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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 1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number: 1-33430
 QIAO XING MOBILE
COMMUNICATION CO., LTD.
  Not Applicable
    
    British Virgin Islands(Translation of Registrants name into English)
    
    (Jurisdiction of Incorporation or Organization)
 10th Floor CEC Building, 6 Zhongguancun South Street, Beijing 100086, Peoples Republic of China
   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, 2007:
   o þ
  o þ
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
  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
    
    
    24Item 4A.
    
    Unresolved Staff Comments
    
    
    39Item 5.
    
    Operating and Financial Review and Prospects
    
    
    39Item 6.
    
    Directors, Senior Management and Employees
    
    
    61Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    69Item 8.
    
    Financial Information
    
    
    71Item 9.
    
    The Offer and Listing
    
    
    72Item 10.
    
    Additional Information
    
    
    72Item 11.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    77Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    78PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    79Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    79Item 15.
    
    Controls and Procedures
    
    
    79Item 16A.
    
    Audit Committee Financial Expert
    
    
    80Item 16B.
    
    Code of Ethics
    
    
    80Item 16C.
    
    Principal Accountant Fees and Services
    
    
    80Item16D.
    
    Exemptions from The Listing Standards for Audit Committees
    
    
    80Item 16E.
    
    Purchases of Equity Securities by The Issuer and Affiliated Purchasers
    
    
    80PART IIIItem 17.
    
    Financial Statements
    
    
    81Item 18.
    
    Financial Statements
    
    
    81Item 19.
    
    Exhibits
    
    
    81EX-4.3 SOFTWARE LICENSE AGREEMENT, DATED OCTOBER 8, 2005EX-4.8 TECHNOLOGY LICENSE AGREEMENT, DATED JUNE 11, 2007EX-8.1 SUBSIDIARIES OF THE REGISTRANTEX-12.1 CERTIFICATION OF CEOEX-12.2 CERTIFICATION OF CFOEX-13.1 CERTIFICATION OF CFO AND CEOEX-15.1 CONSENT OF KPMG, DATED JUNE 25, 2008




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INTRODUCTION
    
    
    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;
    
    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;
    
    RMB and Renminbi are to the legal currency of China;
    
    SMT are to Surface Mount Technology, a space saving technique whereby special leadless components are soldered onto
the surface of a printed circuit board; and
    
    US$, $, and U.S. dollars are to the legal currency of the United States.
   1




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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 the expansion of our manufacturing capacity;
    
    our expectations with respect to increased revenue growth and our ability to achieve profitability resulting from
increases in our production volumes;
    
    our future business development, results of operations and financial condition; and
    
    competition from other manufacturers of mobile handsets.
  2




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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(Amounts in thousands, except per share data)
    
    2003(1)
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Revenues
    
    
    1,602,807
    
    
    
    1,414,265
    
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    430,605Gross profit
    
    
    183,750
    
    
    
    168,751
    
    
    
    337,747
    
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    121,357In-process research and development
    
    
    (35,263
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (31,361
    )
    
    
    (11,880
    )
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (4,425
    )Operating income (loss)
    
    
    23,295
    
    
    
    100,367
    
    
    
    273,890
    
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    99,939Interest expense
    
    
    (11,752
    )
    
    
    (21,719
    )
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (6,448
    )Gain on disposal of a subsidiary
    
    
    
    
    
    
    
    
    
    
    10,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of an investment in affiliate
    
    
    
    
    
    
    10,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in earnings of an affiliate
    
    
    6,920
    
    
    
    1,681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) before income tax expense, minority
interests, and extraordinary items
    
    
    16,442
    
    
    
    91,283
    
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    97,504Income tax expense
    
    
    (5,008
    )
    
    
    (7,533
    )
    
    
    (16,719
    )
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (15,543
    )Minority interests
    
    
    (29,265
    )
    
    
    (43,520
    )
    
    
    (52,349
    )
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (4,534
    )Earnings (loss) before extraordinary items
    
    
    (10,911
    )
    
    
    41,911
    
    
    
    182,450
    
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    77,427Extraordinary items: Gains on acquisitions of additional
equity interests in CECT, net of nil tax
    
    
    
    
    
    
    
    
    
    
    48,157
    
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    3,933Net income (loss) (2)
    
    
    (10,911
    )
    
    
    41,911
    
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    81,360Basic and diluted earnings (loss) per share before
extraordinary gains (3)
    
    
    (0.27
    )
    
    
    1.05
    
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    1.60Basic and diluted earnings (loss) per share (2)(3)
    
    
    (0.27
    )
    
    
    1.05
    
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    1.68Weighted average number of shares outstanding
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    40,000
    
    
    
    
    40,000
    
    
    
    48,322
    
    
    
    48,322
 3




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(Old Basis)
    
    
    (New Basis)Consolidated balance sheet data
    
    December 31,
    
    November
    
    
    December(Amounts in thousands)
    
    2003
    
    2004
    
    2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Cash
    
    
    112,502
    
    
    
    81,741
    
    
    
    379,377
    
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    374,247Accounts receivable, net
    
    
    213,616
    
    
    
    373,051
    
    
    
    513,035
    
    
    
    407,610
    
    
    
    
    546,893
    
    
    
    418,564
    
    
    
    57,380Prepayments to suppliers
    
    
    295,732
    
    
    
    233,098
    
    
    
    232,189
    
    
    
    145,652
    
    
    
    
    232,008
    
    
    
    155,993
    
    
    
    21,385Total current assets
    
    
    831,990
    
    
    
    1,228,800
    
    
    
    1,678,800
    
    
    
    1,684,197
    
    
    
    
    1,893,910
    
    
    
    3,601,182
    
    
    
    493,678Total assets
    
    
    1,118,762
    
    
    
    1,452,774
    
    
    
    1,798,408
    
    
    
    1,985,147
    
    
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    547,543Short-term borrowings
    
    
    323,550
    
    
    
    638,068
    
    
    
    639,972
    
    
    
    610,314
    
    
    
    
    602,790
    
    
    
    983,904
    
    
    
    134,881Accounts payable
    
    
    114,329
    
    
    
    214,204
    
    
    
    312,806
    
    
    
    177,609
    
    
    
    
    165,326
    
    
    
    107,990
    
    
    
    14,804Total current liabilities
    
    
    700,852
    
    
    
    954,089
    
    
    
    1,156,072
    
    
    
    1,026,702
    
    
    
    
    1,207,228
    
    
    
    1,239,764
    
    
    
    169,957Total liabilities
    
    
    718,111
    
    
    
    966,692
    
    
    
    1,161,491
    
    
    
    1,030,413
    
    
    
    
    1,218,968
    
    
    
    1,245,325
    
    
    
    170,719Total shareholders equity
    
    
    297,445
    
    
    
    339,356
    
    
    
    569,963
    
    
    
    879,637
    
    
    
    
    1,040,288
    
    
    
    2,670,542
    
    
    
    366,099
 (Old Basis)
    
    
    (New Basis)January 1,
    
    
    November 30,2006 to
    
    
    2006 toConsolidated cash flow data
    
    Year ended December 31,
    
    November 30,
    
    
    December 31,
    
    Year ended(Amounts in thousands)
    
    2003(1)
    
    2004
    
    2005
    
    2006
    
    
    2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Net cash provided by (used in) operating activities
    
    
    (298,098
    )
    
    
    (13,426
    )
    
    
    110,970
    
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    117,281Net cash provided by (used in) investing activities
    
    
    (10,441
    )
    
    
    (43,455
    )
    
    
    18,386
    
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    3,156Net cash provided by financing activities
    
    
    421,026
    
    
    
    26,120
    
    
    
    168,413
    
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    153,172
 Year ended December 31,Other selected operating data(4)
    
    2003
    
    2004
    
    2005
    
    2006
    
    2007Mobile handsets shipped (in thousands of units)
    
    
    1,210
    
    
    
    1,353
    
    
    
    1,730
    
    
    
    2,262
    
    
    
    3,816Average mobile handset selling price (RMB) (5)
    
    
    1,299
    
    
    
    1,011
    
    
    
    1,012
    
    
    
    1,094
    
    
    
    816
 
 (1)
    
    Includes the operating results and cash flow data of CECT from the date of our acquisition of
65% of CECT on February 8, 2003 under the purchase method of accounting. Before such
acquisition, we were a holding company incorporated in the British Virgin Islands with no
significant operations. As a result, we consider CECT to be our predecessor company.
Therefore, as this information does not reflect the full-year results for CECT, it may not be
comparable to our operating results and cash flow data for the year ended December 31, 2004 or
subsequent years. Separate selected financial data of CECT for the period from January 1, 2003
to February 7, 2003 have not been presented as we believe such additional data is not
significant in order for investors to understand our results of operations.(2)
    
    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 12 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,
    
    
    November 30,2006 to
    
    
    2006 toYear ended December 31,
    
    November 30,
    
    
    December 31,(Amounts in thousands)
    
    2003
    
    2004
    
    2005
    
    2006
    
    
    2006
    
    Year ended December 31, 2007(RMB)
    
    (RMB)
    
    (RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)(Reduction in net income by) / increase in net loss by
    
    
    1,923
    
    
    
    (11,133
    )
    
    
    (24,017
    )
    
    
    (1,147
    )
    
    
    
    1
    
    
    
    (1,056
    )
    
    
    (145
    )(Reduction in basic and diluted earnings per share
by) / increase in basic and diluted earnings per
share by(3)
    
    
    0.35
    
    
    
    (0.28
    )
    
    
    (0.61
    )
    
    
    (0.02
    )
    
    
    
    0.00
    
    
    
    (0.02
    )
    
    
    (0.00
    )
 
 (3)
    
    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 14 to our audited consolidated
financial statements.(4)
    
    Other selected operating data is derived from our operating records and, for the period from
January 1, 2003 to February 7, 2003, the operating records of CECT.(5)
    
    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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Renminbi per U.S. dollar noon buying ratePeriod end
    
    Average(1)
    
    Low
    
    High2003
    
    
    8.2767
    
    
    
    8.2771
    
    
    
    8.2765
    
    
    
    8.28002004
    
    
    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
    
    
    
    7.8127December
    
    
    7.2946
    
    
    
    7.3682
    
    
    
    7.2946
    
    
    
    7.41202008January
    
    
    7.1818
    
    
    
    7.2405
    
    
    
    7.1818
    
    
    
    7.2946February
    
    
    7.1115
    
    
    
    7.1644
    
    
    
    7.1100
    
    
    
    7.1973March
    
    
    7.0120
    
    
    
    7.0722
    
    
    
    7.0105
    
    
    
    7.1110April
    
    
    6.9870
    
    
    
    6.9997
    
    
    
    6.9840
    
    
    
    7.0185May
    
    
    6.9400
    
    
    
    6.9725
    
    
    
    6.9377
    
    
    
    7.0000June (through June 24, 2008)
    
    
    6.8699
    
    
    
    6.9080
    
    
    
    6.8699
    
    
    
    6.9460
 
 Source:Federal Reserve Bank of New York(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
 Due to our rapid growth in recent years, 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.
  7




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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.
  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.
  8




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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.
  9




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##### Table of Contents



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.
  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.
  10




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##### Table of Contents



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.
    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.
  11




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##### Table of Contents



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.
     12




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##### Table of Contents




    
    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.
    Allegations of health risks from the electromagnetic fields generated by base stations and mobile
devices, and the lawsuits and publicity relating to them, regardless of merit, could negatively
affect our operations by leading consumers to reduce their use of mobile handsets or by causing us
to allocate monetary and personnel resources to address these issues.
  13




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##### Table of Contents



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.
    Changes in the regulatory environment for telecommunications systems and services, especially in
China, could negatively impact our business.
   14




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##### Table of Contents



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.
    15




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##### Table of Contents



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.
    Fluctuations in exchange rates could adversely affect our business.
  16




---



##### Table of Contents



If we grant employee share options and other share-based compensation in the future, our net income
could be adversely affected.
  We may become a passive foreign investment company, which could result in adverse U.S. federal
income tax consequences to U.S. investors.
     17




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##### Table of Contents



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.
  18




---



##### Table of Contents



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.
   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.
  
