##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended: December 31, 2008ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from  toORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934Date of event requiring this shell company report
 Commission file number: 1-33430
 QIAO XING MOBILE
COMMUNICATION CO., LTD.
  British Virgin Islands
  10th Floor CEC Building, 6 Zhongguancun South Street, Beijing 100086, Peoples Republic of China
  Securities registered or to be registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Exchange on which registeredOrdinary Shares, without par value
    
    New York Stock Exchange, Inc.
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 Number of outstanding shares of each of the issuers classes of capital or common stock as of December 31, 2008:
   o þ
  o þ
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  þ
 o
 o
  o þ
  o þ




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##### 



TABLE OF CONTENTS
  
 INTRODUCTION
    
    
    1FORWARD-LOOKING STATEMENTS
    
    
    2PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    3Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    3Item 3.
    
    Key Information
    
    
    3Item 4.
    
    Information on the Company
    
    
    21Item 4A.
    
    Unresolved Staff Comments
    
    
    33Item 5.
    
    Operating and Financial Review and Prospects
    
    
    33Item 6.
    
    Directors, Senior Management and Employees
    
    
    51Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    57Item 8.
    
    Financial Information
    
    
    59Item 9.
    
    The Offer and Listing
    
    
    59Item 10.
    
    Additional Information
    
    
    60Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    64Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    64PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    65Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    65Item 15T.
    
    Controls and Procedures
    
    
    65Item 16A.
    
    Audit Committee Financial Expert
    
    
    65Item 16B.
    
    Code of Ethics
    
    
    65Item 16C.
    
    Principal Accountant Fees and Services
    
    
    65Item 16D.
    
    Exemptions from The Listing Standards for Audit Committees
    
    
    66Item 16E.
    
    Purchases of Equity Securities by The Issuer and Affiliated Purchasers
    
    
    66Item 16F.
    
    Change in Registrants Certifying Accountant
    
    
    66Item 16G.
    
    Corporate Governance
    
    
    66PART IIIItem 17.
    
    Financial Statements
    
    
    67Item 18.
    
    Financial Statements
    
    
    67Item 19.
    
    Exhibits
    
    
    67EX-8.1EX-12.1EX-12.2EX-13.1EX-15.1EX-15.2




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##### Table of Contents



INTRODUCTION
    
    
    3G are to the third generation of telecommunication hardware standards and general
technology for mobile networking that provides increased bandwidth and allows a mobile device
user to access a wide variety of services, such as multimedia;
    
    CECT are to CEC Telecom Co., Ltd., our principal operating subsidiary in China;
    
    China or the PRC are to the Peoples Republic of China, excluding, for the purpose of
this annual report only, Taiwan and the special administrative regions of Hong Kong and Macau;
    
    CDMA are to Code Division Multiple Access, a method for transmitting simultaneous encoded
signals over a shared portion of the spectrum. The foremost application of CDMA is digital
cellular phone technology;
    
    EDGE are to Enhanced Data GSM Environment, a faster version of the GSM wireless service
designed to deliver data at rates up to 384 Kbps;
    
    EMS are to electronic manufacturing services, a general term used to describe the
services provided by companies that design, test, manufacture, distribute and provide return
and repair services for electronic components and assemblies for original equipment
manufacturers;
    
    GSM are to Global System for Mobile Communications, a digital cellular phone technology
based on time division multiple access;
    
    GPS are to Global Positioning System, a global navigation satellite system often used for
navigation purposes;
    
    MIIT are to China Ministry of Industry and Information Technology;
    
    RMB and Renminbi are to the legal currency of China;
    
    SIM are to Subscriber Identity Module, the smart card used in cellular phones to securely
store the key that is used to identify the mobile phone service subscriber;
    
    SMT are to Surface Mount Technology, a space saving technique whereby special leadless
components are soldered onto the surface of a printed circuit board;
    
    TD-SCDMA are to Time Division-Synchronous Code Division Multiple Access, a 3G wireless
standard that supports data transmission at speeds up to 2 Mbps. The standard combines time
division multiple access with an adaptive, synchronous-mode code division multiple access
component;
    
    US$, $, and U.S. dollars are to the legal currency of the United States;
    
    WCDMA are to Wideband Code Division Multiple Access, a 3G wireless standard which
utilizes one 5 MHz channel for both voice and data, initially offering data speeds up to 384
Kbps; and
    
    We, us, our company and our are to Qiao Xing Mobile Communication Co., Ltd., its
predecessor entities and its consolidated subsidiaries, unless the context indicates
otherwise.
  1




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   
    
    our expectations regarding the market for mobile handsets;
    
    our expectations regarding the continued growth of the mobile communications industry;
    
    our expectations with respect to advancements in our technologies;
    
    our beliefs regarding the competitiveness of our mobile handset products;
    
    our expectations regarding our manufacturing capacity;
    
    our expectations with respect to revenue growth and our ability to achieve profitability;
    
    our future business development, results of operations and financial condition; and
    
    competition from other manufacturers of mobile handsets.
  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
   (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toConsolidated statement of operations data
    
    Year ended December 31,
    
    November
    
    
    December
    
    Year ended December 31,(Amounts in thousands, except per share data)
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Revenues
    
    
    1,414,265
    
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    315,701Gross profit
    
    
    168,751
    
    
    
    337,747
    
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    866,777
    
    
    
    127,047In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (11,880
    )
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (1,719
    )Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (3,845
    )Operating income (loss)
    
    
    100,367
    
    
    
    273,890
    
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    608,791
    
    
    
    89,233Interest expense
    
    
    (21,719
    )
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (24,259
    )Gain on remeasurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,939
    
    
    
    21,244Loss on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,634
    )
    
    
    (1,559
    )Gain on disposal of subsidiaries
    
    
    
    
    
    
    10,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    333Gain on disposal of an investment in affiliate
    
    
    10,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of an affiliate
    
    
    1,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) before income tax expense, minority interests,
and extraordinary items
    
    
    91,283
    
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    595,422
    
    
    
    87,274Income tax expense
    
    
    (7,533
    )
    
    
    (16,719
    )
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (22,824
    )Minority interests
    
    
    (43,520
    )
    
    
    (52,349
    )
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (2,331
    )Earnings (loss) before extraordinary items
    
    
    41,911
    
    
    
    182,450
    
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    423,804
    
    
    
    62,119Extraordinary items: Gains on acquisitions of additional equity
interests in CECT, net of nil tax
    
    
    
    
    
    
    48,157
    
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    Net income (loss)(1)
    
    
    41,911
    
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    423,804
    
    
    
    62,119Earnings (loss) per share before extraordinary gains(2) Basic
    
    
    1.05
    
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    7.52
    
    
    
    1.10 Diluted
    
    
    1.05
    
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    6.99
    
    
    
    1.02Earnings (loss) per share(1)(2) Basic
    
    
    1.05
    
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    7.52
    
    
    
    1.10 Diluted
    
    
    1.05
    
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    6.99
    
    
    
    1.02Weighted average number of shares outstanding
 3




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##### Table of Contents



(Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toConsolidated statement of operations data
    
    Year ended December 31,
    
    November
    
    
    December
    
    Year ended December 31,(Amounts in thousands, except per share data)
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($) Basic
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    49,216
    
    
    
    49,216 Diluted
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    56,386
    
    
    
    56,386
 (Old Basis)
    
    
    (New Basis)Consolidated balance sheet data
    
    December 31,
    
    November
    
    
    December 31,(Amounts in thousands)
    
    2004
    
    2005
    
    30, 2006
    
    
    2006
    
    2007
    
    2008(RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Cash
    
    
    81,741
    
    
    
    379,377
    
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    426,112Accounts receivable, net
    
    
    373,051
    
    
    
    513,035
    
    
    
    407,610
    
    
    
    
    546,893
    
    
    
    418,564
    
    
    
    462,282
    
    
    
    67,758Prepayments to suppliers
    
    
    233,098
    
    
    
    232,189
    
    
    
    145,652
    
    
    
    
    232,008
    
    
    
    155,993
    
    
    
    363,907
    
    
    
    53,339Total current assets
    
    
    1,228,800
    
    
    
    1,678,800
    
    
    
    1,684,197
    
    
    
    
    1,893,910
    
    
    
    3,601,182
    
    
    
    4,177,000
    
    
    
    612,238Total assets
    
    
    1,452,774
    
    
    
    1,798,408
    
    
    
    1,985,147
    
    
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    662,942Short-term borrowings
    
    
    638,068
    
    
    
    639,972
    
    
    
    610,314
    
    
    
    
    602,790
    
    
    
    983,904
    
    
    
    983,950
    
    
    
    144,221Accounts payable
    
    
    214,204
    
    
    
    312,806
    
    
    
    177,609
    
    
    
    
    165,326
    
    
    
    107,990
    
    
    
    52,047
    
    
    
    7,629Embedded derivative liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,130
    
    
    
    18,194Convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206,211
    
    
    
    30,225Total current liabilities
    
    
    954,089
    
    
    
    1,156,072
    
    
    
    1,026,702
    
    
    
    
    1,207,228
    
    
    
    1,239,764
    
    
    
    1,515,747
    
    
    
    222,169Total liabilities
    
    
    966,692
    
    
    
    1,161,491
    
    
    
    1,030,413
    
    
    
    
    1,218,968
    
    
    
    1,245,325
    
    
    
    1,516,067
    
    
    
    222,216Total shareholders equity
    
    
    339,356
    
    
    
    569,963
    
    
    
    879,637
    
    
    
    
    1,040,288
    
    
    
    2,670,542
    
    
    
    2,914,788
    
    
    
    427,232
 (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toConsolidated cash flow data
    
    Year ended December 31,
    
    November
    
    
    December
    
    Year ended December 31,(Amounts in thousands)
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Net cash provided by (used in) operating activities
    
    
    (13,426
    )
    
    
    110,970
    
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    110,106
    
    
    
    16,139Net cash provided by (used in) investing activities
    
    
    (43,455
    )
    
    
    18,386
    
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (8,452
    )Net cash provided by financing activities
    
    
    26,120
    
    
    
    168,413
    
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    21,068
 Year ended December 31,Other selected operating data(3)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Mobile handsets shipped (in thousands of units)
    
    
    1,353
    
    
    
    1,730
    
    
    
    2,262
    
    
    
    3,816
    
    
    
    2,714Average mobile handset selling price (RMB)(4)
    
    
    1,011
    
    
    
    1,012
    
    
    
    1,094
    
    
    
    816
    
    
    
    788
 
 (1)
    
    Our PRC operating subsidiary, CECT, enjoys certain preferential tax rates and holidays under
local government policies. See Item 5. Operating and financial review and
prospectsTaxation and note 14 to our audited consolidated financial statements included
elsewhere in this annual report. Without the tax holidays, our net income (loss) and basic and
diluted earnings (loss) per share for the following periods would have been reduced or
increased as follows:
 (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toYear ended December 31,
    
    November
    
    
    December
    
    Year ended December 31,(Amounts in thousands)
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)(Reduction in net income by) / increase in net loss by
    
    
    (11,133
    )
    
    
    (24,017
    )
    
    
    (1,147
    )
    
    
    
    1
    
    
    
    (1,056
    )
    
    
    
    
    
    
    Reduction in basic and diluted earnings per share by (2)
    
    
    (0.28
    )
    
    
    (0.61
    )
    
    
    (0.02
    )
    
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    
 
 (2)
    
    Basic and diluted earnings (loss) per share data reflects on a retroactive basis a 40-for-one
share split that became effective on April 13, 2007. See note 17 to our audited consolidated
financial statements included elsewhere in this annual report.(3)
    
    Other selected operating data is derived from our operating records.(4)
    
    The average mobile handset selling price for handsets in a given period is calculated by
dividing revenue from handsets by unit sales volume during the same period. 4




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##### Table of Contents



Renminbi per U.S. dollar certified exchange ratePeriod end
    
    Average(1)
    
    Low
    
    High2004
    
    
    8.2765
    
    
    
    8.2768
    
    
    
    8.2764
    
    
    
    8.27742005
    
    
    8.0702
    
    
    
    8.1826
    
    
    
    8.0702
    
    
    
    8.27652006
    
    
    7.8041
    
    
    
    7.9579
    
    
    
    7.8041
    
    
    
    8.07022007
    
    
    7.2946
    
    
    
    7.5806
    
    
    
    7.2946
    
    
    
    7.81272008
    
    
    6.8225
    
    
    
    6.9193
    
    
    
    6.7800
    
    
    
    7.2946December
    
    
    6.8225
    
    
    
    6.8539
    
    
    
    6.8225
    
    
    
    6.88422009January
    
    
    6.8392
    
    
    
    6.8360
    
    
    
    6.8225
    
    
    
    6.8403February
    
    
    6.8395
    
    
    
    6.8363
    
    
    
    6.8241
    
    
    
    6.8470March
    
    
    6.8329
    
    
    
    6.8760
    
    
    
    6.8240
    
    
    
    6.8438April
    
    
    6.8180
    
    
    
    6.8306
    
    
    
    6.8180
    
    
    
    6.8361May
    
    
    6.8278
    
    
    
    6.8235
    
    
    
    6.8176
    
    
    
    6.8278June (through June 19, 2009)
    
    
    6.8360
    
    
    
    6.8337
    
    
    
    6.8264
    
    
    
    6.8371
 
 Source:
    
    For the period from January 1, 2004 to December 31, 2008, the exchange rates were the
noon buying rates in New York City for cable transfers as certified for customs purposes by
the Federal Reserve Bank of New York and for the period subsequent to and including January
5, 2009, the exchange rates were the certified exchange rates as published by the Federal
Reserve Board of the United States. Effective January 1, 2009, the Federal Reserve Bank of
New York discontinued publication of foreign exchange rates certified for customs purposes
and effective January 5, 2009, the Federal Reserve Board of the United States reinstituted
the publication of the daily exchange rate data in a weekly version of the H.10 release. (1)
    
    Annual averages are calculated from month-end rates. Monthly averages are calculated using
the average of the daily rates during the relevant period. B. Capitalization and Indebtedness
  C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Risks Related to Our Business
 The
current financial crisis and economic downturn may have a material and adverse effect on our businesses, results of operations and financial condition.
  Evaluating our business and prospects may be difficult and our past results may not be indicative
of our future performance.
   5




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If we cannot keep pace with market changes and produce mobile handsets with new technologies and
features in a timely and cost-efficient manner to meet our customers requirements and preferences,
the growth and success of our business will be materially adversely affected.
    
    
    the perceived advantages of our new products over existing competing products;
    
    our ability to attract mobile handset users who are currently using products of our competitors;
    
    product cost relative to performance; and
    
    the level of customer service available to support new products.
   Competition in our industry is intense. Our failure to maintain or improve our market position and
respond successfully to changes in the competitive landscape may have a material adverse impact on
our business and results of operations.
  6




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Our sales, results of operations and reputation could be materially adversely affected if we fail
to efficiently manage our manufacturing operations without interruption, or fail to ensure that our
products meet the expectations of our distributors and our end-user customers and are delivered on
time.
  Our operations could be materially adversely affected if we fail to manage effectively our
relationships with, or lose the services of, our third-party manufacturers or other third-party
service providers.
  We rely on independent mobile handset designers in China for certain software and hardware designs
used in our production. If these or other mobile handset designers terminate their business
relationships with us, or are otherwise unable to provide us with designs suitable for our
products, or if we fail to enhance our in-house research and development activities to compensate
for our inability to obtain designs suitable for our products from these handset designers, our
business and our results of operations could be materially adversely affected.
  7




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Our results of operations, particularly our profitability, may be materially adversely affected if
we do not successfully manage price erosion and are not able to manage costs related to our
products and operations.
  We rely primarily on our distributors for marketing our products at the provincial and local levels
and for after-sales support of our products. Because we have limited influence over our
distributors, we cannot be certain that their marketing and after-sale support of our products will
be adequate or will not harm our brand and reputation. Moreover, if we fail to timely identify
additional or replacement distributors upon the loss of one or more of our distributors, or if we
are unable to successfully manage our distribution network, or if we are unable to collect payments
from our distributors on a timely basis, our operating results may suffer.
   
    
    reduction, delay or cancellation of orders from one or more of our distributors;
    
    selection by one or more of our distributors of our competitors products;
    
    failure to timely identify additional or replacement distributors upon the loss of one or
more of our distributors; and
    
    failure of any of our distributors to make timely payment for our products.
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If we fail to source a sufficient quantity of high-quality components used in our products at
reasonable costs from our suppliers, our competitive position, reputation and business could
suffer. Our dependence on suppliers for certain types of components could jeopardize our production
activities and increase our cost of sales.
    We maintain inventories of raw materials, components and handsets, and our inventories may become
obsolete.
  We plan to market our products to countries outside of China, which may subject us to various
economic, political, regulatory, legal and foreign exchange risks.
  
    
    fluctuations in currency exchange rates of the U.S. dollar and other foreign currencies
against the Renminbi;
    
    difficulty in engaging and retaining distributors and agents who are knowledgeable about,
and can function effectively in, overseas markets;
    
    difficulty in designing products that are compatible with communications and product
standards in foreign countries;
    
    longer accounts receivable collection periods and greater difficulty in accounts receivable
collection;
    
    increased costs associated with maintaining marketing and sales activities in various
countries;
    
    difficulty and costs relating to compliance with unexpected changes in regulatory
requirements and different commercial and legal requirements in the jurisdictions in which we
offer our products;
    
    inability to obtain, maintain or enforce intellectual property rights; and
    
    changes to import and export regulations, including quotas, tariffs and other trade
barriers, delays or difficulties in obtaining export and import licenses, potential foreign
exchange controls and repatriation controls on foreign earnings, exchange rate fluctuations
and currency conversion restrictions.
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We may require additional capital and we may not be able to obtain it on acceptable terms or at
all.
  
    
    investors perception of, and demand for, securities of China-based mobile handset
companies;
    
    conditions of the U.S. and other capital markets in which we may seek to raise funds;
    
    our future results of operations, financial condition and cash flows;
    
    PRC governmental regulation of foreign investment in the telecommunications industry;
    
    economic, political and other conditions in China; and
    
    PRC governmental policies relating to foreign currency borrowings.
  Our past brand-sharing practices may result in negative publicity and may even lead to
investigations or penalties by relevant PRC regulatory authorities, which could have a material
adverse impact on our reputation and business.
   Our operating results are difficult to predict and may fluctuate significantly from period to
period in the future.
  We must develop or otherwise acquire complex, evolving technologies to use in our business and meet
market demand. Our failure to develop or otherwise acquire these complex technologies, or to
successfully commercialize such technologies as new advanced products that meet customer demand on
a timely basis, will have a material adverse effect on our business, our ability to meet our
targets and our results of operations.
   10




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We rely on a number of technologies licensed from third parties and the loss of some or all of
these licenses or failure to renew them on a timely basis could interrupt our production and have a
material adverse impact on our business.
  We have not applied for patents or registered copyrights for most of our intellectual property and
our failure to adequately protect our intellectual property rights may undermine our competitive
position, and litigation to protect our intellectual property rights may be costly.
   We may be exposed to infringement or misappropriation claims by third parties, which, if determined
adversely against us, could disrupt our business and subject us to significant liability to third
parties, as well as have a material adverse effect on our financial condition and results of
operations.
     11




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
    
    pay damage awards;
    
    seek licenses from third parties;
    
    pay additional ongoing royalties, which could decrease our profit margins;
    
    redesign our products; or
    
    be restricted by injunctions,
  It may become more difficult to maintain our quality standards, and problems with product quality
or product performance could result in a decrease in customers and revenue, unexpected expenses and
loss of market share. Product liability claims against us could result in adverse publicity and
potentially significant monetary damages.
    Our sales and profitability depend on the continued growth of the mobile telecommunications
industry, especially in China, and if the mobile telecommunications industry does not grow as we
expect or grows at a slower speed than we expect, our sales and profitability may be materially
adversely affected.
   12




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Changes in the regulatory environment for telecommunications systems and services, especially in
China, could negatively impact our business.
   Any environmental claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may materially adversely affect our financial
condition and results of operations.
  We do not carry any business interruption insurance or third-party liability insurance for our
manufacturing facilities.
  The discontinuation of the preferential tax treatment currently available to our PRC subsidiary,
CECT, could materially adversely affect our results of operations.
   13




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New labor laws in the PRC may adversely affect our results of operations.
  The dividends we receive from CECT and our global income may be subject to PRC tax under the new
PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of
operations. In addition, our foreign corporate holders of ordinary shares may be subject to a PRC
withholding tax upon the dividends payable by us and upon gains realized on the sale of our
ordinary shares, if we are classified as a PRC resident enterprise.
    We depend on our key personnel, and our business and growth may be severely disrupted if we lose
their services. We may also have difficulty attracting and retaining qualified management and
research and development personnel.
    14




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Fluctuations in exchange rates could adversely affect our business.
    Our net income could be adversely affected as a result of the grant of employee share options and
other share-based compensation.
  We believe that we were a passive foreign investment company for U.S. federal income tax purposes
for our taxable year that ended December 31, 2008 and we may continue to be a passive foreign
investment company in the current and future taxable years, which could result in adverse U.S.
federal income tax consequences to U.S. investors.
     15




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If we fail to maintain an effective system of internal control over financial reporting, our
ability to accurately and timely report our financial results or prevent fraud may be adversely
affected. In addition, investor confidence and the market price of our ordinary shares may be
adversely impacted if we or our independent registered public accounting firm conclude that our
internal control over financial reporting is not effective, in accordance with the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002.
   Compliance with new rules and regulations applicable to companies publicly listed in the United
States is costly and complex and any failure by us to comply with these requirements on an ongoing
basis could negatively affect investor confidence in us and cause the market price of our ordinary
shares to decrease.
  Risks Related to our Relationship with XING
 Our parent company has substantial control over us, and one of the existing shareholders of our
parent company has substantial control over our parent company and us. The interests of our parent
company and its controlling shareholder/shareholders may not be aligned with the interests of our
other shareholders.
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As a controlled company, we are exempt from certain NYSE corporate governance requirements, which
may result in our independent directors not having as much influence as they would if we were not a
controlled company.
  
