**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 20-F**

 

| **o**      |   | **REGISTRATION****STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                               |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                        |
| **OR**     |
|       |
| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                        |
|       |   | **For  the fiscal year ended December 31, 2003**                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                        |
| **OR**     |
|       |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                          |
|       |   |                                                                                                                                                                                                                                        |
|       |   | **For  the transition period from                    to                  ** |

 

**Commissionfile number 1-15028**

 

**CHINA UNICOM LIMITED**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **N/A**                                                                                                       |   | **Hong Kong**                                    |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (Translation of  Registrant’s Name Into English)                                                         |   | (Jurisdiction of  Incorporation or Organization) |
|                                                                                                          |   |                                             |
| **75th  Floor, The Center  99 Queen’s Road Central  Hong Kong**(Address of  Principal Executive Offices) |
|                                                                                                          |
| Securities  registered or to be registered pursuant to Section 12(b) of the Act:                         |

 

| **Title of  Each Class**                     |   | **Name of  Each Exchange On Which Registered** |
|----------------------------------------------|--------|------------------------------------------------|
| Ordinary shares, par value HK$0.10 per share |   | New York Stock Exchange, Inc.*                 |

 

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*                                         Notfor trading, but only in connection with the listing on the New York StockExchange, Inc. of American depositary shares, or ADSs, each representing 10ordinary shares.

 

Securities registered or to be registered pursuant toSection 12(g) of the Act:

**None**(Title of class)

 

Securities for which thereis a reporting obligationpursuant to Section 15(d) of the Act:

**None**(Title of Class)

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas of the close of the period covered by the annual report.

 

12,553,172,070 Ordinary Shares as of December 31,2003.

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   ý                                    No o

 

Indicate by check markwhich financial statement item the registrant has elected to follow.

 

Item 17   o     Item 18    ý

 

 

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**TABLEOF CONTENTS**

** **
| Note Regarding Forward-looking Statements                                                |   |
|------------------------------------------------------------------------------------------|--------|
|                                                                                     |   |
| Certain Definitions                                                                      |   |
|                                                                                     |   |
| PART I                                                                                   |   |
|                                                                                     |   |
| Item 1.  Identity of Directors, Senior Management and Advisers                           |   |
|                                                                                     |   |
| Item 2.  Offer Statistics and Expected Timetable                                         |   |
|                                                                                     |   |
| Item 3.  Key Information                                                                 |   |
|                                                                                     |   |
| Item 4.  Information on the Company                                                      |   |
|                                                                                     |   |
| Item 5. Operating and Financial Review and  Prospects                                    |   |
|                                                                                     |   |
| Item 6.  Directors, Senior Management and Employees                                      |   |
|                                                                                     |   |
| Item 7.  Major Shareholders and Related Party Transactions                               |   |
|                                                                                     |   |
| Item 8.  Financial Information                                                           |   |
|                                                                                     |   |
| Item 9.  The Offer and Listing                                                           |   |
|                                                                                     |   |
| Item  10. Additional Information                                                         |   |
|                                                                                     |   |
| Item  11. Quantitative and Qualitative Disclosures About Market Risks                    |   |
|                                                                                     |   |
| Item  12. Description of Securities Other than Equity Securities                         |   |
|                                                                                     |   |
| PART II                                                                                  |   |
|                                                                                     |   |
| Item  13. Defaults, Dividend Arrearages and Delinquencies                                |   |
|                                                                                     |   |
| Item  14. Material Modifications to the Rights of Security Holders and Use of  Proceeds  |   |
|                                                                                     |   |
| Item  15. Controls and Procedures                                                        |   |
|                                                                                     |   |
| Item  16A.  Audit Committee Financial Expert                                        |   |
|                                                                                     |   |
| Item  16B.  Code of Ethics                                                          |   |
|                                                                                     |   |
| Item  16C.  Principal Accountant Fees and  Services                                 |   |
|                                                                                     |   |
| Item  16D.  Exemptions from the Listing  Standards for Audit Committees             |   |
|                                                                                     |   |
| Item  16E.  Purchases of Equity Securities  by the Issuer and Affiliated Purchasers |   |

 

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| PART  III                            |   |
|--------------------------------------|--------|
|                                 |   |
| Item  17.  Financial Statements |   |
|                                 |   |
| Item  18.  Financial Statements |   |
|                                 |   |
| Item  19.  Exhibits             |   |