    
    a majority of our board of directors must be independent directors;
 
    
    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.
  19




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##### Table of Contents



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.
    Uncertainties with respect to the PRC legal system could limit the legal protections available to
you and us.
  20




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##### Table of Contents



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.
  21




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##### Table of Contents



Our failure to obtain the prior approval of the China Securities Regulatory Commission, or the
CSRC, of the listing and trading of our ordinary shares on the New York Stock Exchange could have a
material adverse effect on our business, operating results, reputation and trading price of our
ordinary shares.
  We face risks related to health epidemics and other outbreaks.
  22




---



##### Table of Contents



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;
 
    
    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.
   23




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##### Table of Contents



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.
   24




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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 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; 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.
 25




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##### Table of Contents




    
    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;
 
    
    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.
     26




---



##### Table of Contents



B. Business Overview
    27




---



##### Table of Contents



PRC Mobile Handset Industry
     Growing affordability of mobile handsets
  Continuing growth increasingly driven by replacement demand
  28




---



##### Table of Contents



Increasing demand for differentiated mobile handsets with more functions and personalized features
    Continual evolution of wireless network technologies
  Highly competitive market
  Increasing presence of mobile telecommunication operators and large electronic retailers in handset
distribution
   Our Products
   29




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##### Table of Contents



Date ofModel
    
    Key features
    
    commercial launchC1000
    
    Ultra-long standby battery; metal casing
    
    November 2006C1000+
    
    Ultra-long standby battery; metal casing; password protection
    
    May 2007C2000
    
    Ultra-long standby battery; metal casing; multimedia
    
    May 2007T100
    
    Fingerprint identification; ultra-long standby battery; multimedia; large LCD design
    
    May 2007C1200
    
    Ultra-long standby battery; metal casing; FM radio
    
    July 2007C6000
    
    Stock trading function; ultra-long standby battery; metal casing;
    
    July 2007W100
    
    Watch phone; 65K TFT-LCD; 1GB T-Flash; camera; FM radio
    
    September 2007C3100
    
    Flash light; ultra-long standby battery; ultra-low cost
    
    December 2007T300
    
    Analog mobile TV; fingerprint recognition; ultra-long standby battery; FM radio
    
    January 2008C7000A
    
    Ultra-long standby battery; cardiograph function
    
    February 2008S60
    
    Luxurious series with embedded crystals and leather casing
    
    May 2008
  For the year ended December 31,2005
    
    2006
    
    2007Product
    
    Revenues
    
    Percentage
    
    Rank
    
    Revenues
    
    Percentage
    
    Rank
    
    Revenues
    
    Percentage
    
    RankC1000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    623,495
    
    
    
    19.8
    %
    
    
    1C1000+
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332,318
    
    
    
    10.6
    %
    
    
    2T100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,903
    
    
    
    10.2
    %
    
    
    3C2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    320,147
    
    
    
    10.2
    %
    
    
    4C6000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,099
    
    
    
    8.4
    %
    
    
    5A1000 series
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    478,015
    
    
    
    18.8
    %
    
    
    1
    
    
    
    
    
    
    
    V180 series
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419,634
    
    
    
    16.5
    %
    
    
    2
    
    
    
    
    
    
    
    IPD series
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377,106
    
    
    
    14.9
    %
    
    
    3
    
    
    
    
    
    
    
    CECT3270 series
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    256,554
    
    
    
    10.1
    %
    
    
    4
    
    
    
    
    
    
    
    T800 series
    
    
    389,791
    
    
    
    20.9
    %
    
    
    2
    
    
    
    110,162
    
    
    
    4.3
    %
    
    
    5
    
    
    
    
    
    
    
    T868 series
    
    
    459,426
    
    
    
    24.6
    %
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    QX series
    
    
    135,759
    
    
    
    7.3
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Q series
    
    
    131,531
    
    
    
    7.1
    %
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    T688
    
    
    107,720
    
    
    
    5.8
    %
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 30




---



##### Table of Contents



Research and Development
       Manufacturing
 Manufacturing facilities
   31




---



##### Table of Contents



Raw materials and components
      Production management
  32




---



##### Table of Contents



Manufacturing process
  
 Quality control and certifications
   Distribution and Marketing
 Distribution network
   33




---



##### Table of Contents



Marketing
  Pricing
   After-Sales Services
  Intellectual Property and Proprietary Rights
    34




---



##### Table of Contents



Technology Licenses and Agreements
   
    
    Under a technology license agreement entered into by CECT with
Huayu Ziyuan Software Technology (Beijing) Co., Ltd., or Huayu,
dated May 25, 2004, we were granted the right to use the word
processing system developed by Huayu for a period of five years;
 
    
    Under a software license agreement entered into by CECT with
Mobile Soft Technology (Nanjing) Co., Ltd., or Mobile Soft, on
October 28, 2005, we were granted the right to use certain
software that supports wireless application protocol and
multimedia messaging service functions in our handsets for a
period of two years. The contract was renewed on March 10, 2008
with Access China Inc., a company that acquired Mobile Soft in
2007, for an additional three years;
 
    
    Under a technology license agreement entered into by CECT with
Beijing Qinghua Ziguang Wintone Information Technology Ltd., or
Qinghua Ziguang, dated March 13, 2006, we were granted the right
to use certain handwriting technology developed by Qinghua Ziguang
for a period of two years; and
 
    
    Under a technology license agreement entered into by CECT with
Hanwang Technology Co., Ltd., or Hanwang, dated June 13, 2007, we
were granted the right to use the word processing system developed
by Hanwang for a period of one year. This contract will be renewed
automatically each year until any party to the contract notifies
to terminate the contract.
  Competition
   35




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##### Table of Contents



Environmental Matters
  Employees
  As of December 31,Functions
    
    2005
    
    2006
    
    2007Manufacturing and engineering
    
    
    470
    
    
    
    550
    
    
    
    516General and administration
    
    
    74
    
    
    
    77
    
    
    
    66Marketing and sales
    
    
    18
    
    
    
    32
    
    
    
    44Research and development
    
    
    152
    
    
    
    153
    
    
    
    162
     36




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##### Table of Contents



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.
   37




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##### Table of Contents



MII license
       NDRC approval
    38




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##### Table of Contents



Environmental Regulations
  C. Organizational Structure
  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
   39




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##### Table of Contents



Key Factors Affecting Our Financial Performance
  
    
    Industry growth;
    
    Competition and market position;
    
    Product offerings and pricing;
    
    Cost management; and
    
    Working capital management.
 Industry growth
    Competition and market position
    Product offerings and pricing
  40




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##### Table of Contents



Cost management
  Working capital management
  Financial Impact of Our Corporate History
  
    
    In 2003, we acquired a 65.0% equity interest in CECT for RMB312.8
million in cash and the issuance of one million shares of Xings
common stock valued at approximately RMB13.2 million. This
transaction resulted in an initial in-process research and
development charge and subsequent amortization charges related to
the intangible assets acquired in the transaction.
 
    
    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.
 
    
    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.
 41




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##### Table of Contents




    
    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 ($2.3 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 ($3.9 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
   42




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##### Table of Contents



Year ended December 31,2005
    
    
    
    2006
    
    
    
    2007Percentage
    
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands,
    
    
    
    
    
    of
    
    
    
    
    
    
    
    of
    
    
    
    
    
    
    
    
    
    
    
    ofexcept percentages)
    
    Amount
    
    
    revenue
    
    
    
    Amount
    
    
    revenue
    
    
    
    Amount
    
    
    revenue(RMB)
    
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    
    (RMB)
    
    
    ($)(Old Basis)
    
    
    
    (Combined)(1)
    
    
    
    
    
    
    
    (New Basis)Revenue:Handsets and accessories
    
    
    1,806,076
    
    
    
    96.9
    %
    
    
    
    2,494,004
    
    
    
    98.3
    %
    
    
    
    3,113,756
    
    
    
    426,858
    
    
    
    99.1
    %Services and others
    
    
    58,049
    
    
    
    3.1
    %
    
    
    
    43,207
    
    
    
    1.7
    %
    
    
    
    27,338
    
    
    
    3,747
    
    
    
    0.9
    %Total
    
    
    1,864,125
    
    
    
    100.0
    %
    
    
    
    2,537,211
    
    
    
    100.0
    %
    
    
    
    3,141,094
    
    
    
    430,605
    
    
    
    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 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.    Cost of Goods Sold and Operating Expenses
  Year ended December 31,2005
    
    
    
    2006
    
    
    
    2007Percentage
    
    
    
    
    
    
    
    Percentage
    
    
    
    
    
    
    
    
    
    
    
    Percentage(Amounts in thousands, except
    
    
    
    
    
    of
    
    
    
    
    
    
    
    of
    
    
    
    
    
    
    
    
    
    
    
    ofpercentages)
    
    Amount
    
    
    revenue
    
    
    
    Amount
    
    
    revenue
    
    
    
    Amount
    
    
    revenue(RMB)
    
    
    
    
    
    
    
    (RMB)
    
    
    
    
    
    
    
    (RMB)
    
    
    ($)(Old Basis)
    
    
    
    (Combined)(1)
    
    
    
    
    
    
    
    (New Basis)Cost of goods sold
    
    
    1,526,378
    
    
    
    81.9
    %
    
    
    
    2,062,209
    
    
    
    81.3
    %
    
    
    
    2,255,844
    
    
    
    309,248
    
    
    
    71.8
    %Operating expenses:Selling and distribution
    
    
    15,912
    
    
    
    0.8
    %
    
    
    
    14,761
    
    
    
    0.6
    %
    
    
    
    36,322
    
    
    
    4,979
    
    
    
    1.2
    %General and administrative
    
    
    19,993
    
    
    
    1.1
    %
    
    
    
    21,049
    
    
    
    0.8
    %
    
    
    
    69,032
    
    
    
    9,464
    
    
    
    2.2
    %Research and development
    
    
    16,072
    
    
    
    0.9
    %
    
    
    
    16,292
    
    
    
    0.6
    %
    
    
    
    18,599
    
    
    
    2,550
    
    
    
    0.6
    %In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    41,739
    
    
    
    1.7
    %
    
    
    
    
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    11,880
    
    
    
    0.6
    %
    
    
    
    15,178
    
    
    
    0.6
    %
    
    
    
    32,280
    
    
    
    4,425
    
    
    
    1.0
    %Total operating expenses
    
    
    63,857
    
    
    
    3.4
    %
    
    
    
    109,019
    
    
    
    4.3
    %
    
    
    
    156,233
    
    
    
    21,418
    
    
    
    5.0
    %
 
 (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. 43




---



##### Table of Contents



Cost of goods sold
  Year ended December 31,2005
    
    
    
    2006
    
    
    
    2007Sales
    
    
    
    
    
    
    
    Sales
    
    
    
    
    
    
    
    Sales(Amounts in thousands, except units)
    
    volume
    
    
    Revenue
    
    
    
    volume
    
    
    Revenue
    
    
    
    volume
    
    
    Revenue(Unit)
    
    
    (RMB)
    
    
    
    (Unit)
    
    
    (RMB)
    
    
    
    (Unit)
    
    
    (RMB)(Old Basis)
    
    
    
    (Combined)(1)
    
    
    
    (New Basis)Manufactured in Huizhou facility
    
    
    490,221
    
    
    
    497,123
    
    
    
    
    617,454
    
    
    
    1,058,112
    
    
    
    
    549,547
    
    
    
    416,707Outsourced from EMS providers
    
    
    1,233,334
    
    
    
    1,251,268
    
    
    
    
    1,624,747
    
    
    
    1,391,829
    
    
    
    
    3,266,751
    
    
    
    2,697,037Outsourced from ODMs
    
    
    6,368
    
    
    
    2,576
    
    
    
    
    19,621
    
    
    
    23,569
    
    
    
    
    
    
    
    
    Total
    
    
    1,729,923
    
    
    
    1,750,967
    
    
    
    
    2,261,822
    
    
    
    2,473,510
    
    
    
    
    3,816,298
    
    
    
    3,113,744
 
 (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
  44




---



##### Table of Contents



Research and development expenses
   In-process research and development
  Amortization of other intangible assets
  Share-based compensation expense
   45




