEMENT.
  Name
    
    Age
    
    
    PositionRui Lin Wu
    
    
    54
    
    
    Chairman and Chief Executive OfficerZhi Yang Wu
    
    
    33
    
    
    Vice Chairman and SecretaryAlbert Leung
    
    
    49
    
    
    Chief Financial OfficerZe Yun Mu
    
    
    40
    
    
    Non-Executive DirectorSonny Kwok Wing Hung
    
    
    42
    
    
    Non-Executive DirectorYi Hong Zhang
    
    
    64
    
    
    Non-Executive Director
  Mr. Rui Lin Wu
 Mr. Zhi Yang Wu
 Mr. Albert Leung
 -54-




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Mr. Ze Yun Mu
 Mr. Sonny Kwok Wing Hung
 Mr. Yi Hong Zhang
 B. COMPENSATION.
   -55-




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C. BOARD PRACTICES.
     
    
    recommend annually to our board of directors the appointment of our independent
public accountants;
    
    discuss and review the scope and the fees of the prospective annual audit and review
the results with the independent public accountants;
    
    review and approve non-audit services of the independent public accountants;
    
    review compliance with our existing accounting and financial policies;
    
    review the adequacy of our financial organization; and
    
    review our managements procedures and policies relative to the adequacy of our
internal accounting controls and compliance with U.S. federal and state laws relating
to financial reporting.
  
    
    assess the size and composition of the board of directors in light of our operating
requirements and existing social attitudes and trends;
    
    develop membership qualifications for the board of directors and all board
committees;
    
    monitor compliance with board of director and board committee membership criteria;
    
    review and recommend directors for continued service as required based on our
evolving needs;
    
    coordinate and assist management and the board of directors in recruiting new
members to the board of directors; and
    
    investigate suggestions for candidates for membership on the board of directors and
recommend prospective directors, as required, to provide an appropriate balance of
knowledge, experience and capability on the board of directors, including stockholder
nominations for the board of directors.
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
    
    review and approve corporate goals and objectives relevant to the compensation of
the chief executive officer and other executive officers;
    
    evaluate the chief executive officers performance in light of such goals and
objectives at least annually and communicate the results to the chief executive officer
and the board of directors;
    
    set the chief executive officers compensation levels based on the foregoing
evaluation (including annual salary, bonus, stock options and other direct and indirect
benefits), with ratification by the independent directors of the full board of
directors; and
    
    set the other executive officers compensation levels (including annual salary,
bonus, stock options and other direct and indirect benefits).
 D. EMPLOYEES
  E. SHARE OWNERSHIP.
  
    
    each person who is known by us to own beneficially more than 5% of our outstanding
common stock;
    
    by each of our current executive officers and directors; and
    
    by all current directors and executive officers as a group.
  -57-




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##### Table of Contents



Number
    
    PercentName of Beneficial Holder
    
    Shares Beneficially OwnedWu Holdings Limited
    
    
    6,819,000
    (1)
    
    
    28.8Rui Lin Wu
    
    
    7,364,000
    (1)
    
    
    31.1Zhi Yang Wu
    
    
    400,000
    
    
    
    1.7Albert Leung
    
    
    0
    
    
    
    0Ze Yun Mu
    
    
    0
    
    
    
    0Sonny Kwok Wing Hung
    
    
    0
    
    
    
    0Yi Hong Zhang
    
    
    0
    
    
    
    0All directors and executive officers as a group (6 persons)
    
    
    7,764,000
    
    
    
    32.8
 
 (1)
    
    Wu Holdings Limited is a British Virgin Islands corporation which is wholly owned by the Qiao
Xing Trust. The Qiao Xing Trust is a Cook Islands trust which was formed for the primary
benefit of Zhi Jian Wu Li, the youngest son of Rui Lin Wu, our chairman. The 6,819,000 shares
of common stock owned of record and beneficially by Wu Holdings Limited may be deemed to also
be beneficially owned by Rui Lin Wu (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) since he may be deemed to have and/or share the power to
direct the voting and disposition of such shares. The 2005 Stock Compensation Plan
  
    
    encourage ownership of our common stock by our officers, directors, employees and
advisors;
    
    provide additional incentive for them to promote our success and our business; and
    
    encourage them to remain in our employ by providing them an opportunity to benefit
from any appreciation of our common stock through the issuance of stock options.
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##### Table of Contents




    
    545,000 options
    
    -
    
    Rui Lin Wu, Chairman
    
    400,000 options
    
    -
    
    Zhi Yang Wu, Vice Chairman
    
    400,000 options
    
    -
    
    Zhi Zhong Wu, son of Chairman
    
    400,000 options
    
    -
    
    Zhi Jian Wu, son of Chairman
  Other Options and Warrants Outstanding
  
    
    warrants to purchase 30,000 shares of common stock at $8.50 per share at any time
until December 23, 2009 which we granted to a research advisory firm in December 2004
    
    warrants to purchase an aggregate of 375,000 shares of common stock at $9.86 per
share at any time until February 17, 2010 which we granted to two accredited investors
and the placement agent and finders in February 2005 in connection with a stock
purchase agreement (February 2005 SPA Warrants)
    
    warrants to purchase an aggregate of 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 (April
2005 SPA Warrants)
    
    warrants to purchase an aggregate of 400,000 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to an accredited investor in
January 2006 in connection with a stock purchase agreement (January 2006 SPA
Warrants)
    
    warrants to purchase an aggregate of 145,000 shares of common stock at $8.125 per
share at any time until January 17, 2010 which we granted to a financial consultant and
its employees and related parties in February 2006 in connection with certain corporate
finance consulting and advisory services rendered to the Company during 2005
(February 2006 Warrants)
    
    warrants to purchase an aggregate of 350,000 shares of common stock at $7.00 per
share at any time until February 22, 2010 which we granted to an accredited investor in
February 2006 in connection with a stock purchase agreement (February 2006 SPA
Warrants)
 -59-




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
    
    warrants to purchase an aggregate of 1,844,954 shares of common stock at $8.027 per
share at any time until June 13, 2011 which we granted to two accredited investors and
the placement agent in June 2006 in connection with the sale of $40,000,000 of our
senior convertible notes (June 2006 CB Warrants)
   1.
    
    February 2005 SPA Warrants  416,561 warrants at $8.8762 per warrant2.
    
    April 2005 SPA Warrants  144,408 warrants at $8.8762 per warrant3.
    
    January 2006 SPA Warrants  438,828 warrants at $7.4061 per warrant4.
    
    February 2006 Warrants  159,075 warrants at $7.4061 per warrant5.
    
    February 2006 SPA Warrants  374,469 warrants at $6.5426 per warrant
 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. MAJOR SHAREHOLDERS.
     -60-




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B. RELATED PARTY TRANSACTIONS.
  Name of related parties
    
    Existing relationship with the CompanyMr. Zhi Jian Wu Li
    
    The major shareholderMr. Rui Lin Wu
    
    Director and father of Mr. Zhi Jian Wu LiMr. Zhi Yang Wu
    
    Director and brother of Mr. Zhi Jian Wu LiMr. Zhi Zhong Wu
    
    Brother of Mr. Zhi Jian Wu LiMr. Jie Shi
    
    Director (resigned on September 1, 2005)Mr. Ming Zhu
    
    Non-executive independent director
(resigned on September 1, 2005)Mr. Ze Yun Mu
    
    Non-executive independent directorWu Holdings Limited
    
    Intermediate holding companyExquisite Jewel Limited
    
    Minority shareholderMetrolink Holdings Limited
    
    Minority shareholderSpecialist Consultants Limited
    
    Minority shareholderQiao Xing Group Limited (QXGL)
    
    Common director and minority shareholderQiao Xing Development Limited (QXDL)
    
    Common directorShanghai Sunplus Communication Technology
Company Limited (SSCT)
    
    Common director until September 2004Huizhou Calilee Telecommunication Company
Limited (Calilee)
    
    A company 5% owned by QXGL until March 2005Huizhou Qiaoxing Famous Science &
Technology Co., Ltd. (QFST)
    
    A company 80% owned by QXGLShenzhen Tianna I/E Trade Company Limited
(STIE)
    
    A company 90% owned by QXGLChina Electronics Corporation (CEC)
    
    Minority owner of CECT until July 29, 2005CEC Wireless R&D Limited (CECW)
    
    CEC is a shareholderBeijing China Electronics Changsheng
Investment Management Company Limited
(BCECIM)
    
    CEC is a shareholderChina Electronics Beijing Real Estate
Management Co., Ltd. (CEBREM)
    
    CEC is a shareholderChina National Electronics Import &
Export Corporation (CNEIEC)
    
    CEC is a shareholderGoldcellcom Co., Ltd (GCL)
    
    CEC is a shareholderWuhan Zhongyuan Electronics Group Co.,
Ltd. (WZEG)
    
    CEC is a shareholderShenzhen SED Trade Co., Ltd. (SST)
    
    CEC is a shareholderWuhan Zhongyuan Qi Xing Co., Ltd. (WZQX)
    
    A subsidiary of WZEG
 -61-




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2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals
charged by CEC
    
    
    2,049
    
    
    
    2,743
    
    
    
    1,325
    
    
    
    164Property management fees
paid and payable to- CEBREM
    
    
    788
    
    
    
    971
    
    
    
    852
    
    
    
    106- QXGL
    
    
    34
    
    
    
    68
    
    
    
    61
    
    
    
    7Interest income from CEFCL
    
    
    1,851
    
    
    
    
    
    
    
    
    
    
    
    Rental income from CECM
    
    
    1,103
    
    
    
    1,110
    
    
    
    
    
    
    
    Research and development
fee paid to CECW
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    Commission paid and
payable to CECW
    
    
    5,181
    
    
    
    
    
    
    
    
    
    
    
    Purchases from:- QXDL
    
    
    34
    
    
    
    3,290
    
    
    
    
    
    
    
    - SSCT
    
    
    24,366
    
    
    
    354,368
    
    
    
    
    
    
    
    - STIE
    
    
    13,005
    
    
    
    103,379
    
    
    
    
    
    
    
    Sales to:- CECT *
    
    
    26,821
    
    
    
    
    
    
    
    
    
    
    
    - CECM
    
    
    238,857
    
    
    
    17,536
    
    
    
    
    
    
    
    - Calilee
    
    
    611,281
    
    
    
    293,097
    
    
    
    
    
    
    
    - QFST
    
    
    
    
    
    
    12,458
    
    
    
    41,928
    
    
    
    5,195- GCL
    
    
    7,980
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    Sales to CECT after February 8, 2003 have been eliminated in the consolidated statement
of operations.  -62-




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2004
    
    2005Rmb000
    

Rmb000
    

US$000Due from:- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    3- CNEIEC
    
    
    1
    
    
    
    
    
    
    
    - CEBREM
    
    
    34
    
    
    
    
    
    
    
    - WZEG
    
    
    120
    
    
    
    
    
    
    
    185
    
    
    
    30
    
    
    
    4Due to:- BCECIM
    
    
    3,481
    
    
    
    
    
    
    
    - CEC
    
    
    734
    
    
    
    
    
    
    
    - GCL
    
    
    5,839
    
    
    
    
    
    
    
    - QXGL
    
    
    700
    
    
    
    
    
    
    
    - SST
    
    
    31
    
    
    
    
    
    
    
    - WZQX
    
    
    3
    
    
    
    
    
    
    
    - Mr. Rui Lin Wu
    
    
    14,758
    
    
    
    2,428
    
    
    
    301- Mr. Jie Shi
    
    
    166
    
    
    
    
    
    
    
    - Mr. Ming Zhu
    
    
    7
    
    
    
    
    
    
    
    - Mr. Ze Yun Mu
    
    
    5
    
    
    
    
    
    
    
    25,724
    
    
    
    2,428
    
    
    
    301Accounts receivable from:- CECM
    
    
    32,111
    
    
    
    3,323
    
    
    
    412- QFST
    
    
    7,995
    
    
    
    9,056
    
    
    
    1,122- Calilee
    
    
    35,765
    
    
    
    
    
    
    
    75,871
    
    
    
    12,379
    
    
    
    1,534Accounts payable to STIE
    
    
    7,263
    
    
    
    
    
    
    
    
   -63-




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C. INTERESTS OF EXPERTS AND COUNSEL.
  