 

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**NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

** **

This annual report forthe year ended December 31, 2003 contains forward-looking statements thatare, by their nature, subject to significant risks and uncertainties.  Such forward-looking statements include,without limitation, our strategy and future plan, our capital expenditure plan,our future business condition and financial results, our abilities to expandnetwork capacity and increase network efficiency, our ability to develop newtechnology applications and offer new services, the advantages of code divisionmultiple access, or CDMA, technology and our ability to realize such advantagesand successfully execute our CDMA-related strategy, our ability to leverage ourposition as an integrated telecommunications operator and expand into newbusinesses and new markets, future growth of market demand for our services,and future regulatory and other developments in the Chinese telecommunicationsindustry.

 

Such forward-lookingstatements reflect our current views with respect to future events.  Actual results may differ materially frominformation contained in the forward-looking statements as a result of a numberof factors, including, without limitation, any changes in the regulatorypolicies of the Ministry of Information Industry, or MII, and other relevantgovernment authorities in China, the effects of competition on the demand andprice of our telecommunications services, any changes in telecommunications andrelated technology and applications based on such technology, and changes inpolitical, economic, legal and social conditions in China including the Chinesegovernment’s policies with respect to economic growth, foreign exchange,foreign investment and entry by foreign companies into China’stelecommunications market.  In addition,our future network expansion and other capital expenditure and developmentplans are dependent on numerous factors, including the availability of adequatefinancing on acceptable terms, the adequacy of currently available spectrum oravailability of additional spectrum and the adequate and timely supply ofequipment when required.  Please alsosee the “Risk Factors” section under Item 3.

 

**CERTAIN DEFINITIONS**

** **

As used in this annualreport, references to “us”, “we”, “our,” the “Company” and “Unicom” are toChina Unicom Limited.  Unless thecontext otherwise requires, these references include all of our subsidiaries.  In respect of any time prior to ourincorporation, references to “us”, “we”, “our” and “Unicom” are to thetelecommunications businesses in which our predecessors were engaged and whichwere subsequently assumed by us.  Allreferences to “Unicom Group” are to China United TelecommunicationsCorporation, our indirect controlling shareholder.  Unless the context otherwise requires, these references includeall of its subsidiaries, including us and our subsidiaries.  Please also see “A. History and Developmentof the Company –Acquisition of Unicom New World and the Sale of Guoxin Paging”under Item 4 for our current shareholding structure.

 

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# **PARTI**

# ** **

## **Item1**.  Identity ofDirectors, Senior Management and Advisers

## ** **

Not Applicable.

 

## **Item2**.  OfferStatistics and Expected Timetable

## ** **

Not Applicable.

 

## **Item3**.  Key Information

## ** **

### ***A.***                                    SelectedFinancial Data

### *** ***

The following tablepresents our selected consolidated income statement data for the years endedDecember 31, 1999, 2000, 2001, 2002 and 2003 and our selected consolidatedbalance sheet data as of December 31, 1999, 2000, 2001, 2002 and2003.  The selected consolidated balancesheet data as of December 31, 2002 and 2003 and income statement and cashflow data for the years ended December 31, 2001, 2002 and 2003 have beenderived from our audited consolidated financial statements included in thisannual report.  The selectedconsolidated balance sheet data as of December 31, 1999, 2000 and 2001 andincome statement and cash flow data for the years ended December 31, 1999and 2000 have been derived from our audited consolidated financial statementsthat are not included in this annual report. The financial statements for periods prior to our restructuring andinitial public offering in 2000 reflect historical results of operations andfinancial positions of the businesses that were transferred to us from UnicomGroup in 2000 in contemplation of our initial public offering.

 

Our financial statementsare prepared in accordance with generally accepted accounting principles inHong Kong, or HK GAAP.  Under HK GAAP,prior to 2003, deferred taxation was accounted for at the current taxation ratein respect of timing differences between net income as computed for taxationpurposes and net income as stated in the income statement. A deferred tax assetwas not recognized unless the related benefits are expected to crystallize inthe foreseeable future. Upon the adoption of SSAP 12 in 2003, deferred taxationis provided in full, using the liability method, on temporary differencesarising between the tax bases of assets and liabilities and their carryingamounts in the financial statements. Taxation rates enacted or substantivelyenacted at the balance sheet date are used to determine deferred taxation.Deferred tax assets are recognized to the extent that it is probable thatfuture taxable income will be available against which the temporary differencescan be utilized. Under HK GAAP, the adoption of SSAP 12 in 2003 represents achange in accounting policy which has been applied retrospectively so that thecomparative data presented have been restated to conform to the changed policy.A detailed description is set forth in Note 3(a) to the financial statements.