---



##### Table of Contents



Taxation
 Taxation in the British Virgin Islands
   PRC enterprise income tax
      46




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Obligations for price guarantees
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended(Amounts in thousands)
    
    31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    1,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Provision  reported as a reduction of revenue
    
    
    28,299
    
    
    
    26,619
    
    
    
    
    
    
    
    
    2,943
    
    
    
    403Utilization
    
    
    (29,449
    )
    
    
    (26,619
    )
    
    
    
    
    
    
    
    (2,943
    )
    
    
    (403
    )Balance at end of year/period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Obligations for product warranties
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended(Amounts in thousands)
    
    31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    3,775
    
    
    
    3,922
    
    
    
    
    6,905
    
    
    
    6,809
    
    
    
    933Provision
    
    
    9,220
    
    
    
    13,751
    
    
    
    
    908
    
    
    
    14,960
    
    
    
    2,051Utilization
    
    
    (9,073
    )
    
    
    (10,768
    )
    
    
    
    (1,004
    )
    
    
    (13,672
    )
    
    
    (1,874
    )Balance at end of year/period
    
    
    3,922
    
    
    
    6,905
    
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    1,110
  47




---



##### Table of Contents



Collectibility of accounts receivable
  (Old Basis)
    
    
    (New Basis)January 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended(Amounts in thousands)
    
    31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007(RMB)
    
    (RMB)
    
    
    (RMB)
    
    (RMB)
    
    ($)Balance at beginning of year/period
    
    
    1,653
    
    
    
    2,640
    
    
    
    
    2,046
    
    
    
    2,045
    
    
    
    280Bad debt expense
    
    
    1,001
    
    
    
    
    
    
    
    
    
    
    
    
    3,384
    
    
    
    464Bad debt recovery
    
    
    (14
    )
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    
    
    
    
    Balance at end of year/period
    
    
    2,640
    
    
    
    2,046
    
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    744
   Inventories
   Recoverability of the carrying amount of goodwill
  48




---



##### Table of Contents



CECT brand name
   Impairment of long-lived assets
    Depreciation and amortization of long-lived assets
  49




---



##### Table of Contents



Recent Accounting Pronouncements
       50




---



##### Table of Contents



A. Operating Results
  (Old Basis)
    
    
    (New Basis)
    
    
    (Combined)(1)
    
    
    (New Basis)January 1,
    
    
    November 30,Consolidated statements of
    
    Year ended
    
    2006 to
    
    
    2006 to
    
    
    Year endedoperations data
    
    December 31,
    
    November 30,
    
    
    December 31,
    
    
    December 31,
    
    
    Year ended(Amounts in thousands)
    
    2005
    
    2006
    
    
    2006
    
    
    2006
    
    
    December 31, 2007(RMB)
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    (US$)Revenues
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    
    2,537,211
    
    
    
    
    3,141,094
    
    
    
    430,605Cost of goods sold
    
    
    (1,526,378
    )
    
    
    (1,843,327
    )
    
    
    
    (218,882
    )
    
    
    
    (2,062,209
    )
    
    
    
    (2,255,844
    )
    
    
    (309,248
    )Gross profit
    
    
    337,747
    
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    
    475,002
    
    
    
    
    885,250
    
    
    
    121,357Operating expenses:Selling and distribution
    
    
    (15,912
    )
    
    
    (12,054
    )
    
    
    
    (2,707
    )
    
    
    
    (14,761
    )
    
    
    
    (36,322
    )
    
    
    (4,979
    )General and administrative
    
    
    (19,993
    )
    
    
    (19,879
    )
    
    
    
    (1,170
    )
    
    
    
    (21,049
    )
    
    
    
    (69,032
    )
    
    
    (9,464
    )Research and development
    
    
    (16,072
    )
    
    
    (15,131
    )
    
    
    
    (1,161
    )
    
    
    
    (16,292
    )
    
    
    
    (18,599
    )
    
    
    (2,550
    )In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    (41,739
    )
    
    
    
    
    
    
    
    Amortization of other intangible
assets
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    
    (15,178
    )
    
    
    
    (32,280
    )
    
    
    (4,425
    )Operating income (loss)
    
    
    273,890
    
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    
    365,983
    
    
    
    
    729,017
    
    
    
    99,939Interest income
    
    
    5,592
    
    
    
    5,320
    
    
    
    
    631
    
    
    
    
    5,951
    
    
    
    
    16,373
    
    
    
    2,245Interest expense
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    
    (29,328
    )
    
    
    
    (47,034
    )
    
    
    (6,448
    )Foreign currency exchange gain, net
    
    
    1,044
    
    
    
    9,628
    
    
    
    
    1,502
    
    
    
    
    11,130
    
    
    
    
    12,022
    
    
    
    1,648Impairment of equity investment
    
    
    (7,517
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of a subsidiary
    
    
    10,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    534
    
    
    
    3,857
    
    
    
    
    579
    
    
    
    
    4,436
    
    
    
    
    873
    
    
    
    120Earnings (loss) before income tax
expense, minority interests, and
extraordinary items
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    
    358,172
    
    
    
    
    711,251
    
    
    
    97,504Income tax expense
    
    
    (16,719
    )
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    
    (60,242
    )
    
    
    
    (113,377
    )
    
    
    (15,543
    )Earnings (loss) before minority
interests, and extraordinary items
    
    
    234,799
    
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    
    297,930
    
    
    
    
    597,874
    
    
    
    81,961Minority interests
    
    
    (52,349
    )
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    
    (29,059
    )
    
    
    
    (33,074
    )
    
    
    (4,534
    )Earnings (loss) before extraordinary
items
    
    
    182,450
    
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    
    268,871
    
    
    
    
    564,800
    
    
    
    77,427Extraordinary items:Gains on acquisitions of additional
equity interests in CECT, net of nil
tax
    
    
    48,157
    
    
    
    17,796
    
    
    
    
    
    
    
    
    
    17,796
    
    
    
    
    28,689
    
    
    
    3,933Net income (loss)
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    
    286,667
    
    
    
    
    593,489
    
    
    
    81,360
 
 (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. Period-to-Period Comparisons of Historical Financial Data  2007 Compared to 2006 and 2006
Compared to 2005
  Revenue
 2007 compared to 2006
   51




---



##### Table of Contents



2006 compared to 2005
    Cost of goods sold
 2007 compared to 2006
  2006 compared to 2005
  Gross profit and gross margin
 2007 compared to 2006
  52




---



##### Table of Contents



2006 compared to 2005
  Operating expenses
 2007 compared to 2006
  2006 compared to 2005
  Selling and distribution expenses
 2007 compared to 2006
   2006 compared to 2005
   General and administrative expenses
 2007 compared to 2006
  53




---



##### Table of Contents



2006 compared to 2005
  Research and development expenses
 2007 compared to 2006
  2006 compared to 2005
  In-process research and development
  Amortization of other intangible assets
  Operating income
  Interest income, interest expenses, foreign currency exchange gain, net, and other income, net
 2007 compared to 2006
  54




---



##### Table of Contents



2006 compared to 2005
  Impairment of equity investment
  Gain on disposal of a subsidiary
  Income tax expense
  Minority interests
 2007 compared to 2006
  2006 compared to 2005
  Extraordinary items: Gains on acquisitions of additional equity interests in CECT, net of nil tax
  55




---



##### Table of Contents



Net income
   The Period from January 1, 2006 to November 30, 2006 compared to 2005
  Revenue
  Cost of goods sold
  Gross profit and gross margin
  Operating expenses
  Selling and distribution expenses
  56




---



##### Table of Contents



General and administrative expenses
  Research and development expenses
  Operating income
  Interest income, interest expenses, foreign currency exchange gain, net, and other income, net
  Impairment of equity investment
  Gain on disposal of a subsidiary
  Income tax expense
  Minority interests
  Extraordinary items: Gains on acquisition of additional equity interests in CECT, net of nil tax
  57




---



##### Table of Contents



Net income
   The Period from November 30, 2006 to December 31, 2006
  Inflation
  B. Liquidity and Capital Resources
 Liquidity
     58




---



##### Table of Contents



(Old Basis)
    
    
    (New Basis)
    
    
    (Combined)(1)
    
    
    (New Basis)January 1,
    
    
    November 30,Year ended
    
    2006 to
    
    
    2006 to
    
    
    Year endedDecember 31,
    
    November 30,
    
    
    December 31,
    
    
    December 31,(Amounts in thousands)
    
    2005
    
    2006
    
    
    2006
    
    
    2006
    
    
    Year ended December 31, 2007(RMB)
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    
    (RMB)
    
    ($)Net cash provided by
(used in) operating
activities
    
    
    110,970
    
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    
    298,267
    
    
    
    
    855,524
    
    
    
    117,281Net cash provided by
(used in) investing
activities
    
    
    18,386
    
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    
    (185,886
    )
    
    
    
    23,016
    
    
    
    3,156Net cash provided by
financing activities
    
    
    168,413
    
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    
    270,328
    
    
    
    
    1,117,327
    
    
    
    153,172
 
 (1)
    
    Represents the sum of the relevant data for the period from January 1 to November 20, 2006
and the period from November 30 to December 31, 2006. Although the presentation of 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 cash flow 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
  59




---



##### Table of Contents



Capital resources
  Capital expenditures
  C. Research, Development, Patents and Licenses, Etc.
  D. Trend Information
  E. Off-Balance Sheet Arrangements
   60




---



##### Table of Contents



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
    
    
    26,000
    
    
    
    26,000
    
    
    
    
    
    
    
    
    
    
    
    Operating lease commitments
    
    
    10,634
    
    
    
    4,531
    
    
    
    6,103
    
    
    
    
    
    
    
    Total
    
    
    36,634
    
    
    
    30,531
    
    
    
    6,103
    
    
    
    
    
    
    
    
 G. Safe Harbor
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Name
    
    Age
    
    Position/TitleZhi Yang Wu
    
    
    34
    
    
    Chairman and DirectorRui Lin Wu
    
    
    55
    
    
    Vice Chairman and DirectorZacky Sun
    
    
    45
    
    
    Independent DirectorXin Zhang
    
    
    43
    
    
    Independent DirectorPei De Lou
    
    
    46
    
    
    Independent DirectorDavid Li
    
    
    38
    
    
    Chief Executive OfficerKok Seong Tan
    
    
    36
    
    
    Chief Financial Officer and Principal Accounting Officer
 Directors
    61




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##### Table of Contents



Executive officers
   B. Compensation
 Cash Compensation of Directors and Executive Officers
  Equity Incentive Plan
  Termination of awards
  62




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##### Table of Contents



Administration
  Option exercise
  Change of control
  Amendment and termination of plan
   Ordinary shares
    
    Exerciseunderlying
    
    priceName
    
    options granted
    
    (US$/Share)
    
    Grant date
    
    Expiration dateZhi Yang Wu
    
    
    40,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 20101,250,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013Kok Seong Tan
    
    
    266,720
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2009David Li
    
    
    120,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013Shi Ze Zhu
    
    
    40,000
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013Others(1)
    
    
    1,200,000
    
    
    
    18.00
    
    
    March 19, 2007
    
    March 18, 2011434,800
    
    
    
    7.50
    
    
    March 19, 2007
    
    March 18, 2013
 
 (1)
    
    Consist of one consultant and employees that are not our directors or executive officers. 63




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##### Table of Contents



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;
 
    
    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;
 64




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##### Table of Contents




    
    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.
 65




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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.
 66




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##### Table of Contents



Interested Transactions
  Remuneration and Borrowing
  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.
 67




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##### Table of Contents



Shares beneficiallyowned(1)(2)Number
    
    PercentageDirectors and executive officers:Zhi Yang Wu(3)
    
    
    32,965,000
    
    
    
    61.5
    %Rui Lin Wu(4)
    
    
    32,200,000
    
    
    
    60.0
    %Kok Seong Tan(5)
    
    
    266,720
    
    
    
    *David Li(6)
    
    
    24,000
    
    
    
    *Shi Ze Zhu(7)
    
    
    8,000
    
    
    
    *All Directors and Executive Officers as a Group
    
    
    33,263,720
    
    
    