 ITEM 8. FINANCIAL INFORMATION
 A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION.
     B. SIGNIFICANT CHANGES.
  -64-




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ITEM 9. THE OFFER AND LISTING
 A. OFFER AND LISTING DETAILS.
  Period
    
    High
    
    LowYear 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
    
    
    $
    6.50Year ended December 31, 2005
    
    $
    8.50
    
    
    $
    5.04Quarter 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
    
    
    $
    5.04Quarter ended September 30, 2005
    
    $
    6.11
    
    
    $
    5.13Quarter ended December 31, 2005
    
    $
    8.29
    
    
    $
    5.11Quarter ended March 31, 2006
    
    $
    8.85
    
    
    $
    6.49Quarter ended June 30, 2006*
    
    $
    10.60
    
    
    $
    7.21Month ended December 31, 2005
    
    $
    8.15
    
    
    $
    7.05Month ended January 31, 2006
    
    $
    7.83
    
    
    $
    6.49Month ended February 28, 2006
    
    $
    7.18
    
    
    $
    6.61Month ended March 31, 2006
    
    $
    8.85
    
    
    $
    7.16Month ended April 30, 2006
    
    $
    9.42
    
    
    $
    8.33Month ended May 31, 2006
    
    $
    10.60
    
    
    $
    7.65Month ended June 30, 2006*
    
    $
    9.14
    
    
    $
    7.21
 
 *
    
    Through June 16, 2006 B. PLAN OF DISTRIBUTION.
  -65-




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##### Table of Contents



C. MARKETS.
  D. SELLING SHAREHOLDERS.
  E. DILUTION.
  F. EXPENSES OF THE ISSUE.
  
 ITEM 10. ADDITIONAL INFORMATION
 A. SHARE CAPITAL.
  B. MEMORANDUM AND ARTICLES OF ASSOCIATION.
   -66-




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-67-




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-68-




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##### Table of Contents



C. MATERIAL CONTRACTS.
  D. EXCHANGE CONTROLS.
  E. TAXATION.
  United States Federal Income Taxation
  
    
    a court within the United States is able to exercise primary supervision over its
administration; and
    
    one or more United States persons have the authority to control all of its
substantial decisions.
  -69-




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##### Table of Contents




    
    is a corporation or comes within other exempt categories; or
    
    provides a correct taxpayer identification number, certifies that such holder is not
subject to backup withholding and otherwise complies with the backup withholding rules.
   British Virgin Islands Taxation
  -70-




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##### Table of Contents



F. DIVIDENDS AND PAYING AGENTS.
  G. STATEMENT BY EXPERTS.
  H. DOCUMENTS ON DISPLAY.
  I. SUBSIDIARY INFORMATION.
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   -71-




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##### Table of Contents



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
   -72-




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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 (a) Audit Fees.
 (b) Audit  Related Fees.
 (c) Tax Fees.
 (d) All Other Fees.
 (e) Audit Committee Pre-Approval Policies and Procedures.
  -73-




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##### Table of Contents



(f).
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
  
 PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
 -74-




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F-1




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##### Table of Contents



Note
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    US$000(Restated)
    
    
    
    
    
    (Note 3)ASSETSCurrent assets:Cash and cash equivalents
    
    
    
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    48,532Restricted cash
    
    
    16
    
    
    
    105,640
    
    
    
    136,206
    
    
    
    16,878Restricted cash held in trust by a
director
    
    
    16
    
    
    
    
    
    
    
    13,315
    
    
    
    1,650Bills receivable
    
    
    
    
    
    
    238,372
    
    
    
    401,186
    
    
    
    49,712Accounts receivable, net
    
    
    4
    
    
    
    438,963
    
    
    
    674,017
    
    
    
    83,519Inventories
    
    
    5
    
    
    
    293,407
    
    
    
    233,721
    
    
    
    28,961Prepaid expenses
    
    
    6
    
    
    
    281,057
    
    
    
    292,228
    
    
    
    36,211Other current assets
    
    
    7
    
    
    
    14,177
    
    
    
    13,455
    
    
    
    1,667Receivable from sale of an equity investee
    
    
    12
    .a
    
    
    50,400
    
    
    
    
    
    
    
    Due from related parties
    
    
    30
    
    
    
    185
    
    
    
    30
    
    
    
    4Total current assets
    
    
    
    
    
    
    1,563,091
    
    
    
    2,155,818
    
    
    
    267,134Property, machinery and equipment, net
    
    
    8
    
    
    
    107,162
    
    
    
    52,664
    
    
    
    6,526Construction-in-progress
    
    
    9
    
    
    
    50,934
    
    
    
    59,105
    
    
    
    7,324Land use rights, net
    
    
    10
    
    
    
    182,667
    
    
    
    177,222
    
    
    
    21,960Other non-current assets
    
    
    11
    
    
    
    12,610
    
    
    
    8,282
    
    
    
    1,026Investments at equity
    
    
    12
    
    
    
    3,321
    
    
    
    
    
    
    
    Investments at cost
    
    
    13
    
    
    
    22,599
    
    
    
    7,634
    
    
    
    946Goodwill
    
    
    14
    
    
    
    72,088
    
    
    
    72,088
    
    
    
    8,932Other acquired intangible assets, net
    
    
    15
    
    
    
    62,238
    
    
    
    48,227
    
    
    
    5,976Total assets
    
    
    
    
    
    
    2,076,710
    
    
    
    2,581,040
    
    
    
    319,824LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    
    16
    
    
    
    700,186
    
    
    
    754,212
    
    
    
    93,456Accounts payable
    
    
    
    
    
    
    303,110
    
    
    
    337,780
    
    
    
    41,855Other payables
    
    
    17
    
    
    
    1,565
    
    
    
    16,949
    
    
    
    2,100Accrued liabilities
    
    
    18
    
    
    
    33,888
    
    
    
    58,614
    
    
    
    7,263Deposits received
    
    
    
    
    
    
    7,399
    
    
    
    10,729
    
    
    
    1,330Deferred revenues
    
    
    
    
    
    
    61,117
    
    
    
    53,442
    
    
    
    6,623Capital lease obligations, current portion
    
    
    19
    
    
    
    1,510
    
    
    
    
    
    
    
    Due to related parties
    
    
    30
    
    
    
    25,724
    
    
    
    2,428
    
    
    
    301Taxation payable
    
    
    23
    
    
    
    2,429
    
    
    
    68,886
    
    
    
    8,536Total current liabilities
    
    
    
    
    
    
    1,136,928
    
    
    
    1,303,040
    
    
    
    161,464Capital lease obligations, non-current
portion
    
    
    19
    
    
    
    2,265
    
    
    
    
    
    
    
    Shareholders loans
    
    
    20
    
    
    
    8,163
    
    
    
    7,959
    
    
    
    986Total liabilities
    
    
    
    
    
    
    1,147,356
    
    
    
    1,310,999
    
    
    
    162,450Minority interests
    
    
    
    
    
    
    250,137
    
    
    
    231,201
    
    
    
    28,649Commitments and Contingencies
    
    
    27Shareholders equity:Common stock, par value Rmb0.008
(equivalent of US$0.001); authorized
50,000,000 shares; outstanding and fully
paid  16,645,176 shares as of December
31, 2004 and 18,646,676 as of December
31, 2005
    
    
    21
    
    
    
    138
    
    
    
    154
    
    
    
    19Additional paid-in capital
    
    
    
    
    
    
    445,089
    
    
    
    554,178
    
    
    
    68,670Retained earnings
    
    
    
    
    
    
    234,716
    
    
    
    483,413
    
    
    
    59,901Cumulative translation adjustments
    
    
    
    
    
    
    (726
    )
    
    
    1,095
    
    
    
    135Total shareholders equity
    
    
    
    
    
    
    679,217
    
    
    
    1,038,840
    
    
    
    128,725Total liabilities, minority
interests and shareholders equity
    
    
    
    
    
    
    2,076,710
    
    
    
    2,581,040
    
    
    
    319,824
  F-2




---



##### Table of Contents



Note
    
    
    2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000(Restated)
    
    
    (Restated)
    
    
    
    
    
    
    (Note 3)Net sales
    
    
    
    
    
    
    1,843,282
    
    
    
    2,019,081
    
    
    
    2,874,336
    
    
    
    356,166Cost of goods sold
    
    
    
    
    
    
    (1,598,615
    )
    
    
    (1,795,482
    )
    
    
    (2,385,287
    )
    
    
    (295,567
    )Gross profit
    
    
    
    
    
    
    244,667
    
    
    
    223,599
    
    
    
    489,049
    
    
    
    60,599Operating expenses:Selling expenses
    
    
    
    
    
    
    (74,885
    )
    
    
    (27,873
    )
    
    
    (29,227
    )
    
    
    (3,622
    )General and administrative expenses
    
    
    
    
    
    
    (78,814
    )
    
    
    (100,062
    )
    
    
    (61,503
    )
    
    
    (7,621
    )Research and development
    
    
    
    
    
    
    (6,649
    )
    
    
    (10,449
    )
    
    
    (20,694
    )
    
    
    (2,564
    )In process research and development
    
    
    
    
    
    
    (21,826
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of acquired intangible
assets
    
    
    
    
    
    
    (27,425
    )
    
    
    (11,044
    )
    
    
    (10,159
    )
    
    
    (1,259
    )Impairment of acquired intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,852
    )
    
    
    (477
    )Income from operations
    
    
    
    
    
    
    35,068
    
    
    
    74,171
    
    
    
    363,614
    
    
    
    45,056Interest income
    
    
    
    
    
    
    3,045
    
    
    
    492
    
    
    
    7,130
    
    
    
    883Exchange loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,659
    )
    
    
    (329
    )Interest expense
    
    
    32
    
    
    