 

In addition, financialstatements prepared in accordance with HK GAAP vary in certain materialrespects from generally accepted accounting principles in the United States, orUS GAAP.  In accordance with HK GAAP, weadopted the purchase method to account for our acquisition from Unicom Group ofcertain cellular businesses and assets held by Unicom New CenturyTelecommunications Corporation Limited, or Unicom New Century, and Unicom NewWorld Telecommunications Corporation Limited, or Unicom New World.  The acquisition of Unicom New Century becameeffective on December 31, 2002 and the acquisition of Unicom New Worldbecame effective on December 31, 2003, as described in “A. History andDevelopment of the Company – Restructuring and Acquisition of Unicom NewCentury” and “– Acquisition of Unicom New World and the Sale of Guoxin Paging”under Item 4.  Accordingly, ourconsolidated income statements and, except as otherwise noted, all other HKGAAP financial information presented in this annual report include theoperating results of Unicom New Century only for the year ended

 

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December 31, 2003,and do not include the operating results of Unicom New World.  Under the purchase method, our consolidatedbalance sheet as of December 31, 2002 includes the financial position ofUnicom New Century and our consolidated balance sheet as of December 31,2003 includes the financial position of Unicom New Century and Unicom NewWorld.  In contrast, under US GAAP,these acquisitions would be accounted for as transfers of entities under commoncontrol.  The financial statementsprepared under US GAAP would retroactively be restated for all periodspresented on a combined basis as if the acquisitions had been in effect sinceinception, whereby related assets and liabilities of the acquired businesseswould be accounted for at historical cost and the results of operations of theacquired businesses would be included in the consolidated financial statementsfor the earliest period presented.

 

Under HK GAAP, the saleof Guoxin Paging Corporation Ltd., or Guoxin Paging, on December 31, 2003by us to Unicom Group has been accounted for as a sale of discontinuedoperation. The difference between the sale proceeds and the carrying amount ofnet assets of Guoxin Paging as of December 31, 2003 was recorded as theloss on sale of discontinued operation in our consolidated income statement forthe year ended December 31, 2003. The operating results of Guoxin Pagingfrom January 1, 2003 to the effective date of the sale of Guoxin Pagingwere included in our consolidated income statement for the year endedDecember 31, 2003.  Under US GAAP,the sale of Guoxin Paging to Unicom Group is considered a transfer of businessbetween entities under common control and accounted for at historical cost ofthe net assets transferred, after reduction, if appropriate, for an indicatedimpairment of value. In addition, under US GAAP, the results of operations of acomponent or segment of an entity that has been disposed of should be reportedin discontinued operations as a separate component of income, separated fromcontinuing operations, in the period in which the disposal occurred and inprior periods. Accordingly, all the operating results of Guoxin Paging havebeen grouped into and reported in the income statement as “Discontinuedoperation - Loss from discontinued operation” under US GAAP.

 

See Note 41 to theconsolidated financial statements included in this annual report for a summaryof the principal differences between HK GAAP and US GAAP that have asignificant effect on our financial statements.