    
    our compensation committee must be composed entirely of independent directors; and
    
    our nomination committee must be composed entirely of independent directors.
  We may face competition from our parent company or the other subsidiaries of our parent company or
companies established by Mr. Rui Lin Wu or his family members, and may not be able to compete
successfully against these related parties.
  Because we and Xing have different management, finance teams and audit committees, it is possible
that they may apply accounting policies differently under U.S. GAAP, or make different decisions on
accounting matters or estimates that require judgment. This could result in significant differences
between the financial information presented by Xing and that presented by us.
  Risks Related to Doing Business in China
 Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
products and materially adversely affect our competitive position.
  
    
    the higher level of government involvement;
    
    the early stage of development of the market-oriented sector of the economy;
    
    the rapid growth rate;
    
    the higher level of control over foreign exchange; and
    
    the allocation of resources.
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Uncertainties with respect to the PRC legal system could limit the legal protections available to
you and us.
  We rely principally on dividends and other distributions on equity paid by our operating subsidiary
to fund our cash and financing requirements, but such dividends and other distributions are subject
to restrictions under PRC law. Limitations on the ability of our operating subsidiary to pay
dividends or other distributions to us could have a material adverse effect on our ability to grow,
make investments or acquisitions, pay dividends to you, and otherwise fund and conduct our
business.
  Restrictions on currency exchange may limit our ability to receive and use our revenues
effectively.
   Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders to personal liability and limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiarys
ability to distribute profits to us, or otherwise materially and adversely affect us.
 18




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We face risks related to health epidemics and other outbreaks.
  Risks Related to Investment in our Shares
 The market price for our ordinary shares may be highly volatile.
  
    
    announcements of technological or competitive developments;
    
    regulatory developments in our target markets affecting us, our customers or our competitors;
 19




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
    
    announcements regarding intellectual property infringement litigation involving us or other mobile handset manufacturers or the issuance of patents to us or our competitors;
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts;
    
    changes in the economic performance or market valuations of other mobile handset companies;
    
    additions or departures of our directors, executive officers and key research personnel; and
    
    release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares.
  Substantial future sales or perceived sales of our ordinary shares in the public market could cause
the price of our ordinary shares to decline.
   Our articles of association contain anti-takeover provisions that could have a material adverse
effect on the rights of holders of our ordinary shares.
  Your right to participate in any future rights offerings may be limited, which may cause dilution
to your holdings.
  Certain judgments obtained against us by our shareholders may not be enforceable.
  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.
 20




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##### Table of Contents



ITEM 4. INFORMATION ON THE COMPANY
 A. History and Development of the Company
     
    
    the Notes are unsecured and mature on May 15, 2011;
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008;
    
    the Notes are convertible at the holders option into our ordinary shares at an initial
conversion price of $7.43 per ordinary share (which represents a 10% premium to the arithmetic
average of the daily volume-weighted average price (VWAP) of our ordinary shares during the
five trading day period ending on the day immediately prior to the date of execution of the
SPA), subject to adjustments as provided for in the Notes;
    
    the conversion price for our ordinary shares is subject to reset if the average of the
daily VWAP of our ordinary shares for the five consecutive trading days ending on each
three-month anniversary of the issuance date of the Notes until maturity (each a Reset Date)
is less than $6.76. In that event, the conversion price is reset to a price equal to 92.5% of
the arithmetic average of the daily 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 $4.05 per share. The conversion price of the Notes was reset to US$4.05 per share on
November 15, 2008;
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders of
the Notes (together with their affiliates) would beneficially own in excess of 9.99% of our
ordinary shares outstanding immediately after giving effect to the conversion;
    
    the Notes require an automatic re-pricing of the conversion price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the conversion price;
    
    the holders of the Notes can require us to redeem the Notes at any time on or after the 18
month anniversary of the issuance date of the Notes in an amount equal to the sum of (a) the
outstanding principal of the Notes, and (b) the accrued and unpaid interest thereon;
    
    in the event of a default, change of control and certain other fundamental transactions,
the holders of the Notes have the right to require us to redeem all or any portion of the
Notes at a price equal to the greater of (i) the amount to be redeemed multiplied by a
redemption premium of 125% and (ii) the amount to be redeemed multiplied by the quotient
determined by dividing the closing bid price of our ordinary shares on the date immediately
preceding such event by the conversion price of the Notes;
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
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable U.S.
dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided by the
exchange rate of one U.S. dollar to Renminbi on the date such payment is due; and
    
    we are required under the terms of a Registration Rights Agreement entered into
concurrently with the SPA to file with the SEC a registration statement to register the
ordinary shares issuable upon the conversion of the Notes and the exercise of the Warrants to
permit the resale of such ordinary shares to the public. The registration statement was filed
by the Company on June 27, 2008 and was declared effective by the SEC on July 11, 2008.
  
    
    each Warrant is exercisable to purchase one ordinary share;
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments as
provided for in the Warrant;
    
    the Warrants are exercisable at any time during a period of five years from May 15, 2008,
the date of issuance;
    
    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 ordinary shares upon
the 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 ordinary shares outstanding
immediately after giving effect to such exercise; and
    
    the Warrants require an automatic re-pricing of the exercise price if we make certain sales
of our ordinary shares or ordinary share equivalents in a capital-raising transaction at a
price below the exercise price of the Warrants.
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B. Business Overview
       23




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PRC Mobile Handset Industry
     Growing affordability of mobile handsets
  Continuing growth increasingly driven by replacement demand
  Increasing demand for differentiated mobile handsets with more functions and personalized features
    Continual evolution of wireless network technologies
  24




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##### Table of Contents



Highly competitive market
  Increasing presence of mobile telecommunication operators and large electronic retailers in handset
distribution
   Our Products
      Date ofModel
    
    Key features
    
    commercial launchC3100
    
    Flash light; ultra-long standby battery; ultra-low cost
    
    December 2007C1800
    
    Ultra-long standby battery; FM radio; ultra-low cost
    
    March 2008T150
    
    Fingerprint identification; ultra-long standby battery; metal
casing;
    
    April 2008VEVA S60
    
    Luxury series with embedded crystals; ultra-long standby
battery
    
    May 2008C6000D
    
    Ultra-long standby battery; dual SIM cards; stock trading
function
    
    June 2008VEVA S70
    
    Luxury series with embedded crystals; ultra-long standby
battery; EDGE technology
    
    July 2008C5188
    
    Ultra-long standby battery; stock trading function; bluetooth
technology
    
    July 2008VEVA S50
    
    Luxury series with embedded crystals; ultra-long standby
battery; GPS function
    
    October 2008VEVA S80
    
    Luxury series with embedded crystals; ultra-long standby
battery; dual SIM cards; arc slider design; EDGE function
    
    April 2009VEVA S90
    
    Luxury series with embedded crystals; ultra-long standby
battery; digital TV; GPS function; multi-touch function
    
    May 2009VEVA U9
    
    Luxury series with embedded crystals; slider design; FM
radio; bluetooth technology
    
    May 2009
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For the year ended December 31,2006
    
    2007
    
    2008Product
    
    Revenue
    
    Percentage
    
    Rank
    
    Revenue
    
    Percentage
    
    Rank
    
    Revenue
    
    Percentage
    
    Rank(RMB)
    
    
    
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    
    
    
    (RMB)(Amounts in thousands, except percentages)VEVA S60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,328
    
    
    
    29.6
    %
    
    
    1VEVA S70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262,688
    
    
    
    12.3
    %
    
    
    2W100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234,443
    
    
    
    11.0
    %
    
    
    3C3100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,521
    
    
    
    8.5
    %
    
    
    4VEVA S50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,298
    
    
    
    7.0
    %
    
    
    5C1000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    623,495
    
    
    
    19.8
    %
    
    
    1
    
    
    
    
    
    
    
    C1000+
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332,318
    
    
    
    10.6
    %
    
    
    2
    
    
    
    
    
    
    
    T100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,903
    
    
    
    10.2
    %
    
    
    3
    
    
    
    
    
    
    
    C2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320,147
    
    
    
    10.2
    %
    
    
    4
    
    
    
    
    
    
    
    C6000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,099
    
    
    
    8.4
    %
    
    
    5
    
    
    
    
    
    
    
    A1000 series
    
    
    478,015
    
    
    
    18.8
    %
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    V180 series
    
    
    419,634
    
    
    
    16.5
    %
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IPD series
    
    
    377,106
    
    
    
    14.9
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CECT 3270 series
    
    
    256,554
    
    
    
    10.1
    %
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T800 series
    
    
    110,162
    
    
    
    4.3
    %
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Research and Development
       26




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Manufacturing
 Manufacturing facilities
     Raw materials and components
      Production management
  27




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Manufacturing process
  
 Quality control and certifications
   Distribution and Marketing
 Distribution network
    Marketing
  28




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Pricing
   After-Sales Services
  Intellectual Property and Proprietary Rights
     Technology Licenses and Agreements
   29




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Competition
      Environmental Matters
  Employees
  As of December 31,Functions
    
    2006
    
    2007
    
    2008Manufacturing and engineering
    
    
    550
    
    
    
    516
    
    
    
    373General and administration
    
    
    77
    
    
    
    66
    
    
    
    66Marketing and sales
    
    
    32
    
    
    
    44
    
    
    
    85Research and development
    
    
    153
    
    
    
    162
    
    
    
    168
    30




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Insurance
  Our Principal Facilities
    Regulations
  Chinese Regulatory Framework for the Telecommunications Industry
 Overview
   
    
    Formulating and enforcing industry policies, regulations and technology standards;
    
    Granting network access licenses for telecommunications equipment;
    
    Supervising the quality and the operation of telecommunications equipment connected to
public telecommunication networks; and
    
    Together with other relevant regulatory authorities, formulating the macro-planning of
mobile telecommunications equipment production.
   31




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MIIT license
       NDRC approval
     Environmental Regulations
  C. Organizational Structure
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D. Property, Machinery and Equipment
  
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this annual report. This discussion contains forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from those projected in the
forward-looking statements. In evaluating our business, you should carefully consider the
information provided under Item 3. Key InformationD. Risk factors.
 Unless otherwise indicated, the 2006 full-year financial data set forth in this section are sums of
the data for the period from January 1 to November 30, 2006 and the period from November 30 to
December 31, 2006. The latter period reflects push-down accounting resulting from the purchase by
our parent company of the remaining 20% equity interest in our company on November 30, 2006. See
Financial impact of our corporate history. Although the presentation of the combined full year
financial data for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we believe
this combination is useful to provide investors with a more complete understanding of our results
of operations data from year to year.
 Overview
   Key Factors Affecting Our Financial Performance
  
    
    Industry growth;
    
    Competition and market position;
    
    Product offerings and pricing;
    
    Cost management; and
    
    Working capital management.
 Industry growth
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Competition and market position
    Product offerings and pricing
    Cost management
  Working capital management
  Financial Impact of Our Corporate History
  
    
    In 2004, CECT disposed of its 40.0% equity interest in CEC Mobile Co., Ltd., or CECM, for
cash consideration of RMB72.0 million, resulting in a gain on disposal of RMB10.7 million.
After the disposal, CECT continued to hold a 10% equity interest in CECM.
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
    
    In 2005, we acquired an additional 25.0% equity interest in CECT for aggregate
consideration of RMB75.0 million, including, among other components, the transfer of a 90.0%
equity interest in Beijing Jinxin Hengtong Technology Company Limited, or BJHTCL, and a 3.9%
equity interest in China Electronics Financial Co., Ltd., both of which were originally held
through CECT. This transaction resulted in an extraordinary gain of RMB48.2 million on the
acquisition of additional equity interest in CECT and a gain of RMB10.3 million on the
disposal of BJHTCL.
    
    In July 2006, we made an additional capital contribution of $18.8 million (equivalent to
RMB149.6 million) into CECT. As the minority CECT shareholder did not make a corresponding
additional capital contribution, our ownership interest in CECT increased by 3.4% to 93.4%.
The transaction resulted in an extraordinary gain of RMB17.8 million.
    
    In June 2007, we made another capital contribution of $50 million (equivalent to RMB380.4
million) into CECT. As the minority CECT shareholder did not make a corresponding additional
capital contribution, our ownership interest in CECT increased by 3.14% to 96.6%. The
transaction resulted in an extraordinary gain of RMB28.7 million.
    
    In May 2008, we issued the $70,000,000 Notes in exchange for a combination of 6,966,666 of
our ordinary shares that were owned by the Investors of the Notes, valued at approximately
US$48,349,000, and cash of $21,651,000. For the year ended December 31, 2008, the Notes
resulted in interest expense of RMB92.9 million ($13.6 million), gain on revaluation of the
derivative instruments embedded in the Notes of RMB144.9 million ($21.2 million) and an
exchange loss of RMB11.5 million ($1.7 million) that arose from the revaluation of the Notes.
    
    In August 2008, the holders of the Notes exercised the option to convert $8,251,000 of the
principal amount of the Notes and accrued interest thereon of $46,000 into 1,511,397 of our
ordinary shares at a conversion price of US$5.49 per share, resulting in a loss on
extinguishment of the convertible debts of RMB10.6 million ($1.6 million).
  
    
    Fair value adjustments to the extent of Xings additional 20% acquired interest relating to
inventories (RMB1.1 million), property, machinery and equipment (RMB1.5 million) and
intangible assets (RMB55.2 million), and the related adjustments to deferred taxes;
    
    A net adjustment to historical goodwill of RMB89.4 million; and
    
    An in-process research and development charge of RMB41.7 million, representing Xings
acquired interest in the estimated fair value of product technologies under development as of
November 30, 2006.
    Revenue
   35




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##### Table of Contents



(Combined) (1)
    
    
    (New Basis)Year ended
    
    
    Year ended December 31,December 31, 2006
    
    
    2007
    
    2008Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    of revenue
    
    
    Amount
    
    of revenue
    
    Amount
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    (RMB)
    
    ($)Revenues:Handsets and accessories
    
    
    2,494,004
    
    
    
    98.3
    %
    
    
    
    3,113,756
    
    
    
    99.1
    %
    
    
    2,140,346
    
    
    
    313,719
    
    
    
    99.4
    %Services and others
    
    
    43,207
    
    
    
    1.7
    %
    
    
    
    27,338
    
    
    
    0.9
    %
    
    
    13,527
    
    
    
    1,982
    
    
    
    0.6
    %Total
    
    
    2,537,211
    
    
    
    100.0
    %
    
    
    
    3,141,094
    
    
    
    100.0
    %
    
    
    2,153,873
    
    
    
    315,701
    
    
    
    100.0
    %
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined revenues for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we
believe this combination is useful to provide investors with a more complete understanding of
our results of operations data from year to year.   Cost of Goods Sold and Operating Expenses
  (Combined) (1)
    
    
    (New Basis)Year ended
    
    
    Year ended December 31,December 31, 2006
    
    
    2007
    
    2008Percentage
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except percentages)
    
    Amount
    
    of revenue
    
    
    Amount
    
    of revenue
    
    Amount
    
    of revenue(RMB)
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    (RMB)
    
    ($)Cost of goods sold
    
    
    2,062,209
    
    
    
    81.3
    %
    
    
    
    2,255,844
    
    
    
    71.8
    %
    
    
    1,287,096
    
    
    
    188,654
    
    
    
    59.8
    %Operating expenses:Selling and distribution
    
    
    14,761
    
    
    
    0.6
    %
    
    
    
    36,322
    
    
    
    1.2
    %
    
    
    146,551
    
    
    
    21,481
    
    
    
    6.8
    %General and administrative
    
    
    21,049
    
    
    
    0.8
    %
    
    
    
    69,032
    
    
    
    2.2
    %
    
    
    44,231
    
    
    
    6,483
    
    
    
    2.1
    %Research and development
    
    
    16,292
    
    
    
    0.6
    %
    
    
    
    18,599
    
    
    
    0.6
    %
    
    
    29,242
    
    
    
    4,286
    
    
    
    1.4
    %In-process research and development
    
    
    41,739
    
    
    
    1.7
    %
    
    
    
    
    
    
    
    Amortization of other intangible
assets
    
    
    15,178
    
    
    
    0.6
    %
    
    
    
    32,280
    
    
    
    1.0
    %
    
    
    11,727
    
    
    
    1,719
    
    
    
    0.5
    %Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,235
    
    
    
    3,845
    
    
    
    1.2
    %Total operating expenses
    
    
    109,019
    
    
    
    4.3
    %
    
    
    
    156,233
    
    
    
    5.0
    %
    
    
    257,986
    
    
    
    37,814
    
    
    
    12.0
    %
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined cost of goods sold and operating expenses for the year ended December 31, 2006 is not
in accordance with U.S. GAAP, we believe this combination is useful to provide investors with
a more complete understanding of our results of operations data from year to year. 36




---



##### Table of Contents



Cost of goods sold
  (Combined)(1)
    
    
    (New Basis)Year ended
    
    
    Year ended December 31,December 31, 2006
    
    
    2007
    
    2008Sales
    
    
    
    
    
    
    Sales
    
    
    
    
    
    Sales(Amounts in thousands, except units)
    
    volume
    
    Revenue
    
    
    volume
    
    Revenue
    
    volume
    
    Revenue(Unit)
    
    (RMB)
    
    
    (Unit)
    
    (RMB)
    
    (Unit)
    
    (RMB)Manufactured in Huizhou facility
    
    
    617,454
    
    
    
    1,058,112
    
    
    
    
    549,547
    
    
    
    416,707
    
    
    
    714,199
    
    
    
    389,348Outsourced from EMS providers
    
    
    1,624,747
    
    
    
    1,391,829
    
    
    
    
    3,266,751
    
    
    
    2,697,037
    
    
    
    1,999,756
    
    
    
    1,748,879Outsourced from ODMs
    
    
    19,621
    
    
    
    23,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,261,822
    
    
    
    2,473,510
    
    
    
    
    3,816,298
    
    
    
    3,113,744
    
    
    
    2,713,955
    
    
    
    2,138,227
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined revenue for the year ended December 31, 2006 is not in accordance with U.S. GAAP, we
believe this combination is useful to provide investors with a more complete understanding of
our results of operations data from year to year.   Operating expenses
  Selling and distribution expenses
  General and administrative expenses
   37




---



##### Table of Contents



Research and development expenses
   In-process research and development
  Amortization of other intangible assets
  Impairment of other intangible assets
  Share-based compensation expense
   Taxation
 Taxation in the British Virgin Islands
   PRC enterprise income tax
  38




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Obligations for price guarantees
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,(Amounts in thousands)
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision  reported as a reduction of revenue
    
    
    26,619
    
    
    
    
    
    
    
    
    2,943
    
    
    
    91
    
    
    
    13Utilization
    
    
    (26,619
    )
    
    
    
    
    
    
    
    (2,943
    )
    
    
    (91
    )
    
    
    (13
    )Balance at end of year/period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 39




---



##### Table of Contents



Obligations for product warranties
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,(Amounts in thousands)
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    3,922
    
    
    
    
    6,905
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    1,187Provision
    
    
    13,751
    
    
    
    
    908
    
    
    
    14,960
    
    
    
    7,485
    
    
    
    1,097Utilization
    
    
    (10,768
    )
    
    
    
    (1,004
    )
    
    
    (13,672
    )
    
    
    (10,553
    )
    
    
    (1,547
    )Balance at end of year/period
    
    
    6,905
    
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    5,029
    
    
    
    737
  Collectibility of accounts receivable
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,(Amounts in thousands)
    
    30, 2006
    
    
    31, 2006
    
    2007
    
    2008(RMB)
    
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    2,640
    
    
    
    
    2,046
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    796Bad debt expense
    
    
    
    
    
    
    
    
    
    
    
    3,384
    
    
    
    1,277
    
    
    
    187Bad debt recovery
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    
    
    
    
    (595
    )
    
    
    (87
    )Bad debt write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    (10
    )Balance at end of year/period
    
    
    2,046
    
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    6,043
    
    
    
    886
   40




---



##### Table of Contents



Inventories
   Recoverability of the carrying amount of goodwill
   CECT brand name
   Impairment of long-lived assets
  41




---



##### Table of Contents



Depreciation and amortization of long-lived assets
   Valuation of the Embedded Derivatives
   Recent Accounting Pronouncements
    42




---



##### Table of Contents



43




---



##### Table of Contents



A. Operating Results
  (Old Basis)
    
    
    (New Basis)
    
    
    (Combined)(1)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 to
    
    
    Year endedConsolidated statements of operations data
    
    December
    
    
    December
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    31, 2006
    
    
    31, 2006
    
    
    31, 2006
    
    
    2007
    
    2008(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Revenues
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    
    2,537,211
    
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    315,701Cost of goods sold
    
    
    (1,843,327
    )
    
    
    
    (218,882
    )
    
    
    
    (2,062,209
    )
    
    
    
    (2,255,844
    )
    
    
    (1,287,096
    )
    
    
    (188,654
    )Gross profit
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    
    475,002
    
    
    
    
    885,250
    
    
    
    866,777
    
    
    
    127,047Operating expenses:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Selling and distribution
    
    
    (12,054
    )
    
    
    
    (2,707
    )
    
    
    
    (14,761
    )
    
    
    
    (36,322
    )
    
    
    (146,551
    )
    
    
    (21,481
    )General and administrative
    
    
    (19,879
    )
    