    (18,985
    )
    
    
    (27,060
    )
    
    
    (41,752
    )
    
    
    (5,174
    )Gain on disposal of subsidiary
    
    
    29
    .f
    
    
    
    
    
    
    
    
    
    
    10,307
    
    
    
    1,277Gain on disposal of equity investee
    
    
    12
    
    
    
    
    
    
    
    41,465
    
    
    
    1,579
    
    
    
    196Gain on disposal of other equity
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,035
    
    
    
    624Other income, net
    
    
    
    
    
    
    2,088
    
    
    
    1,597
    
    
    
    640
    
    
    
    79Income before income tax
    
    
    
    
    
    
    21,216
    
    
    
    90,665
    
    
    
    343,894
    
    
    
    42,612Provision for income tax
    
    
    23
    
    
    
    
    
    
    
    (10,404
    )
    
    
    (27,813
    )
    
    
    (3,446
    )Income before minority interests
    
    
    
    
    
    
    21,216
    
    
    
    80,261
    
    
    
    316,081
    
    
    
    39,166Minority interests
    
    
    
    
    
    
    (35,748
    )
    
    
    (56,763
    )
    
    
    (102,870
    )
    
    
    (12,747
    )Equity in earnings of equity investees
    
    
    12
    
    
    
    6,802
    
    
    
    (624
    )
    
    
    
    
    
    
    Net (loss) income before
extraordinary gain
    
    
    
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    213,211
    
    
    
    26,419Extraordinary gain on acquisition of
minority interests
    
    
    29.f
    
    
    
    
    
    
    
    
    
    
    
    35,486
    
    
    
    4,397Net (loss) income
    
    
    
    
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    248,697
    
    
    
    30,816Other comprehensive (loss) income
Translation adjustments
    
    
    
    
    
    
    (746
    )
    
    
    70
    
    
    
    1,821
    
    
    
    226Comprehensive (loss) income
    
    
    
    
    
    
    (8,476
    )
    
    
    22,944
    
    
    
    250,518
    
    
    
    31,042Basic (loss) earnings per common shareBefore extraordinary gain
    
    
    25
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.39
    
    
    Rmb
    11.64
    
    
    US$
    1.44Extraordinary gain
    
    
    25
    
    
    
    
    
    
    
    
    
    
    Rmb
    1.94
    
    
    US$
    0.24After extraordinary gain
    
    
    25
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.39
    
    
    Rmb
    13.58
    
    
    US$
    1.68Diluted (loss) earnings per common shareBefore extraordinary gain
    
    
    25
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.38
    
    
    Rmb
    11.64
    
    
    US$
    1.44Extraordinary gain
    
    
    25
    
    
    
    
    
    
    
    
    
    
    Rmb
    1.94
    
    
    US$
    0.24After extraordinary gain
    
    
    25
    
    
    Rmb
    (0.50
    )
    
    Rmb
    1.38
    
    
    Rmb
    13.58
    
    
    US$
    1.68Weighted average number of shares
outstanding- Basic
    
    
    25
    
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    18,319,000- Diluted
    
    
    25
    
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    18,320,000
    
    
    
    18,320,000
  F-3




---



##### Table of Contents



2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000(Restated)
    
    (Restated)
    
    
    
    
    
    (Note 3)Cash flows from operating activities:Net (loss) income
    
    
    (7,730
    )
    
    
    22,874
    
    
    
    248,697
    
    
    
    30,816Adjustments to reconcile net (loss) income
to net cash used in operating activities -Depreciation of property, machinery and
equipment
    
    
    8,995
    
    
    
    12,105
    
    
    
    11,831
    
    
    
    1,466Amortization of land use rights
    
    
    4,094
    
    
    
    4,097
    
    
    
    4,062
    
    
    
    503Amortization of other acquired intangible
assets
    
    
    27,425
    
    
    
    11,044
    
    
    
    10,159
    
    
    
    1,259Impairment of other acquired intangible
assets
    
    
    
    
    
    
    
    
    
    
    3,852
    
    
    
    477In process research and development
    
    
    21,826
    
    
    
    
    
    
    
    
    
    
    
    Bad debt expense
    
    
    772
    
    
    
    5,617
    
    
    
    111
    
    
    
    14Net loss (gain) on disposal of property,
machinery and equipment
    
    
    195
    
    
    
    100
    
    
    
    (339
    )
    
    
    (42
    )Stock-based compensation
    
    
    26,929
    
    
    
    32,736
    
    
    
    700
    
    
    
    87Foreign exchange loss
    
    
    
    
    
    
    
    
    
    
    2,659
    
    
    
    329Interest expense on shareholders loans
    
    
    478
    
    
    
    478
    
    
    
    473
    
    
    
    59Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    (10,307
    )
    
    
    (1,277
    )Gain on disposal of equity investee
    
    
    
    
    
    
    (41,465
    )
    
    
    (1,579
    )
    
    
    (196
    )Gain on disposal of other equity
investments
    
    
    
    
    
    
    
    
    
    
    (5,035
    )
    
    
    (624
    )Minority interests
    
    
    35,748
    
    
    
    56,763
    
    
    
    102,870
    
    
    
    12,747Equity in earnings of equity investees
    
    
    (6,802
    )
    
    
    624
    
    
    
    
    
    
    
    Extraordinary gain on acquisition of
minority interests
    
    
    
    
    
    
    
    
    
    
    (35,486
    )
    
    
    (4,397
    )Changes in operating assets and liabilities -Accounts receivable
    
    
    (221,466
    )
    
    
    (189,629
    )
    
    
    (235,165
    )
    
    
    (29,140
    )Bills receivable
    
    
    (2,431
    )
    
    
    (218,536
    )
    
    
    (162,814
    )
    
    
    (20,175
    )Inventories
    
    
    172,156
    
    
    
    (144,120
    )
    
    
    59,686
    
    
    
    7,396Prepaid expenses
    
    
    (158,525
    )
    
    
    106,167
    
    
    
    (11,171
    )
    
    
    (1,384
    )Other current assets
    
    
    (1,816
    )
    
    
    (64
    )
    
    
    722
    
    
    
    89Taxation receivable
    
    
    55,695
    
    
    
    10,310
    
    
    
    
    
    
    
    Due from related parties
    
    
    5,773
    
    
    
    (30
    )
    
    
    155
    
    
    
    19Accounts payable
    
    
    62,436
    
    
    
    126,084
    
    
    
    34,670
    
    
    
    4,296Other payables
    
    
    (2,293
    )
    
    
    (13,065
    )
    
    
    7,315
    
    
    
    907Accrued liabilities
    
    
    (5,491
    )
    
    
    13,819
    
    
    
    24,726
    
    
    
    3,064Deposits received
    
    
    
    
    
    
    (1,485
    )
    
    
    3,330
    
    
    
    413Deferred revenues
    
    
    (294,143
    )
    
    
    (7,219
    )
    
    
    (7,675
    )
    
    
    (951
    )Taxation payable
    
    
    (5,264
    )
    
    
    2,429
    
    
    
    66,457
    
    
    
    8,235Due to related parties
    
    
    (23,965
    )
    
    
    10,230
    
    
    
    (25,605
    )
    
    
    (3,173
    )Net cash (used in) provided by operating
activities
    
    
    (307,404
    )
    
    
    (200,136
    )
    
    
    87,299
    
    
    
    10,817
 F-4




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##### Table of Contents



2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    

Rmb000
    

US$000(Restated)
    
    (Restated)Cash flows from investing activities:Acquisitions of property, machinery and
equipment
    
    
    (43,655
    )
    
    
    (27,859
    )
    
    
    (8,926
    )
    
    
    (1,106
    )Acquisition of land use right
    
    
    
    
    
    
    (8,000
    )
    
    
    
    
    
    
    Net cash inflow from acquisition of
subsidiary (Note 29.d)
    
    
    38,369
    
    
    
    
    
    
    
    
    
    
    
    Net cash inflow from disposal of
subsidiary (Note 29.c)
    
    
    210,000
    
    
    
    
    
    
    
    
    
    
    
    Net cash inflow from disposal of equity
investee (Note 29.e)
    
    
    
    
    
    
    21,600
    
    
    
    55,300
    
    
    
    6,852Net cash outflow from acquisition of
minority interests (Note 29.f)
    
    
    
    
    
    
    
    
    
    
    (1,093
    )
    
    
    (135
    )Capital contribution in an equity investee
(Note 12.b)
    
    
    
    
    
    
    (4,900
    )
    
    
    
    
    
    
    Expenditures on construction-in-progress
    
    
    (1,184
    )
    
    
    (49,750
    )
    
    
    (8,171
    )
    
    
    (1,012
    )Proceeds from disposal of property,
machinery and equipment
    
    
    
    
    
    
    3,009
    
    
    
    6,882
    
    
    
    853Net cash provided by (used in) investing
activities
    
    
    203,530
    
    
    
    (65,900
    )
    
    
    43,992
    
    
    
    5,452Cash flows from financing activities:Increase in restricted cash
    
    
    (44,207
    )
    
    
    (20,451
    )
    
    
    (43,881
    )
    
    
    (5,437
    )New short-term borrowings
    
    
    720,791
    
    
    
    1,353,372
    
    
    
    754,212
    
    
    
    93,456Repayment of short-term borrowings
    
    
    (461,319
    )
    
    
    (1,092,658
    )
    
    
    (700,186
    )
    
    
    (86,762
    )Contribution from minority shareholder
    
    
    1,274
    
    
    
    
    
    
    
    
    
    
    
    Repayment of capital lease obligation
    
    
    (1,311
    )
    
    
    (1,511
    )
    
    
    (3,775
    )
    
    
    (468
    )Net proceeds from exercise of options and
warrants
    
    
    910
    
    
    
    45,638
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    111,704
    
    
    
    13,842Net cash provided by financing activities
    
    
    216,138
    
    
    
    284,390
    
    
    
    118,074
    
    
    
    14,631Effect of translation adjustments
    
    
    (746
    )
    
    
    70
    
    
    
    1,405
    
    
    
    174Net increase in cash and cash equivalents
    
    
    111,518
    
    
    
    18,424
    
    
    
    250,770
    
    
    
    31,074Cash and cash equivalents, beginning of year
    
    
    10,948
    
    
    
    122,466
    
    
    
    140,890
    
    
    
    17,458Cash and cash equivalents, end of year
    
    
    122,466
    
    
    
    140,890
    
    
    
    391,660
    
    
    
    48,532Supplemental disclosure of cash flow
information(Note 29)
  F-5




---



##### Table of Contents



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, 2002
    
    
    
    
    
    
    15,282
    
    
    
    127
    
    
    
    337,931
    
    
    
    
    
    
    
    219,572
    
    
    
    (50
    )Issue of shares to
warrant/option holders
    
    
    21
    
    
    
    256
    
    
    
    2
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    Recognition of
compensation expense
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    26,929
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,730
    )
    
    
    Shareholders
contribution
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (746
    )Balance as of December
31, 2003, as restated
    
    
    