 
|                                                    |   | **As of or  for the year ended December 31**              |   |
|---------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                    |   | **1999**                                                       |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   | **2003** |   |
|                                                    |   | **RMB**                                                        |   | **RMB** |   | **RMB** |   | **RMB** |   | **RMB** |   | **US$(1)** |   |
|                                                    |   | **(in  millions, except number of shares and per share data)** |   |
| **Income Statement Data:**                              |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Hong  Kong GAAP (As restated) (2):                      |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue (Turnover):                          |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Cellular  Business                                      |   | 5,314                                                          |   | 12,188 |   | 20,505 |   | 30,613 |   | 56,927 |   | 6,878 |   |
| • GSM Business                                     |   | 5,314                                                          |   | 12,188 |   | 20,505 |   | 27,388 |   | 40,304 |   | 4,870 |   |
| • CDMA Business                                    |   | —                                                         |   | — |   | — |   | 3,225 |   | 16,623 |   | 2,008 |   |
| Paging  Business                                        |   | 9,047                                                          |   | 8,483 |   | 4,342 |   | 2,161 |   | 1,403 |   | 170 |   |
| Long  Distance Business                                 |   | —                                                         |   | 556 |   | 1,489 |   | 2,766 |   | 2,273 |   | 275 |   |
| Data  Business                                          |   | 79                                                             |   | 481 |   | 1,550 |   | 2,173 |   | 2,624 |   | 317 |   |
| Internet  Business                                      |   | —                                                         |   | 59 |   | 270 |   | 620 |   | 813 |   | 98 |   |
| Total  service revenue                                  |   | 14,440                                                         |   | 21,767 |   | 28,156 |   | 38,333 |   | 64,040 |   | 7,738 |   |
| Sales  of telecommunications products                   |   | 3,010                                                          |   | 1,925 |   | 1,237 |   | 2,244 |   | 3,596 |   | 434 |   |
| Total  operating revenue                                |   | 17,450                                                         |   | 23,692 |   | 29,393 |   | 40,577 |   | 67,636 |   | 8,172 |   |
| Operating  expenses                                     |   | (14,634                                                        | )      | (18,470 | ) | (24,129 | ) | (33,253 | ) | (59,122 | ) | (7,143 | ) |
| Operating  income                                       |   | 2,816                                                          |   | 5,222 |   | 5,264 |   | 7,324 |   | 8,514 |   | 1,029 |   |
| Loss  on sale of discontinued operation (Guoxin Paging) |   | —                                                         |   | — |   | — |   | — |   | 663 |   | 80 |   |

 