    62.0
    %Principal shareholders:Qiao Xing Universal Telephone, Inc.(8)
    
    
    32,200,000
    
    
    
    60.0
    %DKR SoundShore Oasis Holding Fund Ltd.(9)(11)
    
    
    6,966,666
    
    
    
    13.0
    %CEDAR DKR Holding Fund Ltd.(10)(11)
    
    
    6,966,666
    
    
    
    13.0
    %
 
 *
    
    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 53,065,000 ordinary
shares outstanding as of March 31, 2008 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)
    
    Includes 495,000 ordinary shares held by Mr. Zhi Yang Wu, 270,000 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, 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.(4)
    
    Includes 32,200,000 ordinary shares held by Xing. Mr. Rui
Lin Wu is chairman and chief executive officer of Xing. Excluding equity interest owned by his
son, Mr. Zhi Jian Wu Li, he does not own any equity interest in Xing. Mr. Rui Lin Wu disclaims
ownership of the ordinary shares held by Xing except to the extent of his pecuniary interest
therein.(5)
    
    Includes 266,720 ordinary shares issuable upon exercise of options held by Mr. Kok Seong Tan.(6)
    
    Includes 24,000 ordinary shares issuable upon exercise of options held by Dr. David Li.(7)
    
    Includes 8,000 ordinary shares issuable upon exercise of options held by Mr. Shi Ze Zhu.(8)
    
    Xing is a British Virgin Islands company currently listed on the Nasdaq Global Market. Except
for the public shareholders, Xings ultimate major shareholder is Mr. Zhi Jian Wu Li, brother
of our chairman and son of our vice- chairman, who owns an aggregate of 22.0% equity interest
in Xing through Qiao Xing Trust and Wu Holdings Ltd. as of March 31, 2008. The address of Xing
is Qiao Xing Science Technological & Industrial Zone, Tangquan, Huizhou, Guangdong, 516023,
Peoples Republic of China.(9)
    
    Includes 6,270,000 ordinary shares held by DKR SoundShore Oasis Holding Fund Ltd. and 696,666
ordinary shares held by CEDAR DKR Holding Fund Ltd..(10)
    
    Includes 696,666 ordinary shares held by CEDAR DKR Holding Fund Ltd. and 6,270,000 ordinary
shares held by DKR SoundShore Oasis Holding Fund Ltd..(11)
    
    The address of both DKR SoundShore Oasis Holding Fund Ltd. and CEDAR DKR Holding Fund Ltd. is
1281 East Main Street, 3rd Floor, Stamford, CT 06902-3565, United States. DKR Oasis Management
Company L.P. has been appointed the discretionary investment manager of DKR SoundShore Oasis
Holding Fund Ltd. and CEDAR DKR Holding Fund Ltd. and has the authority to do any and all acts
on behalf of the two funds, including voting any shares held by them. Mr. Seth Fischer is the
managing member of Oasis Management Holdings LLC, one of the general partners of the DKR Oasis
Management Company L.P. Mr. Fischer has ultimate responsibility for the investment decisions
of the two funds.   68




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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major Shareholders
  B. Related Party Transactions
 Equity Incentive Plan
  Sales and Purchases of Mobile Handsets and Accessories
  
    
    Purchases from QXCI, our affiliate, in the amounts of RMB62.0 million in 2005; and
    
    Sales to QXCI for cash consideration of RMB4.7 million in 2005 and RMB1.4 million ($0.2 million) in 2006.
 Service Transactions
  Cash Advances To and From Related Parties
    69




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##### Table of Contents



Arrangements in Connection with the Senior Convertible Notes Issued by Xing
  Guarantees and Pledges
  Transfer of Equity Interest
  Non-Competition Arrangement
  70




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##### Table of Contents



Transfer of Trademark Application Rights
  Miscellaneous
   C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
  Dividend Policy
   B. Significant Changes
  71




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##### Table of Contents



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
    
    
    
    6.76Quarterly 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
    
    
    
    5.50Monthly highs and lows:November 2007
    
    
    11.34
    
    
    
    6.76December 2007
    
    
    9.57
    
    
    
    7.62January 2008
    
    
    8.76
    
    
    
    6.67February 2008
    
    
    8.89
    
    
    
    6.93March 2008
    
    
    7.00
    
    
    
    5.50April 2008
    
    
    7.88
    
    
    
    5.87May 2008
    
    7.52
    
    6.19June 2008 (through June 24, 2008)
    
    6.09
    
    5.05
 B. Plan of Distribution
  C. Markets
  D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 A. Share Capital
  72




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##### Table of Contents



B. Memorandum and Articles of Association
  C. Material Contracts
  D. Exchange Controls
   E. Taxation
 The following sets forth the material British Virgin Islands and U.S. federal income tax
consequences of an investment in our ordinary shares. It is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to
change. This discussion does not deal with all possible tax consequences relating to an investment
in our ordinary shares, such as the tax consequences under state, local and other tax laws. To the
extent that the discussion relates to matters of British Virgin Islands tax law, it represents the
opinion of Conyers Dill & Pearman, our British Virgin Islands counsel. To the extend that the
discussion relates to matters of PRC tax law, it represents the opinion of King & Wood Law Firm,
our PRC counsel. To the extent that the discussion relates to matters of U.S. federal income tax
law, it represents the opinion of Shearman & Sterling LLP, our special U.S. counsel.
 British Virgin Islands Taxation
   U.S. Federal Income Taxation
  73




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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.
  
    
    a 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
  74




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Taxation of disposition of 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.
   75




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##### Table of Contents




    
    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.
     Information reporting and backup withholding
   F. Dividends and Paying Agents
  76




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G. Statement by Experts
  H. Documents on Display
    I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Exchange Risk
    77




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Interest Rate Risk
  
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  78




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PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
     
 ITEM 15. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Changes in Internal Control over Financial Reporting
  79




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ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Years ended December 31,2006
    
    2007(Amounts in
thousands)
    
    (RMB)
    
    (RMB)
    
    (US$)Audit fees
    
    
    2,715
    
    
    
    8,034
    
    
    
    1,101Audit-related fees
    
    Nil
    
    Nil
    
    Nil
  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  80




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  
 ITEM 19. EXHIBITS
 ExhibitNumber
    
    Description1.1
    
    Amended and Restated Memorandum of Association*1.2
    
    Second Amended and Restated Memorandum and Articles of Association of the Registrant*4.1
    
    Equity Incentive Plan*4.2
    
    Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant*4.3
    
    Software License Agreement, dated October 8, 2005*, which was renewed as of March 10, 20084.4
    
    Non-Competition Agreement*4.5
    
    Agreement of Transfer of Trademark Application Rights*4.6
    
    Registration Rights Agreement, dated June 13, 2006*4.7
    
    Guaranty, dated June 13, 2006*4.8
    
    Technology Licence Agreement, dated
June 13, 20074.9
    
    Technology Licence Agreement, dated
May 25, 2004*4.10
    
    Technology License Agreement, dated
March 13, 2006*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 KPMG, dated June 26, 2008
 
 *
    
    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. 81




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##### Table of Contents



SIGNATURE
  QIAO XING MOBILE COMMUNICATION CO., LTD.Date:  June 26, 2008
    By:
    /s/  Zhi Yang WuName:
    Zhi Yang WuTitle:
    Chairman 82




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2007
    
    
    F-3Consolidated Statements of Operations for the Year Ended December 31,
2005, the Period from January 1, 2006 to November 30, 2006, the
Period from November 30, 2006 to December 31, 2006 and the Year Ended
December 31, 2007
    
    
    F-4Consolidated Statements of Cash Flows for the Year Ended December 31,
2005, the Period from January 1, 2006 to November 30, 2006, the
Period from November 30, 2006 to December 31, 2006 and the Year Ended
December 31, 2007
    
    
    F-5Consolidated Statements of Shareholders Equity and Comprehensive
Income for the Year ended December 31, 2005, the Period from January
1, 2006 to November 30, 2006, the Period from November 30, 2006 to
December 31, 2006 and the Year Ended December 31, 2007
    
    
    F-7Notes to the Consolidated Financial Statements for the Year ended
December 31, 2005, the Period from January 1, 2006 to November 30,
2006, the Period from November 30, 2006 to December 31, 2006 and the
Year Ended December 31, 2007
    
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
       
 F-2




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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 31,2006
    
    2007RMB
    
    RMB
    
    US$AssetsCurrent assets:Cash
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    374,247Restricted cash
    
    
    119,302
    
    
    
    94,384
    
    
    
    12,939Accounts receivable, net
    
    
    546,893
    
    
    
    418,564
    
    
    
    57,380Bills receivable
    
    
    27,635
    
    
    
    
    
    
    
    Inventories
    
    
    163,833
    
    
    
    177,279
    
    
    
    24,303Prepayments to suppliers
    
    
    232,008
    
    
    
    155,993
    
    
    
    21,385Prepaid expenses and other current assets
    
    
    38,193
    
    
    
    19,295
    
    
    
    2,645Deferred income taxes
    
    
    3,960
    
    
    
    5,685
    
    
    
    779Total current assets
    
    
    1,893,910
    
    
    
    3,601,182
    
    
    
    493,678Property, machinery and equipment, net
    
    
    190,511
    
    
    
    175,469
    
    
    
    24,055Land use rights
    
    
    38,106
    
    
    
    36,106
    
    
    
    4,950Equity investment, at cost
    
    
    7,803
    
    
    
    7,803
    
    
    
    1,070Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    15,465Other intangible assets, net
    
    
    93,008
    
    
    
    60,728
    
    
    
    8,325Total assets
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    547,543Liabilities, minority interests and shareholders equityCurrent liabilities:Short-term borrowings
    
    
    602,790
    
    
    
    983,904
    
    
    
    134,881Accounts payable
    
    
    165,326
    
    
    
    107,990
    
    
    
    14,804Prepayments from customers
    
    
    15,389
    
    
    
    4,585
    
    
    
    629Accrued liabilities
    
    
    35,360
    
    
    
    41,401
    
    
    
    5,676Amounts due to related parties
    
    
    345,122
    
    
    
    4,532
    
    
    
    621Other payables and current liabilities
    
    
    20,298
    
    
    
    58,630
    
    
    
    8,038Income taxes payable
    
    
    22,943
    
    
    
    38,722
    
    
    
    5,308Total current liabilities
    
    
    1,207,228
    
    
    
    1,239,764
    
    
    
    169,957Deferred income taxes
    
    
    11,740
    
    
    
    5,561
    
    
    
    762Total liabilities
    
    
    1,218,968
    
    
    
    1,245,325
    
    
    
    170,719Minority interests
    
    
    76,896
    
    
    
    78,235
    
    
    
    10,725Shareholders equity:Ordinary shares:Par value: nil (2006: US$0.00025) 
Authorized: Unlimited (2006: 200,000,000) 
Issued and outstanding: 52,500,000 (2006: 40,000,000)
    
    
    83
    
    
    
    1,316,726
    
    
    
    180,507Additional paid-in capital
    
    
    1,059,690
    
    
    
    802,892
    
    
    
    110,067Retained earnings (accumulated deficit)
    
    
    (19,485
    )
    
    
    574,004
    
    
    
    78,689Accumulated other comprehensive loss
    
    
    
    
    
    
    (23,080
    )
    
    
    (3,164
    )Total shareholders equity
    
    
    1,040,288
    
    
    
    2,670,542
    
    
    
    366,099Commitments and contingenciesTotal liabilities, minority interests
and shareholders equity
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    547,543
  F-3




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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))Year
    
    January 1,
    
    
    Novemberended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Revenues:External parties
    
    
    1,853,181
    
    
    
    2,277,112
    
    
    
    
    255,154
    
    
    
    3,127,780
    
    
    
    428,780Related parties
    
    
    10,944
    
    
    
    4,086
    
    
    
    
    859
    
    
    
    13,314
    
    
    
    1,825Total revenues
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    430,605Cost of goods sold
    
    
    (1,526,378
    )
    
    
    (1,843,327
    )
    
    
    
    (218,882
    )
    
    
    (2,255,844
    )
    
    
    (309,248
    )Gross profit
    
    
    337,747
    
    
    