    
    
    (1,170
    )
    
    
    
    (21,049
    )
    
    
    
    (69,032
    )
    
    
    (44,231
    )
    
    
    (6,483
    )Research and development
    
    
    (15,131
    )
    
    
    
    (1,161
    )
    
    
    
    (16,292
    )
    
    
    
    (18,599
    )
    
    
    (29,242
    )
    
    
    (4,286
    )In-process research and development
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    
    (15,178
    )
    
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (1,719
    )Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (3,845
    )Operating income (loss)
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    
    365,983
    
    
    
    
    729,017
    
    
    
    608,791
    
    
    
    89,233Interest income
    
    
    5,320
    
    
    
    
    631
    
    
    
    
    5,951
    
    
    
    
    16,373
    
    
    
    24,405
    
    
    
    3,577Interest expense
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    
    (29,328
    )
    
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (24,259
    )Foreign currency exchange gain (loss), net
    
    
    9,628
    
    
    
    
    1,502
    
    
    
    
    11,130
    
    
    
    
    12,022
    
    
    
    (5,142
    )
    
    
    (754
    )Gain on remeasurement of embedded
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,939
    
    
    
    21,244Loss on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,634
    )
    
    
    (1,559
    )Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    333Other income (loss), net
    
    
    3,857
    
    
    
    
    579
    
    
    
    
    4,436
    
    
    
    
    873
    
    
    
    (3,700
    )
    
    
    (541
    )Earnings (loss) before income tax expense,
minority interests, and extraordinary
items
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    
    358,172
    
    
    
    
    711,251
    
    
    
    595,422
    
    
    
    87,274Income tax expense
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    
    (60,242
    )
    
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (22,824
    )Earnings (loss) before minority interests,
and extraordinary items
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    
    297,930
    
    
    
    
    597,874
    
    
    
    439,705
    
    
    
    64,450Minority interests
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    
    (29,059
    )
    
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (2,331
    )Earnings (loss) before extraordinary items
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    
    268,871
    
    
    
    
    564,800
    
    
    
    423,804
    
    
    
    62,119Extraordinary items:Gains on acquisitions of additional equity
interests in CECT, net of nil tax
    
    
    17,796
    
    
    
    
    
    
    
    
    
    17,796
    
    
    
    
    28,689
    
    
    
    
    
    
    
    Net income (loss)
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    
    286,667
    
    
    
    
    593,489
    
    
    
    423,804
    
    
    
    62,119
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined operating results for the year ended December 31, 2006 is not in accordance with U.S.
GAAP, we believe this combination is useful to provide investors with a more complete
understanding of our results of operations data from year to year. 44




---



##### Table of Contents



Period-to-Period Comparisons of Historical Financial Data  2008 Compared to 2007 and 2007
Compared to 2006
  Revenue
 2008 compared to 2007
    2007 compared to 2006
   Cost of goods sold
 2008 compared to 2007
  2007 compared to 2006
  45




---



##### Table of Contents



Gross profit and gross margin
 2008 compared to 2007
  2007 compared to 2006
  Operating expenses
 2008 compared to 2007
  2007 compared to 2006
  Selling and distribution expenses
 2008 compared to 2007
   2007 compared to 2006
   General and administrative expenses
 2008 compared to 2007
   2007 compared to 2006
  46




---



##### Table of Contents



Research and development expenses
 2008 compared to 2007
   2007 compared to 2006
  In-process research and development
  Amortization of other intangible assets
  Impairment of other intangible assets
  Operating income
  Interest income, interest expenses, foreign currency exchange gain, net, and other income, net
 2008 compared to 2007
  2007 compared to 2006
  Gain on remeasurement of embedded derivatives
  47




---



##### Table of Contents



Loss on extinguishment of convertible debts
  Gain on disposal of subsidiaries
  Income tax expense
  Minority interests
 2008 compared to 2007
  2007 compared to 2006
  Extraordinary items: Gains on acquisitions of additional equity interests in CECT, net of nil tax
  Net income
  Inflation
  B. Liquidity and Capital Resources
 Liquidity
    48




---



##### Table of Contents



(Old Basis)
    
    
    (New Basis)
    
    
    (Combined)(1)
    
    
    (New Basis)January 1,
    
    
    November2006 to
    
    
    30, 2006 to
    
    
    Year endedDecember
    
    
    December
    
    
    December
    
    
    Year ended December 31,(Amounts in thousands)
    
    31, 2006
    
    
    31, 2006
    
    
    31, 2006
    
    
    2007
    
    2008(RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    (US$)Net cash provided by (used in) operating
activities
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    
    298,267
    
    
    
    
    855,524
    
    
    
    110,106
    
    
    
    16,139Net cash provided by (used in) investing
activities
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    
    (185,886
    )
    
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (8,452
    )Net cash provided by financing activities
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    
    270,328
    
    
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    21,068
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 30, 2006
and the period from November 30 to December 31, 2006. Although the presentation of the
combined cash flow data for the year ended December 31, 2006 is not in accordance with U.S.
GAAP, we believe this combination is useful to provide investors with a more complete
understanding of our results of operations data from year to year. Net cash provided by (used in) operating activities
   Net cash provided by (used in) investing activities
  Net cash provided by financing activities
  49




---



##### Table of Contents



Capital resources
  Capital expenditures
  C. Research, Development, Patents and Licenses, Etc.
  D. Trend Information
  E. Off-Balance Sheet Arrangements
   F. Tabular Disclosure of Contractual Obligations
  Due by PeriodLess than
    
    1 to
    
    3 to
    
    More thanTotal
    
    1 year
    
    3 years
    
    5 years
    
    5 years(amounts in thousands of Renminbi)Purchase obligations relating to raw materials and components
    
    
    17,034
    
    
    
    17,034
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    7,818
    
    
    
    4,362
    
    
    
    3,456
    
    
    
    
    
    
    
    Total
    
    
    24,852
    
    
    
    21,396
    
    
    
    3,456
    
    
    
    
    
    
    
    
 G. Safe Harbor
  50




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##### Table of Contents



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Name
    
    Age
    
    Position/TitleZhi Yang Wu
    
    
    35
    
    
    Chairman and DirectorRui Lin Wu
    
    
    56
    
    
    Vice Chairman and DirectorZacky Sun
    
    
    46
    
    
    Independent DirectorXin Zhang
    
    
    44
    
    
    Independent DirectorPei De Lou
    
    
    47
    
    
    Independent DirectorDavid Li
    
    
    39
    
    
    Chief Executive OfficerKok Seong Tan
    
    
    37
    
    
    Chief Financial Officer and Principal Accounting Officer
 Directors
      Executive officers
  51




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##### Table of Contents



B. Compensation
 Cash Compensation of Directors and Executive Officers
  Equity Incentive Plan
  Administration
  Options
   Change of control
  Amendment and termination of plan and awards
    52




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##### Table of Contents



Ordinary shares
    
    Exerciseunderlying
    
    priceName
    
    options granted
    
    ($/Share)
    
    Grant date
    
    Expiration dateZhi Yang Wu
    
    
    20,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 20101,250,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013David Li
    
    
    120,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013Others(1)
    
    
    1,200,000
    
    
    
    18.00
    
    
    March 19, 2007
    
    March 18, 2011354,800
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013
 
 (1)
    
    Consists of one consultant and employees that are not our directors or executive officers. Employment Agreements
  C. Board Practices
 Board Composition
   
    
    the establishment of a compensation committee composed entirely of independent directors;
and
    
    the establishment of a nomination committee composed entirely of independent directors.
 Board Committees
  Audit committee
  
    
    the appointment, re-appointment, evaluation, compensation, oversight and termination of the
work of our independent auditor (including resolution of disagreements between management and
the independent auditor regarding financial reporting);
    
    ensuring that it receives from our independent auditor a formal written statement attesting
to the auditors independence and describing all relationships between the independent auditor
and us;
    
    pre-approving any audit and non-audit services, including tax services, to be provided by
our independent auditor in accordance with NYSE rules;
    
    reviewing and discussing our annual audited financial statements and quarterly financial
statements with management and our independent auditor;
 53




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##### Table of Contents




    
    reviewing and discussing with our independent auditor all critical accounting policies and
practices to be used by us in preparing our financial statements, all alternative treatments
of financial information within U.S. GAAP, and other material communications between our
independent auditor and management;
    
    reviewing and discussing our policies with respect to risk assessment and risk management;
    
    reviewing and discussing, with management and counsel, any legal matters that may have a
material impact on us and any material reports or inquiries from regulatory or governmental
agencies;
    
    establishing procedures for the receipt, retention and treatment of complaints regarding
accounting, internal accounting controls, auditing matters or potential violations of law, and
the confidential, anonymous submission by our employees of concerns regarding questionable
accounting or auditing matters or potential violations of law;
    
    annually reviewing the independent auditors report describing the auditing firms internal
quality control procedures, any material issues raised by the most recent internal quality
control review, or peer review of the independent auditors and all relationships between the
independent auditors and us;
    
    setting hiring policies for employees or former employees of the independent auditors;
    
    reviewing reports prepared by management or the independent auditors relating to
significant financial reporting issues and judgments;
    
    reviewing major issues as to the adequacy of our internal controls and any special audit
steps adopted in light of material control deficiencies;
    
    annually reviewing and reassessing the adequacy of our audit committee charter;
    
    meeting separately and periodically with management, the internal auditors and the
independent auditors and reporting regularly to the full board of directors; and
    
    reviewing and approving policies and procedures with respect to proposed transactions
between us and our related parties, and approving in advance all proposed related-party
transactions as defined in Item 404 of Regulation S-K promulgated by the SEC.
 Nominating and corporate governance committee
   
    
    identifying and recommending to the board nominees for election or re-election to the
board, or for appointment to fill any vacancy;
    
    reviewing annually with the board the current composition of the board in light of the
characteristics of independence, age, skills, experience and availability of service to us;
    
    reviewing the continued board membership of a director upon a significant change in such
directors principal occupation;
    
    identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the nominating and corporate
governance committee itself;
    
    advising the board periodically with respect to significant developments in the law and
practice of corporate governance as well as our compliance with applicable laws and
regulations, and making recommendations to the board on all matters of corporate governance
and on any corrective action to be taken;
    
    establishing criteria and processes for, and leading the board and each committee of the
board in, its annual performance self-evaluation;
    
    monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance; and
    
    ensuring that the composition of the board facilitates our ability to maintain our status
as a foreign private issuer.
 54




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##### Table of Contents



Compensation committee
   
    
    approving and overseeing the total compensation package for our executives;
    
    reviewing and making recommendations to the board with respect to the compensation of our
directors and officers;
    
    reviewing and approving corporate goals and objectives relevant to the compensation of our
chief executive officer, evaluating the performance of our chief executive officer in light of
those goals and objectives, and setting the compensation, including any bonus compensation, of
our chief executive officer based on this evaluation;
    
    reviewing the results of, and procedures for, the evaluation of the performance of other
executive officers, including any bonus compensation;
    
    reviewing periodically and making recommendations to the board regarding any long-term
incentive compensation or equity plans, programs or similar arrangements, administering these
plans and reviewing and determining share-based compensation for our directors and officers;
    
    reviewing and making recommendations to the board regarding all new employment, consulting,
retirement and severance agreements and arrangements proposed for our executives; and
    
    selecting peer groups of companies to be used for purposes of determining competitive
compensation packages.
 Duties of Directors
   
    
    convening shareholders annual general meetings and reporting its work to shareholders at
such meetings;
    
    declaring dividends and distributions;
    
    appointing officers and determining the term of office of the officers;
    
    exercising the borrowing powers of our company and mortgaging the property of our company;
and
    
    approving the transfer of shares in our company, including the registering of such shares
in our share register.
 Interested Transactions
  Remuneration and Borrowing
  55




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##### Table of Contents



Qualification
  Terms of Directors and Executive Officers
  Limitation on Liability and Indemnification Matters
   D. Employees
  E. Share Ownership
  
    
    each of our current directors and executive officers; and
    
    each person known to us to own beneficially more than 5.0% of our shares.
 Shares beneficially owned(1)(2)(3)Number
    
    PercentageDirectors and executive officers:Zhi Yang Wu(4)
    
    
    32,720,000
    
    
    
    68.0
    %Rui Lin Wu(5)
    
    
    32,200,000
    
    
    
    67.6
    %David Li(6)
    
    
    48,000
    
    
    
    *All Directors and Executive Officers as a Group
    
    
    32,768,000
    
    
    
    68.0
    %Principal shareholder:Qiao Xing Universal Telephone, Inc.(7)
    
    
    32,200,000
    
    
    
    67.6
    %
 
 *
    
    Less than 1%.(1)
    
    Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to the ordinary shares.(2)
    
    The percentage of beneficial ownership of each listed person is based on 47,609,731 ordinary
shares outstanding as of April 30, 2009 and any ordinary shares underlying share options
exercisable by
such person within 60 days of the date of this annual report but excludes ordinary shares
underlying options held by any other person.(3)
    
    As of April 30, 2009, the outstanding amount of the Notes was approximately $61.7 million.
Given that the conversion price of the Notes was reset to US$4.05 per share on November 15,
2008, the outstanding Notes could be converted into approximately 15,246,556 ordinary shares
of our company. The holders of the Notes also held 1,648,721 warrants to purchase our ordinary
shares as of April 30, 2009. As a result, immediately after giving effect to the conversion of
the Notes into our ordinary shares and the exercise of the right to purchase our ordinary
shares under the warrants, the holders of the Notes and warrants would beneficially own
approximately 26.2% of our ordinary shares. However, the SPA provides that neither the Notes
nor the warrants could be converted or exercised, if, after giving effect to such conversion
or exercise, the holders of the Notes (together with their affiliates) would beneficially own
in excess of 9.99% of our ordinary shares outstanding immediately after giving effect to such
conversion or exercise. The notes and warrants were held by DKR SoundShore Oasis Holding Fund
Ltd., CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. as of April 30, 2009. The registered
address of DKR SoundShore Oasis Holding Fund Ltd. and Chestnut Fund Ltd. is c/o Codan Trust
Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman,
KY1-1111, Cayman Islands. The registered address of CEDAR DKR Holding Fund Ltd. is c/o Walkers
SPV Limited, PO Box 908GT, Walker House, Mary 56




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##### Table of Contents



Street, George Town, Grand Cayman, Cayman
Islands. DKR Oasis Management Company L.P., with its principal address at 1281 East Main
Street, 3rd Floor, Stamford, CT 06902-3565, United States, acts as the discretionary
investment manager of DKR SoundShore Oasis Holding Fund Ltd., CEDAR DKR Holding Fund Ltd. and
Chestnut Fund Ltd., and is responsible for directing the formulation of the investment program
of the three funds, and has the authority to do any and all acts on behalf of the three funds
with respect to the investment program, maintenance and administration of the three funds,
including voting any shares held by them. Oasis Management Holdings LLC, for which Mr. Seth
Fischer is a managing member, is the non-managing general partner of DKR Oasis Management
Company L.P. On March 31, 2009, Xing and Mr. Ru Lin Wu, the chairman of Xing and vice chairman
of our company, entered into agreements to purchase our outstanding Notes of approximately
US$61.7 million from the three holders of the Notes, DKR SoundShore Oasis Holding Fund Ltd.,
CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. (collectively, the Sellers). Under the
terms of the agreements, Xing agreed to purchase US$30.0 million of the outstanding Notes for
an aggregate purchase price of US$24.0 million, payable in three installments to the Sellers
on or before the close of business, New York time, on May 1, 2009. Mr. Ru Lin Wu agreed to
purchase the remaining Notes for an aggregate purchase price of US$26.0 million, payable in
full to the Sellers on or before the close of business, New York time, on August 31, 2009.(4)
    
    Includes 520,000 ordinary shares issuable upon exercise of options held by Mr. Zhi Yang Wu
and 32,200,000 ordinary shares held by Xing. Mr. Zhi Yang Wu is the vice chairman of Xing.
Excluding equity interest owned by his brother, Mr. Zhi Jian Wu Li, and his father, Mr. Rui
Ling Wu, he does not own any equity interest in Xing. Mr. Zhi Yang Wu disclaims ownership of
the ordinary shares held by Xing except to the extent of his pecuniary interest therein.(5)
    
    Includes 32,200,000 ordinary shares held by Xing. Mr. Rui Lin Wu is the chairman and chief
executive officer of Xing. Mr. Zhi Jian Wu Li, brother of our chairman and son of our vice
chairman, owned an aggregate of 9.3% equity interest in Xing through Qiao Xing Trust and Wu
Holdings Ltd. as of April 30, 2009. Mr. Ru Lin Wu also owned 43.7% equity interest in Xing as
of April 30, 2009. Mr. Rui Lin Wu disclaims ownership of the ordinary shares held by Xing
except to the extent of his pecuniary interest therein.(6)
    
    Includes 48,000 ordinary shares issuable upon exercise of options held by Dr. David Li.(7)
    
    Xing is a British Virgin Islands company currently listed on the Nasdaq Global Market. Mr.
Zhi Jian Wu Li, brother of our chairman and son of our vice chairman, owned an aggregate of
9.3% equity interest in Xing through Qiao Xing Trust and Wu Holdings Ltd. as of April 30,
2009. Mr. Ru Lin Wu also owned a 43.7% equity interest in Xing as of April 30, 2009. The
address of Xing is Qiao Xing Science Technological & Industrial Zone, Tangquan, Huizhou,
Guangdong, 516023, Peoples Republic of China.   
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  B. Related Party Transactions
 Equity Incentive Plan
  Sales of Mobile Handsets and Accessories
  Service Transactions
  Cash Advances To and From Related Parties
   57




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##### Table of Contents



Arrangements in Connection with the Senior Convertible Notes Issued by Xing
  Guarantees and Pledges
  Non-Competition Arrangement
  Transfer of Trademark Application Rights
  58




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##### Table of Contents



C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
   B. Significant Changes
  
 ITEM 9. THE OFFER AND LISTING
 A. Offering and Listing Details
  Trading priceHigh
    
    Low($)
    
    ($)Annual highs and lows:Year ended December 31, 2007 (from May 3, 2007)
    
    
    15.48
    
    
    
    6.76Year ended December 31, 2008
    
    
    8.89
    
    
    
    1.56Quarterly highs and lows:Second quarter 2007 (from May 3, 2007)
    
    
    12.45
    
    
    
    8.53Third quarter 2007
    
    
    10.75
    
    
    
    6.92Fourth quarter 2007
    
    
    15.48
    
    
    
    6.76First quarter 2008
    
    
    8.89
    
    
    
    5.50Second quarter 2008
    
    
    7.88
    
    
    
    4.78Third quarter 2008
    
    
    6.47
    
    
    
    2.79Fourth quarter 2008
    
    
    3.40
    
    
    
    1.56First quarter 2009
    
    
    2.95
    
    
    
    1.32Monthly highs and lows:December 2008
    
    
    3.18
    
    
    
    2.15January 2009
    
    
    2.95
    
    
    
    1.84February 2009
    
    
    2.70
    
    
    
    1.70March 2009
    
    
    2.40
    
    
    
    1.32April 2009
    
    
    2.82
    
    
    
    2.00
 59




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##### Table of Contents



Trading priceHigh
    
    Low($)
    
    ($)May 2009
    
    
    4.06
    
    
    
    2.76June 2009 (through June 12, 2009)
    
    
    4.33
    
    
    
    3.25
 B. Plan of Distribution
  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
  C. Material Contracts
  D. Exchange Controls
   E. Taxation
 British Virgin Islands Taxation
   U.S. Federal Income Taxation
  60




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##### Table of Contents




    
    banks;
    
    certain financial institutions;
    
    insurance companies;
    
    broker dealers;
    
    U.S. expatriates;
    
    traders that elect to mark-to-market;
    
    tax-exempt entities;
    
    persons that have a functional currency other than the U.S. dollar;
    
    persons liable for alternative minimum tax;
    
    persons holding an ordinary share as part of a straddle, hedging, conversion or integrated
transaction; or
    
    persons that actually or constructively own 10% or more of our voting stock.
 PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S.
FEDERAL INCOME TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES.
  
    
    an individual citizen or resident of the United States;
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) organized under the laws of the United States, any state thereof or the District of
Columbia;
    
    an estate whose income is subject to U.S. federal income taxation regardless of its source;
or
    
    a trust that (1) is subject to the primary supervision of a court within the United States
and one or more U.S. persons have the authority to control all substantial decisions of the
trust or (2) was in existence on August 20, 1996, was treated as a U.S. person under the
Internal Revenue Code on the previous day and has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
  Taxation of dividends and other distributions on the ordinary shares
    61




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##### Table of Contents



Taxation of disposition of ordinary shares
   Passive foreign investment company
 .
  
    
    at least 75% of its gross income is passive income, or
    
    at least 50% of the average quarterly value of its assets during a taxable year is derived
from assets that produce, or that are held for the production of, passive income.
    
    
    the excess distribution or gain will be allocated ratably on a daily basis over your
holding period for the ordinary shares,
    
    the amount allocated to the current taxable year, and any taxable year prior to the first
taxable year in which we became a PFIC, will be treated as ordinary income, and
    
    the amount allocated to each other year will be subject to the highest tax rate in effect
for that year and the interest charge applicable to underpayments of tax will be imposed on
the resulting tax attributable to each such year.
  62




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Information reporting and backup withholding
   F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
    I. Subsidiary Information
  63




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##### Table of Contents



ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
     Interest Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  64




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##### Table of Contents



PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15T . CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Managements Report on Internal Control over Financial Reporting
    Changes in Internal Control over Financial Reporting
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Year ended December 31,(Amounts in thousands)
    
    2007
    
    2008(1)(RMB)
    
    (RMB)
    