2

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|                                                                                                                  |   | **As of or  for the year ended December 31**              |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                                                                                  |   | **1999**                                                       |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   | **2003** |   |
|                                                                                                                  |   | **RMB**                                                        |   | **RMB** |   | **RMB** |   | **RMB** |   | **RMB** |   | **US$(1)** |   |
|                                                                                                                  |   | **(in  millions, except number of shares and per share data)** |   |
| Income  before taxation                                                                                               |   | 1,759                                                          |   | 4,482 |   | 5,463 |   | 6,303 |   | 6,096 |   | 737 |   |
| Net  income                                                                                                           |   | 927                                                            |   | 3,324 |   | 4,602 |   | 4,598 |   | 4,217 |   | 510 |   |
| • Basic net income per share (3)                                                                                 |   | 0.095                                                          |   | 0.297 |   | 0.367 |   | 0.366 |   | 0.336 |   | 0.041 |   |
| • Number of shares outstanding for  basic net income per share (in thousands) (3)                                |   | 9,725,000                                                      |   | 11,208,224 |   | 12,552,996 |   | 12,552,996 |   | 12,553,010 |   | 12,553,010 |   |
| • Diluted net income per share (3)                                                                               |   | —                                                         |   | 0.297 |   | 0.367 |   | 0.366 |   | 0.336 |   | 0.041 |   |
| • Number of shares outstanding for  diluted net income per share (in thousands) (3)                              |   | 9,725,000                                                      |   | 11,208,224 |   | 12,552,996 |   | 12,552,996 |   | 12,568,683 |   | 12,568,683 |   |
| • Basic net income per ADS (4)                                                                                   |   | 0.953                                                          |   | 2.966 |   | 3.666 |   | 3.663 |   | 3.359 |   | 0.406 |   |
| • Number of ADS outstanding for  basic net income per share  (in  thousands) (3)                            |   | 972,500                                                        |   | 1,120,822 |   | 1,255,300 |   | 1,255,300 |   | 1,255,301 |   | 1,255,301 |   |
| • Diluted net income per ADS (4)                                                                                 |   | —                                                         |   | 2.966 |   | 3.666 |   | 3.663 |   | 3.355 |   | 0.405 |   |
| • Number of ADS outstanding for  diluted net income per share (in thousands) (3)                                 |   | 972,500                                                        |   | 1,121,968 |   | 1,255,300 |   | 1,255,300 |   | 1,256,869 |   | 1,256,869 |   |
|                                                                                                                  |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| US  GAAP (As restated) (2)&(5)                                                                                    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue                                                                                                    |   | —                                                         |   | — |   | 32,501 |   | 50,415 |   | 71,958 |   | 8,694 |   |
| Operating  income from continuing operations                                                                          |   | —                                                         |   | — |   | 7,921 |   | 9,753 |   | 10,701 |   | 1,293 |   |
| Net  income before discontinued operation, and cumulative effect of change in  accounting policy                      |   | —                                                         |   | — |   | 5,866 |   | 5,493 |   | 6,070 |   | 733 |   |
| Loss  from discontinued operation, net of tax                                                                         |   | —                                                         |   | — |   | 710 |   | 422 |   | 1,342 |   | 162 |   |
| Effect  of change in accounting policy(transitional adjustment of goodwill impairment  upon the adoption of SFAS 142) |   | —                                                         |   | — |   | — |   | 42 |   | — |   | — |   |
| Net  income                                                                                                           |   | —                                                         |   | — |   | 5,155 |   | 5,028 |   | 4,728 |   | 571 |   |
| • Basic net income per share before  discontinued operation and effect of change in accounting policy (3)        |   | —                                                         |   | — |   | 0.467 |   | 0.438 |   | 0.484 |   | 0.058 |   |
| • Basic net income per ADS before  discontinued operation and effect of change in accounting policy (4)          |   | —                                                         |   | — |   | 4.673 |   | 4.376 |   | 4.836 |   | 0.584 |   |
| • Basic net income per share after  discontinued operation and effect of change in accounting policy (3)         |   | —                                                         |   | — |   | 0.411 |   | 0.401 |   | 0.377 |   | 0.046 |   |
| • Basic net income per ADS after  discontinued operation and effect of change in accounting policy (4)           |   | —                                                         |   | — |   | 4.107 |   | 4.006 |   | 3.767 |   | 0.455 |   |
|                                                                                                                  |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| **Balance sheet Data:**                                                                                               |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                  |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Hong  Kong GAAP (As restated) (2):                                                                                    |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Bank  balances and cash                                                                                               |   | 6,002                                                          |   | 44,717 |   | 18,413 |   | 14,433 |   | 9,220 |   | 1,114 |   |
| Property,  plant and equipment, net                                                                                   |   | 33,227                                                         |   | 52,864 |   | 75,748 |   | 107,487 |   | 118,105 |   | 14,270 |   |
| Total  assets                                                                                                         |   | 45,504                                                         |   | 113,057 |   | 128,278 |   | 149,628 |   | 149,838 |   | 18,104 |   |
| Net  assets                                                                                                           |   | 11,207                                                         |   | 58,336 |   | 62,884 |   | 67,219 |   | 69,615 |   | 8,411 |   |
| Short-term  debt and current portion of other long-term debt                                                          |   | 7,894                                                          |   | 8,501 |   | 7,933 |   | 15,330 |   | 18,173 |   | 2,196 |   |
| Obligations  under finance lease-current portion                                                                      |   | —                                                         |   | — |   | 8 |   | 17 |   | 25 |   | 3 |   |

 