    437,871
    
    
    
    
    37,131
    
    
    
    885,250
    
    
    
    121,357Operating expenses:Selling and distribution
    
    
    (15,912
    )
    
    
    (12,054
    )
    
    
    
    (2,707
    )
    
    
    (36,322
    )
    
    
    (4,979
    )General and administrative
    
    
    (19,993
    )
    
    
    (19,879
    )
    
    
    
    (1,170
    )
    
    
    (69,032
    )
    
    
    (9,464
    )Research and development
    
    
    (16,072
    )
    
    
    (15,131
    )
    
    
    
    (1,161
    )
    
    
    (18,599
    )
    
    
    (2,550
    )In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (4,425
    )Operating income (loss)
    
    
    273,890
    
    
    
    379,917
    
    
    
    
    (13,934
    )
    
    
    729,017
    
    
    
    99,939Other income (expense):Interest income
    
    
    5,592
    
    
    
    5,320
    
    
    
    
    631
    
    
    
    16,373
    
    
    
    2,245Interest expense
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (6,448
    )Foreign currency exchange gain, net
    
    
    1,044
    
    
    
    9,628
    
    
    
    
    1,502
    
    
    
    12,022
    
    
    
    1,648Impairment of equity investment
    
    
    (7,517
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on disposal of a subsidiary
    
    
    10,307
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other income, net
    
    
    534
    
    
    
    3,857
    
    
    
    
    579
    
    
    
    873
    
    
    
    120Earnings (loss) before income tax
expense, minority interests, and
extraordinary items
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    97,504Income tax expense
    
    
    (16,719
    )
    
    
    (55,991
    )
    
    
    
    (4,251
    )
    
    
    (113,377
    )
    
    
    (15,543
    )Earnings (loss) before minority
interests, and extraordinary items
    
    
    234,799
    
    
    
    315,616
    
    
    
    
    (17,686
    )
    
    
    597,874
    
    
    
    81,961Minority interests
    
    
    (52,349
    )
    
    
    (27,260
    )
    
    
    
    (1,799
    )
    
    
    (33,074
    )
    
    
    (4,534
    )Earnings (loss) before extraordinary items
    
    
    182,450
    
    
    
    288,356
    
    
    
    
    (19,485
    )
    
    
    564,800
    
    
    
    77,427Extraordinary items:Gains on acquisitions of additional
equity interests in CECT, net of nil tax
    
    
    48,157
    
    
    
    17,796
    
    
    
    
    
    
    
    
    28,689
    
    
    
    3,933Net income (loss)
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    81,360Basic and diluted earnings (loss) per share:Earnings (loss) before extraordinary items
    
    
    4.56
    
    
    
    7.21
    
    
    
    
    (0.49
    )
    
    
    11.69
    
    
    
    1.60Extraordinary gains
    
    
    1.21
    
    
    
    0.44
    
    
    
    
    
    
    
    
    0.59
    
    
    
    0.08Earnings (loss) per share
    
    
    5.77
    
    
    
    7.65
    
    
    
    
    (0.49
    )
    
    
    12.28
    
    
    
    1.68Weighted average number of
shares outstanding
    
    
    40,000,000
    
    
    
    40,000,000
    
    
    
    
    40,000,000
    
    
    
    48,322,000
    
    
    
    48,322,000
 
 F-4




---



##### 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,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December31, 2005
    
    30, 2006
    
    
    31, 2006
    
    Year ended December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Cash flows from operating activities:Net income (loss)
    
    
    230,607
    
    
    
    306,152
    
    
    
    
    (19,485
    )
    
    
    593,489
    
    
    
    81,360Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:Depreciation
    
    
    7,450
    
    
    
    5,271
    
    
    
    
    499
    
    
    
    10,754
    
    
    
    1,474Land use rights expense
    
    
    1
    
    
    
    
    
    
    
    
    69
    
    
    
    817
    
    
    
    112Impairment of equity investment
    
    
    7,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    41,739
    
    
    
    
    
    
    
    Amortization of other intangible assets
    
    
    11,880
    
    
    
    10,890
    
    
    
    
    4,288
    
    
    
    32,280
    
    
    
    4,425Bad debt expense (recovery), net
    
    
    987
    
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    3,384
    
    
    
    464Inventory write-downs
    
    
    9,130
    
    
    
    3,152
    
    
    
    
    46
    
    
    
    11,068
    
    
    
    1,517Foreign currency exchange gain, net
    
    
    (1,044
    )
    
    
    (9,833
    )
    
    
    
    (1,498
    )
    
    
    (12,290
    )
    
    
    (1,685
    )Deferred income taxes
    
    
    (5,498
    )
    
    
    260
    
    
    
    
    (467
    )
    
    
    (6,237
    )
    
    
    (855
    )(Gain) loss on disposal of property,
machinery and equipment
    
    
    (329
    )
    
    
    8
    
    
    
    
    
    
    
    
    57
    
    
    
    8Gain on disposal of a subsidiary
    
    
    (10,307
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Minority interests
    
    
    52,349
    
    
    
    27,260
    
    
    
    
    1,799
    
    
    
    33,074
    
    
    
    4,534Share-based compensation
    
    
    
    
    
    
    3,522
    
    
    
    
    
    
    
    
    38,626
    
    
    
    5,295Extraordinary gains on acquisitions of
additional equity interests in CECT,
net of nil tax
    
    
    (48,157
    )
    
    
    (17,796
    )
    
    
    
    
    
    
    
    (28,689
    )
    
    
    (3,933
    )Changes in operating assets and
liabilities, net of effects of purchase
of additional interest in CECT in
2005 and push-down accounting
adjustments in 2006Accounts receivable
    
    
    (140,971
    )
    
    
    106,019
    
    
    
    
    (139,282
    )
    
    
    124,945
    
    
    
    17,128Bills receivable
    
    
    (184,347
    )
    
    
    179,098
    
    
    
    
    14,425
    
    
    
    27,635
    
    
    
    3,789Inventories
    
    
    25,035
    
    
    
    106,883
    
    
    
    
    (102,105
    )
    
    
    (24,012
    )
    
    
    (3,292
    )Prepayments to suppliers
    
    
    1,791
    
    
    
    (24,302
    )
    
    
    
    552
    
    
    
    71,909
    
    
    
    9,858Prepaid expenses and other current assets
    
    
    (2,551
    )
    
    
    6,586
    
    
    
    
    2,956
    
    
    
    18,898
    
    
    
    2,591Amounts due from related parties
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accounts payable
    
    
    98,602
    
    
    
    (135,197
    )
    
    
    
    (12,283
    )
    
    
    (57,336
    )
    
    
    (7,860
    )Prepayments from customers
    
    
    (7,805
    )
    
    
    (24,898
    )
    
    
    
    (3,146
    )
    
    
    (10,804
    )
    
    
    (1,481
    )Accrued liabilities
    
    
    20,148
    
    
    
    12,112
    
    
    
    
    (6,565
    )
    
    
    6,041
    
    
    
    828Amounts due to related parties
    
    
    (6,606
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other payables and current liabilities
    
    
    39,405
    
    
    
    (33,564
    )
    
    
    
    (1,370
    )
    
    
    6,136
    
    
    
    841Income taxes payable
    
    
    13,528
    
    
    
    (7,651
    )
    
    
    
    4,718
    
    
    
    15,779
    
    
    
    2,163Net cash provided by (used in)
operating activities
    
    
    110,970
    
    
    
    513,378
    
    
    
    
    (215,111
    )
    
    
    855,524
    
    
    
    117,281
 F-5




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##### 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,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December31, 2005
    
    30, 2006
    
    
    31, 2006
    
    Year ended December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Cash flows from investing activities:Purchase of property, machinery and
equipment
    
    
    (6,089
    )
    
    
    (161,467
    )
    
    
    
    (2
    )
    
    
    (1,944
    )
    
    
    (266
    )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
    
    
    (102,964
    )
    
    
    (67,999
    )
    
    
    
    (8,864
    )
    
    
    (222,870
    )
    
    
    (30,553
    )Release of restricted cash upon
repayment of bank borrowings
    
    
    70,338
    
    
    
    78,255
    
    
    
    
    5,754
    
    
    
    247,788
    
    
    
    33,969Proceeds from the partial sale of an
investment in affiliate
    
    
    50,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchases of additional equity interests
in CECT
    
    
    (126
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Collection of amounts due from China
Electronics Financial Co. Ltd.
    
    
    
    
    
    
    7,030
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from disposal of property,
machinery and equipment
    
    
    6,827
    
    
    
    411
    
    
    
    
    
    
    
    
    42
    
    
    
    6Net cash provided by (used in)
investing activities
    
    
    18,386
    
    
    
    (249,317
    )
    
    
    
    63,431
    
    
    
    23,016
    
    
    
    3,156Cash flows from financing activities:Net proceeds from issuance of ordinary
shares, net of issuance cost of
RMB134,531 (US$18,443)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,026,611
    
    
    
    140,736Capital contributed by a minority
shareholder of a subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,100
    
    
    
    287Proceeds received from exercise of
share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,911
    
    
    
    4,238Proceeds from short-term borrowings
    
    
    972,160
    
    
    
    1,089,219
    
    
    
    
    23,883
    
    
    
    1,496,963
    
    
    
    205,215Repayments of short-term borrowings
    
    
    (970,256
    )
    
    
    (1,116,271
    )
    
    
    
    (31,100
    )
    
    
    (1,108,831
    )
    
    
    (152,007
    )Proceeds from borrowings from Xing or from
related parties on behalf of Xing
    
    
    820,381
    
    
    
    593,578
    
    
    
    
    242,814
    
    
    
    396,998
    
    
    
    54,424Repayments of borrowings from Xing
or from related parties on behalf
of Xing
    
    
    (650,097
    )
    
    
    (496,865
    )
    
    
    
    (34,930
    )
    
    
    (727,425
    )
    
    
    (99,721
    )Repayment of capital lease obligations
    
    
    (3,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    168,413
    
    
    
    69,661
    
    
    
    
    200,667
    
    
    
    1,117,327
    
    
    
    153,172Effect of foreign exchange rate changes
    
    
    (133
    )
    
    
    
    
    
    
    
    
    
    
    
    (27,971
    )
    
    
    (3,835
    )Net increase in cash
    
    
    297,636
    
    
    
    333,722
    
    
    
    
    48,987
    
    
    
    1,967,896
    
    
    
    269,774Cash, beginning of year/period
    
    
    81,741
    
    
    
    379,377
    
    
    
    
    713,099
    
    
    
    762,086
    
    
    
    104,473Cash, end of year/period
    
    
    379,377
    
    
    
    713,099
    
    
    
    
    762,086
    
    
    
    2,729,982
    
    
    
    374,247Supplemental disclosure of cash flow
information:Interest paid
    
    
    32,332
    
    
    
    24,394
    
    
    
    
    3,555
    
    
    
    45,576
    
    
    
    6,248Income tax paid
    
    
    8,689
    
    
    
    63,382
    
    
    
    
    
    
    
    
    103,835
    
    
    
    14,235Offset of payable for disposal of investment
    
    
    (4,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share issuance cost in the form of
share-based payment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,859
    
    
    
    Payables for purchase of property,
machinery and equipment
    
    
    (474
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   F-6




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##### Table of Contents



QIAO XING MOBILE COMMUNICATION CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPENHENSIVE 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, 2005
    
    
    40,000,000
    
    
    
    83
    
    
    
    308,283
    
    
    
    30,990
    
    
    
    
    
    
    
    339,356Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,607
    
    
    
    
    
    
    
    230,607
    
    
    
    230,607Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,607Balance as of December 31, 2005
    
    
    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
    )
    
    
    2,670,542US$
    
    
    
    
    
    
    180,507
    
    
    
    110,067
    
    
    
    78,689
    
    
    
    (3,164
    )
    
    
    366,099
  F-7




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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 sales 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.
Prior to November 30, 2006, the Company was 80% owned by Qiao Xing Universal Telephone, Inc.
(Xing or the parent company). 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).On May 3, 2007, the Company listed its ordinary shares on the New York Stock Exchange (the
NYSE) under the symbol QXM. 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. Immediately prior to
the completion of the IPO, the investors of US$40,000 senior convertible notes issued by Xing
(Note 19(b)) exercised an option to convert the entire US$40,000 senior convertible notes into
7,800,000 ordinary shares of the Company that were held by Xing. As a result of the IPO and
conversion of the senior convertible notes, Xings 100% ownership interest in the Company
decreased to 61.33% as of December 31, 2007.(c)
    
    Significant concentrations and risksThe Group is subject to, among others, the following significant concentrations and risks:CountryAs 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.Revenue concentrationsIndividual customers accounting for more than 10% of the Groups revenue for the year ended
December 31, 2005, 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, are as
follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 to
    
    Year endedDecember
    
    November
    
    
    December
    
    December31, 2005
    
    30, 2006
    
    
    31, 2006
    
    31, 2007Shenzhen 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.
    