    ($)Audit fees
    
    
    8,034
    
    
    
    1,354
    
    
    
    198Audit-related fees
    
    
    
    
    
    
    
    
    
    
    
 65




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##### Table of Contents



(1)
    
    The audit fees billed by KPMG, our prior independent registered public accounting firm, in
connection with the re-issuance of their audit report on our financial statements for the
period from January 1, 2006 through November 30, 2006, the period from November 30, 2006 to
December 31, 2006 and the year ended December 31, 2007 was $48,000. The audit fees billed by
Crowe Horwath LLP, our independent registered public accounting firm, in connection with the
audit of our financial statements for the year ended December 31, 2008 was $150,000.  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   
 ITEM 16F. CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
      
 ITEM 16G. CORPORATE GOVERNANCE
  
    
    As a controlled company as defined under Section 303A of the NYSE Listed Company Manual,
we are exempt from certain corporate governance requirements. Relying on this exemption, Mr.
Zhi Yang Wu, who does not satisfy the independence requirements of Section 303A of the NYSE
Listed Company Manual, serves as a member of our nominating and corporate governance committee
and compensation committee;
    
    We do not have formal corporate governance guidelines similar to those required for U.S.
domestic companies; and
    
    Our non-management directors do not schedule regular executive sessions similar to those
followed by U.S. domestic companies.
 66




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNumber
    
    Description1.1
    
    Amended and Restated Memorandum of Association(1)1.2
    
    Second Amended and Restated Memorandum and Articles of Association of the Registrant(1)4.1
    
    Equity Incentive Plan(1)4.2
    
    Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant(1)4.3
    
    Software License Agreement, dated October 8, 2005(1), which was renewed on March 10, 2008(2)4.4
    
    Non-Competition Agreement(1)4.5
    
    Technology Licenses Agreement, dated June 13, 2007(2)4.6
    
    Securities Purchase Agreement, dated May 15, 2008(3)4.7
    
    Registration Rights Agreement, dated May 15, 2008(3)8.1
    
    Subsidiaries of the Registrant12.1
    
    Certification of Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 200212.2
    
    Certification of Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 200213.1
    
    Certification of Chief Executive Officer and Chief Financial Officer required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200215.1
    
    Consent of Crowe Horwath LLP, dated June 30, 200915.2
    
    Consent of KPMG, dated
June 30, 2009
 
 (1)
    
    Incorporated by reference from the Registrants F-1 registration statement (File No.
333-142162), as amended, first filed with the SEC on April 17, 2007.(2)
    
    Incorporated by reference from the Registrants annual report on Form 20-F for the year ended
December 31, 2007 (File Na 1-33430) filed with the SEC on June 26, 2008.(3)
    
    Incorporated by reference from the Registrants 6-K furnished on May 19, 2008. 67




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SIGNATURE
  QIAO XING MOBILE COMMUNICATION CO., LTD.Date: June 30, 2009
    By:
    /s/ Zhi Yang WuName:
    Zhi Yang WuTitle:
    Chairman 68




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##### 



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
 PageReport of Independent Registered Public Accounting Firm  Crowe Horwath LLP
    
    
    F-2Report of Independent Registered Public Accounting Firm  KPMG
    
    
    F-3Consolidated Balance Sheets as of December 31, 2007 and 2008
    
    
    F-4Consolidated Statements of Operations for the Period from January 1, 2006
to November 30, 2006, the Period from November 30, 2006 to December 31,
2006 and the Years Ended December 31, 2007 and 2008
    
    
    F-5Consolidated Statements of Cash Flows for the Period from January 1, 2006
to November 30, 2006, the Period from November 30, 2006 to December 31,
2006 and the Years Ended December 31, 2007 and 2008
    
    
    F-6Consolidated Statements of Shareholders Equity and Comprehensive Income
for the Period from January 1, 2006 to November 30, 2006, the Period from
November 30, 2006 to December 31, 2006 and the Years Ended December 31,
2007 and 2008
    
    
    F-8Notes to the Consolidated Financial Statements for the Period from January
1, 2006 to November 30, 2006, the Period from November 30, 2006 to December
31, 2006 and the Years Ended December 31, 2007 and 2008
    
    
    F-9
  F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-3




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (amounts in thousands, except share and per share data
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$AssetsCurrent assets:Cash
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    426,112Restricted cash
    
    
    94,384
    
    
    
    136,299
    
    
    
    19,978Accounts receivable, net
    
    
    418,564
    
    
    
    462,282
    
    
    
    67,758Bills receivable
    
    
    
    
    
    
    43,516
    
    
    
    6,378Inventories
    
    
    177,279
    
    
    
    183,169
    
    
    
    26,848Prepayments to suppliers
    
    
    155,993
    
    
    
    363,907
    
    
    
    53,339Prepaid expenses and other current assets
    
    
    19,295
    
    
    
    38,996
    
    
    
    5,716Deferred income taxes
    
    
    5,685
    
    
    
    6,994
    
    
    
    1,025Deferred debt issuance costs, net
    
    
    
    
    
    
    34,689
    
    
    
    5,084Total current assets
    
    
    3,601,182
    
    
    
    4,177,000
    
    
    
    612,238Property, machinery and equipment, net
    
    
    175,469
    
    
    
    167,233
    
    
    
    24,512Land use rights
    
    
    36,106
    
    
    
    35,304
    
    
    
    5,175Equity investment, at cost
    
    
    7,803
    
    
    
    7,803
    
    
    
    1,144Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    16,536Other intangible assets, net
    
    
    60,728
    
    
    
    22,766
    
    
    
    3,337Total assets
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    662,942Liabilities, minority interests and shareholders equityCurrent liabilities:Short-term borrowings
    
    
    983,904
    
    
    
    983,950
    
    
    
    144,221Accounts payable
    
    
    107,990
    
    
    
    52,047
    
    
    
    7,629Prepayments from customers
    
    
    4,585
    
    
    
    42,551
    
    
    
    6,237Accrued liabilities
    
    
    41,401
    
    
    
    50,014
    
    
    
    7,331Amounts due to related parties
    
    
    4,532
    
    
    
    11,155
    
    
    
    1,635Other payables and current liabilities
    
    
    58,630
    
    
    
    7,227
    
    
    
    1,059Income taxes payable
    
    
    38,722
    
    
    
    38,462
    
    
    
    5,638Embedded derivative liability
    
    
    
    
    
    
    124,130
    
    
    
    18,194Convertible notes
    
    
    
    
    
    
    206,211
    
    
    
    30,225Total current liabilities
    
    
    1,239,764
    
    
    
    1,515,747
    
    
    
    222,169Deferred income taxes
    
    
    5,561
    
    
    
    320
    
    
    
    47Total liabilities
    
    
    1,245,325
    
    
    
    1,516,067
    
    
    
    222,216Minority interests
    
    
    78,235
    
    
    
    92,065
    
    
    
    13,494Shareholders equity:Ordinary shares:Par value: nilAuthorized: UnlimitedIssued and outstanding: 47,609,731 (2007: 52,500,000) shares
    
    
    1,316,726
    
    
    
    1,064,421
    
    
    
    156,016Additional paid-in capital
    
    
    802,892
    
    
    
    883,410
    
    
    
    129,485Retained earnings
    
    
    574,004
    
    
    
    997,808
    
    
    
    146,253Accumulated other comprehensive loss
    
    
    (23,080
    )
    
    
    (30,851
    )
    
    
    (4,522
    )Total shareholders equity
    
    
    2,670,542
    
    
    
    2,914,788
    
    
    
    427,232Commitments and contingenciesTotal liabilities, minority interests
and shareholders equity
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    662,942
  F-4




---



##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (amounts in thousands, except share and per share data)
 Old Basis(Note 2(a))
    
    
    New Basis (Note 2(a))January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Revenues:External parties
    
    
    2,277,112
    
    
    
    
    255,154
    
    
    
    3,127,780
    
    
    
    2,147,300
    
    
    
    314,738Related parties
    
    
    4,086
    
    
    
    
    859
    
    
    
    13,314
    
    
    
    6,573
    
    
    
    963Total revenues
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    315,701Cost of goods sold
    
    
    (1,843,327
    )
    
    
    
    (218,882
    )
    
    
    (2,255,844
    )
    
    
    (1,287,096
    )
    
    
    (188,654
    )Gross profit
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    866,777
    
    
    
    127,047Operating expenses:Selling and distribution
    
    
    (12,054
    )
    
    
    
    (2,707
    )
    
    
    (36,322
    )
    
    
    (146,551
    )
    
    
    (21,481
    )General and administrative
    
    
    (19,879
    )
    
    
    
    (1,170
    )
    
    
    (69,032
    )
    
    
    (44,231
    )
    
    
    (6,483
    )Research and development
    
    
    (15,131
    )
    
    
    
    (1,161
    )
    
    
    (18,599
    )
    
    
    (29,242
    )
    
    
    (4,286
    )In-process research and development
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (1,719
    )Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (3,845
    )Operating income (loss)
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    608,791
    
    
    
    89,233Other income (expense):Interest income
    
    
    5,320
    
    
    
    
    631
    
    
    
    16,373
    
    
    
    24,405
    
    
    
    3,577Interest expense
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (165,506
    )
    
    
    (24,259
    )Foreign currency exchange gain (loss), net
    
    
    9,628
    
    
    
    
    1,502
    
    
    
    12,022
    
    
    
    (5,142
    )
    
    
    (754
    )Gain on remeasurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,939
    
    
    
    21,244Loss on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,634
    )
    
    
    (1,559
    )Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,269
    
    
    
    333Other income (loss), net
    
    
    3,857
    
    
    
    
    579
    
    
    
    873
    
    
    
    (3,700
    )
    
    
    (541
    )Earnings (loss) before income tax
expense, minority interests, and
extraordinary items
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    595,422
    
    
    
    87,274Income tax expense
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (155,717
    )
    
    
    (22,824
    )Earnings (loss) before minority
interests, and extraordinary items
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    597,874
    
    
    
    439,705
    
    
    
    64,450Minority interests
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (15,901
    )
    
    
    (2,331
    )Earnings (loss) before extraordinary items
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    423,804
    
    
    
    62,119Extraordinary items:Gains on acquisitions of additional
equity interests in CECT, net of nil tax
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    Net income (loss)
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    423,804
    
    
    
    62,119Basic earnings (loss) per share:Earnings (loss) before extraordinary items
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    7.52
    
    
    
    1.10Extraordinary gains
    
    
    0.44
    
    
    
    
    
    
    
    
    0.59
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    7.52
    
    
    
    1.10Diluted earnings (loss) per share:Earnings (loss) before extraordinary items
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    6.99
    
    
    
    1.02Extraordinary gains
    
    
    0.44
    
    
    
    
    
    
    
    
    0.59
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    6.99
    
    
    
    1.02
  F-5




---



##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (amounts in thousands)
 Old Basis(Note 2(a))
    
    
    New Basis (Note 2(a))January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    423,804
    
    
    
    62,119Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:Depreciation
    
    
    5,271
    
    
    
    
    499
    
    
    
    10,754
    
    
    
    11,957
    
    
    
    1,753Amortization of land use rights
    
    
    
    
    
    
    
    69
    
    
    
    817
    
    
    
    802
    
    
    
    117In-process research and development
    
    
    
    
    
    
    
    41,739
    
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    10,890
    
    
    
    
    4,288
    
    
    
    32,280
    
    
    
    11,727
    
    
    
    1,719Impairment of other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,235
    
    
    
    3,845Bad debt expense (recovery), net
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    3,384
    
    
    
    682
    
    
    
    100Inventory write-downs
    
    
    3,152
    
    
    
    
    46
    
    
    
    11,068
    
    
    
    6,650
    
    
    
    975Foreign currency exchange gain (loss), net
    
    
    (9,833
    )
    
    
    
    (1,498
    )
    
    
    (12,290
    )
    
    
    5,142
    
    
    
    754(Gain) loss on disposal of property,
machinery and equipment
    
    
    8
    
    
    
    
    
    
    
    
    57
    
    
    
    (15
    )
    
    
    (2
    )Accretion of discount on convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,512
    
    
    
    10,335Amortization of deferred debt issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,851
    
    
    
    1,590Gain on remeasurement of embedded derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,939
    )
    
    
    (21,244
    )Loss on extinguishment of convertible debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,634
    
    
    
    1,559Accrued interest settled through the
issuance of ordinary shares on the
conversion of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    316
    
    
    
    46Gain on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,269
    )
    
    
    (333
    )Minority interests
    
    
    27,260
    
    
    
    
    1,799
    
    
    
    33,074
    
    
    
    15,901
    
    
    
    2,331Deferred income taxes
    
    
    260
    
    
    
    
    (467
    )
    
    
    (6,237
    )
    
    
    (6,550
    )
    
    
    (960
    )Share-based compensation
    
    
    3,522
    
    
    
    
    
    
    
    
    38,626
    
    
    
    14,668
    
    
    
    2,150Extraordinary gains on acquisitions of
additional equity interests in CECT,
net of nil tax
    
    
    (17,796
    )
    
    
    
    
    
    
    
    (28,689
    )
    
    
    
    
    
    
    Changes in operating assets and
liabilities, net of effects of push-down
accounting adjustments in 2006Accounts receivable
    
    
    106,019
    
    
    
    
    (139,282
    )
    
    
    124,945
    
    
    
    (53,844
    )
    
    
    (7,892
    )Bills receivable
    
    
    179,098
    
    
    
    
    14,425
    
    
    
    27,635
    
    
    
    (43,516
    )
    
    
    (6,378
    )Inventories
    
    
    106,883
    
    
    
    
    (102,105
    )
    
    
    (24,012
    )
    
    
    (15,527
    )
    
    
    (2,276
    )Prepayments to suppliers
    
    
    (24,302
    )
    
    
    
    552
    
    
    
    71,909
    
    
    
    (195,018
    )
    
    
    (28,585
    )Prepaid expenses and other current assets
    
    
    6,586
    
    
    
    
    2,956
    
    
    
    18,898
    
    
    
    (13,684
    )
    
    
    (2,006
    )Accounts payable
    
    
    (135,197
    )
    
    
    
    (12,283
    )
    
    
    (57,336
    )
    
    
    (50,844
    )
    
    
    (7,452
    )Prepayments from customers
    
    
    (24,898
    )
    
    
    
    (3,146
    )
    
    
    (10,804
    )
    
    
    37,966
    
    
    
    5,565Accrued liabilities
    
    
    12,112
    
    
    
    
    (6,565
    )
    
    
    6,041
    
    
    
    9,213
    
    
    
    1,350Other payables and current liabilities
    
    
    (33,564
    )
    
    
    
    (1,370
    )
    
    
    6,136
    
    
    
    (20,488
    )
    
    
    (3,003
    )Income taxes payable
    
    
    (7,651
    )
    
    
    
    4,718
    
    
    
    15,779
    
    
    
    (260
    )
    
    
    (38
    )Net cash provided by (used in)
operating activities
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    110,106
    
    
    
    16,139
 F-6




---



##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(amounts in thousands)
 Old Basis(Note 2(a))
    
    
    New Basis (Note 2(a))January 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Cash flows from investing activities:Purchase of property, machinery and equipment
    
    
    (161,467
    )
    
    
    
    (2
    )
    
    
    (1,944
    )
    
    
    (14,895
    )
    
    
    (2,183
    )Purchase of land use rights
    
    
    (39,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deposit for purchase of property, machinery and
equipment
    
    
    (133,085
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Refund of deposit for purchase of property,
machinery and equipment
    
    
    66,542
    
    
    
    
    66,543
    
    
    
    
    
    
    
    
    
    
    
    Restricted cash related to new bank borrowings
    
    
    (67,999
    )
    
    
    
    (8,864
    )
    
    
    (222,870
    )
    
    
    (108,858
    )
    
    
    (15,956
    )Release of restricted cash upon repayment of
bank borrowings
    
    
    78,255
    
    
    
    
    5,754
    
    
    
    247,788
    
    
    
    66,943
    
    
    
    9,812Collection of amounts due from China
Electronics Financial Co. Ltd.
    
    
    7,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash outflow on disposal of subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,162
    )
    
    
    (170
    )Proceeds from disposal of property, machinery
and equipment
    
    
    411
    
    
    
    
    
    
    
    
    42
    
    
    
    309
    
    
    
    45Net cash provided by (used in)investing
activities
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    (57,663
    )
    
    
    (8,452
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    1,026,611
    
    
    
    
    
    
    
    Net proceeds from issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,887
    
    
    
    18,891Capital contributed by a minority shareholder
of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    2,100
    
    
    
    
    
    
    
    Proceeds received from exercise of share options
    
    
    
    
    
    
    
    
    
    
    
    30,911
    
    
    
    
    
    
    
    Proceeds from short-term borrowings
    
    
    1,089,219
    
    
    
    
    23,883
    
    
    
    1,496,963
    
    
    
    1,650,123
    
    
    
    241,865Repayments of short-term borrowings
    
    
    (1,116,271
    )
    
    
    
    (31,100
    )
    
    
    (1,108,831
    )
    
    
    (1,643,314
    )
    
    
    (240,867
    )Proceeds from borrowings from Xing or from
related parties on behalf of Xing
    
    
    593,578
    
    
    
    
    242,814
    
    
    
    396,998
    
    
    
    57,681
    
    
    
    8,455Repayments of borrowings from Xing or from
related parties on behalf of Xing
    
    
    (496,865
    )
    
    
    
    (34,930
    )
    
    
    (727,425
    )
    
    
    (49,639
    )
    
    
    (7,276
    )Net cash provided by financing activities
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    143,738
    
    
    
    21,068Effect of foreign exchange rate changes
    
    
    
    
    
    
    
    
    
    
    
    (27,971
    )
    
    
    (19,015
    )
    
    
    (2,787
    )Net increase in cash
    
    
    333,722
    
    
    
    
    48,987
    
    
    
    1,967,896
    
    
    
    177,166
    
    
    
    25,968Cash, beginning of year/period
    
    
    379,377
    
    
    
    
    713,099
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    400,144Cash, end of year/period
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    2,907,148
    
    
    
    426,112Supplemental disclosure of cash flow
information:Interest paid
    
    
    24,394
    
    
    
    
    3,555
    
    
    
    45,576
    
    
    
    77,622
    
    
    
    11,377Income tax paid
    
    
    63,382
    
    
    
    
    
    
    
    
    103,835
    
    
    
    162,527
    
    
    
    23,822Share issuance costs in the form of share-based
payment
    
    
    
    
    
    
    
    
    
    
    
    12,859
    
    
    
    
    
    
    
    Warrant issuance costs in the form of
share-based payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    366Convertible note issuance costs in the form of
share-based payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,451
    
    
    
    4,610Ordinary shares repurchased through the
issuance of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338,165
    
    
    
    49,566Ordinary shares issued on partial conversion of
convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,054
    
    
    
    8,070
   F-7




---



##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
 (amounts in thousands, except share data)
 Retained
    
    AccumulatedOrdinary shares
    
    Additional
    
    earnings
    
    other
    
    
    
    
    
    TotalNumber
    
    
    
    
    
    paid-in
    
    (accumulated
    
    comprehensive
    
    
    
    
    
    comprehensiveof shares
    
    Amount
    
    capital
    
    deficit)
    
    loss
    
    Total
    
    incomeRMB
    
    RMB
    
    RMB
    
    RMB
    
    RMB
    
    RMBOld Basis (Note 2(a))Balance as of January 1, 2006
    
    
    40,000,000
    
    
    
    83
    
    
    
    308,283
    
    
    
    261,597
    
    
    
    
    
    
    
    569,963Net income for the period from January 1
to November 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,152
    
    
    
    
    
    
    
    306,152
    
    
    
    306,152Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306,152Share-based compensation
    
    
    
    
    
    
    
    
    
    
    3,522
    
    
    
    
    
    
    
    
    
    
    
    3,522Balance as of November 30, 2006
    
    
    40,000,000
    
    
    
    83
    
    
    
    311,805
    
    
    
    567,749
    
    
    
    
    
    
    
    879,637New Basis (Note 2(a))New Basis accounting adjustments (Note 3)
    
    
    
    
    
    
    
    
    
    
    747,885
    
    
    
    (567,749
    )
    
    
    
    
    
    
    180,136Net loss for the period from November 30
to December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,485
    )
    
    
    
    
    
    
    (19,485
    )
    
    
    (19,485
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,485
    )Balance as of December 31, 2006
    
    
    40,000,000
    
    
    
    83
    
    
    
    1,059,690
    
    
    
    (19,485
    )
    
    
    
    
    
    
    1,040,288Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    593,489
    
    
    
    
    
    
    
    593,489
    
    
    
    593,489Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,080
    )
    
    
    (23,080
    )
    
    
    (23,080
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570,409Transfer of additional paid-in capital to share capital
    
    
    
    
    
    
    308,283
    
    
    
    (308,283
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of ordinary shares
    
    
    12,500,000
    
    
    
    1,021,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,021,219Share-based compensation: options granted to a director and employees
    
    
    
    
    
    
    
    
    
    
    38,626
    
    
    
    
    
    
    
    
    
    
    
    38,626 options granted to a consultant as ordinary share issuance cost
    
    
    
    
    
    
    (12,859
    )
    
    
    12,859
    
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2007
    
    
    52,500,000
    
    
    
    1,316,726
    
    
    
    802,892
    
    
    
    574,004
    
    
    
    (23,080
    )
    
    
    2,670,542Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423,804
    
    
    
    
    
    
    
    423,804
    
    
    
    423,804Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,771
    )
    
    
    (7,771
    )
    
    
    (7,771
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416,033Issuance of ordinary shares
    
    
    2,076,397
    
    
    
    85,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,860Cancellation of ordinary shares
    