    
    
    
    15,538
    
    
    
    129
    
    
    
    366,246
    
    
    
    
    
    
    
    211,842
    
    
    
    (796
    )Issue of shares to
option holders
    
    
    22
    
    
    
    995
    
    
    
    8
    
    
    
    45,300
    
    
    
    
    
    
    
    
    
    
    
    Issue of shares to
warrant holders
    
    
    22
    
    
    
    12
    
    
    
    
    
    
    
    330
    
    
    
    
    
    
    
    
    
    
    
    Recognition of
compensation expense
    
    
    21
    
    
    
    100
    
    
    
    1
    
    
    
    32,735
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,874
    
    
    
    Shareholders
contribution
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Balance as of December
31, 2004, as restated
    
    
    
    
    
    
    16,645
    
    
    
    138
    
    
    
    445,089
    
    
    
    
    
    
    
    234,716
    
    
    
    (726
    )Issue of common stock
    
    
    21
    
    
    
    2,000
    
    
    
    16
    
    
    
    119,994
    
    
    
    
    
    
    
    
    
    
    
    Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,041
    )Issue of stock
purchase warrants to
investors and external
consultants
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    9,963Recognition of
compensation expense
    
    
    21 & 22
    
    
    
    2
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248,697
    
    
    
    Shareholders
contribution
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    473
    
    
    
    
    
    
    
    
    
    
    
    Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,821Balance as of December
31, 2005
    
    
    
    
    
    
    18,647
    
    
    
    154
    
    
    
    554,178
    
    
    
    
    
    
    
    483,413
    
    
    
    1,095Balance as of December
31, 2005 (in US$000)
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    68,670
    
    
    
    
    
    
    
    59,901
    
    
    
    135
  F-6




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##### Table of Contents



Percentage of equityPlace of
    
    interest attributable toName
    
    incorporation
    
    the Group
    
    Principal activities2004
    
    2005Hui Zhou Qiao Xing
    
    Mainland China
    
    
    90.0
    %
    
    
    90.0
    %
    
    Manufacturing of GSMCommunication Industry
    
    
    
    
    
    Note (a)
    
    mobile phones and salesLimited (QXCI)
    
    
    
    
    
    
    
    
    
    
    
    
    
    of indoor phonesHui Zhou Qiao Xing Property
    
    Mainland China
    
    
    90.0
    %
    
    
    90.0
    %
    
    Property holdingLimited (QXPL)
    
    
    
    
    
    Note (b)Qiao Xing Mobile
    
    BVI
    
    
    80.0
    %
    
    
    80.0
    %
    
    Investment holdingCommunication Company
    
    
    
    
    
    Note (c)Limited
(QXMC)Qiao Xing Communication
    
    BVI
    
    
    100.0
    %
    
    
    100.0
    %
    
    Investment holdingHoldings Limited
    
    
    
    
    
    Note (d)(QXCH)CEC Telecom Co., Ltd.
    
    Mainland China
    
    
    52.0
    %
    
    
    72.0
    %
    
    Production and sales of(CECT)
    
    
    
    
    
    Note (e)
    
    mobile phones andaccessoriesBeijing Jinxin Hengtong
    
    Mainland China
    
    
    46.8
    %
    
    
    
    
    
    DormantTechnology Company
    
    
    
    
    
    Note (f)Limited
(BJHTCL)
 F-7




---



##### Table of Contents



Country risk
  F-8




---



##### Table of Contents



Concentration of credit risk
  Technology risk
    2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of consolidation
   F-9




---



##### Table of Contents



(b)
    
    Subsidiaries
  (c)
    
    Cash and Cash Equivalents
  (d)
    
    Trade accounts receivable
  (e)
    
    Inventories
   (f)
    
    Property, machinery and equipment and construction-in-progress
  F-10




---



##### Table of Contents



(g)
    
    Land use rights
  (h)
    
    Investment at equity
  (i)
    
    Investment at cost
  (j)
    
    Goodwill
   F-11




---



##### Table of Contents



(k)
    
    Other acquired intangible assets
       F-12




---



##### Table of Contents



(l)
    
    Sales recognition
    (m)
    
    Product warranties
  (n)
    
    Shipping and Handling Costs
  (o)
    
    Advertising costs
  (p)
    
    Leases
   (q)
    
    Research and development expenditures
  F-13




---



##### Table of Contents



(r)
    
    Stock-based compensation
   (s)
    
    Debt issuance costs and borrowing costs
  (t)
    
    Income taxes
  (u)
    
    Segment information
  F-14




---



##### Table of Contents



(v)
    
    Foreign currency translation
   (w)
    
    Comprehensive income
  (x)
    
    Earnings (loss) per common share
  (y)
    
    Financial instruments
  F-15




---



##### Table of Contents



(z)
    
    Prior year adjustments
   Consolidated Balance Sheet as of December 31, 2004
 As originally
    
    
    
    
    
    
    Effect ofreported
    
    
    As restated
    
    
    restatementRmb000
    
    
    Rmb000
    
    
    Rmb000Total current assets
    
    
    1,563,091
    
    
    
    1,563,091
    
    
    
    Acquired intangible assets, net
    
    
    95,751
    
    
    
    62,238
    
    
    
    (33,513
    )Other non-current assets
    
    
    451,381
    
    
    
    451,381
    
    
    
    Total assets
    
    
    2,110,223
    
    
    
    2,076,710
    
    
    
    (33,513
    )Total liabilities
    
    
    1,147,356
    
    
    
    1,147,356
    
    
    
    Minority interests
    
    
    283,650
    
    
    
    250,137
    
    
    
    (33,513
    )Total shareholders equity
    
    
    679,217
    
    
    
    679,217
    
    
    
    Total liabilities, minority
interests and shareholders
equity
    
    
    2,110,223
    
    
    
    2,076,710
    
    
    
    (33,513
    )
 F-16




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2004
 As originally
    
    
    
    
    
    
    Effect ofreported
    
    
    As restated
    
    
    restatementRmb000
    
    
    Rmb000
    
    
    Rmb000Net sales
    
    
    2,019,081
    
    
    
    2,019,081
    
    
    
    Cost of goods sold
    
    
    (1,795,482
    )
    
    
    (1,795,482
    )
    
    
    Gross profit
    
    
    223,599
    
    
    
    223,599
    
    
    
    Selling, general and administrative,
research and development expenses, and
stock-based compensation
    
    
    (138,384
    )
    
    
    (138,384
    )
    
    
    Amortization of acquired intangible assets
    
    
    (16,990
    )
    
    
    (11,044
    )
    
    
    (5,946
    )Income from operations
    
    
    68,225
    
    
    
    74,171
    
    
    
    5,946Other income and expenses
    
    
    16,494
    
    
    
    16,494
    
    
    
    Income before income tax
    
    
    84,719
    
    
    
    90,665
    
    
    
    5,946Provision for income tax
    
    
    (10,404
    )
    
    
    (10,404
    )
    
    
    Income before minority interests
    
    
    74,315
    
    
    
    80,261
    
    
    
    5,946Minority interests
    
    
    (50,817
    )
    
    
    (56,763
    )
    
    
    5,946Equity in earnings of equity investees
    
    
    (624
    )
    
    
    (624
    )
    
    
    Net income
    
    
    22,874
    
    
    
    22,874
    
    
    
    
 Consolidated Balance Sheet as of December 31, 2003
 As originally
    
    
    
    
    
    
    Effect ofreported
    
    
    As restated
    
    
    restatementRmb000
    
    
    Rmb000
    
    
    Rmb000Total current assets
    
    
    1,043,531
    
    
    
    1,043,531
    
    
    
    Acquired intangible assets, net
    
    
    112,741
    
    
    
    73,282
    
    
    
    (39,459
    )Other non-current assets
    
    
    411,689
    
    
    
    411,689
    
    
    
    Total assets
    
    
    1,567,961
    
    
    
    1,528,502
    
    
    
    (39,459
    )Total liabilities
    
    
    757,707
    
    
    
    757,707
    
    
    
    Minority interests
    
    
    232,833
    
    
    
    193,374
    
    
    
    (39,459
    )Total shareholders equity
    
    
    577,421
    
    
    
    577,421
    
    
    
    Total liabilities, minority
interests and shareholders
equity
    
    
    1,567,961
    
    
    
    1,528,502
    
    
    
    (39,459
    )
 F-17




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##### Table of Contents



Consolidated Statement of Operations for the year ended December 31, 2003
 As originally
    
    
    
    
    
    
    Effect ofreported
    
    
    As restated
    
    
    restatementRmb000
    
    
    Rmb000
    
    
    Rmb000Net sales
    
    
    1,843,282
    
    
    
    1,843,282
    
    
    
    Cost of goods sold
    
    
    (1,598,615
    )
    
    
    (1,598,615
    )
    
    
    Gross profit
    
    
    244,667
    
    
    
    244,667
    
    
    
    Selling, general and administrative,
research and development expenses, and
stock-based compensation
    
    
    (160,348
    )
    
    
    (160,348
    )
    
    
    In process research and development
    
    
    (33,579
    )
    
    
    (21,826
    )
    
    
    (11,753
    )Amortization of acquired intangible assets
    
    
    (42,192
    )
    
    
    (27,425
    )
    
    
    (14,767
    )Income from operations
    
    
    8,548
    
    
    
    35,068
    
    
    
    26,520Other income and expenses
    
    
    (13,852
    )
    
    
    (13,852
    )
    
    
    (Loss) income before income tax
    
    
    (5,304
    )
    
    
    21,216
    
    
    
    26,520Provision for income tax
    
    
    
    
    
    
    
    
    
    
    (Loss) income before minority interests
    
    
    (5,304
    )
    
    
    21,216
    
    
    
    26,520Minority interests
    
    
    (9,228
    )
    
    
    (35,748
    )
    
    
    26,520Equity in earnings of equity investees
    
    
    6,802
    
    
    
    6,802
    
    
    
    Net loss
    
    
    (7,730
    )
    
    
    (7,730
    )
    
    
    
 (aa)
    
    Reclassifications
  (bb)
    
    Recently issued accounting standards
  F-18




---



##### Table of Contents



F-19




---



##### Table of Contents



F-20




---



##### Table of Contents



3.
    