    
    23
    %
    
    
    15
    %
    
    
    
    
    
    
    
    Xian Ruiqiao Electronics Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    
    15
    %
    
    
    Jinan Qiaoxing Telecommunication Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    
    14
    %
    
    
    Wuhan Jiajiali Electronics Co., Ltd.
    
    
    
    
    
    
    
    
    
    
    
    12
    %
    
    
    Total
    
    
    23
    %
    
    
    72
    %
    
    
    
    96
    %
    
    
    36
    %
 As of December 31, 2006 and 2007, the Groups five largest accounts receivable accounted for
approximately 68% and 67%, respectively, of the Groups total accounts receivable.
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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)
 1
    
    Principal activities, organization and significant concentrations and risks (continued)(c)
    
    Significant concentrations and risks (continued)Concentrations of cash balances held at financial institutionsAs of December 31, 2006 and 2007, cash of RMB762,074 and RMB2,711,907 (US$371,769),
respectively, was held in uninsured accounts at major financial institutions located in the
PRC, and cash of RMBNil and RMB17,512 (US$2,401), respectively, was held in uninsured accounts
at major financial institutions located in the Hong Kong Special Administrative Region (the
HK SAR). Further, as of December 31, 2006 and 2007, the Companys cash balance included
U.S. dollar denominated bank deposits of US$Nil and US$44,517 (equivalent to RMBNil and
RMB324,737), respectively, in uninsured accounts at major institutions located in the PRC, and
US$Nil and US$2,323 (equivalent to RMBNil and RMB16,946), 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.TechnologyThe 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.SuppliersThe 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.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).On November 30, 2006, Xing acquired an additional 20% equity interest in the Company, which it
had not already owned and as a result obtained 100% equity interest of the Company. 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 push-downed 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.
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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)(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 RMB119,302 and RMB94,384
(US$12,939) as of December 31, 2006 and 2007 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
historical 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, 2006 and 2007,
discounted bills of RMB17,725 and RMBNil, respectively are included in short-term borrowings.(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
labour 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 RMB452,809, RMB1,178,203, RMB125,528 and
RMB1,909,685 (US$261,794) for the year ended December 31, 2005, 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, respectively, are not reflected as cash outflows from
operating activities.
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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)(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 respective periods of the
rights.(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 monthsLicences
    
    5 years
 Management has determined that the Groups CECT brand name held by its subsidiary, CEC
Telecom Co., Ltd. (CECT), does not have a determinable useful life. Consequently, the
carrying amount of this brand name is not amortized but rather 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.
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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)(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.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 RMB28,299, RMB26,619, RMBNil
and RMB2,943 (US$403), respectively for the year ended December 31, 2005, 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.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.
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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)(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,
    
    
    
    NovemberYear ended
    
    
    2006 to
    
    
    
    30, 2006 toDecember
    
    
    November
    
    
    
    December
    
    
    Year ended31, 2005
    
    
    30, 2006
    
    
    
    31, 2006
    
    
    December 31, 2007RMB
    
    
    RMB
    
    
    
    RMB
    
    
    RMB
    
    
    US$Balance at beginning of year/period
    
    
    3,775
    
    
    
    3,922
    
    
    
    
    6,905
    
    
    
    6,809
    
    
    
    933Provision
    
    
    9,220
    
    
    
    13,751
    
    
    
    
    908
    
    
    
    14,960
    
    
    
    2,051Utilization
    
    
    (9,073
    )
    
    
    (10,768
    )
    
    
    
    (1,004
    )
    
    
    (13,672
    )
    
    
    (1,874
    )Balance at end of year/period
    
    
    3,922
    
    
    
    6,905
    
    
    
    
    6,809
    
    
    
    8,097
    
    
    
    1,110
 (m)
    
    Research and development costs and advertising costsResearch and development costs are expenses as incurred.Adverting costs are charged to selling and distribution expenses when incurred. Advertising
costs amounted to RMB13,787, RMB10,382, RMB2,491 and RMB26,445 (US$3,625) for the year ended
December 31, 2005, 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,
respectively.(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 year ended December 31, 2005, 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, contributions to the defined
contribution plans were RMB647, RMB606, RMB45 and RMB624 (US$86) respectively. The Group has
no other obligation for the payment of employee benefits associated with these plans beyond
the contributions described above.(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.
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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)(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.On January 1, 2007, the Group adopted Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of
Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertain tax positions. This interpretation requires that an entity
recognizes in the consolidated financial statements the impact of a tax position, if that
position is more likely than not of being sustained upon examination, based on the technical
merits of the position. The Group has elected to classify interest and penalties related to
unrecognized tax benefits, if and when required, as part of income tax expense in the
statement of operations. The adoption of FIN 48 on January 1, 2007 did not have any effect on
the Groups consolidated financial statements.(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 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
average exchange rates prevailing during the period from May 3, 2007 through December 31,
2007. 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 2007 RMB amounts included in the accompanying
consolidated financial statements have been translated into U.S. dollars at the rate of
US$1.00 = RMB7.2946, being the noon buy rate for U.S. dollars in effect on December 31, 2007
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, 2007, or at any other date.
 F-14




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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 per shareBasic earnings per share is computed by dividing net income 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. There were no ordinary shares equivalents outstanding during the year ended
December 31, 2005, the period from January 1, 2006 through November 30, 2006 and the period
from November 30, 2006 through December 31, 2006. Ordinary shares equivalents outstanding for
the year ended December 31, 2007, consist of shares issuable pursuant to the Companys stock
option plan. Such ordinary share equivalents were anti-dilutive and accordingly excluded from
the calculation of diluted earnings per share during the year ended December 31, 2007.(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, 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)
    
    ReclassificationCertain reclassifications have been made to the prior years financial statements to conform
to the current years presentation.
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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)(w)
    
    Recently issued accounting standardsSFAS No. 157, Fair Value MeasurementsIn September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. Under SFAS No.
157, fair value refers to the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years, with early adoption permitted. In November 2007, the FASB proposed a one-year
deferral of SFAS No. 157s fair value measurement requirements for non-financial assets and
liabilities that are not required or permitted to be measured at fair value on a recurring
basis. Management does not expect the adoption of SFAS No. 157 will have a material impact on
the Groups consolidated financial statements.SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities 
including an amendment of FASB Statement No. 115In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  including an amendment of FASB Statement No. 115. SFAS No. 159
permits companies to measure certain financial instruments and certain other items at fair
value. The standard requires that unrealized gains and losses on items for which the fair
value option has been elected be reported in earnings. SFAS No. 159 is effective for the
Group on January 1, 2008, although earlier adoption is permitted. The Group has elected not
to adopt the fair value option as permitted under SFAS No. 159.SFAS No. 141R, Business Combinations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.SFAS No. 160, Non-Controlling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51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. FAS 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.SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities  an amendment of FASB
Statement No. 133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 No. 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 No.
161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008.FASB Staff Position (FSP) No. Accounting Principles Board (APB) 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)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 No. APB
14-1 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 No. APB 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 No. APB 14-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the
impact of the adoption of APB 14-1 on its 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 8)
    
    
    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.
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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
    
    AcquisitionsThe Company accounts for its step-up acquisitions of the equity interests in CECT using the
purchase method. This method requires that 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 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 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.Subsequent to the acquisition of an initial 65% equity interest (Note 8), the Companys
acquisitions of additional equity interest in CECT include the following:Acquisition of additional equity interest in CECT on July 31, 2005On July 31, 2005, the Company completed the acquisition of an additional 25% equity interest
in CECT from Huizhou Qiao Xing Communication Industry Ltd. (QXCI), a subsidiary of Xing, for
a total consideration of RMB75,000. QXCI acquired the 25% equity interest in CECT from China
Electronics Corporation (CEC) at the same consideration of RMB75,000 on July 29, 2005 on
behalf of the Company and in contemplation that the 25% equity interest in CECT acquired would
be transferred to the Company on the same terms shortly after the purchase. The transaction
was structured to facilitate the governmental approval process for the acquisition. The
favorable purchase price primarily reflected the facts that (i) CEC sought to dispose of its
interest in CECT on an accelerated basis to complete its own group restructuring plans, and
(ii) it became easier for domestic enterprises to manufacture mobile handsets in China due to
regulatory changes, which reduced the marketability and demand for the license held by CECT.Additional 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%.
 F-18




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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 acquisition dates:
 July 31,
    
    July 31,2005
    
    2006
    
    June 30, 2007RMB
    
    RMB
    
    RMB
    
    US$Consideration:Total cash consideration
    
    
    4,607
    
    
    
    149,600
    
    
    
    380,425
    
    
    
    52,152Less: Ownership interest in cash consideration
    
    
    
    
    
    
    (139,742
    )
    
    
    (367,295
    )
    
    
    (50,352
    )Net cash consideration
    
    
    4,607
    
    
    
    9,858
    
    
    
    13,130
    
    
    
    1,800Additional consideration:- Investment in China Electronics
Financial Co., Ltd. (Note (a))
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    - Investment in Beijing Jinxin Hengtong
Technology Company Limited (Note (b))
    
    
    50,393
    
    
    
    
    
    
    
    
    
    
    
    Total purchase consideration
    
    
    75,000
    
    
    
    9,858
    
    
    
    13,130
    
    
    
    1,800Fair value of assets acquired:Property, machinery and equipment
    
    
    9,810
    
    
    
    1,511
    
    
    
    5,929
    
    
    
    813Land use rights
    
    
    
    
    
    
    
    
    
    
    1,222
    
    
    
    168Other tangible assets and liabilities acquired
    
    
    123,157
    
    
    
    27,654
    
    
    
    41,819
    
    
    
    5,733In-process research and development
    
    
    65,237
    
    
    
    6,287
    
    
    
    7,981
    
    
    
    1,094Other intangible assets
    
    
    67,617
    
    
    
    13,914
    
    
    
    16,009
    
    
    
    2,195Fair value of net assets acquired
    
    
    265,821
    
    
    
    49,366
    
    
    
    72,960
    
    
    
    10,003Negative goodwill
    
    
    190,821
    
    
    
    39,508
    
    
    
    59,830
    
    
    
    8,203Allocation of negative goodwill:Property, machinery and equipment
    
    
    (9,810
    )
    
    
    (1,511
    )
    
    
    (5,929
    )
    
    
    (813
    )Land use
rights
    
    
    
    
    
    
    
    
    
    
    (1,222
    )
    
    
    (168
    )In-process research and development
    
    
    (65,237
    )
    
    
    (6,287
    )
    
    
    (7,981
    )
    
    
    (1,094
    )Other intangible assets
    
    
    (67,617
    )
    
    
    (13,914
    )
    
    
    (16,009
    )
    
    
    (2,195
    )Negative goodwill allocated to fair
value of long term assets
    
    
    (142,664
    )
    
    
    (21,712
    )
    
    
    (31,141
    )
    
    
    (4,270
    )Extraordinary item  gain on
acquisition of additional
equity interest in CECT
    
    
    48,157
    
    
    
    17,796
    
    
    
    28,689
    
    
    
    3,933
 (a)
    
    Investment in China Electronics Financial Co., Ltd. (CEFCL)CECTs 3.86% interest in CEFCL, which was invested prior to the Companys initial acquisition
of CECT on February 8, 2003, had an original investment costs of RMB20,000. The investment in
CEFCL had continued to be accounted for under the cost method up till July 29, 2005, when such
investment was transferred to QXCI (and thereafter to CEC) at a consideration of RMB20,000.
No dividends or other distributions were received from CEFCL during this holding period and
accordingly, the carrying value of the investment remained at RMB20,000 as at July 29, 2005,
when the Company was offered by CEC to repurchase the 3.86% non-controlling interest at
RMB20,000 and use that as part of the total consideration for the Companys acquisition of the
additional 25% equity interest in CECT.
 