    
    (6,966,666
    )
    
    
    (338,165
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (338,165
    )Issuance of stock purchase warrants to convertible note
investors and external consultants
    
    
    
    
    
    
    
    
    
    
    70,012
    
    
    
    
    
    
    
    
    
    
    
    70,012Warrant issuance costs
    
    
    
    
    
    
    
    
    
    
    (4,162
    )
    
    
    
    
    
    
    
    
    
    
    (4,162
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    14,668
    
    
    
    
    
    
    
    
    
    
    
    14,668Balance as of December 31, 2008
    
    
    47,609,731
    
    
    
    1,064,421
    
    
    
    883,410
    
    
    
    997,808
    
    
    
    (30,851
    )
    
    
    2,914,788US$
    
    
    
    
    
    
    156,016
    
    
    
    129,485
    
    
    
    146,253
    
    
    
    (4,522
    )
    
    
    427,232
  F-8




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
 1
    
    Principal activities, organization and significant concentrations and risks
 (a)
    
    Principal activitiesQiao Xing Mobile Communication Co., Ltd. (the Company) and its subsidiaries (collectively,
the Group) are principally engaged in the production and sale of mobile phones and
accessories in the Peoples Republic of China (the PRC).
 (b)
    
    OrganizationThe Company was incorporated in the British Virgin Islands (the BVI) on January 31, 2002.
The Company listed its ordinary shares on the New York Stock Exchange (the NYSE) under the
symbol QXM on May 3, 2007. On May 8, 2007, the Company and certain selling shareholders
completed an initial public offering (the IPO) of 13,333,334 ordinary shares. The IPO,
which was priced at US$12 per share, consisted of 12,500,000 new ordinary shares issued by
the Company and 833,334 ordinary shares offered by the selling shareholders.As of December 31, 2008, the Company was 67.6% (2007: 61.3%) owned by Qiao Xing Universal
Telephone, Inc. (Xing), a company listed on the Nasdaq National Market.Details of the Groups subsidiaries are as follows:
 Percentage of equity interestPlace of
    
    attributable to the GroupName of subsidiary
    
    Note
    
    incorporation
    
    as of December 31,2007
    
    2008CEC Telecom Co., Ltd. (CECT)
    
    
    
    
    
    PRC
    
    
    96.6
    %
    
    
    96.6
    %Beijing CECT Yitong Technology Co., Ltd (BCYT)
    
    
    (i
    )
    
    PRC
    
    
    64.4
    %
    
    
    Huizhou CEC Telecom Co., Ltd. (HCECT)
    
    (ii)
    
    PRC
    
    
    
    
    
    
    
 
 (i)
    
    The Groups interest in BCYT as of December 31, 2007 was held through CECT, which
owned a 66.7% equity interest in BCYT. The Groups interest in BCYT was disposed of
during the year ended December 31, 2008.(ii)
    
    HCECT was incorporated in January 2008 and was owned as to 100% by CECT. The
Groups interest in HCECT was disposed of subsequently during the year ended December
31, 2008. (c)
    
    Significant concentrations and risksThe Group is subject to, among others, the following significant concentrations and risks:
 Country
 As substantially all of the Groups operations are conducted in the PRC, the Group is subject
to special considerations and significant risks not typically associated with companies
operating in North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environments and foreign currency exchange. The
Groups results may be adversely affected by changes in the political and social conditions
in the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, foreign currency exchange and remittance abroad, and rates and
methods of taxation, among other things.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 1
    
    Principal activities, organization and significant concentrations and risks (continued)
 (c)
    
    Significant concentrations and risks (continued)Revenue concentrationsIndividual customers accounting for more than 10% of the Groups revenue for the period from
January 1, 2006 through November 30, 2006, the period from November 30, 2006 through December
31, 2006, and the years ended December 31, 2007 and 2008, are as follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008Beijing U-life International Technology Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    %Shenzhen Laidi Technical Co., Ltd.
    
    
    30
    %
    
    
    
    13
    %
    
    
    12
    %
    
    
    Shenzhen Siecom Communication Technology
Development Co., Ltd.
    
    
    11
    %
    
    
    
    23
    %
    
    
    12
    %
    
    
    Beijing Beidou Communication & Equipment Co.,
Ltd.
    
    
    
    
    
    
    
    
    
    
    
    12
    %
    
    
    Beijing Jinsheng Technical Co., Ltd.
    
    
    16
    %
    
    
    
    19
    %
    
    
    
    
    
    
    Beijing Jiasheng Ruitong Electronics Co., Ltd.
    
    
    15
    %
    
    
    
    
    
    
    
    
    
    
    
    12
    %Xian Ruiqiao Electronics Co., Ltd.
    
    
    
    
    
    
    
    15
    %
    
    
    
    
    
    
    Jinan Qiaoxing Telecommunication Co., Ltd.
    
    
    
    
    
    
    
    14
    %
    
    
    
    
    
    
    Wuhan Jiajiali Electronics Co., Ltd.
    
    
    
    
    
    
    
    12
    %
    
    
    
    
    
    
    Total
    
    
    72
    %
    
    
    
    96
    %
    
    
    36
    %
    
    
    65
    %
 As of December 31, 2007 and 2008, the Groups five largest accounts receivable accounted for
approximately 67% and 91%, respectively, of the Groups total accounts receivable.
 Concentrations of cash balances held at financial institutions
 As of December 31, 2007 and 2008, cash of RMB2,711,907
and RMB2,904,187 (US$425,678),
respectively, was held in uninsured accounts at major financial institutions located in the
PRC, and cash of RMB17,512 and RMB2,961 (US$434), respectively, was held in uninsured
accounts at major financial institutions located in the Hong Kong Special Administrative
Region (the HK SAR). Further, as of December 31, 2007 and 2008, the Companys cash balance
included U.S. dollar denominated bank deposits of US$44,517 and
US$5,196 (equivalent to
RMB324,737 and RMB35,450), respectively, in uninsured accounts at major institutions located
in the PRC, and US$2,323 and US$429 (equivalent to RMB16,946 and RMB2,928), respectively, in
uninsured accounts at major financial institutions located in the HK SAR. Management
believes that these major financial institutions are of high credit quality.
 Technology
 The Group is developing products which incorporate complex and evolving technologies that
require substantial expenditures and resources. These new products may fail to be accepted
at the rates or levels the Group anticipates and the Group may fail to realize the expected
benefits from its investments in these new technologies. Further, the Group may experience
greater variability in its operating results than in the past, particularly depending on the
general economic conditions and the pace of development and acceptance of new technologies.
Changes in the communication industry are expected to increase competition and change the
competitive landscape and may adversely affect the Groups operating results.
 Suppliers
 The Group purchases materials and components from various suppliers in the PRC. The Group
believes that there are a number of suppliers in the PRC with the ability to consistently
supply materials and components that meet the Groups quality standards and requirements. In
the event that a major supplier ceases to sell to the Group, the Group believes that it could
shift to other suppliers without incurring undue costs.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies
 (a)
    
    Basis of presentationThe Groups consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP).Prior to November 30, 2006, the Company was 80% owned by Xing. The Company became a wholly
owned subsidiary of Xing on November 30, 2006 when Xing acquired the remaining 20% equity
interest in the Company from Galbo Enterprise Limited (Galbo). Xings acquisition of the
20% minority interest in the Company has been accounted for by Xing using the purchase
method. Accordingly, the purchase accounting adjustments as a result of Xings acquisition
of the 20% minority interest in the Company have been pushed-down and reflected in the
accompanying financial statements.Due to the impact of the changes arising from the push-down accounting adjustments (Note 3),
the 2006 statements of operations presentation separates the results into two periods: (1)
the period from January 1, 2006 through November 30, 2006 (Old Basis) and (2) the period
from November 30, 2006 through December 31, 2006 (New Basis). A vertical black line is
inserted to indicate the application of a new basis of accounting and separate the Old Basis
and the New Basis presentations in the consolidated financial statements.
 (b)
    
    Principles of consolidationThe consolidated financial statements include the financial statements of the Company and its
majority-owned subsidiaries. All significant inter-company balances and transactions have
been eliminated upon consolidation.
 (c)
    
    Cash, restricted cash and related party cash management arrangementCash consists of cash on hand and interest-bearing deposits placed with banks.Cash that is restricted as to withdrawal for use or pledged as security is disclosed
separately on the face of the consolidated balance sheet, and is not included in cash in the
consolidated statements of cash flows. Restricted cash of RMB94,384 and RMB136,299
(US$19,978) as of December 31, 2007 and 2008, respectively, represents pledged deposits for
securing short-term bank borrowings.The Group participates in a cash management arrangement at the direction and discretion of
Xing. Consequently, the Group periodically both transfers cash to and receives cash from
certain related parties. These cash flows are unrelated to the production and delivery of
the Groups products and services and are not derived from transactions or other events that
enter into the determination of the Groups net income (loss). For purposes of the
consolidated statements of cash flows, the cash inflows and outflows under this related party
financing arrangement are presented under cash flows from financing activities.
 (d)
    
    Accounts and bills receivablesAccounts receivable are recorded at invoiced amount net of deductions for trade discounts.
The Group maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Group determines the allowance
for doubtful accounts based on the age of the accounts receivable balance, the customers
payment history and its current credit-worthiness and current economic trends. Account
balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Group does not have any off-balance-sheet credit exposure related to
its customers.To reduce the Groups credit risk, the Group has required certain customers to pay for the
sale of the Groups products by bills receivable. Bills receivable represents interest-free
short-term notes receivable issued by a financial institution that entitles the Group to
receive the full face amount from the financial institution at a stated maturity date, which
is within one year from the date of issuance.In certain circumstances, the Group has sold, with recourse, bills receivables to banks. The
recourse obligation represents the amount the Group would be obligated to repay to the extent
that the issuing financial institution does not make payment upon maturity. Because the
discounted bills receivables have not been legally isolated from the Group, the discounted
bills receivables sold with recourse have been accounted for as short-term secured borrowings
until the bills receivable are paid. Upon payment of bills receivable, the discounted bills
receivables and related short-term secured borrowings are derecognized. Historically, the
Group has experienced no losses on bills receivable. As of December 31, 2007 and 2008,
discounted bills of nil and RMB40,000 (US$5,863), respectively are included in short-term
borrowings.
 F-11




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)
 (e)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined using the
first-in, first-out method. Costs of finished goods are composed of direct materials, direct
labor and an attributable portion of manufacturing overhead based on normal operating
capacity. Adjustments are recorded to write-down damaged, obsolete and slow-moving items to
their estimated net residual value based on the ageing of the inventories, current and
expected future market trends and conditions, and the physical condition of the inventory.
 (f)
    
    Prepayments to suppliersAdvance payments for purchases of raw materials are included in prepayments to suppliers
and represent cash deposits paid to vendors for future purchases. The Group is required to
make advance payments for certain new suppliers. Advanced payments are unsecured,
non-interest bearing and expected to be utilized within one year.The outstanding balance of prepayments to suppliers is reduced and reclassified to
inventories when inventory is received and passes quality inspection based on the terms of
the purchase order. Such reclassifications of RMB1,178,203, RMB125,528, RMB1,909,685 and
RMB1,492,267 (US$218,727) for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31,
2007 and 2008, respectively, are not reflected as cash outflows from operating activities.
 (g)
    
    Property, machinery and equipmentProperty, machinery and equipment are stated at cost less accumulated depreciation and
impairment. Property, machinery and equipment acquired in a purchase business combination
and upon acquisitions of minority interest are initially recorded based on a purchase price
allocation. In addition, as a result of the application of push-down accounting (Note 3),
the Groups property, machinery and equipment have been adjusted to a new cost basis, which
reflects Xings original 80% interest at depreciated cost and Xings 20% acquired interest at
fair value as of November 30, 2006.Major expenditures for betterments and renewals are capitalized. All ordinary repair and
maintenance costs are expensed as incurred. Depreciation on property, machinery and
equipment is provided using the straight-line method (after taking into account their
respective estimated residual values) over the following estimated useful lives:
 Buildings and improvements
    
    5 - 30 yearsMachinery and equipment
    
    5 - 12 yearsFurniture and office equipment
    
    5 - 10 yearsMotor vehicles
    
    5 - 8 years
 Depreciation of property, machinery and equipment attributable to manufacturing activities is
capitalized as part of inventory and expensed to cost of goods sold when the inventory is
sold. Depreciation related to abnormal amounts from idle capacity is charged to cost of
goods sold in the period. When items are retired or otherwise disposed of, income is charged
or credited for the difference between the net book value and proceeds received thereon.
Assets to be disposed of are separately presented on the consolidated balance sheet and
reported at the lower of their carrying amount or fair value less costs to sell, and are no
longer depreciated.
 (h)
    
    Land use rightsLand use rights represent the exclusive right to occupy and use a piece of land in the PRC
during the contractual period of the rights. Land use rights are carried at cost, subject to
adjustments resulting from the effects of purchase accounting and push-down accounting, and
are charged to expense on a straight-line basis over 50 years, the contractual period of the
rights.
 F-12




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)
 (i)
    
    Goodwill and other intangible assetsGoodwill represents the excess of the cost of an acquisition over the fair value of net
assets acquired. Goodwill is not amortized, but is instead tested for impairment at least
annually.Acquired intangible assets are recognized if it satisfies either the contractual-legal or
separability criterion specified under U.S. GAAP. Such intangible assets are initially
measured and recorded at fair value. As a result of the application of push-down accounting,
other intangible assets have been adjusted to a new cost basis, which reflects Xings
original 80% interest at amortized cost and the 20% acquired interest at fair value as of
November 30, 2006.Intangible assets with determinable useful lives are amortized as follows:
 Customer relationships
    
    3 - 5 yearsCompleted technology
    
    1.8 - 5 yearsCore technology
    
    4 - 5 yearsBacklog
    
    4 - 5 monthsLicenses
    
    5 years
 Management has determined that the Groups CECT brand name held by its subsidiary, CECT,
does not have a determinable useful life. Consequently, the carrying amount of this brand
name is not amortized but is tested for impairment annually or more frequently if events or
changes in circumstances indicate that the assets might be impaired. Such impairment test
consists of a comparison of the fair value of the brand name with its carrying amount, and an
impairment loss is recognized if and when the carrying amount of the brand name exceeds its
fair value.
 (j)
    
    Impairment of long-lived assetsLong-lived assets with determinable useful lives, such as property, machinery and equipment
and amortizable intangible assets, are tested for impairment if events or changes in
circumstances indicate that the asset might be impaired. Recoverability of such assets to be
held and used is measured by a comparison of the carrying amount of the asset to the
estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset.Goodwill and the CECT brand name which are not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss would be recognized on the
CECT brand name to the extent that the carrying amount of the CECT brand name exceeds its
fair value. For goodwill, the impairment determination is made at the reporting unit level
and consists of two steps. In the first step, the Company determines the fair value of its
reporting unit and compares it to its carrying amount, including goodwill. Second, if the
carrying amount of the reporting unit exceeds its fair value, an impairment loss is
recognized for any excess of the carrying amount of the reporting units goodwill over the
implied fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a purchase price
allocation. The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Management has determined that CECT is the reporting unit for
testing goodwill impairment. The fair value of the CECT is determined based on the market
approach, under which the fair value is estimated based on market multiples of earnings for
comparable companies.
 (k)
    
    Revenue recognitionThe Group derives revenues principally from the sales of mobile phones and accessories in the
PRC, and to a lesser extent the rendering of technical, processing and other related
services.Sales of mobile phones and accessoriesSales represent the invoiced amount, net of discounts, returns, volume rebates and price
guarantees granted to customers. The Group recognizes revenue when products are received by
the customers at the location designated by the customer and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence
of an arrangement exists and the selling price is fixed or determinable.
 F-13




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)
 (k)
    
    Revenue recognition (continued)The Group recognizes a liability for price guarantees, which generally cover a period of
between three to four months, based on managements estimates of future price reductions and
the level of unsold inventories held by customers at the dates of expected price adjustments.
Price guarantees reported as a reduction of revenues amounted to RMB26,619, RMBNil, RMB2,943
and RMB91 (US$13) for the period from January 1, 2006 through November 30, 2006, the period
from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, respectively.In the PRC, value-added-tax (VAT), at a rate of 17% of invoiced amount is collected on
behalf of the PRC tax authorities. Revenue is recorded net of VAT. VAT collected from
customers is offset against VAT paid for purchases and is recorded as a liability on the
consolidated balance sheet until paid.Provision of servicesRevenues from the provision of technical, processing and other related services are
recognized in the period when performance of the service is completed as agreed to in each
written service agreement, the fee is fixed or determinable, and collection of relevant
receivable is reasonably assured.
 (l)
    
    Product warrantiesThe Group provides a warranty to customers that its products will meet the functionality
standards agreed to in each sales arrangement. The Group provides for the estimated warranty
costs under these guarantees based upon historical experience and managements estimate of
the level of future claims, and accrues for specific items at the time their existence is
known and the amounts are estimable. Provisions of product warranty costs, which are charged
to cost of goods sold, are analyzed as follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Balance at
beginning of
period/year
    
    
    3,922
    
    
    
    
    6,905
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    1,187Provision
    
    
    13,751
    
    
    
    
    908
    
    
    
    14,960
    
    
    
    7,485
    
    
    
    1,097Utilization
    
    
    (10,768
    )
    
    
    
    (1,004
    )
    
    
    (13,672
    )
    
    
    (10,553
    )
    
    
    (1,547
    )Balance at end
of period/year
    
    
    6,905
    
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    5,029
    
    
    
    737
 (m)
    
    Research and development costs, advertising costs, and shipping and handling costsResearch and development costs are expenses as incurred.Adverting costs are charged to selling and distribution expenses when incurred. Advertising
costs amounted to RMB10,382, RMB2,491, RMB26,445 and RMB137,166 (US$20,105) for the period
from January 1, 2006 through November 30, 2006, the period from November 30, 2006 through
December 31, 2006, and the years ended December 31, 2007 and 2008, respectively.The costs of shipping and distributing products are included in cost of sales.
 (n)
    
    Retirement and other postretirement benefitsPursuant to relevant PRC regulations, the Groups subsidiaries are required to make
contributions to various defined contribution plans organized by the PRC government. The
contributions are made for each qualifying PRC employee at 20% of a standard salary base as
determined by the PRC governmental authority. Contributions to the defined contribution
plans are charged to expense as the service is provided. For the period from January 1, 2006
through November 30, 2006, the period from November 30, 2006 through December 31, 2006, and
the years ended December 31, 2007 and 2008, contributions to the defined contribution plans
were RMB606, RMB45, RMB624 and RMB2,228 (US$327), respectively. The Group has no other
obligation for the payment of employee benefits associated with these plans beyond the
contributions described above.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)
 (o)
    
    Share-based paymentsThe Group accounts for share based payments under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No.
123R). SFAS No. 123R requires that all compensation cost related to share options or
similar equity instruments be measured at the fair value of the award and recognized over the
requisite service period, which is generally the same as the vesting period. When no future
services are required to be performed by the employee in exchange for the reward, and if such
award does not contain a performance or market condition, the cost of the award (as measured
based on the grant-date fair value) is expensed on the grant date.
 (p)
    
    Income taxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences
between the financial statements carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws
is recognized in the statement of operations in the period that the change in tax rates or
tax laws is enacted. Interest and penalties related to unrecognized tax benefits, if and when
required, are classified as part of income tax expense in the statement of operations.
 (q)
    
    Foreign currency transactionsThe reporting currency of the Group is Renminbi (RMB).Through May 2, 2007, the Companys functional currency was RMB. Effective May 3, 2007, the
Company changed its functional currency to United States dollars (U.S. dollar or US$) due
to the significant changes in the Companys economic facts and circumstances upon the
completion of the Companys listing on the NYSE, which resulted in the Companys financing
activity being predominately denominated in and expected to continue to be predominately
denominated in U.S. dollar. The corresponding adjustment attributable to current-rate
translation of non-monetary assets
as of the date of the change was immaterial and has been recorded as accumulated other
comprehensive loss, a separate component within shareholders equity.The functional currency of all other companies within the Group is the RMB. Monetary assets
and liabilities which are denominated in currencies other than RMB are translated into RMB
using the applicable exchange rates quoted by the Peoples Bank of China (the PBOC) at each
balance sheet date. Transactions of the Company through May 2, 2007 and of all other
companies within the Group denominated in currencies other than RMB are translated into RMB
at the exchange rates quoted by the PBOC prevailing at the dates of transactions. Foreign
exchange gains or losses resulting from the settlement of foreign currency transactions and
from the translation at each period of assets and liabilities denominated in foreign
currencies are recorded as foreign currency exchange gain, net in the consolidated statements
of operations.Effective from May 3, 2007, assets and liabilities of the Company are translated into RMB
using the exchange rate as of the balance sheet date. Income and expenses are translated at
the average exchange rate prevailing during the reporting period. The gains and losses
resulting from translation of financial statements of the Company are recorded as accumulated
other comprehensive loss, a separate component within shareholders equity.RMB is not freely convertible into foreign currencies. All foreign exchange transactions
involving RMB must take place either through the PBOC or other institutions authorized to buy
and sell foreign currency. The exchange rate adopted for foreign exchange transactions are
the rates of exchange quoted by the PBOC which are determined largely by supply and demand.For the convenience of readers, certain 2008 RMB amounts included in the accompanying
consolidated financial statements have been translated into U.S. dollars at the rate of
US$1.00 = RMB6.8225, being the noon buy rate for U.S. dollars in effect on December 31, 2008
in the City of New York for cable transfer in RMB per U.S. dollar as certified for custom
purposes by the Federal Reserve Bank. No representation is made that RMB amounts could have
been, or could be, converted into U.S. dollars at that rate or at any other certain rate on
December 31, 2008, or at any other date.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)(r)
    