    CONVENIENCE TRANSLATION
  F-21




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Trade receivables- related parties (Note 30)
    
    
    75,871
    
    
    
    12,379
    
    
    
    1,534- third parties
    
    
    369,481
    
    
    
    668,138
    
    
    
    82,791445,352
    
    
    
    680,517
    
    
    
    84,325Less: Allowance for doubtful accounts
    
    
    (6,389
    )
    
    
    (6,500
    )
    
    
    (806
    )Accounts receivable, net
    
    
    438,963
    
    
    
    674,017
    
    
    
    83,519
  2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    772
    
    
    
    6,389
    
    
    
    792Increase in allowance for doubtful accounts
    
    
    5,617
    
    
    
    111
    
    
    
    14End of year
    
    
    6,389
    
    
    
    6,500
    
    
    
    806
   2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Raw materials
    
    
    153,952
    
    
    
    146,196
    
    
    
    18,116Finished goods
    
    
    139,455
    
    
    
    87,525
    
    
    
    10,845293,407
    
    
    
    233,721
    
    
    
    28,961
 F-22




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Advances to suppliers
    
    
    255,743
    
    
    
    270,695
    
    
    
    33,543Prepaid design, licensing and tooling fees
    
    
    23,817
    
    
    
    20,885
    
    
    
    2,588Other
    
    
    1,497
    
    
    
    648
    
    
    
    80281,057
    
    
    
    292,228
    
    
    
    36,211
   2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Advances to staff
    
    
    2,951
    
    
    
    4,175
    
    
    
    517Advances to others
    
    
    2,039
    
    
    
    90
    
    
    
    11Interest receivable from China Electronics
Financial Co., Ltd (Note
13)
    
    
    7,030
    
    
    
    7,030
    
    
    
    871Rental and utility deposits
    
    
    422
    
    
    
    278
    
    
    
    35Other
    
    
    1,735
    
    
    
    1,882
    
    
    
    23314,177
    
    
    
    13,455
    
    
    
    1,667
 F-23




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Buildings
    
    
    39,352
    
    
    
    
    
    
    
    Leasehold improvements
    
    
    8,375
    
    
    
    3,198
    
    
    
    396Machinery, equipment and software
    
    
    89,666
    
    
    
    80,386
    
    
    
    9,961Furniture and office equipment
    
    
    7,655
    
    
    
    8,176
    
    
    
    1,013Motor vehicles
    
    
    3,397
    
    
    
    2,685
    
    
    
    333148,445
    
    
    
    94,445
    
    
    
    11,703Less: Accumulated depreciation and
amortization
    
    
    (41,283
    )
    
    
    (41,781
    )
    
    
    (5,177
    )Property, machinery and equipment, net
    
    
    107,162
    
    
    
    52,664
    
    
    
    6,526
       2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Cost
    
    
    204,500
    
    
    
    203,047
    
    
    
    25,160Less: Accumulated amortization
    
    
    (21,833
    )
    
    
    (25,825
    )
    
    
    (3,200
    )Land use rights, net
    
    
    182,667
    
    
    
    177,222
    
    
    
    21,960
  F-24




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Deposits for purchase of property,
machinery and equipment
    
    
    4,610
    
    
    
    282
    
    
    
    35Deposit for acquisition of land [Note (a)]
    
    
    8,000
    
    
    
    8,000
    
    
    
    99112,610
    
    
    
    8,282
    
    
    
    1,026
   F-25




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    37,214
    
    
    
    3,321
    
    
    
    412Equity in earnings of CEC Mobile
Co., Ltd.(CECM) from January 1,
2004 to June 30, 2004 [Note (a)]
    
    
    955
    
    
    
    
    
    
    
    Disposal of CECM on June 30, 2004
[Note (a)]
    
    
    (38,169
    )
    
    
    
    
    
    
    Investment in Suzhou Minji CEC
Telecom Co., Ltd. (SMCECT) on
January 13, 2004 [Note (b)]
    
    
    4,900
    
    
    
    
    
    
    
    Equity in losses of SMCECT from
January 13, 2004 to December 31,
2004 [Note (b)]
    
    
    (1,579
    )
    
    
    
    
    
    
    Disposal of SMCECT on January 1,
2005 [Note (b)]
    
    
    
    
    
    
    (3,321
    )
    
    
    (412
    )End of year
    
    
    3,321
    
    
    
    
    
    
    
    
     2003Rmb000
    
    US$000(unaudited)
    
    (unaudited)Current assets
    
    
    149,167
    
    
    
    18,023Non-current assets
    
    
    1,494
    
    
    
    181Total assets
    
    
    150,661
    
    
    
    18,204Current liabilities
    
    
    76,233
    
    
    
    9,212Capital and reserves
    
    
    74,428
    
    
    
    8,992Total liabilities and equity
    
    
    150,661
    
    
    
    18,204
 F-26




---



##### Table of Contents



2003Rmb000
    
    US$000(unaudited)
    
    (unaudited)Net sales
    
    
    270,546
    
    
    
    32,688Cost of sales
    
    
    (243,403
    )
    
    
    (29,408
    )Gross profit
    
    
    27,143
    
    
    
    3,280Operating expenses
    
    
    (12,910
    )
    
    
    (1,560
    )Income from operations
    
    
    14,233
    
    
    
    1,720Other expenses
    
    
    (629
    )
    
    
    (76
    )Net income
    
    
    13,604
    
    
    
    1,644The Groups equity in CECMs earnings (50%)
    
    
    6,802
    
    
    
    822
   Settlement Date
    
    Rmb000Before July 12, 2004
    
    
    21,600Before July 15, 2005
    
    
    36,000Before August 30, 2005
    
    
    14,40072,000
   Rmb000Consideration
    
    
    72,000Share of net asset value of CECM disposed of as of June 30,
2004
    
    
    (30,535
    )Gain on disposal
    
    
    41,465
 F-27




---



##### Table of Contents



Rmb000(unaudited)Total current assets
    
    
    256,531Property, plant and equipment
    
    
    2,246Total current liabilities
    
    
    (182,439
    )Net assets
    
    
    76,338Equity interest in CECM disposed of
    
    
    40
    %Share of net asset value of CECM disposed of as of June 30,
2004
    
    
    30,535
    2004Rmb000
    
    US$000(Unaudited)
    
    (Unaudited)Current and total assets
    
    
    6,863
    
    
    
    829Current liabilities
    
    
    79
    
    
    
    9Capital and reserves
    
    
    6,784
    
    
    
    820Total 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
    )
  F-28




---



##### Table of Contents



Rmb000Consideration
    
    
    4,900Share of net asset value of SMCECT disposed of as of January 1, 2005
    
    
    (3,321
    )Gain on disposal
    
    
    1,579
   2004
    
    2005Rmb000
    
    Rmb000
    
    US$000China Electronics Financial Co., Ltd
[Note (a)]
    
    
    14,965
    
    
    
    
    
    
    
    CECM (Note 12.a)
    
    
    7,634
    
    
    
    7,634
    
    
    
    94622,599
    
    
    
    7,634
    
    
    
    946
       F-29




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##### Table of Contents



Expectedweightedaverageamortizationperiod
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Cost:- CECT trademark
    
    Indefinite
    
    
    28,189
    
    
    
    28,189
    
    
    
    3,493- Customer relationship
    
    5 years
    
    
    19,013
    
    
    
    19,013
    
    
    
    2,356- Completed technology
    
    5 years
    
    
    2,967
    
    
    
    2,967
    
    
    
    368- Core technology
    
    5 years
    
    
    26,113
    
    
    
    26,113
    
    
    
    3,236- Backlog
    
    5 months
    
    
    17,302
    
    
    
    17,302
    
    
    
    2,144- License
    
    5 years
    
    
    7,123
    
    
    
    7,123
    
    
    
    882- In process research and development
    
    Expense off
    
    
    21,826
    
    
    
    21,826
    
    
    
    2,704122,533
    
    
    
    122,533
    
    
    
    15,183Less: Accumulated amortization- Customer relationship
    
    
    
    
    
    
    (7,289
    )
    
    
    (11,091
    )
    
    
    (1,374
    )- Completed technology
    
    
    
    
    
    
    (1,137
    )
    
    
    (1,731
    )
    
    
    (214
    )- Core technology
    
    
    
    
    
    
    (10,010
    )
    
    
    (15,233
    )
    
    
    (1,888
    )- Backlog
    
    
    
    
    
    
    (17,302
    )
    
    
    (17,302
    )
    
    
    (2,144
    )- License
    
    
    
    
    
    
    (2,731
    )
    
    
    (3,271
    )
    
    
    (405
    )- In process research and development
    
    
    
    
    
    
    (21,826
    )
    
    
    (21,826
    )
    
    
    (2,705
    )(60,295
    )
    
    
    (70,454
    )
    
    
    (8,730
    )Less: Impairment provision- License
    
    
    
    
    
    
    
    
    
    
    (3,852
    )
    
    
    (477
    )Other acquired intangible assets, net
    
    
    
    
    
    
    62,238
    
    
    
    48,227
    
    
    
    5,976
 F-30




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##### Table of Contents



The expected future amortization expense of other acquired intangible assets is as follows:
 AmountRmb000
    
    
    US$000Year ending December 31,- 2006
    
    
    9,618
    
    
    
    1,192- 2007
    
    
    9,618
    
    
    
    1,192- 2008
    
    
    802
    
    
    
    99Total
    
    
    20,038
    
    
    
    2,483
 16.
    
    SHORT-TERM BORROWINGSShort-term borrowings consist of:
 2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Bills payable
    
    
    339,430
    
    
    
    288,542
    
    
    
    35,754Bank loans
    
    
    360,756
    
    
    
    465,670
    
    
    
    57,702700,186
    
    
    
    754,212
    
    
    
    93,456
         F-31




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##### Table of Contents



17.
    
    OTHER PAYABLESOther payables consist of:
 2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Payables for construction work of
factories
    
    
    
    
    
    
    3,968
    
    
    
    492Payables for stock issuance costs
    
    
    
    
    
    
    3,678
    
    
    
    456Payables for purchase of property,
machinery and equipment
    
    
    478
    
    
    
    2,004
    
    
    
    248Payable to CEC for the acquisition
of minority interests in CECT (Note
29.f)
    
    
    
    
    
    
    3,640
    
    
    
    451Others
    
    
    1,087
    
    
    
    3,659
    
    
    
    4531,565
    
    
    
    16,949
    
    
    
    2,100
 F-32




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##### Table of Contents



18.
    
    ACCRUED LIABILITIESAccrued liabilities consist of:
 2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Accruals for operating expenses- Design fees
    
    
    
    
    
    
    13,450
    
    
    
    1,666- Technical license fees
    
    
    17,859
    
    
    
    28,455
    
    
    
    3,526- Salaries
    
    
    3,447
    
    
    
    4,544
    
    
    
    563- Advertising
    
    
    
    
    
    
    309
    
    
    
    38- Price guarantee
    
    
    1,150
    
    
    
    
    
    
    
    - Warranty
    
    
    4,295
    
    
    
    7,712
    
    
    
    956- Others
    
    
    3,351
    
    
    
    1,136
    
    
    
    141Provision for staff benefit [Note (a)]
    
    
    3,786
    
    
    
    3,008
    
    
    
    37333,888
    
    
    
    58,614
    
    
    
    7,263
   19.
    
    CAPITAL LEASE OBLIGATIONSFuture minimum lease payments under a capital lease are as follows:
 2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Payable during the following periods- 2005
    
    
    1,909
    
    
    
    
    
    
    
    - 2006
    
    
    1,909
    
    
    
    
    
    
    
    - 2007
    
    
    954
    
    
    
    
    
    
    
    Total minimum lease payments
    
    
    4,772
    
    
    
    
    
    
    
    Less: Amount representing future
interest
    
    
    (997
    )
    
    
    
    
    
    
    Present value of minimum lease
payments
    
    
    3,775
    
    
    
    
    
    
    
    Less: Current portion
    
    
    (1,510
    )
    
    
    
    
    
    
    Non-current portion
    
    
    2,265
    
    
    
    
    
    
    
    
 20.
    