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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)(b)
    
    Investment in Beijing Jinxin Hengtong Technology Company Limited (BJHTCL)BJHTCL was 90% owned by CECT at the date of the Companys initial acquisition of CECT on
February 8, 2003. Prior to the transfer to QXCI (and thereafter to CEC) as part of the
consideration for the Companys acquisition of the additional 25% equity interests in CECT,
the major assets of BJHTCL were buildings and structures located in Beijing, and the related
land use right. Based on an external valuation report, the aggregate fair value of buildings
and structures, and the land use right held by BJHTCL was RMB48,700 at July 29, 2005, which
together with the aggregate carrying amount of cash and other receivables of RMB886, gave an
estimated fair value of BJHTCL of RMB49,586. Management has considered that the difference of
RMB807 between the estimated fair value of RMB49,586 and the offer by CEC of RMB50,393 is
immaterial.The gain on disposal of BJHTCL of RMB10,307, as recognized in the consolidated statements of
operations for the year ended December 31, 2005, is calculated as follows:
 RMBFair value of investment in BJHTCL
    
    
    50,393Net assets disposed of (Note 18)
    
    
    (40,086
    )Gain on disposal of subsidiary
    
    
    10,307
 5
    
    Accounts receivable, netAccounts receivable, net consists of the following:
 December 31,2006
    
    2007RMB
    
    RMB
    
    US$Accounts receivable
    
    
    548,938
    
    
    
    423,993
    
    
    
    58,124Less: Allowance for doubtful accounts
    
    
    (2,045
    )
    
    
    (5,429
    )
    
    
    (744
    )Accounts receivable, net
    
    
    546,893
    
    
    
    418,564
    
    
    
    57,380
  Old Basis
    
    
    New BasisJanuary 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Balance at beginning of year/period
    
    
    1,653
    
    
    
    2,640
    
    
    
    
    2,046
    
    
    
    2,045
    
    
    
    280Bad debt expense
    
    
    1,001
    
    
    
    
    
    
    
    
    
    
    
    
    3,384
    
    
    
    464Bad debt recovery
    
    
    (14
    )
    
    
    (594
    )
    
    
    
    (1
    )
    
    
    
    
    
    
    Balance at end of year/period
    
    
    2,640
    
    
    
    2,046
    
    
    
    
    2,045
    
    
    
    5,429
    
    
    
    744
  
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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)
 6
    
    InventoriesInventories by category consist of the following:
 December 31,2006
    
    2007RMB
    
    RMB
    
    US$Raw materials
    
    
    131,998
    
    
    
    119,373
    
    
    
    16,365Finished goods
    
    
    31,835
    
    
    
    57,906
    
    
    
    7,938Total inventories
    
    
    163,833
    
    
    
    177,279
    
    
    
    24,303
   7
    
    Property, machinery and equipment, netProperty, machinery and equipment consist of the following:
 December 31,2006
    
    2007RMB
    
    RMB
    
    US$Buildings and improvements
    
    
    153,741
    
    
    
    148,956
    
    
    
    20,420Machinery and equipment
    
    
    34,608
    
    
    
    32,915
    
    
    
    4,512Furniture and office equipment
    
    
    1,962
    
    
    
    1,948
    
    
    
    267Motor vehicles
    
    
    699
    
    
    
    1,728
    
    
    
    237Total property, machinery, and equipment
    
    
    191,010
    
    
    
    185,547
    
    
    
    25,436Less: accumulated depreciation
    
    
    (499
    )
    
    
    (10,078
    )
    
    
    (1,381
    )Property ,machinery, and equipment, net
    
    
    190,511
    
    
    
    175,469
    
    
    
    24,055
    Old Basis
    
    
    New BasisJanuary 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Cost of goods sold
    
    
    4,172
    
    
    
    3,584
    
    
    
    
    344
    
    
    
    9,192
    
    
    
    1,260Selling and distribution expenses
    
    
    75
    
    
    
    53
    
    
    
    
    
    
    
    
    6
    
    
    
    1General and administrative expenses
    
    
    3,203
    
    
    
    1,634
    
    
    
    
    155
    
    
    
    1,556
    
    
    
    213Total
    
    
    7,450
    
    
    
    5,271
    
    
    
    
    499
    
    
    
    10,754
    
    
    
    1,474
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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)
 8
    
    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).9
    
    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, 2006Gross
    
    
    
    
    
    Othercarrying
    
    Accumulated
    
    intangiblesamount
    
    amortization
    
    assets, netRMB
    
    RMB
    
    RMBCECT brand
    
    
    39,835
    
    
    
    
    
    
    
    39,835Customer relationships
    
    
    5,418
    
    
    
    (306
    )
    
    
    5,112Completed technology
    
    
    16,950
    
    
    
    (823
    )
    
    
    16,127Core technology
    
    
    24,193
    
    
    
    (742
    )
    
    
    23,451Backlog
    
    
    9,175
    
    
    
    (2,294
    )
    
    
    6,881Licenses
    
    
    1,725
    
    
    
    (123
    )
    
    
    1,602Total
    
    
    97,296
    
    
    
    (4,288
    )
    
    
    93,008
 December 31, 2007Grosscarrying
    
    Accumulatedamount
    
    amortization
    
    Other intangible assets, netRMB
    
    RMB
    
    RMB
    
    US$CECT brand
    
    
    39,835
    
    
    
    
    
    
    
    39,835
    
    
    
    5,461Customer relationships
    
    
    5,418
    
    
    
    (4,470
    )
    
    
    948
    
    
    
    130Completed technology
    
    
    16,950
    
    
    
    (10,866
    )
    
    
    6,084
    
    
    
    834Core technology
    
    
    24,193
    
    
    
    (10,455
    )
    
    
    13,738
    
    
    
    1,883Backlog
    
    
    9,175
    
    
    
    (9,175
    )
    
    
    
    
    
    
    Licenses
    
    
    1,725
    
    
    
    (1,602
    )
    
    
    123
    
    
    
    17Total
    
    
    97,296
    
    
    
    (36,568
    )
    
    
    60,728
    
    
    
    8,325
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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)
 9
    
    Other intangible assets, net (continued)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,- 2008
    
    
    11,727- 2009
    
    
    4,733- 2010
    
    
    4,433Total
    
    
    20,893
 10
    
    Short-term borrowingsShort-term borrowings consist of the following:
 December 31,2006
    
    2007RMB
    
    RMB
    
    US$Bills payable
    
    
    216,978
    
    
    
    197,335
    
    
    
    27,052Bank loans
    
    
    368,087
    
    
    
    786,569
    
    
    
    107,829Other borrowings, secured by bills receivable
    
    
    17,725
    
    
    
    
    
    
    
    Total short-term borrowings
    
    
    602,790
    
    
    
    983,904
    
    
    
    134,881
     December 31,2006
    
    2007RMB
    
    RMB
    
    US$Pledged by:
    
    
    119,302
    
    
    
    94,384
    
    
    
    12,939- Bank deposits
    
    
    17,725
    
    
    
    
    
    
    
    - Bills receivableGuarantees provided by:- Qiao Xing Group Limited (QXGL)
    
    
    449,000
    
    
    
    160,000
    
    
    
    21,934- QXGL and directors of the Company
    
    
    400,000
    
    
    
    570,000
    
    
    
    78,140- Xing
    
    
    78,087
    
    
    
    338,006
    
    
    
    46,336- director of the Company
    
    
    60,000
    
    
    
    
    
    
    
    
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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)
 11
    
    Segment informationThe 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, in-process
research and development, impairment of equity investment, fair value adjustments on
inventories, property, machinery and equipment, and land use rights and interest income,
administrative expenses and net foreign currency exchange gains or
losses of the Company. Segment
assets consist of total assets of CECT excluding goodwill, other intangible assets, fair value
adjustments on property, machinery and equipment, and land use rights, and assets held by the Company.
 Old Basis
    
    
    New BasisYear
    
    January 1,
    
    
    Novemberended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Revenues- Sales of mobile phones
and accessories
    
    
    1,806,076
    
    
    
    2,239,458
    
    
    
    
    254,546
    
    
    
    3,113,756
    
    
    
    426,858- Services and other revenues
    
    
    58,049
    
    
    
    41,740
    
    
    
    
    1,467
    
    
    
    27,338
    
    
    
    3,747Total segment and
consolidated revenue
    
    
    1,864,125
    
    
    
    2,281,198
    
    
    
    
    256,013
    
    
    
    3,141,094
    
    
    
    430,605Segment income
    
    
    269,159
    
    
    
    377,723
    
    
    
    
    32,320
    
    
    
    746,618
    
    
    
    102,352Segment assets
    
    
    1,733,016
    
    
    
    1,927,111
    
    
    
    
    2,136,120
    
    
    
    3,492,959
    
    
    
    478,842Interest income
    
    
    5,592
    
    
    
    5,320
    
    
    
    
    631
    
    
    
    10,619
    
    
    
    1,456Interest expense
    
    
    (32,332
    )
    
    
    (27,115
    )
    
    
    
    (2,213
    )
    
    
    (47,034
    )
    
    
    (6,448
    )Depreciation
    
    
    (8,051
    )
    
    
    (6,677
    )
    
    
    
    (630
    )
    
    
    (12,504
    )
    
    
    (1,714
    )
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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)
 11
    
    Segment information (continued)A reconciliation of segment income to consolidated income (loss) before income tax expense,
minority interests and extraordinary items for the year ended December 31, 2005, 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 is as follows:
 Old Basis
    
    
    New BasisJanuary 1,
    
    
    NovemberYear ended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Segment income  CECT
    
    
    269,159
    
    
    
    377,723
    
    
    
    
    32,320
    
    
    
    746,618
    
    
    
    102,352In-process research and development
    
    
    
    
    
    
    
    
    
    
    
    (41,739
    )
    
    
    
    
    
    
    Amortization of other
intangible assets
    
    
    (11,880
    )
    
    
    (10,890
    )
    
    
    
    (4,288
    )
    
    
    (32,280
    )
    
    
    (4,425
    )Impairment of other
equity investment
    
    
    (7,517
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair value adjustment on property,
machinery and equipment
    
    
    601
    
    
    
    1,406
    
    
    
    
    131
    
    
    
    1,750
    
    
    
    240Fair value adjustment on inventories
    
    
    
    
    
    
    
    
    
    
    
    (1,053
    )
    
    
    (502
    )
    
    
    (69
    )Fair value
adjustment on land use rights
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    2Interest income, administrative
expenses and net foreign currency
exchange gain (loss) of the
Company
    
    
    1,155
    
    
    
    3,368
    
    
    
    
    1,194
    
    
    
    (4,348
    )
    
    
    (596
    )Consolidated earnings (loss) before
income tax expense, minority
interests, and extraordinary items
    
    
    251,518
    
    
    
    371,607
    
    
    
    
    (13,435
    )
    
    
    711,251
    
    
    
    97,504
  December 31,2006
    
    2007RMB
    
    RMB
    
    US$Total segment assets  CECT
    
    
    2,136,120
    
    
    
    3,492,959
    
    
    
    478,842- Goodwill
    
    
    112,814
    
    
    
    112,814
    
    
    
    15,465- Other intangible assets, net
    
    
    93,008
    
    
    
    60,728
    
    
    
    8,325- Property, machinery and equipment, net
    
    
    (9,658
    )
    
    
    (14,042
    )
    
    
    (1,925
    )- Land use rights
    
    
    
    
    
    
    (1,169
    )
    
    
    (160
    )- Assets held by the Company
    
    
    3,868
    
    
    
    342,812
    
    
    
    46,996Total assets
    
    
    2,336,152
    
    
    
    3,994,102
    
    
    
    547,543
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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
    