    Earnings (loss) per shareBasic earnings (loss) per share is computed using the two-class method by dividing net
income allocated to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year/period. Diluted earnings per share is calculated by dividing net
income by the weighted average number of ordinary and dilutive ordinary shares equivalents
outstanding during the year/period. Potential dilutive securities are not included in the
calculation of diluted earnings (loss) per share if the impact is anti-dilutive.(s)
    
    Use of estimatesThe preparation of the consolidated financial statements in accordance with U.S. GAAP requires
management of the Group to make a number of estimates and assumptions relating to the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant items subject to estimates and assumptions
in the Groups consolidated financial statements include determining the fair values of assets
and liabilities acquired in business combinations and purchase of additional equity interests
in CECT from the minority interest holder, the estimated useful lives of property, machinery
and equipment and intangible assets with determinable lives, recoverability of the carrying
values of property, machinery and equipment, goodwill and other intangible assets, the fair
value of share-based payments, the fair values of conversion options and other derivatives
embedded in convertible notes, the fair value of ordinary share warrants granted in connection
with the issuance of the convertible notes, allowances for doubtful receivables, realizable
value of inventories, and deferred income tax assets, warranty obligations and price
guarantees. Actual result could differ from those estimates.(t)
    
    Segment informationThe Group uses the management approach in determining reportable operating segments. The
management approach considers the internal organization and reporting used by the Groups
chief operating decision maker for making operating decisions and assessing performance as the
source for determining the Groups operating segments. Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue and operating
results of CECT, the operating subsidiary in the PRC. As such, management has determined that
CECT is the Groups only operating segment, as that term is defined by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. As the Groups
operations and customers are principally all located in the PRC, no geographic information has
been presented.(u)
    
    ContingenciesIn the normal course of business, the Group is subject to contingencies, including legal
proceedings and claims arising out of the business that relate to a wide range of matters.
The Group recognizes a liability for such contingency if it determines it is probable that a
loss has occurred and a reasonable estimate of the loss can be made. The Group may consider
many factors in making these assessments including past history and the specifics of each
matter. As the Group has not become aware of any claims since operations commenced, the Group
has not recognized a liability for any claims.(v)
    
    Recently issued accounting standardsIn September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements, which defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for assets and liabilities measured at fair
value. SFAS No. 157 applies to existing accounting pronouncements that require fair value
measurements; it does not require any new fair value measurements. In February 2008, FASB
issued FASB Staff Position (FSP) No. FAS 157-2, Effective Date of FASB Statement No. 157
(FSP 157-2), which delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The Company
adopted the effective portions of SFAS No. 157 beginning the year ended December 31, 2008,
with no material impact to its consolidated financial statements. Management does not expect
the adoption of FSP 157-2 to have a material impact on the Groups consolidated financial
statements.In December 2007, the FASB issued SFAS No. 141R, a revision of SFAS No. 141, Business
Combinations. SFAS No. 141R establishes requirements for the recognition and measurement of
acquired assets, liabilities, goodwill, and non-controlling interests (formerly minority
interests). SFAS No. 141R also provides disclosure requirements related to business
combinations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008.
SFAS No. 141R will be applied prospectively to business combinations with an acquisition date
on or after the effective date.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)(v)
    
    Recently issued accounting standards (continued)In December 2007, the FASB issued SFAS No. 160, Non-Controlling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51. SFAS No. 160 establishes new standards
for the accounting for and reporting of non-controlling interests and for the loss of control
of partially owned and consolidated subsidiaries. SFAS No. 160 does not change the criteria
for consolidating a partially owned entity. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008. The provisions of SFAS No. 160 will be applied
prospectively upon adoption except for the presentation and disclosure requirements, which
will be applied retrospectively. SFAS No. 160 states that accounting and reporting for
minority interests will be recharacterized as non-controlling interests and classified as a
component of equity. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more partially
owned and consolidated subsidiaries. Except for the classification of minority interest as a
component of equity, management does not expect the initial adoption of SFAS No. 160 will have
a material impact on the Groups consolidated financial statements.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133. This statement requires
enhanced disclosures for derivative instruments and hedging activities that include how and
why an entity uses derivatives, how these instruments and the related hedged items are
accounted for under SFAS 133 and related interpretations, and how derivative instruments and
related hedged items affect the entitys financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Management does not expect the adoption of SFAS 161
to have a material impact on the Groups consolidated financial statements.In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is
effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. Early adoption is prohibited. The guidance for determining the useful life of a
recognized intangible asset in FSP 142-3 shall be applied prospectively to intangible assets
acquired after the effective date. Management does not expect the adoption of FSP 142-3 to
have a material impact on Groups consolidated financial statements.In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles, which identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with U.S. GAAP. SFAS No. 162 became effective
November 15, 2008. Management does not expect the adoption of SFAS No. 162 to have a material
impact on the Groups consolidated financial statements.In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP 14-1),
which requires the issuer of convertible debt instruments with cash settlement features to
account separately for the liability and equity components of the instrument. The debt would
be recognized at the present value of its cash flows discounted using the issuers
nonconvertible debt borrowing rate at the time of issuance. The equity component would be
recognized as the difference between the proceeds from the issuance of the note and the fair
value of the liability. FSP 14-1 will also require an accretion of the resultant debt
discount over the expected life of the debt. The proposed transition guidance requires
retrospective application to all periods presented, and does not grandfather existing
instruments. FSP 14-1 is effective for fiscal years beginning after December 15, 2008.
Management does not expect the adoption of FSP 14-1 to have a material impact on the Groups
consolidated financial statements.In June 2008, the Emerging Issue Task Force (EITF) issued EITF Issue No. 07-5, Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock (EITF
07-5). EITF 07-5 clarifies the determination of whether an instrument (or an embedded
feature) is indexed to an entitys own stock, which would qualify as a scope exception under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-5 is
effective for financial statements issued for fiscal years beginning after December 15, 2008.
EITF 07-5 does not permit early adoption for an existing instrument. Management does not
expect the adoption of EITF 07-5 to have a material effect on the Groups consolidated
financial statements.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 2
    
    Summary of significant accounting policies (continued)(v)
    
    Recently issued accounting standards (continued)In June 2008, the FASB issued FSP EITF Issue No. 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP 03-6-1). FSP
03-6-1 clarifies that share-based payment awards that entitle their holders to receive
non-forfeitable dividends or dividend equivalents before vesting should be considered
participating securities. FSP 03-6-1 is effective for fiscal years beginning after December
15, 2008 on a retrospective basis. The Company has not granted any share-based payment awards
that contain non-forfeitable rights to dividends or dividend equivalents before vesting since
incorporation. Management does not expect the adoption of FSP 03-6-1 to have a material
impact on Groups consolidated financial statements.On October 10, 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active (FSP 157-3), which clarifies the
application of SFAS No. 157 in a market that is not active. Additional guidance is provided
regarding how the reporting entitys own assumptions should be considered when relevant
observable inputs do not exist, how available observable inputs in a market that is not active
should be considered when measuring fair value, and how the use of market quotes should be
considered when assessing the relevance of inputs available to measure fair value. FSP 157-3
became effective immediately upon issuance. Its adoption did not have a material effect on the
Groups consolidated financial statements.In November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets (EITF 08-7). EITF 08-7 applies to defensive intangible assets, which are acquired
intangible assets that the acquirer does not intend to actively use but intends to hold to
prevent its competitors from obtaining access to them. As these assets are separately
identifiable, EITF 08-7 requires an acquiring entity to account for defensive intangible
assets as a separate unit of accounting. Defensive intangible assets must be recognized at
fair value in accordance with SFAS No. 141R and SFAS No. 157. EITF 08-7 is effective for
defensive intangible assets acquired in fiscal years beginning on or after December 15, 2008.
Management does not expect the adoption of EITF 08-7 to have a material impact on Groups
consolidated financial statements.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 3
    
    New Basis accounting adjustmentsOn November 30, 2006, Xing acquired the remaining 20% equity interest in the Company from
Galbo for a total consideration of RMB356,064. As a result, the Company became a wholly owned
subsidiary of Xing at the time and a new basis of accounting in the Groups consolidated
financial statements was required to push-down the effect of Xings acquisition of the 20%
equity interest in the Company.The original 80% equity interest held by Xing had no significant effect on the application of
push-down accounting since it was obtained by Xing in 2002 in connection with the formation of
the Company for which no purchase adjustments were recorded. The cost of the acquisition of
the 20% equity interest has been allocated by Xing to the fair value of the Companys
identifiable net assets at the date of the acquisition based on the additional 20% ownership
interest acquired.The following presents the fair values attributable to the assets acquired and liabilities
assumed by Xing. These values exclude the historical carrying values attributable to Xings
original 80% equity interest in the Company:
 November 30,2006RMBInventories
    
    
    28,530Property, machinery and equipment
    
    
    36,737Net deferred income tax liabilities
    
    
    (8,746
    )Other tangible assets and liabilities acquired
    
    
    100,048Intangible assets: In-process research and development
    
    
    41,739 Other intangible assets
    
    
    63,656Goodwill (Note 9)
    
    
    94,100Purchase price allocated
    
    
    356,064Satisfied by: Cash consideration
    
    
    170,343 Fair value of Xings share issued (1,562,348 shares @ US$15.17 each)
    
    
    185,721Total consideration
    
    
    356,064
 The effects of the push-down accounting adjustments consist of the following:
 (i)
    
    Fair value adjustments to the extent of Xings additional 20% acquired interest
relating to inventories of RMB1,053, property, machinery and equipment of RMB1,478 and
other intangible assets of RMB55,247. In addition, the accumulated depreciation and
accumulated amortization balances as of November 30, 2006 related to Xings original 80%
ownership interest in the Company have been eliminated against the gross carrying value
of the respective property, machinery and equipment, and other intangible assets to
establish a new cost basis of these assets.(ii)
    
    In-process research and development of RMB41,739, representing Xings acquired
interest in the estimated fair value of product technologies under development as of
November 30, 2006. These product development projects and related research and
development activities have no alternative future use, and were charged to expense by
Xing and pushed down to the Groups consolidated statements of operations for the period
from November 30, 2006 to December 31, 2006. In-process research and development as of
November 30, 2006 was valued using the multi-period excess earnings method. Under this
method, the value of the in-process research and development asset is determined as the
present value of the incremental after-tax cash flows attributable only to that asset.(iii)
    
    Adjustments to deferred income taxes related to the temporary differences
resulting from the above push-down accounting adjustments. In accordance with EITF Issue
No. 96-7, Accounting for Deferred Taxes on In-Process Research and Development
Activities Acquired in a Purchase Business Combination, in-process research and
development is charged to expense on a gross basis and does not reflect any tax benefit.
 F-19




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 3
    
    New Basis accounting adjustments (continued)
 (iv)
    
    Adjustments to goodwill under the new basis of accounting, which represented the
sum of 80% of the goodwill arising from the initial acquisition of CECT on February 8,
2003 and the goodwill arising from Xings acquisition of the remaining 20% interest in
the Company. In addition, retained earnings of the Group as of November 30, 2006,
excluding the effect of the in-process research and development charge, have been
eliminated with a corresponding adjustment to additional paid-in capital.
 4
    
    AcquisitionsAdditional capital injection into CECT on July 31, 2006On July 31, 2006, the Company injected additional capital of US$18,750 (RMB149,600) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection
and as a result, the Companys equity interest in CECT increased from 90% to 93.41%.Additional capital injection into CECT on June 30, 2007On June 30, 2007, the Company injected additional capital of US$50,000 (RMB380,425) into CECT
in the form of cash. The minority shareholder did not participate in the capital injection
and as a result, the Companys equity interest in CECT increased from 93.41% to 96.55%.The Company accounted for the above step-up acquisitions of the equity interests in CECT using
the purchase method. This method requires the acquisition cost to be allocated to the assets
acquired, including separately identifiable intangible assets, and liabilities assumed, based
on a pro-rata share of their estimated fair values. The Company makes estimates and judgments
in determining the fair value of the assets acquired and liabilities assumed based on
independent appraisal reports as well as its experience in the valuation of similar assets and
liabilities. If different judgments or assumptions were used, the amounts assigned to the
individual acquired assets or liabilities could be materially different. For each of the
Groups acquisitions, the fair value of the underlying net assets, representing the Companys
additional equity interest acquired in CECT, exceeded the Companys purchase price, giving
rise to negative goodwill. Such negative goodwill was first allocated to reduce the purchase
price allocated to certain assets. The remaining unallocated negative goodwill has been
recognized as an extraordinary gain in the consolidated statements of operations in the year
of acquisition.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 4
    
    Acquisitions (continued)The following table summarizes the purchase price allocated to the fair value of the Companys
share of net assets acquired for each acquisition at the respective acquisition date:
 July 31,
    
    June 30,2006
    
    2007RMB
    
    RMBConsideration:Total cash consideration
    
    
    149,600
    
    
    
    380,425Less: Ownership interest in cash consideration
    
    
    (139,742
    )
    
    
    (367,295
    )Net cash consideration
    
    
    9,858
    
    
    
    13,130Fair value of assets acquired:Property, machinery and equipment
    
    
    1,511
    
    
    
    5,929Land use rights
    
    
    
    
    
    
    1,222Other tangible assets and liabilities acquired
    
    
    27,654
    
    
    
    41,819In-process research and development
    
    
    6,287
    
    
    
    7,981Other intangible assets
    
    
    13,914
    
    
    
    16,009Fair value of net assets acquired
    
    
    49,366
    
    
    
    72,960Negative goodwill
    
    
    39,508
    
    
    
    59,830Allocation of negative goodwill:Property, machinery and equipment
    
    
    (1,511
    )
    
    
    (5,929
    )Land use rights
    
    
    
    
    
    
    (1,222
    )In-process research and development
    
    
    (6,287
    )
    
    
    (7,981
    )Other intangible assets
    
    
    (13,914
    )
    
    
    (16,009
    )Negative goodwill allocated to fair
value of long-term assets
    
    
    (21,712
    )
    
    
    (31,141
    )Extraordinary item  gain on
acquisition of additional
equity interest in CECT
    
    
    17,796
    
    
    
    28,689
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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 5
    
    DisposalsThe Group disposed of its interests in BCYT and HCECT during the year ended December 31, 2008.
The condensed historical balances of the subsidiaries assets and liabilities that were
disposed of consisted of:
 BCYT
    
    HCECT
    
    TotalRMB
    
    RMB
    
    RMBCash
    
    
    924
    
    
    
    238
    
    
    
    1,162Other current assets
    
    
    20,866
    
    
    
    14,616
    
    
    
    35,482Property, machinery and equipment
    
    
    
    
    
    
    10,876
    
    
    
    10,876Current liabilities
    
    
    
    
    
    
    (5,808
    )
    
    
    (5,808
    )Minority interests
    
    
    (2,071
    )
    
    
    
    
    
    
    (2,071
    )Net assets disposed of
    
    
    19,719
    
    
    
    19,922
    
    
    
    39,641
 The gain on disposal of subsidiaries reflected in the consolidated statement of operations for
the year ended December 31, 2008 is calculated as follows:
 BCYT
    
    HCECT
    
    TotalRMB
    
    RMB
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Net assets disposed of
    
    
    (19,719
    )
    
    
    (19,922
    )
    
    
    (39,641
    )Gain on disposal
    
    
    281
    
    
    
    1,988
    
    
    
    2,269
 The net cash outflow in respect of the disposal of subsidiaries during the year ended December
31, 2008 is as follows:
 BCYT
    
    HCECT
    
    TotalRMB
    
    RMB
    
    RMBConsideration
    
    
    20,000
    
    
    
    21,910
    
    
    
    41,910Cash disposed of
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )Consideration paid
for through set-off
of payables
    
    
    (20,000
    )
    
    
    (13,146
    )
    
    
    (33,146
    )Unpaid consideration
as at December 31,
2008
    
    
    
    
    
    
    (8,764
    )
    
    
    (8,764
    )Net cash outflow
    
    
    (924
    )
    
    
    (238
    )
    
    
    (1,162
    )
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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 6
    
    Accounts receivable, netAccounts receivable, net consists of the following:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Accounts receivable
    
    
    423,993
    
    
    
    468,325
    
    
    
    68,644Less: Allowance for doubtful accounts
    
    
    (5,429
    )
    
    
    (6,043
    )
    
    
    (886
    )Accounts receivable, net
    
    
    418,564
    
    
    
    462,282
    
    
    
    67,758
 The following table presents the movement of the allowance for doubtful accounts:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Balance at
beginning of
period/year
    
    
    2,640
    
    
    
    
    2,046
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    796Bad debt expense
    
    
    
    
    
    
    
    
    
    
    
    3,384
    
    
    
    1,277
    
    
    
    187Bad debt recovery
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    
    
    
    
    (595
    )
    
    
    (87
    )Bad debt write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    (10
    )Balance at end
of period/year
    
    
    2,046
    
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    6,043
    
    
    
    886
 The Group has a credit policy in place and the exposure to credit risk is monitored on an
ongoing basis. Credit evaluations are performed on all customers requiring credit over a
certain amount. These receivables are due within 30 to 90 days from the date of billing.
Normally, the Group does not obtain collateral from customers.7
    
    InventoriesInventories by category consist of the following:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Raw materials
    
    
    119,373
    
    
    
    116,195
    
    
    
    17,031Finished goods
    
    
    57,906
    
    
    
    66,974
    
    
    
    9,817Total inventories
    
    
    177,279
    
    
    
    183,169
    
    
    
    26,848
 Inventories write-downs of RMB3,152, RMB46, RMB11,068 and RMB6,650 (US$975) were charged to
cost of goods sold during the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007
and 2008, respectively.Inventories sold during the period from January 1, 2006 through November 30, 2006, the period
from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, include recovery of previously written down inventory of
RMB16,033, nil, RMB266 and
RMB1,228 (US$180), respectively, as a result of the subsequent sale of such inventory at
amounts that were higher than the written down value.
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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 8
    
    Property, machinery and equipment, netProperty, machinery and equipment consist of the following:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Buildings and improvements
    
    
    148,956
    
    
    
    148,956
    
    
    
    21,833Machinery and equipment
    
    
    32,915
    
    
    
    32,554
    
    
    
    4,772Furniture and office equipment
    
    
    1,948
    
    
    
    2,407
    
    
    
    353Motor vehicles
    
    
    1,728
    
    
    
    3,483
    
    
    
    510Total property, machinery, and equipment
    
    
    185,547
    
    
    
    187,400
    
    
    
    27,468Less: accumulated depreciation
    
    
    (10,078
    )
    
    
    (20,167
    )
    
    
    (2,956
    )Property, machinery, and equipment, net
    
    
    175,469
    
    
    
    167,233
    
    
    
    24,512
 All the Groups property, machinery and equipment are located in the PRC.Depreciation charge for each of the year/period was allocated to the following expenses items:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Cost of goods sold
    
    
    3,584
    
    
    
    
    344
    
    
    
    9,192
    
    
    
    10,134
    
    
    
    1,485Selling and distribution expenses
    
    
    53
    
    
    
    
    
    
    
    
    6
    
    
    
    4
    
    
    
    1General and administrative
expenses
    
    
    1,634
    
    
    
    
    155
    
    
    
    1,556
    
    
    
    1,819
    
    
    
    267Total
    
    
    5,271
    
    
    
    
    499
    
    
    
    10,754
    
    
    
    11,957
    
    
    
    1,753
 9
    
    GoodwillOn February 8, 2003, the Company completed the acquisition of its initial 65% equity interest
in CECT which resulted in the recognition of goodwill of RMB23,393 (Old Basis). Such
historical goodwill was subsequently adjusted to RMB18,714 to reflect the effects of the
application of push-down accounting on November 30, 2006 (New Basis). Goodwill also includes
RMB94,100, which arose from Xings acquisition of the remaining 20% interest in the Company,
which upon application of push-down accounting was recognized on the Companys consolidated
financial statements (Note 3).The impairment tests conducted by the Group on goodwill for the years ended December 31, 2006,
2007 and 2008 did not result in any impairment charges.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 10
    
    Other intangible assets, netIntangible assets, which arose from the acquisition of the Groups initial 65% equity interest
in CECT on February 8, 2003, and from the push-down accounting adjustments on November 30,
2006 upon Xings acquisition of an additional 20% equity interest in the Company (as discussed
in Note 3), comprise the following components:
 December 31, 2007Gross
    
    
    
    
    
    Othercarrying
    
    Accumulated
    
    intangiblesamount
    
    amortization
    
    assets, netRMB
    
    RMB
    
    RMBCECT brand
    
    
    39,835
    
    
    
    
    
    
    
    39,835Customer relationships
    
    
    5,418
    
    
    
    (4,470
    )
    
    
    948Completed technology
    
    
    16,950
    
    
    
    (10,866
    )
    
    
    6,084Core technology
    
    
    24,193
    
    
    
    (10,455
    )
    
    
    13,738Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,602
    )
    
    
    123Total
    
    
    97,296
    
    
    
    (36,568
    )
    
    
    60,728
 December 31, 2008Grosscarrying
    
    Accumulated
    
    Accumulatedamount
    
    amortization
    
    impairment
    
    Other intangible assets, netRMB
    
    RMB
    
    RMB
    
    RMB
    
    US$CECT brand
    
    
    39,835
    
    
    
    
    
    
    
    (26,235
    )
    
    
    13,600
    
    
    
    1,993Customer relationships
    
    
    5,418
    
    
    
    (5,118
    )
    
    
    
    
    
    
    300
    
    
    
    44Completed technology
    
    
    16,950
    
    
    
    (16,950
    )
    
    
    
    
    