    SHAREHOLDERS LOANS
 F-33




---



##### Table of Contents



21.
    
    COMMON STOCK
         F-34




---



##### Table of Contents



22.
    
    STOCK OPTIONS AND WARRANTS
           F-35




---



##### Table of Contents



F-36




---



##### Table of Contents



F-37




---



##### Table of Contents



No. of stockoptions/
    
    
    Weighted averagewarrants
    
    
    exercise priceUS$Outstanding 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
    
    
    
    8.18Lapsed in 2005
    
    
    (390,800
    )
    
    
    8.18Issued in 2005
    
    
    535,000
    
    
    
    9.78Outstanding, as of December 31, 2005
    
    
    535,000
    
    
    
    9.78Exercisable as of December 31, 2005
    
    
    535,000
    
    
    
    9.78Exercisable, as of December 31, 2004
    
    
    390,800
    
    
    
    8.18
  Weighted-averageNumber of
    
    
    Weighted-average
    
    
    remainingoutstanding
    
    
    exercise price per
    
    
    contractual lifeoption/warrant
    
    
    option/warrant
    
    
    (years)US$Warrants I
    
    
    30,000
    
    
    
    8.50
    
    
    
    3.98Warrants II
    
    
    375,000
    
    
    
    9.86
    
    
    
    4.13Warrants III
    
    
    130,000
    
    
    
    9.86
    
    
    
    4.28535,000
    
    
    
    9.78
    
    
    
    4.16
 F-38




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##### Table of Contents



2003
    
    
    2004
    
    
    2005US$
    
    
    US$
    
    
    US$Warrants I
    
    
    
    
    
    
    
    
    
    
    2.41Warrants II
    
    
    
    
    
    
    
    
    
    
    2.68Warrants III
    
    
    
    
    
    
    
    
    
    
    1.54Weighted average fair value
    
    
    
    
    
    
    
    
    
    
    2.39
 The fair values were computed based on the following weighted average assumptions:
 2003
    
    2004
    
    2005Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    3.60
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    0.00
    %Expected term
    
    
    
    
    
    
    
    
    
    2.61 yearsExpected stock price volatility
    
    
    
    
    
    
    
    
    
    
    65.71
    %
 23.
    
    INCOME TAXES
    F-39




---



##### Table of Contents



2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Mainland Chineseincome tax- current
    
    
    
    
    
    
    10,404
    
    
    
    27,813
    
    
    
    3,446- deferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,404
    
    
    
    27,813
    
    
    
    3,446
  2003
    
    2004
    
    2005Mainland Chinese statutory income tax
rate
    
    
    (33.0
    %)
    
    
    33.0
    %
    
    
    33.0
    %Tax effect of tax holidays
    
    
    25.5
    %
    
    
    (44.2
    %)
    
    
    (28.0
    %)Net effect of disposal of equity investee
    
    
    
    
    
    
    (16.1
    %)
    
    
    (0.2
    %)Losses of BVI companies not subject to
tax
    
    
    16.0
    %
    
    
    16.6
    %
    
    
    1.1
    %Non-deductible activities
    
    
    35.0
    %
    
    
    21.4
    %
    
    
    1.3
    %Utilization of tax loss brought forward
    
    
    (43.5
    %)
    
    
    
    
    
    
    Deferred tax assets not recognized
    
    
    
    
    
    
    1.6
    %
    
    
    0.9
    %Effective income tax rate
    
    
    
    
    
    
    12.3
    %
    
    
    8.1
    %
  F-40




---



##### Table of Contents



2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Allowance for doubtful accounts
    
    
    1,141
    
    
    
    975
    
    
    
    121Write-off of obsolete and
slow-moving inventories
    
    
    6,056
    
    
    
    6,390
    
    
    
    792Loss carryforward
    
    
    2,695
    
    
    
    1,835
    
    
    
    2279,892
    
    
    
    9,200
    
    
    
    1,140Valuation allowance
    
    
    (9,892
    )
    
    
    (9,200
    )
    
    
    (1,140
    )Deferred income tax assets
    
    
    
    
    
    
    
    
    
    
    
  2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Beginning of year
    
    
    
    
    
    
    1,896
    
    
    
    9,892
    
    
    
    1,226Increase (release) in
valuation allowance
    
    
    1,896
    
    
    
    7,996
    
    
    
    (692
    )
    
    
    (86
    )End of year
    
    
    1,896
    
    
    
    9,892
    
    
    
    9,200
    
    
    
    1,140
   2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Mainland Chinese enterprise income tax
    
    
    (10,404
    )
    
    
    (29,530
    )
    
    
    (3,659
    )Mainland Chinese value-added tax
    
    
    12,772
    
    
    
    (38,153
    )
    
    
    (4,728
    )Mainland Chinese other taxes
    
    
    (4,797
    )
    
    
    (1,203
    )
    
    
    (149
    )(2,429
    )
    
    
    (68,886
    )
    
    
    (8,536
    )
 F-41




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##### Table of Contents



2003
    
    2004
    
    2005Rmb
    
    Rmb
    
    Rmb
    
    US$Net (loss) income
before extraordinary
gain
    
    
    (7,730,000
    )
    
    
    22,874,000
    
    
    
    213,211,000
    
    
    
    26,419,000Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    35,486,000
    
    
    
    4,397,000Net (loss) income
after extraordinary
gain
    
    
    (7,730,000
    )
    
    
    22,874,000
    
    
    
    248,697,000
    
    
    
    30,816,000Weighted average
common shares basic
    
    
    15,420,000
    
    
    
    16,443,000
    
    
    
    18,319,000
    
    
    
    18,319,000Effect of dilutive
stock options and
warrants
    
    
    
    
    
    
    116,527
    
    
    
    1,000
    
    
    
    1,000Weighted average
common shares diluted
    
    
    15,420,000
    
    
    
    16,559,527
    
    
    
    18,320,000
    
    
    
    18,320,000
 F-42




---



##### Table of Contents



2003
    
    2004
    
    2005Rmb
    
    Rmb
    
    Rmb
    
    US$Basic (loss) earnings
per common share:Before
extraordinary
gain
    
    
    (0.50
    )
    
    
    1.39
    
    
    
    11.64
    
    
    
    1.44Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    1.94
    
    
    
    0.24After
extraordinary
gain
    
    
    (0.50
    )
    
    
    1.39
    
    
    
    13.58
    
    
    
    1.68Diluted (loss)
earnings per common
share:Before
extraordinary
gain
    
    
    (0.50
    )
    
    
    1.38
    
    
    
    11.64
    
    
    
    1.44Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    1.94
    
    
    
    0.24After
extraordinary
gain
    
    
    (0.50
    )
    
    
    1.38
    
    
    
    13.58
    
    
    
    1.68
      F-43




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##### Table of Contents



(a)
    
    Capital commitments
  2004
    
    2005Rmb000
    
    Rmb000
    
    US$000Capital expenditures authorized and
contracted for:- Construction of factory premises
and staff quarters
    
    
    40,184
    
    
    
    39,221
    
    
    
    4,860- Purchase of land and buildings
    
    
    63,275
    
    
    
    58,700
    
    
    
    7,274- Purchase of machinery and equipment
    
    
    930
    
    
    
    5,562
    
    
    
    689104,389
    
    
    
    103,483
    
    
    
    12,823
 (b)
    
    Operating lease commitments
  AmountRmb000
    
    US$000For the years ending December 31,- 2006
    
    
    4,012
    
    
    
    497- 2007
    
    
    837
    
    
    
    104- 2008
    
    
    605
    
    
    
    75Total
    
    
    5,454
    
    
    
    676
    F-44




---



##### Table of Contents




    
    the Notes bear interest at the rate of 3.5% per annum, payable in cash in arrears on
a calendar quarterly basis beginning June 30, 2006;
    
    the Notes will mature on June 12, 2009;
    
    the Notes are unsecured and are guaranteed by QXMC;
    
    the Notes are convertible, at the investors option, into common stocks of the
Company at an initial conversion price of US$8.027 per share, or into common stocks of
QXMC in the event of its initial public offering at a price equal to 7 times QXMCs
2005 consolidated earnings per share. The conversion price for the Companys common
stock is subject to reset when the volume weighted average price (VWAP) of the
Companys common stock for the five trading days ending on each two-month anniversary
from June 13, 2006 until maturity of the Notes (each a Reset Date) is less than
US$6.98 (or such previously reset price). In the event of a reset, the conversion
price will be set equal to the greater of US$5.15 or 90% of the VWAP of the Companys
common stock for the five trading days ending on the applicable Reset Date;
    
    the Notes will not be convertible to the extent that after giving effect to such
conversion, the investors (together with their affiliates) would beneficially own in
excess of 9.99% of the Companys common stock outstanding immediately after giving
effect to the conversion;
    
    the Notes may be redeemed after two years in an amount equal to the sum of (a) the
outstanding principal of the Notes, (b) the accrued and unpaid interest thereon, and
(c) 6% on the sum of (a) and (b); and
    
    the Company has the right, subject to certain terms and conditions, to deliver shares of its common stock in lieu of cash on redemption or maturity of the Notes, and
the number of shares would be determined by dividing the face amount and accrued
interest by the average closing price of the Companys common stock for the 10 days
prior to redemption, and then multiplying that amount by 0.975.
 F-45




---



##### Table of Contents




    
    the warrants have an exercise price of US$8.027 per share and may be exercised at
any time during a 5-year period commencing from June 13, 2006;
    
    the warrants will not be exercisable to the extent that after giving effect to such
exercise, the holder (together with its affiliates) would beneficially own in excess of
9.99% of the Companys common stock outstanding immediately after giving effect to such
exercise; and
    
    the warrants require an automatic repricing of the exercise price if the Company
makes certain sales of its common stock or common stock equivalents in a
capital-raising transaction at a price below the warrant exercise price.
      F-46




---



##### Table of Contents



Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2005
 Pro FormaHistorical
    
    Adjustments
    
    Pro FormaRmb000
    
    Rmb000
    
    Rmb000ASSETSCurrent assets:Cash and cash equivalents
    
    
    391,660
    
    
    
    322,808
    
    
    
    714,468Restricted cash
    
    
    136,206
    
    
    
    
    
    
    
    136,206Restricted cash held in trust by a
director
    
    
    13,315
    
    
    
    
    
    
    
    13,315Bills receivable
    
    
    401,186
    
    
    
    
    
    
    
    401,186Accounts receivable, net
    
    
    674,017
    
    
    
    
    
    
    
    674,017Inventories
    
    
    233,721
    
    
    
    
    
    
    
    233,721Prepaid expenses
    
    
    292,228
    
    
    
    
    
    
    
    292,228Other current assets
    
    
    13,455
    
    
    