    Income taxesThe 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, which 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 entitled to a 7.5% PRC enterprise
income tax rate from January 1, 2003 through December 31, 2005. 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. Further, on December 6, 2007, the State Council released the implementation rules to
the Enterprise Income Tax Law. According to the New Tax Law, from January 1, 2008 the
applicable enterprise income tax rates for enterprises in the PRC
will be 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
qualifying high-technology enterprises under the New Tax Law. The detailed application of the newly introduced
preferential tax policies have yet to be made public.Under the New Tax Law and before obtaining any
qualifying high-technology enterprise status, CECT,
including its Huizhou branch, would be 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 are exempt from the withholding tax, therefore, the Company
has not recognized a deferred tax liability for the undistributed earnings through December
31, 2007.Income tax expense consists of the following:
 Old Basis
    
    
    New BasisYear
    
    January 1,
    
    
    Novemberended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Current expense
    
    
    22,217
    
    
    
    55,731
    
    
    
    
    4,718
    
    
    
    119,614
    
    
    
    16,398Deferred expense (benefit)
    
    
    (5,498
    )
    
    
    260
    
    
    
    
    (467
    )
    
    
    (6,237
    )
    
    
    (855
    )Total income tax expense
    
    
    16,719
    
    
    
    55,991
    
    
    
    
    4,251
    
    
    
    113,377
    
    
    
    15,543
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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
    
    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 BasisYear
    
    January 1,
    
    
    Novemberended
    
    2006 to
    
    
    30, 2006 toDecember
    
    November
    
    
    December
    
    Year ended31, 2005
    
    30, 2006
    
    
    31, 2006
    
    December 31, 2007RMB
    
    RMB
    
    
    RMB
    
    RMB
    
    US$Expected tax based on PRC
statutory income tax rate at
33%
    
    
    83,001
    
    
    
    122,630
    
    
    
    
    (4,434
    )
    
    
    234,713
    
    
    
    32,176Tax effect of preferential tax
rates
    
    
    (46,200
    )
    
    
    (67,160
    )
    
    
    
    (4,753
    )
    
    
    (134,627
    )
    
    
    (18,455
    )Tax effect of tax holidays
    
    
    (24,120
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax rate differential of the
Company
    
    
    (381
    )
    
    
    (2,274
    )
    
    
    
    (394
    )
    
    
    2,189
    
    
    
    300Non-deductible in-process
research and development
    
    
    
    
    
    
    
    
    
    
    
    13,775
    
    
    
    
    
    
    
    Non-deductible advertising
expenses
    
    
    2,315
    
    
    
    1,239
    
    
    
    
    54
    
    
    
    
    
    
    
    Non-deductible share-based
compensation expenses
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    10,037
    
    
    
    1,376Other non-deductible expenses
    
    
    2,112
    
    
    
    1,407
    
    
    
    
    3
    
    
    
    1,065
    
    
    
    146Non-taxable income
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Actual income tax expense
    
    
    16,719
    
    
    
    55,991
    
    
    
    
    4,251
    
    
    
    113,377
    
    
    
    15,543Effect of tax holidays per share
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  December 31,2006
    
    2007RMB
    
    RMB
    
    US$Deferred tax assets:Allowance for doubtful accounts
    
    
    352
    
    
    
    868
    
    
    
    119Inventory write-offs
    
    
    2,587
    
    
    
    3,602
    
    
    
    494Accrued product warranties
    
    
    1,021
    
    
    
    1,215
    
    
    
    166Property, machinery and equipment, net
    
    
    2,212
    
    
    
    3,268
    
    
    
    448Land use rights
    
    
    
    
    
    
    281
    
    
    
    39Total deferred tax assets
    
    
    6,172
    
    
    
    9,234
    
    
    
    1,266Deferred tax liability:Other intangible assets, net
    
    
    (13,952
    )
    
    
    (9,110
    )
    
    
    (1,249
    )Net deferred tax asset (liability)
    
    
    (7,780
    )
    
    
    124
    
    
    
    17
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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
    
    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, 2006 and 2007. 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 January 1, 2007, the Group has no material unrecognized tax benefit which would
favorably affect the effective income tax rate in future periods and does not believe there
will be any significant increases or decreases within the next twelve months. According to
the PRC Tax Administration and Collection Law, the statute of limitations is three years from
2005 to 2007 if the underpayment of taxes is due to computational errors made by the taxpayer
or the withholding agent. The statute of limitations extends to five years from 2003 to 2007
under special circumstances, which are not clearly defined. In the case of a related party
transaction, the statute of limitation is ten years from 1998 to 2007. There is no statute of
limitation in the case of tax evasion.13
    
    Distribution of incomeFor the year ended December 31, 2005, 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, 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 year ended December 31, 2005, 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, CECT had made transfers to
the general reserve of approximately RMB24,228, RMBNil, RMB29,118 and RMB65,796 (US$9,020),
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 year ended December 31,
2005, 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. The accumulated balance
of statutory reserve funds maintained at CECT as of December 31, 2006 and 2007 were RMB67,131
and RMB137,126 (US$18,798), respectively.14
    
    Ordinary sharesPursuant 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 3, 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).
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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)
 15
    
    Share-based compensation(a)
    
    Xing 2005 Stock PlanOn December 2, 2005, the shareholders of the Companys parent company, 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 (US$451), 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 and for the year ended December 31, 2007.(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 fair value of the share options on the date of grant 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
    %
  
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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)
 15
    
    Share-based compensation (continued)(b)
    
    QXMC 2007 Stock Plan (continued)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) during the year ended December 31, 2007, of which 1% was charged to selling and
distribution expenses, 94% to general and administrative expenses and 5% to research and
development expenses, with a corresponding increase in additional paid-in capital. As of
December 31, 2007, the total unrecognized compensation cost related to unvested share options
amounted to US$9,080, which is expected to be recognized over a remaining weighted average
vesting periods of 2.2 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$18.00 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
    %
  Weighted
    
    Weightedaverage
    
    averageexercise
    
    remaining
    
    AggregateNumber of
    
    price
    
    contractual
    
    intrinsicoptions
    
    per share
    
    term
    
    valueUS$
    
    
    
    US$Balance as of January 1, 2007
    
    
    
    
    
    
    Granted on March 19, 2007
    
    
    3,916,520
    
    
    
    10.72Balance as of December 31, 2007
    
    
    3,916,520
    
    
    
    10.72
    
    
    3.7 years
    
    
    2,581Exercisable as of December 31, 2007
    
    
    2,031,720
    
    
    
    13.70
    
    
    2.4 years
    
    
    790
 16
    
    Fair value of financial instrumentsThe carrying amount of cash, accounts receivable, prepaid expenses and other current assets,
amounts due to related parties, accrued liabilities and other payables and current
liabilities and short-term borrowings, approximates their fair values because of the short
maturity of these instruments.
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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)
 17
    
    Commitments and contingencies(a)
    
    Operating lease commitmentsThe Group has operating lease agreements for office and factory premises, which extends
through December 2010. As of December 31, 2007, the Groups future minimum lease payments
required under non-cancellable operating leases are as follows:
 RMBYear ending December 31,- 2008
    
    
    4,531- 2009
    
    
    3,052- 2010
    
    
    3,051Total
    
    
    10,634
  (b)
    
    GuaranteesThe Group had provided guarantees to banks in respect of borrowings granted to QXCI to the
extent of RMB190,000 and RMB150,000 (US$20,563) as of December 31, 2006 and 2007,
respectively. Such borrowings were utilized by QXCI to the extent of RMB145,700 and
RMB107,550 (US$14,744) as of December 31, 2006 and 2007, respectively.18
    
    Supplemental disclosure of cash flow informationAs more fully described in Note 4, the Company purchased an additional equity interest in
CECT on July 31, 2005. Part of the purchase consideration was the Companys investment in
CEFCL, which had a carrying value of RMB20,000 at July 31, 2005, and the Groups net
investment in BJHTCL. At July 31, 2005, the carrying amounts of BJHTCLs assets and
liabilities that were transferred to QXCI (and thereafter to CEC) in the above transaction
consisted of:
 RMBCash
    
    
    126Other receivables
    
    
    751Property, machinery and equipment, net
    
    
    37,826Lease prepayments
    
    
    1,383Net assets disposed of (Note 4)
    
    
    40,086
  RMBCash disposed of
    
    
    126Plus: additional cash consideration agreed to
    
    
    4,607Less: Prepaid consideration as of December 31, 2004
    
    
    (1,000
    )Less: Consideration paid by Xing on behalf of the Group (Note 19(c))
    
    
    (3,607
    )Net cash outflow in respect of acquisition of additional interest in CECT
    
    
    126
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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
    
    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 Communication Holdings, Ltd. (QXCH)
    
    Subsidiary of XingQiao Xing Group Limited (QXGL)
    
    A company controlled by certain directors of the CompanyQiao Xing Electronics Holdings Co., Ltd. (QXEH)
    
    A company controlled by certain directors of the CompanyChina Electronics Corporation (CEC)
    
    Minority shareholder of CECT until July 29, 2005China Electronics Beijing Real Estate Management Co.,
Ltd. (CEBREM)
    
    CEC is a shareholder
 (b)
    
    Summary of related party transactions
 (i)
    
    During the year ended December 31, 2005 and 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 RMB4,710 and RMB1,377 respectively.(ii)
    
    During the year ended December 31, 2005, the Group purchased handset components
from QXCI in the normal course of its business at similar terms as the Group traded with
its independent suppliers, amounting to RMB61,972. The amounts charged to cost of goods
sold when sold during the year ended December 31, 2007.(iii)
    
    During the year ended December 31, 2005, 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, the Group received processing fee income from QXCI for
handset processing services rendered, amounting to RMB6,234, RMB2,709, RMB859 and
RMB13,314 (US$1,825) respectively.(iv)
    
    During the year ended December 31, 2005, the Group paid rental expenses to CEC, a
minority shareholder of CECT until July 29, 2005, for renting an office premise in
Beijing, the PRC, amounting to RMB1,325. CEC was no longer a related party to the Group
since July 29, 2005.(v)
    
    During the year ended December 31, 2005, the Group paid property management fees
to CEBREM for an office premise in Beijing, the PRC, amounting to RMB852. CEBREM was no
longer a related party to the Group since July 29, 2005.(vi)
    
    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.
  F-32




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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
    
    Related party transactions (continued)(c)
    
    Summary of related party balances
 December 31,2006
    
    2007RMB
    
    RMB
    
    US$Amount due to Xing
    
    
    (345,122
    )
    
    
    (4,532
    )
    
    
    (621
    )
  December 31,2006
    
    2007RMB
    
    RMB
    
    US$Amounts due from(to) related parties before
the execution of the deed of assignment:- Xing
    
    
    (264,171
    )
    
    
    (54,848
    )
    
    
    (7,519
    )- QXCH
    
    
    (78,639
    )
    
    
    
    
    
    
    - QXGL
    
    
    30,727
    
    
    
    (1,914
    )
    
    
    (262
    )- QXEH
    
    
    (26,420
    )
    
    
    
    
    
    
    - Shareholder of Xing: Wu Li Zhi Jian
    
    
    (9,492
    )
    
    
    
    
    
    
    - Director: Wu Zhi Yang
    
    
    (837
    )
    
    
    (737
    )
    
    
    (101
    )- QXCI
    
    
    3,710
    
    
    
    52,967
    
    
    
    7,261Net advances from Xing
    
    
    (345,122
    )
    
    
    (4,532
    )
    
    
    (621
    )
   20
    
    Subsequent eventPursuant 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
worth of 3-year senior convertible notes (the Notes) with warrants. The Notes have a 4.0% annual
coupon and are redeemable at par. The consideration paid on May 15, 2008 by the Investors for the
Notes comprised a combination of 6,966,666 shares of the Companys common stock that were owned by
the Investors, valued at approximately US$48,349 based on the closing market price of the Companys
shares on May 14, 2008 and cash of US$21,651. All shares submitted by the Investors in exchange
for the Notes will be cancelled. The net cash proceeds raised by the Company are expected to be
used for general corporate purposes, including funding potential ventures which the Company is
currently evaluating.
 F-33