    
    
    
    
    
    Core technology
    
    
    24,193
    
    
    
    (15,327
    )
    
    
    
    
    
    
    8,866
    
    
    
    1,300Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,725
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    97,296
    
    
    
    (48,295
    )
    
    
    (26,235
    )
    
    
    22,766
    
    
    
    3,337
 The fair value of the CECT brand name was estimated using the Relief-from-Royalty Method, a
discounted cash flow approach which brings into play, in the case of CECT, a single set of
estimated cash flows and a discount rate commensurate with the risk. The cash flow
contribution from the brand name comes from savings in royalty that CECT would have to pay to
a third party for the use of its brand name if CECT had not had the right to use it but
nevertheless had wanted its products to have a recognized brand. The cash flow contribution
of the CECT brand name is linked to the cash inflow from the sales revenue of CECT. As
there is a lack of publicly available information about comparable licensing transactions in
the PRC suitable for the Groups purpose, the royalty savings as a percentage of sales revenue
is estimated by comparing the operational profit margin as a percentage of sales revenue of
CECT with its superior CECT brand name with those of comparable companies in the PRC which
operate on an OEM sub-contractor basis or with an inferior brand. Also, marketing expense is
required to maintain the brand name for CECT. An average of marketing expense as a percentage
of sales revenue is taken from the statements of operations of CECT in the medium term
forecast. This percentage is then used to estimate cash outflow relating to marketing expense
in the cash flow forecast under the Relief-from-Royalty Method.The impairment tests conducted by the Group on the CECT brand name for the years ended
December 31, 2006 and 2007 did not result in any impairment charges. For the year ended
December 31, 2008, due to the Groups strategic shift to focus more on its high-end
VEVA-branded handsets, the Group recorded an impairment charge of RMB26,235 (US$3,845) on its
CECT brand name.Amortization of other intangible assets is recognized on a straight-line basis over the
estimated useful lives. The expected future amortization expense is as follows:
 RMBYear ending December 31, 2009
    
    
    4,733 2010
    
    
    4,433Total
    
    
    9,166
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QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 11
    
    Short-term borrowingsShort-term borrowings consist of the following:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Bills payable
    
    
    197,335
    
    
    
    39,850
    
    
    
    5,841Bank loans
    
    
    786,569
    
    
    
    904,100
    
    
    
    132,517Other borrowings, secured by bills receivable
    
    
    
    
    
    
    40,000
    
    
    
    5,863Total short-term borrowings
    
    
    983,904
    
    
    
    983,950
    
    
    
    144,221
 Bills payable represents bank borrowings with payment terms of not more than 180 days and are
non-interest bearing unless they become trust receipt loans which then bear interest at the
prevailing bank lending rates.During each of the periods presented, the Group entered into various loan agreements with
commercial banks in the PRC at terms ranging from three months to one year. The weighted
average interest rate on bank loans outstanding as of December 31, 2007 and 2008 was 6.8% and
7.3%, respectively. The principal amounts of these short-term loans are repayable at the end
of the loan period, while the related interest expense of these short-term loans is payable on
a monthly or quarterly basis.Short-term borrowings of RMB73,046 and RMB68,000 (US$9,967) as of December 31, 2007 and 2008,
respectively are subject to certain financial covenants relating to certain of the Groups and
Xings tangible net worth, borrowing to tangible net worth plus minority interest, current
ratio, and interest to earnings before interest and taxes ratios. If the Group were to breach
the covenants, the drawn down facilities would become payable on demand. The Group was in
compliance with these financial covenants as of December 31, 2007 and 2008.Short-term borrowings are secured by the following:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Pledged by: Bank deposits
    
    
    94,384
    
    
    
    136,299
    
    
    
    19,978 Bills receivable
    
    
    
    
    
    
    40,000
    
    
    
    5,863Guarantees provided by: Qiao Xing Group Limited (QXGL)
    
    
    160,000
    
    
    
    160,000
    
    
    
    23,452 QXGL and directors of the Company
    
    
    570,000
    
    
    
    360,000
    
    
    
    52,767 Xing
    
    
    338,006
    
    
    
    336,000
    
    
    
    49,249 directors of the Company
    
    
    
    
    
    
    218,500
    
    
    
    32,026
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 12
    
    Convertible notesPursuant to a Securities Purchase Agreement and Registration Rights Agreement signed on May
15, 2008, the Company issued to two existing shareholders of the Company (the Investors)
US$70,000 of senior convertible notes (the Notes) that came with warrants to purchase
1,648,721 ordinary shares of the Company (the Investor Warrants). The consideration paid on
May 15, 2008 by the Investors for the Notes comprised a combination of 6,966,666 ordinary shares of the Company that were owned by the Investors, valued at approximately US$48,349
based on the closing market price of the Companys ordinary shares on May 14, 2008, and cash
of US$21,651. All ordinary shares submitted by the Investors in exchange for the Notes were
cancelled. In addition, the Company also issued warrants to its placement agent to purchase
up to 942,127 ordinary shares of the Company at terms identical to the Investor Warrants (the
Agent Warrants and collectively with the Investor Warrants, the Warrants).The material terms and conditions of the Notes are summarized as follows:
 
    
    the Notes are unsecured and mature on May 15, 2011;
    
    the Notes bear interest at a rate of 4.0% per annum, payable in cash in arrears on a
calendar semi-annual basis beginning June 30, 2008 and the default rate is 15%;
    
    the Notes are convertible at the holders option into ordinary shares of the Company
at an initial conversion price of $7.43 per share. The conversion price is subject to
reset if the average of the daily volume weighted average price (VWAP) of the Companys
ordinary shares for the five consecutive trading days ending on each three-month
anniversary of the issuance date of the Notes until maturity (each a Reset Date) is
less than $6.76. In that event, the conversion price is reset to a price equal to the
greater of US$4.05 or 92.5% of the arithmetic average of the daily VWAP of the Companys
ordinary shares for the five trading days ending on the applicable Reset Date. The
conversion price of the Notes was reset to US$4.05 on November 15, 2008;
    
    the Notes cannot be converted if, after giving effect to such conversion, the holders
of the Notes (together with their affiliates) would beneficially own in excess of 9.99%
of the Companys ordinary shares outstanding immediately after giving effect to the
conversion;
    
    the Notes require an automatic re-pricing of the conversion price if the Company make
certain sales of its ordinary shares or ordinary share equivalents in a capital-raising
transaction at a price below the conversion price;
    
    the holders of the Notes have the right to require the Company to redeem the Notes at
any time on or after the 18 month anniversary of the issuance date of the Notes in an
amount equal to the sum of (a) the outstanding principal of the Notes, and (b) the
accrued and unpaid interest thereon. Accordingly, the Notes were classified as current
liabilities on the consolidated balance sheet as of December 31, 2008;
    
    in the event of a default, change of control and certain other fundamental
transactions, the holders of the Notes have the right to require the Company to redeem
all or any portion of the Notes at a price equal to the greater of (i) the amount to be
redeemed multiplied by a redemption premium of 125% and (ii) the amount to be redeemed
multiplied by the quotient determined by dividing the closing bid price of the Companys
ordinary shares on the date immediately preceding such event by the conversion price of
the Notes;
    
    all principal, interest, late charges and other amounts due under the Notes that are
payable in cash shall be settled in U.S. dollars in an amount equal to the applicable
U.S. dollar cash payment due under the terms of the Notes multiplied by 6.99 and divided
by the exchange rate of one U.S. dollar to RMB on the date such payment is due; and
    
    the Company is required under the terms of the Registration Rights Agreement to file
with the Securities and Exchange Commission (SEC) a registration statement to register
the ordinary shares issuable upon the conversion of the Notes and the exercise of the
Warrants to permit the resale of such ordinary shares to the public. The registration
statement was filed by the Company on June 27, 2008 and was declared effective by the SEC
on July 11, 2008.
 The material terms and conditions of the Warrants are summarized as follows:
 
    
    the initial exercise price of each Warrant is $8.91 per share, subject to adjustments
as provided for in the Warrant;
    
    the Warrants are exercisable at any time during a period of five years from May 15,
2008;
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 12
    
    Convertible notes (continued)
 
    
    the Warrants contain a cashless exercise feature if the registration statement
covering the shares underlying the Warrants is not available for the resale upon the
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 the Companys ordinary shares
outstanding immediately after giving effect to such exercise; and
    
    the Warrants require an automatic re-pricing of the exercise price if the Company
makes certain sales of its ordinary shares or ordinary share equivalents in a
capital-raising transaction at a price below the exercise price of the Warrants.
 The Notes included on the consolidated balance sheet as of December 31, 2008 are analyzed as
follows:
 RMB
    
    US$Gross proceeds
    
    
    489,601
    
    
    
    71,763Discount on notes: Equity-classified Investor Warrants
    
    
    (36,062
    )
    
    
    (5,286
    ) Liability-classified embedded derivatives
    
    
    (304,037
    )
    
    
    (44,564
    )Value of debt component at date of issue
    
    
    149,502
    
    
    
    21,913Foreign currency realignment
    
    
    7,484
    
    
    
    1,097Accretion of discount
    
    
    70,512
    
    
    
    10,335Partial conversion of Notes into ordinary shares
    
    
    (21,287
    )
    
    
    (3,120
    )Net value at end of year
    
    
    206,211
    
    
    
    30,225
 The terms and features of the Investor Warrants were evaluated under the guidance set forth in
EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to a Companys
Own Stock and the Company concluded that all indicators for equity classification provided in
EITF Issue No. 00-19 were present.Pursuant to APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants, the gross proceeds from the issuance of the Notes were allocated to the
Investors Warrants and the Notes on a relative fair value basis. The fair value of the
Investors Warrants applied for the purposes of the aforementioned allocation was estimated
using a multi-period binomial option pricing model on the grant date of the warrants and
amounted to approximately RMB59,415 (US$8,709). As a result of the allocation, approximately
RMB36,062 (US$5,286) of the gross proceeds from the issuance of the Notes was allocated to the
value of the Investor Warrants, which was recorded as a discount to the face value of the
Notes and credited to additional paid-in capital.The Notes are a form of hybrid instrument that comes with embedded derivatives, including the
right to convert the Notes into ordinary shares of the Company by the note holders, a put
option conditional upon certain events of default and a put option conditional upon a change
of control. In accordance with the guidance of SFAS No. 133, as amended, Accounting for
Derivative Instruments and Hedging Activities, and EITF Issue No. 00-19, the embedded
derivatives must be removed from the debt host and accounted for separately as derivative
instruments. Based on EITF No. 00-19, the embedded derivatives were determined to be
classified as liabilities on the balance sheet. The value of the embedded compound
derivatives on the date of initial recognition has been deducted as a discount to the face
value of the Notes and recorded as a liability on the balance sheet. Subsequent to initial
recognition, the liability-classified embedded derivatives are marked-to-market at the end of
each reporting period with the resulting gain or loss recognized in the consolidated statement
of operations. The valuation of the embedded derivatives at each period-end is derived from
various valuation methods which uses significant unobservable inputs (Level 3), including
Monte Carlo Simulation and Backward Dynamic Programming.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 12
    
    Convertible notes (continued)The embedded derivative liability included on the consolidated balance sheet as of December
31, 2008 is analyzed as follows:
 RMB
    
    US$Value on initial recognition
    
    
    304,037
    
    
    
    44,564Foreign currency realignment
    
    
    (6,551
    )
    
    
    (961
    )Gain on remeasurement included in earnings
    
    
    (144,939
    )
    
    
    (21,244
    )Settled on conversion of Notes
    
    
    (28,417
    )
    
    
    (4,165
    )Net value at end of year
    
    
    124,130
    
    
    
    18,194Gain on remeasurement for the period
include in earnings attributable to the
change in unrealized gain of liabilities
still outstanding at end of year
    
    
    (138,206
    )
    
    
    (20,257
    )
 The discount arising from the Investors Warrants and the embedded derivatives is accreted to
interest expense to the first put date of the Notes using the effective interest method.Costs associated with the issuance of the Notes, which have been classified as deferred debt
issuance costs on the consolidated balance sheet, are analyzed as follows:
 RMB
    
    US$Amount attributed to Agent Warrants
    
    
    31,451
    
    
    
    4,610Other cash costs
    
    
    20,887
    
    
    
    3,061Total deferred debt issuance costs on initial recognition
    
    
    52,338
    
    
    
    7,671Foreign currency realignment
    
    
    (1,198
    )
    
    
    (176
    )Amortization
    
    
    (10,851
    )
    
    
    (1,590
    )Written-off on conversion of Notes
    
    
    (5,600
    )
    
    
    (821
    )Net value at end of year
    
    
    34,689
    
    
    
    5,084
 The fair value of the Agent Warrants on the grant date, which was estimated using a
multi-period binomial option pricing model, amounted to approximately RMB33,951 (US$4,976). Of
this amount, RMB31,451 (US$4,610) was debited to deferred debt issuance costs as cost
associated with the issuance of the Notes and while the balance of
RMB2,500 (US$366) was
debited to additional paid-in capital as cost associated with the issuance of the Investor
Warrants.The deferred debt issuance costs are amortized to expense to the first put date of the Notes
using the effective interest method.On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46
into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share. The extinguishment of the
convertible debts that arose from the conversion resulted in a loss of RMB10,634 (US$1,559)
computed as follows:
 RMB
    
    US$Fair value of ordinary shares issued (@ US$5.31 per share)
    
    
    55,054
    
    
    
    8,069(Less) add: Carrying amount of: Notes
    
    
    (21,287
    )
    
    
    (3,120
    ) Accrued interest
    
    
    (316
    )
    
    
    (46
    ) Embedded derivatives
    
    
    (28,417
    )
    
    
    (4,165
    ) Deferred debt issuance costs
    
    
    5,600
    
    
    
    821Loss on extinguishment of convertible debts
    
    
    10,634
    
    
    
    1,559
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 13
    
    Segment information
 The Group has one operating segment  CECT, the operating subsidiary in the PRC. The results
of CECT used by the management to evaluate business performance are based on U.S. GAAP and
those accounting policies are consistent with those used in the preparation of the
consolidated financial statements.Segment income is determined based on income before income tax expense, minority interests and
extraordinary items and further excludes amortization of other intangible assets, impairment
of other intangible assets, in-process research and development, impairment of equity
investment, fair value adjustments on inventories, property, machinery and equipment, land use
rights, and income (loss) before income tax expense of the Company. Segment assets consist of
total assets of CECT excluding goodwill, other intangible assets, fair value adjustments on
property, machinery and equipment, land use rights, and other assets held by the Company.
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Revenues Sales of mobile phones
and accessories
    
    
    2,239,458
    
    
    
    
    254,546
    
    
    
    3,113,756
    
    
    
    2,140,346
    
    
    
    313,719 Services and other revenues
    
    
    41,740
    
    
    
    
    1,467
    
    
    
    27,338
    
    
    
    13,527
    
    
    
    1,982Total segment and
consolidated revenue
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    2,153,873
    
    
    
    315,701Segment income
    
    
    377,723
    
    
    
    
    32,320
    
    
    
    746,618
    
    
    
    606,853
    
    
    
    88,949Segment assets
    
    
    1,927,111
    
    
    
    
    2,136,120
    
    
    
    3,492,959
    
    
    
    4,327,502
    
    
    
    634,299Interest income
    
    
    5,320
    
    
    
    
    631
    
    
    
    10,619
    
    
    
    22,758
    
    
    
    3,336Interest expense
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (72,562
    )
    
    
    (10,636
    )Depreciation
    
    
    (6,677
    )
    
    
    
    (630
    )
    
    
    (12,504
    )
    
    
    (13,898
    )
    
    
    (2,037
    )
 F-30




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 13
    
    Segment information (continued)
 A reconciliation of segment income to consolidated income (loss) before income tax expense,
minority interests and extraordinary items for the period from January 1, 2006 through
November 30, 2006, the period from November 30, 2006 through December 31, 2006 and the years
ended December 31, 2007 and 2008, is as follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Segment income  CECT
    
    
    377,723
    
    
    
    
    32,320
    
    
    
    746,618
    
    
    
    606,853
    
    
    
    88,949In-process research
and development
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of other
intangible assets
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (11,727
    )
    
    
    (1,719
    )Impairment of other
intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,235
    )
    
    
    (3,845
    )Fair value adjustment
on property,
machinery and
equipment
    
    
    1,406
    
    
    
    
    131
    
    
    
    1,750
    
    
    
    1,941
    
    
    
    285Fair value adjustment
on inventories
    
    
    
    
    
    
    
    (1,053
    )
    
    
    (502
    )
    
    
    
    
    
    
    Fair value adjustment
on land use rights
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    26
    
    
    
    4Income (loss) before
income tax expense of
the Company
    
    
    3,368
    
    
    
    
    1,194
    
    
    
    (4,348
    )
    
    
    24,564
    
    
    
    3,600Consolidated earnings
(loss) before income
tax expense, minority
interests, and
extraordinary items
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    595,422
    
    
    
    87,274
 A reconciliation of segment assets to consolidated total assets as of December 31, 2007 and
2008 is as follows:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Total segment assets  CECT
    
    
    3,492,959
    
    
    
    4,327,502
    
    
    
    634,299 Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    16,536 Other intangible assets, net
    
    
    60,728
    
    
    
    22,766
    
    
    
    3,337 Property, machinery and equipment, net
    
    
    (14,042
    )
    
    
    (12,101
    )
    
    
    (1,774
    ) Land use rights
    
    
    (1,169
    )
    
    
    (1,144
    )
    
    
    (168
    ) Assets held by the Company
    
    
    342,812
    
    
    
    73,083
    
    
    
    10,712Total assets
    
    
    3,994,102
    
    
    
    4,522,920
    
    
    
    662,942
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 14
    
    Income taxes
 The Company and its subsidiaries are subject to income tax on an entity basis on income
arising in or derived from the tax jurisdictions in which they operate.The Company was incorporated under the International Business Companies Act of the BVI and,
accordingly, is exempt from BVI income taxes.Substantially all of the Groups income before income tax expense, minority interests, and
extraordinary items is generated in the PRC by CECT. Prior to January 1, 2008, CECT was
regarded as a high-tech enterprise by the PRC government and was granted a preferential PRC
enterprise income tax rate of 15%. Further, CECT was granted a tax holiday from the PRC
enterprise income tax for the period from May 22, 2000 to December 31, 2002, and was entitled
to a 7.5% PRC enterprise income tax rate from January 1, 2003 through December 31, 2005.
Prior to January 1, 2008, the branch of CECT at Huizhou, the PRC, is subject to the PRC
enterprise income tax at a rate of 24% as the branch is regarded as a manufacturing entity
located at the coastal zone.On March 16, 2007, the Fifth Plenary Session of the Tenth National Peoples Congress passed
the Enterprise Income Tax Law of the PRC (the New Tax Law) which took effect on January 1,
2008. Under the New Tax Law, effective January 1, 2008, the applicable enterprise income tax
rates in the PRC was revised to 25%. However, certain qualifying high-technology enterprises
will be entitled to a reduced enterprise income tax rate of 15% if they are recognized and
obtain the approval as a qualifying high-technology enterprise under the New Tax Law.Under the New Tax Law and before obtaining any qualifying high-technology enterprise status,
CECT, including its Huizhou branch, is subject to the enterprise income tax rate of 25%
commencing from the year beginning January 1, 2008. The deferred tax assets and liabilities
of CECT are measured using the enacted tax rate of 25% that is expected to apply in the years
in which those temporary differences are expected to be recovered or settled. In the event
that CECT is subsequently granted the qualifying high-technology enterprise status under the
New Tax Law, adjustments will be made to the deferred tax balance of CECT in the year that
such status is obtained.The new Tax Law also imposes a 10% withholding income tax for dividends distributed by a
foreign invested enterprise to its immediate holding company outside China for distribution of
earnings generated after January 1, 2008. Under the New Tax Law, the distribution of earnings
generated prior to January 1, 2008 is exempt from the withholding tax. In addition, as CECT
will not be distributing its earnings for the year ended December 31, 2008 to the Company, no
deferred tax liability has been recognized for the undistributed earnings of CECT through
December 31, 2008.Income tax expense consists of the following:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Current expense
    
    
    55,731
    
    
    
    
    4,718
    
    
    
    119,614
    
    
    
    162,267
    
    
    
    23,784Deferred expense (benefit)
    
    
    260
    
    
    
    
    (467
    )
    
    
    (6,237
    )
    
    
    (6,550
    )
    
    
    (960
    )Total income tax expense
    
    
    55,991
    
    
    
    
    4,251
    
    
    
    113,377
    
    
    
    155,717
    
    
    
    22,824
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 14
    
    Income taxes (continued)
 Substantially all of the taxable income of the Group is generated by CECT, the Groups
subsidiary located in the PRC that is subject to the PRC enterprise income tax. A
reconciliation of the expected income tax expense (based on the PRC statutory income tax
rate) to the actual income tax expense is as follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Expected tax based on PRC
statutory income tax rate
at 25% (33% for periods
prior to 2008)
    
    
    122,630
    
    
    
    
    (4,434
    )
    
    
    234,713
    
    
    
    148,855
    
    
    
    21,818Tax effect of preferential
tax rates
    
    
    (67,160
    )
    
    
    
    (4,753
    )
    
    
    (134,627
    )
    
    
    
    
    
    
    Tax rate differential of
the Company
    
    
    (2,274
    )
    
    
    
    (394
    )
    
    
    2,189
    
    
    
    (5,972
    )
    
    
    (875
    )Non-deductible expenses: In-process research
and development
    
    
    
    
    
    
    
    13,775
    
    
    
    
    
    
    
    
    
    
    
     Advertising expenses
    
    
    1,239
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
     Share-based
compensation expenses
    