    
    
    
    
    13,455Receivable from sale of an equity investee
    
    
    
    
    
    
    
    
    
    
    Due from related parties
    
    
    30
    
    
    
    
    
    
    
    30Total current assets
    
    
    2,155,818
    
    
    
    322,808
    
    
    
    2,478,626Property, machinery and equipment, net
    
    
    52,664
    
    
    
    
    
    
    
    52,664Construction-in-progress
    
    
    59,105
    
    
    
    
    
    
    
    59,105Land use rights, net
    
    
    177,222
    
    
    
    
    
    
    
    177,222Other non-current assets
    
    
    8,282
    
    
    
    
    
    
    
    8,282Investments at equity
    
    
    
    
    
    
    
    
    
    
    Investments at cost
    
    
    7,634
    
    
    
    
    
    
    
    7,634Goodwill
    
    
    72,088
    
    
    
    
    
    
    
    72,088Other acquired intangible assets, net
    
    
    48,227
    
    
    
    
    
    
    
    48,227Discount on convertible notes
    
    
    
    
    
    
    21,076
    
    
    
    21,076Total assets
    
    
    2,581,040
    
    
    
    343,884
    
    
    
    2,924,924LIABILITIES, MINORITY INTERESTS
AND SHAREHOLDERS EQUITYCurrent liabilities:Short-term borrowings
    
    
    754,212
    
    
    
    
    
    
    
    754,212Accounts payable
    
    
    337,780
    
    
    
    
    
    
    
    337,780Other payables
    
    
    16,949
    
    
    
    
    
    
    
    16,949Accrued liabilities
    
    
    58,614
    
    
    
    
    
    
    
    58,614Deposits received
    
    
    10,729
    
    
    
    
    
    
    
    10,729Deferred revenues
    
    
    53,442
    
    
    
    
    
    
    
    53,442Capital lease obligations, current portion
    
    
    
    
    
    
    
    
    
    
    Due to related parties
    
    
    2,428
    
    
    
    
    
    
    
    2,428Taxation payable
    
    
    68,886
    
    
    
    
    
    
    
    68,886Total current liabilities
    
    
    1,303,040
    
    
    
    
    
    
    
    1,303,040Shareholders loans
    
    
    7,959
    
    
    
    
    
    
    
    7,959Convertible notes
    
    
    
    
    
    
    322,808
    
    
    
    322,808Warrants
    
    
    
    
    
    
    21,076
    
    
    
    21,076Total liabilities
    
    
    1,310,999
    
    
    
    343,884
    
    
    
    1,654,883Minority interests
    
    
    231,201
    
    
    
    
    
    
    
    231,201Shareholders equity:Common stock, par value Rmb0.008
(equivalent of US$0.001); authorized
50,000,000 shares; outstanding and fully
paid - 16,645,176 shares as of December
31, 2004 and 18,646,676 as of December
31, 2005
    
    
    154
    
    
    
    
    
    
    
    154Additional paid-in capital
    
    
    554,178
    
    
    
    
    
    
    
    554,178Retained earnings
    
    
    483,413
    
    
    
    
    
    
    
    483,413Cumulative translation adjustments
    
    
    1,095
    
    
    
    
    
    
    
    1,095Total shareholders equity
    
    
    1,038,840
    
    
    
    
    
    
    
    1,038,840Total liabilities, minority
interests and shareholders equity
    
    
    2,581,040
    
    
    
    343,884
    
    
    
    2,924,924
 F-47




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##### Table of Contents



Unaudited Pro Forma Consolidated Statement of Operations and Comprehensive Income
for the year ended December 31, 2005
 Pro FormaHistorical
    
    
    Adjustments
    
    
    Pro FormaRmb000
    
    
    Rmb000
    
    
    Rmb000Net sales
    
    
    2,874,336
    
    
    
    
    
    
    
    2,874,336Cost of goods sold
    
    
    (2,385,287
    )
    
    
    
    
    
    
    (2,385,287
    )Gross profit
    
    
    489,049
    
    
    
    
    
    
    
    489,049Operating expenses:Selling expenses
    
    
    (29,227
    )
    
    
    
    
    
    
    (29,227
    )General and administrative expenses
    
    
    (61,503
    )
    
    
    
    
    
    
    (61,503
    )Research and development
    
    
    (20,694
    )
    
    
    
    
    
    
    (20,694
    )Amortization of acquired intangible assets
    
    
    (10,159
    )
    
    
    
    
    
    
    (10,159
    )Impairment of acquired intangible assets
    
    
    (3,852
    )
    
    
    
    
    
    
    (3,852
    )Income from operations
    
    
    363,614
    
    
    
    
    
    
    
    363,614Interest income
    
    
    7,130
    
    
    
    
    
    
    
    7,130Exchange loss, net
    
    
    (2,659
    )
    
    
    
    
    
    
    (2,659
    )Interest expense
    
    
    (41,752
    )
    
    
    (11,298
    )
    
    
    (53,050
    )Amortization of discount
    
    
    
    
    
    
    (49,422
    )
    
    
    (49,422
    )Gain on revaluation of warrants
    
    
    
    
    
    
    14,087
    
    
    
    14,087Gain on disposal of subsidiary
    
    
    10,307
    
    
    
    
    
    
    
    10,307Gain on disposal of equity investee
    
    
    1,579
    
    
    
    
    
    
    
    1,579Gain on disposal of other equity investments
    
    
    5,035
    
    
    
    
    
    
    
    5,035Other income, net
    
    
    640
    
    
    
    
    
    
    
    640Income before income tax
    
    
    343,894
    
    
    
    (46,633
    )
    
    
    297,261Provision for income tax
    
    
    (27,813
    )
    
    
    
    
    
    
    (27,813
    )Income before minority interests
    
    
    316,081
    
    
    
    (46,633
    )
    
    
    269,448Minority interests
    
    
    (102,870
    )
    
    
    
    
    
    
    (102,870
    )Net income before extraordinary gain
    
    
    213,211
    
    
    
    (46,633
    )
    
    
    166,578Extraordinary gain on acquisition of
minority interests
    
    
    35,486
    
    
    
    
    
    
    
    35,486Net income
    
    
    248,697
    
    
    
    (46,633
    )
    
    
    202,064Other comprehensive income  Translation
adjustments
    
    
    1,821
    
    
    
    
    
    
    
    1,821Comprehensive income
    
    
    250,518
    
    
    
    (46,633
    )
    
    
    203,885Basic earnings per common shareBefore extraordinary gain
    
    Rmb
    11.64
    
    
    Rmb
    (2.55
    )
    
    Rmb
    9.09Extraordinary gain
    
    Rmb
    1.94
    
    
    
    
    
    
    Rmb
    1.94After extraordinary gain
    
    Rmb
    13.58
    
    
    Rmb
    (2.55
    )
    
    Rmb
    11.03Diluted earnings per common shareBefore extraordinary gain
    
    Rmb
    11.64
    
    
    Rmb
    (4.49
    )
    
    Rmb
    7.15Extraordinary gain
    
    Rmb
    1.94
    
    
    Rmb
    (0.42
    )
    
    Rmb
    1.52After extraordinary gain
    
    Rmb
    13.58
    
    
    Rmb
    (4.91
    )
    
    Rmb
    8.67Weighted average number of shares outstanding- Basic
    
    
    18,319,000
    
    
    
    
    
    
    
    18,319,000- Diluted
    
    
    18,320,000
    
    
    
    4,983,000
    
    
    
    23,303,000
 F-48




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##### Table of Contents



2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Interest
    
    
    18,507
    
    
    
    26,582
    
    
    
    41,752
    
    
    
    5,174Income taxes
    
    
    
    
    
    
    
    
    
    
    8,687
    
    
    
    1,076
 F-49




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##### Table of Contents



Rmb000Cash and cash equivalents
    
    
    6,927Pledged bank deposits
    
    
    226,099Accounts receivables, net
    
    
    280,806Inventories
    
    
    62,591Prepaid expenses
    
    
    11,301Due from related parties
    
    
    4,581Property, plant and equipment, net
    
    
    171,292Prepaid land use rights
    
    
    29,086Accounts payable
    
    
    (30,046
    )Other payables
    
    
    (72,131
    )Accrued liabilities
    
    
    (11,072
    )Taxation payable
    
    
    (113,957
    )Long term borrowings
    
    
    (30,000
    )Short term borrowings
    
    
    (410,407
    )125,070Minority interests disposed of
    
    
    5,880Gain on disposal of subsidiary
    
    
    79,050Total consideration
    
    
    210,000Satisfied by:Cash
    
    
    210,000
  2002
    
    2003Rmb000
    
    Rmb000
    
    US$000Cash consideration
    
    
    
    
    
    
    210,000
    
    
    
    25,372Cash and cash equivalents disposed of
    
    
    (6,927
    )
    
    
    
    
    
    
    Net cash (outflow) inflow
    
    
    (6,927
    )
    
    
    210,000
    
    
    
    25,372
 F-50




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##### Table of Contents



Rmb000Cash and cash equivalents
    
    
    171,119Pledged bank deposits
    
    
    28,499Bills receivable
    
    
    17,405Accounts receivable
    
    
    34,224Inventories
    
    
    321,194Prepaid expenses
    
    
    178,906Other current assets
    
    
    7,645Taxation receivable
    
    
    66,005Due from related parties
    
    
    10,601Property, machinery and equipment
    
    
    57,784Land use rights
    
    
    1,800Investment at equity
    
    
    30,412Investment at cost
    
    
    14,965Goodwill
    
    
    72,088Other acquired intangible assets
    
    
    122,533Total assets acquired
    
    
    1,135,180Short-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
    
    
    69,298Net 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 QXMC
    
    
    (2,680
    )323,313
 F-51




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##### Table of Contents



2002
    
    
    2003Rmb000
    
    
    Rmb000
    
    
    US$000Cash consideration
    
    
    (180,000
    )
    
    
    (132,750
    )
    
    
    (16,039
    )Cash and cash equivalents acquired
    
    
    
    
    
    
    171,119
    
    
    
    20,675Net cash (outflow) inflow
    
    
    (180,000
    )
    
    
    38,369
    
    
    
    4,636
       F-52




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##### Table of Contents



Rmb000
    
    
    US$000Cash and cash equivalents
    
    
    10,390
    
    
    
    1,287Pledged bank deposits
    
    
    44,773
    
    
    
    5,548Bills receivable
    
    
    43,078
    
    
    
    5,338Accounts receivable
    
    
    125,523
    
    
    
    15,554Inventories
    
    
    73,535
    
    
    
    9,112Prepaid expenses
    
    
    68,006
    
    
    
    8,427Other current assets
    
    
    6,826
    
    
    
    846Due from related parties
    
    
    63,634
    
    
    
    7,885Property, machinery and equipment
    
    
    9,795
    
    
    
    1,214
    (*)Construction-in-progress
    
    
    15
    
    
    
    2
    (*)Investment at cost
    
    
    1,908
    
    
    
    236Other acquired intangible assets
    
    
    131,996
    
    
    
    16,356
    (*)Total assets acquired
    
    
    579,479
    
    
    
    71,805Short-term borrowings
    
    
    167,100
    
    
    
    20,706Accounts payable
    
    
    97,797
    
    
    
    12,118Other payables
    
    
    4,763
    
    
    
    590Accrued liabilities
    
    
    6,045
    
    
    
    749Deposits received
    
    
    2,772
    
    
    
    344Deferred revenues
    
    
    22,745
    
    
    
    2,818Due to related parties
    
    
    8,375
    
    
    
    1,038Taxation payable
    
    
    8,719
    
    
    
    1,081Total liabilities assumed
    
    
    318,316
    
    
    
    39,444Net assets acquired
    
    
    261,163
    
    
    
    32,361Less: Purchase price
    
    
    (75,000
    )
    
    
    (9,293
    )Excess of net assets acquired over purchase price
    
    
    186,163
    
    
    
    23,068Less: Allocation of negative goodwill to
non-financial assets
    
    
    (141,806
    )
    
    
    (17,572
) [Sum of(*) above]Extraordinary gain before minority interests
    
    
    44,357
    
    
    
    5,496Less: Minority interests share of extraordinary gain
    
    
    (8,871
    )
    
    
    (1,099
    )Extraordinary gain after minority interests
    
    
    35,486
    
    
    
    4,397
 F-53




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##### Table of Contents



Agreed valuationRmb000
    
    US$000Cash
    
    
    4,607
    
    
    
    570Investment in CEFCL
    
    
    20,000
    
    
    
    2,478Investment in BJHTCL
    
    
    900
    
    
    
    112Amount due from BJHTCL
    
    
    49,493
    
    
    
    6,13375,000
    
    
    
    9,293
  Rmb000
    
    US$000Cash and cash equivalents
    
    
    126
    
    
    
    16Other receivables
    
    
    751
    
    
    
    93Property, machinery and equipment
    
    
    37,826
    
    
    
    4,687Land use rights
    
    
    1,383
    
    
    
    171Amount due to CECT
    
    
    (49,493
    )
    
    
    (6,133
    )Net liabilities disposed of
    
    
    (9,407
    )
    
    
    (1,166
    )
  Rmb000
    
    US$000Consideration
    
    
    900
    
    
    
    111Net liabilities disposed of
    
    
    9,407
    
    
    
    1,166Gain on disposal of subsidiary
    
    
    10,307
    
    
    
    1,277
  Rmb000
    
    US$000Cash consideration
    
    
    4,607
    
    
    
    570Cash and cash equivalents disposed of
    
    
    126
    
    
    
    16Less: Unpaid consideration as at December 31,
2005 (Note 17)
    
    
    (3,640
    )
    
    
    (451
    )Net cash outflow in respect of acquisition of
minority interests
    
    
    1,093
    
    
    
    135
 F-54




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##### Table of Contents



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




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##### Table of Contents



2003
    
    2004
    
    2005Rmb000
    
    Rmb000
    
    Rmb000
    
    US$000Operating lease rentals
charged by CEC
    
    
    2,049
    
    
    
    2,743
    
    
    
    1,325
    
    
    
    164Property management fees
paid and payable to- CEBREM
    
    
    788
    
    
    
    971
    
    
    
    852
    
    
    
    106- QXGL
    
    
    34
    
    
    
    68
    
    
    
    61
    
    
    
    7Interest income from CEFCL
    
    
    1,851
    
    
    
    
    
    
    
    
    
    
    
    Rental income from CECM
    
    
    1,103
    
    
    
    1,110
    
    
    
    
    
    
    
    Research and development
fee paid to CECW
    
    
    
    
    
    
    391
    
    
    
    
    
    
    
    Commission paid and
payable to CECW
    
    
    5,181
    
    
    
    
    
    
    
    
    
    
    
    Purchases from:- QXDL
    
    
    34
    
    
    
    3,290
    
    
    
    
    
    
    
    - SSCT
    
    
    24,366
    
    
    
    354,368
    
    
    
    
    
    
    
    - STIE
    
    
    13,005
    
    
    
    103,379
    
    
    
    
    
    
    
    Sales to:- CECT *
    
    
    26,821
    
    
    
    
    
    
    
    
    
    
    
    - CECM
    
    
    238,857
    
    
    
    17,536
    
    
    
    
    
    
    
    - Calilee
    
    
    611,281
    
    
    
    293,097
    
    
    
    
    
    
    
    - QFST
    
    
    
    
    
    
    12,458
    
    
    
    41,928
    
    
    
    5,195- GCL
    
    
    7,980
    
    
    
    
    
    
    
    
    
    
    
    
 
 *
    
    Sales to CECT after February 8, 2003 have been eliminated in the consolidated statement
of operations.  F-56




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##### Table of Contents



2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    US$000Due from:- Exquisite Jewel Limited
    
    
    6
    
    
    
    6
    
    
    
    1- Wu Holdings Limited
    
    
    24
    
    
    
    24
    
    
    
    3- CNEIEC
    
    
    1
    
    
    
    
    
    
    
    - CEBREM
    
    
    34
    
    
    
    
    
    
    
    - WZEG
    
    
    120
    
    
    
    
    
    
    
    185
    
    
    
    30
    
    
    
    4Due to:- BCECIM
    
    
    3,481
    
    
    
    
    
    
    
    - CEC
    
    
    734
    
    
    
    
    
    
    
    - GCL
    
    
    5,839
    
    
    
    
    
    
    
    - QXGL
    
    
    700
    
    
    
    
    
    
    
    - SST
    
    
    31
    
    
    
    
    
    
    
    - WZQX
    
    
    3
    
    
    
    
    
    
    
    - Mr. Rui Lin Wu
    
    
    14,758
    
    
    
    2,428
    
    
    
    301- Mr. Jie Shi
    
    
    166
    
    
    
    
    
    
    
    - Mr. Ming Zhu
    
    
    7
    
    
    
    
    
    
    
    - Mr. Ze Yun Mu
    
    
    5
    
    
    
    
    
    
    
    25,724
    
    
    
    2,428
    
    
    
    301Accounts receivable from:- CECM
    
    
    32,111
    
    
    
    3,323
    
    
    
    412- QFST
    
    
    7,995
    
    
    
    9,056
    
    
    
    1,122- Calilee
    
    
    35,765
    
    
    
    
    
    
    
    75,871
    
    
    
    12,379
    
    
    
    1,534Accounts payable to STIE
    
    
    7,263
    
    
    
    
    
    
    
    
   F-57




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##### Table of Contents



31.
    
    SEGMENT ANALYSIS
  Mobile Phones
    
    Indoor Phones
    
    Corporate
    
    TotalRmb000
    
    Rmb000
    
    Rmb000
    
    Rmb0002004Revenue
    
    
    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
    
    
    
    54,6502005Revenue
    
    
    2,619,683
    
    
    
    254,653
    
    
    
    
    
    
    
    2,874,336Gross margin
    
    
    449,881
    
    
    
    39,168
    
    
    
    
    
    
    
    489,049Inventories
    
    
    219,272
    
    
    
    16,825
    
    
    
    
    
    
    
    236,097Property, machinery and equipment
    
    
    50,506
    
    
    
    2,158
    
    
    
    
    
    
    
    52,664Expenditures for long-lived assets
    
    
    12,505
    
    
    
    265
    
    
    
    8,171
    
    
    
    20,941
    2003
    
    2004
    
    2005Beijing Ho.COM Electronic Co., Ltd.
    
    
    4
    %
    
    
    22
    %
    
    
    22
    %BenQ Corporation
    
    
    
    
    
    
    22
    %
    
    
    8
    %Calilee (Note 30)
    
    
    36
    %
    
    
    16
    %
    
    
    CECM (Note 30)
    
    
    14
    %
    
    
    10
    %
    
    
    
 F-58




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##### Table of Contents



2003
    
    2004
    
    2005QFST (Note 30)
    
    
    
    
    
    
    6
    %
    
    
    16
    %Zhong Nan Company
    
    
    13
    %
    
    
    7
    %
    
    
    4
    %
   2003
    
    
    2004
    
    
    2005Rmb000
    
    
    Rmb000
    
    
    Rmb000
    
    
    US$000Depreciation of property,
machinery and equipment
    
    
    8,995
    
    
    
    12,105
    
    
    
    11,831
    
    
    
    1,466Amortization of land use rights
    
    
    4,094
    
    
    
    4,097
    
    
    
    4,062
    
    
    
    503Interest expense for:- bank loans
    
    
    7,556
    
    
    
    12,922
    
    
    
    23,489
    
    
    
    2,911- other bank borrowings
    
    
    10,353
    
    
    
    13,261
    
    
    
    17,014
    
    
    
    2,108- finance lease
    
    
    598
    
    
    
    399
    
    
    
    776
    
    
    
    96- shareholders loans
(imputed interest)
    
    
    478
    
    
    
    478
    
    
    
    473
    
    
    
    59Total interest expense
    
    
    18,985
    
    
    
    27,060
    
    
    
    41,752
    
    
    
    5,174Advertising expenses
    
    
    42,784
    
    
    
    14,658
    
    
    
    11,800
    
    
    
    1,462Shipping and handling costs
    
    
    10,358
    
    
    
    2,923
    
    
    
    7,390
    
    
    
    916
 F-59




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##### Table of Contents



ITEM 19. EXHIBITS
         Exhibit 1.1
    
    Memorandum of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 1.2
    
    Articles of Association of the Company  incorporated by reference to the Exhibits to our Registration Statement
on Form F-1, SEC File No. 333-9274, declared effective on February 16, 1999.Exhibit 4.1
    
    Securities Purchase Agreement dated as of April 27, 2006 covering the sale of $40,000,000 of our 3.5% senior
convertible notes and common stock purchase warrants*Exhibit 4.2
    
    Form of 3.5% Senior Convertible Note issued pursuant to the Securities Purchase Agreement dated as of April 27,
2006*Exhibit 4.3
    
    Form of Warrant issued pursuant to the Securities Purchase Agreement dated as of April 27, 2006*Exhibit 4.4
    
    Form of Registration Rights Agreement entered into pursuant to the Securities Purchase Agreement dated as of April
27, 2006*Exhibit 8.1
    
    List of Significant Subsidiaries of the CompanyExhibit 11.1
    
    Code of Ethics**Exhibit 12.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)Exhibit 12.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)Exhibit 13.1
    
    Certification of Chief Executive
Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350Exhibit 13.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
 
 *
    
    - incorporated by reference to the Exhibits to our Report on
Form 6-K filed with the SEC on April 28, 2006, SEC File No.
000-29946.**
    
    - incorporated by reference to the Exhibits to our annual
report on Form 20-F for the fiscal year ended December 31,
2003. 134




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##### Table of Contents



SIGNATURES
  QIAO XING UNIVERSAL TELEPHONE, INC.
(Registrant)Date: June 20, 2006
    By:
    /s/ RUI LIN WURui Lin WuChairman 135




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##### Table of Contents



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