    
    149
    
    
    
    
    
    
    
    
    10,037
    
    
    
    3,667
    
    
    
    537 Other
    
    
    1,407
    
    
    
    
    3
    
    
    
    1,065
    
    
    
    9,257
    
    
    
    1,357Non-taxable income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    (13
    )Actual income tax expense
    
    
    55,991
    
    
    
    
    4,251
    
    
    
    113,377
    
    
    
    155,717
    
    
    
    22,824
 Deferred income tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of those
amounts shown on the consolidated balance sheets are as follows:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Deferred tax assets:Tax losses carried forward
    
    
    
    
    
    
    1,288
    
    
    
    189Allowance for doubtful accounts
    
    
    868
    
    
    
    1,033
    
    
    
    151Inventory write-offs
    
    
    3,602
    
    
    
    3,919
    
    
    
    574Accrued product warranties
    
    
    1,215
    
    
    
    754
    
    
    
    111Property, machinery and equipment, net
    
    
    3,268
    
    
    
    2,821
    
    
    
    414Land use rights
    
    
    281
    
    
    
    275
    
    
    
    40Total deferred tax assets
    
    
    9,234
    
    
    
    10,090
    
    
    
    1,479Deferred tax liability:Other intangible assets, net
    
    
    (9,110
    )
    
    
    (3,416
    )
    
    
    (501
    )Net deferred tax asset
    
    
    124
    
    
    
    6,674
    
    
    
    978
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 14
    
    Income taxes (continued)
 In assessing the realizability of deferred income tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this assessment.Based upon the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes that it
is more likely than not that the Group will realize the benefits of the deductible
differences as of December 31, 2007 and 2008. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.As of December 31, 2007 and 2008, the Group has no material unrecognized tax benefit which
would favorably affect the effective income tax rate in future periods and does not believe
that there will be any significant increases or decreases of unrecognized tax benefits within
the next twelve months. No interest or penalties relating to income tax matters have been
imposed on the Group during the year ended December 31, 2006, 2007 and 2008, and no provision
for interest and penalties is deemed necessary as of December 31, 2007 and 2008.According to the PRC Tax Administration and Collection Law, the statute of limitations is
three years if the underpayment of taxes is due to computational errors made by the taxpayer
or its withholding agent. The statute of limitations extends to five years under special
circumstances, which are not clearly defined. In the case of a related party transaction, the
statute of limitation is ten years. There is no statute of limitation in the case of tax
evasion.
 15
    
    Distribution of income
 For the period from January 1, 2006 through November 30, 2006, the period from November 30,
2006 through December 31, 2006, and the years ended December 31, 2007 and 2008, substantially
all of the Groups income was contributed by CECT. Income of CECT, as determined under
generally accepted accounting principles in the PRC (the PRC GAAP), is distributable after
transfer to dedicated statutory reserve funds, namely, the general reserve, the enterprise
expansion fund, and the staff welfare and bonus fund, pursuant to the laws applicable to
Foreign Investment Enterprises in the PRC and the Companys articles of association. These
reserve funds can only be used for specific purposes and are not distributable as cash
dividends. Under the relevant regulations, CECT is required to transfer at least 10% of its
annual PRC GAAP income to the general reserve until such reserve reaches 50% of its
registered capital.Transfers to the enterprise expansion fund and the staff welfare and bonus fund are at the
discretion of the board of directors of CECT. For the period from January 1, 2006 through
November 30, 2006, the period from November 30, 2006 through December 31, 2006, and the years
ended December 31, 2007 and 2008, CECT made transfers to the general reserve of approximately
nil, RMB29,118, RMB65,796 and RMB46,429 (US$6,805), respectively. The board of directors
of CECT did not recommend any transfers to the enterprise expansion fund and the staff
welfare and bonus fund for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006 and the years ended December 31, 2007
and 2008. The accumulated balance of statutory reserve funds maintained at CECT as of
December 31, 2007 and 2008 were RMB137,126 and RMB183,555 (US$26,904), respectively.
 F-34




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 16
    
    Earnings (loss) per share
 The following represents a reconciliation from basic earnings (loss) per share to diluted
earnings (loss) per share:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    November2006 to
    
    
    30, 2006 toNovember
    
    
    December
    
    Year ended December 31,30, 2006
    
    
    31, 2006
    
    2007
    
    2008RMB
    
    
    RMB
    
    RMB
    
    RMB
    
    US$Net income (loss) before
extraordinary items
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    423,804
    
    
    
    62,119Amount allocated to
participating convertible
notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,889
    )
    
    
    (7,899
    )Net income (loss) before
extraordinary items
available to ordinary
shareholders
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    369,915
    
    
    
    54,220Extraordinary items
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    Basic net income (loss)
after extraordinary items
available to ordinary
shareholders
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    369,915
    
    
    
    54,220Net income (loss) before
extraordinary items
available to common
stockholders
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    369,915
    
    
    
    54,220Net income allocated to
participating convertible
notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,889
    
    
    
    7,899Interest on convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,944
    
    
    
    13,623Exchange loss on revaluation
of convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,471
    
    
    
    1,681Loss on extinguishment of
convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,634
    
    
    
    1,559Gain on remeasurement of
derivatives embedded in
convertible notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,939
    )
    
    
    (21,244
    )Fully diluted net income
(loss) before extraordinary
items
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    393,914
    
    
    
    57,738Extraordinary items
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    
    
    
    
    Fully diluted net income
(loss) after extraordinary
items
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    393,914
    
    
    
    57,738Weighted average ordinary
shares:Basic
    
    
    40,000,000
    
    
    
    
    40,000,000
    
    
    
    48,322,000
    
    
    
    49,216,000
    
    
    
    49,216,000Effect of dilutive ordinary
share equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,170,000
    
    
    
    7,170,000Diluted
    
    
    40,000,000
    
    
    
    
    40,000,000
    
    
    
    48,322,000
    
    
    
    56,386,000
    
    
    
    56,386,000Basic earnings (loss) per
common share:Before extraordinary items
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    7.52
    
    
    
    1.10Extraordinary items
    
    
    0.44
    
    
    
    
    
    
    
    
    0.59
    
    
    
    
    
    
    
    After extraordinary items
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    7.52
    
    
    
    1.10Diluted earnings(loss) per
common share:Before extraordinary items
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    6.99
    
    
    
    1.02Extraordinary items
    
    
    0.44
    
    
    
    
    
    
    
    
    0.59
    
    
    
    
    
    
    
    After extraordinary items
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    6.99
    
    
    
    1.02
 F-35




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 There were no ordinary share equivalents outstanding during the period from January 1, 2006
through November 30, 2006 and the period from November 30, 2006 through December 31, 2006.
Ordinary share equivalents outstanding during the year ended December 31, 2007, which consist
of share options issued pursuant to the Companys stock option plan, were anti-dilutive and
accordingly, were excluded from the calculation of diluted earnings per share for the year
ended December 31, 2007. Except for the convertible notes issued in May 2008, all other
ordinary share equivalents outstanding during the year ended December 31, 2008, including
share options and warrants, were anti-dilutive and accordingly, were excluded from the
calculation of diluted earnings per share for the year ended December 31, 2008.
 17
    
    Ordinary shares
 Pursuant to a shareholders resolution of the Company passed on January 8, 2007, the par
value of the Companys shares was reduced to nil and the Company was authorized to issue an
unlimited number of ordinary shares. As a result, the Companys additional paid-in capital
account as of January 8, 2007 of approximately RMB308,283, which relates to the proceeds from
issuance of ordinary shares in prior periods, was transferred to and became part of the
Companys ordinary share capital.On April 13, 2007, the Companys Board of Directors and Xing approved and executed a
40-for-one split of the Companys ordinary shares. All shares and per share amounts
presented in the accompanying consolidated financial statements have been presented on a
retroactive basis to reflect the effect of the share split.On May 8, 2007, the Company issued 12,500,000 new ordinary shares at US$12 per share in
connection with its IPO on the NYSE. The net proceeds from the IPO, after deduction of
related expenses, amounted to approximately RMB1,021,219 (US$139,997).On January 7, 2008, the Company issued 565,000 new ordinary shares at US$7.50 per share upon
the exercise of share options granted to a director and certain of the Companys employees.On May 15, 2008, the Company repurchased 6,966,666 of its issued ordinary shares at US$6.94
per share from two existing shareholders of the Company through the issuance of the Notes
discussed in note 12 to the consolidated financial statements. All ordinary shares
repurchased were subsequently cancelled.On August 19, 2008, the holders of the Notes exercised the option to convert US$8,251 of the
principal amount of the Notes and accrued interest thereon of US$46
into 1,511,397 ordinary shares of the Company at a conversion price of US$5.49 per share. The stock price of the
Companys ordinary shares was US$5.31 at the date of exercise of the option to convert.
 18
    
    Share options and warrants
 (a)
    
    Xing 2005 Stock PlanOn December 2, 2005, the shareholders of Xing approved and adopted the 2005 Stock
Compensation Plan of Xing (the Xing 2005 Stock Plan), which allows for the issuance of
either incentive stock options and or non-qualified stock options to certain directors,
employees and external advisors of Xing and its subsidiary companies. A total of 2,000,000
common shares were authorized and reserved for issuance under the Xing 2005 Stock Plan as of
December 31, 2005.On February 24, 2006, pursuant to the Xing 2005 Stock Plan, Xing granted a total of 2,000,000
share options, of which 120,000 share options were granted to a director and 1,880,000 share
options were granted to certain employees of the Group, as compensation for services rendered
by them to the Group. The fair value of these options was estimated at the date of grant to
be US$3.6495 each by using the Black-Scholes option pricing model. These options, each of
which gives the holder the right to subscribe for one ordinary share of Xing at an exercise
price of US$7.00, vested immediately and were exercisable within a period of ten years from
the date of grant. The options granted are not exercisable into ordinary share of the
Company. The Group recorded share-based compensation expense of RMB3,522, being the fair
value of the options at the date of grant as computed using the Black-Scholes option pricing
model, in the period from January 1, 2006 through November 30, 2006 and a corresponding
credit to additional paid-in capital. No other options were granted to the directors or the
employees of the Group pursuant to the Xing 2005 Stock Plan for the period from November 30,
2006 to December 31, 2006 or for the years ended December 31, 2007 and 2008.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 18
    
    Share options and warrants (continued)
 (b)
    
    QXMC 2007 Stock PlanPursuant to a shareholders resolution passed on March 19, 2007, the Company adopted an equity
incentive plan (the QXMC 2007 Stock Plan) under which the Company may grant incentive stock
options, nonstatutory stock options, restricted stock, stock appreciation rights, restricted
stock units, performance units, performance shares and other stock based awards to certain
qualifying directors, employees and consultants of the Group in accordance with the provisions
of the QXMC 2007 Stock Plan.On March 19, 2007, the Company granted stock options to a director and various employees of
the Group to purchase 2,716,520 shares of the Companys ordinary shares at an exercise price
of US$7.50 per share. The options granted have terms ranging from 2 to 6 years from the date
of grant and vest on various dates commencing from November 1, 2007.The weighted-average fair value of the share options on the date of grant was US$5.23 per
share option, which was estimated by management using the Black-Scholes option pricing based
on the following assumptions:
 Fair value of underlying ordinary shares on grant date
    
    US$
    10.43Expected share price volatility
    
    
    47.50
    %Expected dividend yield
    
    
    0.0
    %Expected term (in years)
    
    
    3.5Risk-free interest rate
    
    
    5.0
    %
 The estimated fair value of the Companys underlying shares on the date of grant was
determined by management considering the valuation performed by American Appraisal China
Limited, an unrelated independent valuation firm. Because the Company did not have a trading
history at the time the options were issued, the weighted average expected volatility of
47.50% was estimated based on the average volatility of several comparable listed companies in
the telecommunication equipment sector. The risk-free rate for periods within the contractual
life of the options is based on the market yield of U.S. dollar China International Government
Bonds in effect at the time of grant. The expected dividend yield was based on historical
dividends. The expected term was estimated based on the average vesting and contractual terms
as the Company does not have sufficient data on which to estimate the expected future
exercises of the option granted. Changes in these subjective input assumptions could
materially affect the fair value estimates.The Company recognizes compensation cost based on the grant date fair value over the period
that the employees are required to provide services in exchange for the award. The amount of
share-based compensation expense recognized for the options was approximately US$5,119
(RMB38,626) and US$2,111 (RMB14,668) during the years ended December 31, 2007 and 2008,
respectively. Of the expense recognized in 2007, 1% was charged to selling and distribution
expenses, 94% to general and administrative expenses and 5% to research and development
expenses. Of the expense recognized in 2008, 2% was charged to selling and distribution
expenses, 83% to general and administrative expenses and 15% to research and development
expenses. As of December 31, 2008, the total unrecognized compensation cost related to
unvested share options amounted to US$6,378, which is expected to be recognized over a
remaining weighted average vesting periods of 3.3 years.In addition, on March 19, 2007, in consideration of services rendered in connection with the
Companys IPO, the Company also granted an option to a consultant to purchase up to 1,200,000
shares of the Companys common stock at an exercise price of US$18 per share with a term of
four years commencing from the grant date. The option vested on April 1, 2007 and will expire
on March 18, 2011. The estimated fair value of the option, which amounted to approximately
RMB12,859 (US$1,763) as computed using the Black-Scholes option-pricing model on the grant
date, was credited to additional paid-in capital and included as ordinary shares issuance
costs during the year ended December 31, 2007.The fair value of the share options on the date of grant was US$1.385 per share option which
was estimated by management using the Black-Scholes option pricing based on the following
assumptions:
 Fair value of underlying ordinary shares on grant date
    
    US$
    10.43Expected share price volatility
    
    
    48.90
    %Expected dividend yield
    
    
    0.0
    %Expected term (in years)
    
    
    2.0Risk-free interest rate
    
    
    5.1
    %
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 18
    
    Share options and warrants (continued)
 (b)
    
    QXMC 2007 Stock Plan (continued)Stock option activity of the Company during the year ended December 31, 2008 was as follows:
 Weighted
    
    Weightedaverage
    
    averageexercise
    
    remaining
    
    AggregateNumber of
    
    price
    
    contractual
    
    intrinsicoptions
    
    per share
    
    term
    
    valueUS$
    
    
    
    
    
    US$Balance as of January 1, 2008
    
    
    3,916,520
    
    
    
    10.72Exercised
    
    
    (565,000
    )
    
    
    7.50Forfeited
    
    
    (140,000
    )
    
    
    7.50Balance as of December 31, 2008
    
    
    3,211,520
    
    
    
    11.42
    
    
    3.1 years
    
    
    Vested and expected to vest as of
December 31, 2008
    
    
    3,211,520
    
    
    
    11.42
    
    
    3.1 years
    
    
    Exercisable as of December 31, 2008
    
    
    1,847,680
    
    
    
    14.32
    
    
    2.3 years
    
    
    
 (c)
    
    WarrantsThe Company did not have any outstanding warrants during the period from January 1, 2006
through November 30, 2006, the period from November 30, 2006 through December 31, 2006, and
the year ended December 31, 2007. Warrants outstanding during the year ended December 31,
2008 relates to the Warrants issued in connection with the issuance of the Notes discussed in
note 12 to the consolidated financial statements. Information about the warrants outstanding
as of December 31, 2008 is as follows:
 Weighted
    
    Weightedaverage
    
    averageexercise
    
    remainingNumber of
    
    price
    
    contractualwarrants
    
    per share
    
    termUS$Investor Warrants
    
    
    1,648,721
    
    
    
    8.91
    
    
    4.4 yearsAgent Warrants
    
    
    942,127
    
    
    
    8.91
    
    
    4.4 yearsTotal
    
    
    2,590,848
    
    
    
    8.91
    
    
    4.4 yearsExercisable as of December 31, 2008
    
    
    2,590,848
    
    
    
    8.91
    
    
    4.4 years
 The fair value of the Warrants on the date of grant was US$5.15 per warrant, which was
estimated by management using a multi-period binomial option pricing model based on the
following assumptions:
 Stock price of underlying ordinary share on grant date
    
    US$7.45Risk-free interest rate
    
    
    4.3
    %Expected dividend yield
    
    
    0
    %Expected term
    
    5 yearsExpected stock price volatility
    
    
    65.38
    %
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 19
    
    Fair value of financial instruments
 The carrying amounts for cash, restricted cash, accounts receivable, bills receivable,
prepayments to suppliers, prepaid expenses and other current assets, short-term borrowings,
accounts payable, prepayments from customers, accrued liabilities, amounts due from related
parties, and other payables and current liabilities, approximate their fair values because of
the short maturity of these instruments.The carrying amount and the estimated fair value of the Groups convertible notes at December
31, 2008 was RMB206,211 (US$30,225) and RMB357,621 (US$52,418), respectively. The
liability-classified embedded derivatives relating to the convertible notes are measured at
fair value at the end of each reporting period (see note 12).
 20
    
    Commitments and contingencies
 (a)
    
    Operating lease commitmentsThe Group has operating lease agreements for office and factory premises which extend through
December 2010. As of December 31, 2008, the Groups future minimum lease payments required
under non-cancellable operating leases are as follows:
 RMBYear ending December 31, 2009
    
    
    4,362 2010
    
    
    3,456Total
    
    
    7,818
 Lease expenses of the Group for the period from January 1, 2006 through November 30, 2006, the
period from November 30, 2006 through December 31, 2006, and the years ended December 31, 2007
and 2008 were approximately, RMB3,347, RMB323, RMB4,560 and RMB4,998 (US$733), respectively.
 (b)
    
    GuaranteesThe Group had provided guarantees to banks in respect of borrowings granted to QXCI to the
extent of RMB150,000 as of December 31, 2007 and 2008. Such borrowings were utilized by QXCI
to the extent of RMB107,550 and RMB105,655 (US$15,486) as of December 31, 2007 and 2008,
respectively.
 21
    
    Related party transactions
 (a)
    
    Name and relationship of related parties
 Name of related party
    
    Existing relationship with the CompanyQiao Xing Universal Telephone, Inc. (Xing)
    
    Parent companyHuizhou Qiao Xing Communication Industry
Ltd. (QXCI)
    
    Subsidiary of XingQiao Xing Group Limited (QXGL)
    
    A company controlled by certain directors of the
Company
 (b)
    
    Summary of related party transactions
 (i)
    
    During the period from January 1, 2006 through November 30, 2006, the Group sold
mobile phones and accessories to QXCI, a subsidiary of Xing, in the ordinary course of
its business at similar terms as the Group traded with its independent customers,
amounting to RMB1,377.(ii)
    
    During the period from January 1, 2006 through November 30, 2006, the period from
November 30, 2006 through December 31, 2006, and the years ended December 31, 2007 and
2008, the Group received processing fee income from QXCI for handset processing services
rendered, amounting to RMB2,709, RMB859, RMB13,314 and RMB6,573 (US$963), respectively.
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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share and per share data)
 21
    
    Related party transactions (continued)
 (b)
    
    Summary of related party transactions (continued)
 (iii)
    
    The Company provided guarantee in respect of US$40,000 of senior convertible notes
issued by Xing to two strategic investors in June 2006. Immediately prior to the listing
of the Companys ordinary shares on the NYSE on May 3, 2007, the two strategic investors
converted the US$40,000 convertible notes into 7,800,000 ordinary shares of the Company
that were then owned by Xing.
 The Group also participates in a cash management arrangement at the direction and discretion
of Xing as further described below. Other transactions with related parties are set out in
other Notes to the consolidated financial statements.
 (c)
    
    Summary of related party balances
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Amount due to Xing
    
    
    (4,532
    )
    
    
    (11,155
    )
    
    
    (1,635
    )
 The amount represents non-interest bearing net advances to and from Xing which are unsecured
and have no fixed repayment terms. The amount resulted principally from the Groups
participation in a cash management arrangement at the direction and discretion of Xing (Note
2(c)) and represents the netting of the following advances to and from the related parties of
Xing:
 December 31,2007
    
    2008RMB
    
    RMB
    
    US$Amounts due (to) from related parties before
execution of netting arrangement: Xing
    
    
    (54,848
    )
    
    
    (14,047
    )
    
    
    (2,059
    ) QXGL
    
    
    (1,914
    )
    
    
    (4,364
    )
    
    
    (640
    ) Director: Wu Zhi Yang
    
    
    (737
    )
    
    
    (147
    )
    
    
    (21
    ) QXCI
    
    
    52,967
    
    
    
    7,403
    
    
    
    1,085Net advances from Xing
    
    
    (4,532
    )
    
    
    (11,155
    )
    
    
    (1,635
    )
 22
    
    Subsequent events
 (a)
    
    On March 5, 2009, CECT incorporated a wholly-owned subsidiary, Beijing VEVA Technology Co.,
Ltd. (BVT), in the PRC to engage in the sale of mobile phones and accessories. The
registered and paid-up capital of BVT was RMB50,000.(b)
    
    On March 31, 2009, Xing and Mr. Wu Ruilin, the chairman of Xing and vice chairman of the
Company, entered into agreements to purchase the outstanding Notes of the Company of
approximately US$61,749 from the three holders of the Notes, DKR SoundShore Oasis Holding Fund
Ltd., CEDAR DKR Holding Fund Ltd. and Chestnut Fund Ltd. (collectively, the Sellers). Under
the terms of the agreements, Xing agreed to purchase US$30,000 of the outstanding Notes for an
aggregate purchase price of US$24,000, payable in three installments to the Sellers on or
before the close of business, New York time, on May 1, 2009. Mr. Wu Ruilin agreed to purchase
the remaining Notes for an aggregate purchase price of US$26 million, payable in full to the
Sellers on or before the close of business, New York time, on August 31, 2009.
 F-40