3

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|                                                 |   | **As of or  for the year ended December 31**              |   |
|------------------------------------------------------|--------|----------------------------------------------------------------|--------|
|                                                 |   | **1999**                                                       |   | **2000** |   | **2001** |   | **2002** |   | **2003** |   | **2003** |   |
|                                                 |   | **RMB**                                                        |   | **RMB** |   | **RMB** |   | **RMB** |   | **RMB** |   | **US$(1)** |   |
|                                                 |   | **(in  millions, except number of shares and per share data)** |   |
| Obligations  under finance lease-non current portion |   | —                                                         |   | — |   | 101 |   | 101 |   | 100 |   | 12 |   |
| Other  long-term debt                                |   | 12,234                                                         |   | 27,151 |   | 36,337 |   | 37,686 |   | 36,213 |   | 4,375 |   |
| Shareholders’  equity                           |   | 8,676                                                          |   | 57,452 |   | 62,054 |   | 66,653 |   | 69,615 |   | 8,411 |   |
|                                                 |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| US  GAAP (As restated) (2)&(5)                   |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Property,  plant and equipment, net                  |   | —                                                         |   | — |   | — |   | 118,787 |   | 118,124 |   | 14,272 |   |
| Total  assets                                        |   | —                                                         |   | — |   | — |   | 164,636 |   | 150,413 |   | 18,173 |   |
| Obligations  under finance lease-current portion     |   | —                                                         |   | — |   | — |   | 17 |   | 25 |   | 3 |   |
| Obligations  under finance lease-non current portion |   | —                                                         |   | — |   | — |   | 101 |   | 100 |   | 12 |   |
| Other  long-term debt                                |   | —                                                         |   | — |   | — |   | 45,520 |   | 36,213 |   | 4,375 |   |
| Shareholders’  equity                           |   | —                                                         |   | — |   | — |   | 64,215 |   | 65,913 |   | 7,964 |   |
|                                                 |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                            |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Hong  Kong GAAP:                                     |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Net  cash provided by operating activities           |   | 4,511                                                          |   | 9,344 |   | 11,078 |   | 13,054 |   | 22,565 |   | 2,726 |   |
| Net  cash used in investing activities               |   | (13,930                                                        | )      | (30,551 | ) | (46,125 | ) | (5,166 | ) | (19,051 | ) | (2,302 | ) |
| Net  cash provided by (used in) financing activities |   | 11,084                                                         |   | 59,921 |   | 8,743 |   | (11,868 | ) | (8,778 | ) | (1,061 | ) |
|                                                 |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| US  GAAP (As restated) (5):                          |   |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Net  cash provided by operating activities           |   | —                                                         |   | — |   | 15,320 |   | 18,215 |   | 25,992 |   | 3,140 |   |
| Net  cash used in investing activities               |   | —                                                         |   | — |   | (62,971 | ) | (10,256 | ) | (20,272 | ) | (2,449 | ) |
| Net  cash provided by (used in) financing activities |   | —                                                         |   | — |   | 21,015 |   | (12,773 | ) | (11,379 | ) | (1,375 | ) |

 

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(1)                                  The translation of RMB into US dollars hasbeen made at the rate of RMB8.2767 to US$1.00, the noon buying rate in New YorkCity for cable transfer in RMB as certified for customs purposes by the FederalReserve Bank of New York on December  31, 2003. The translations aresolely for the convenience of the reader.

 

(2)                                  The adoption of HK SSAP12 “Income Tax”(revised) in 2003 represents a change in accounting policy which has beenapplied retrospectively so that the comparative data presented have beenrestated to conform to the changed policy. See Note 3(a) set forth in thefinancial statements for detailed information.

 

(3)                                  See Notes 15 and 41 to the financialstatements included in this Form 20-F on how basic and diluted net income pershare are calculated under HK GAAP and US GAAP, respectively.

 

(4)                                  Net income per ADS is calculated bymultiplying net income per share by 10, which is the number of sharesrepresented by each ADS.

 

(5)                                  The US GAAP amounts as of December 31,2003 and 2002 and for each of the years in the three-year period endedDecember 31, 2003 are presented as if the acquisitions of Unicom NewCentury and Unicom New World had been in existence since the beginning of theearliest period presented.

 

**HistoricalExchange Rates Information**

** **

We publish our financialstatements in Renminbi, or RMB, the legal tender currency in the People’sRepublic of China.  In this annualreport, references to “US dollars” or “US$” are to United States

 

4

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dollars and references to“Hong Kong dollars”, “HK dollars” or “HK$” are to Hong Kong dollars.  Solely for the convenience of the reader,this annual report contains translations of certain RMB and Hong Kong dollaramounts into US dollar amounts and vice versa at specified rates.  These translations should not be construedas representations that the RMB or Hong Kong dollar amounts actually representsuch US dollar amounts or could be converted into US dollar amounts at therates indicated or at all.  Unlessotherwise stated, the translations of RMB and Hong Kong dollars into US dollarsand vice versa have been made at the rate of RMB8.2767 to US$1.00 and HK$7.7640to US$1.00, the noon buying rates in New York City for cable transfers payablein RMB or Hong Kong dollars as certified for customs purposes by the FederalReserve Bank of New York on December 31, 2003.

 

The noon buying rates onJune 18, 2004 were RMB8.2766 to US$1.00 andHK$7.7997****to US$1.00, respectively.  The average noon buying rates for 1999,2000, 2001, 2002 and 2003 were RMB8.2785, RMB8.2784, RMB8.2772, RMB8.2772 andRMB8.2771, respectively, to US$1.00, and HK$7.7599, HK$7.7936, HK$7.7996,HK$7.7996 and HK$7.7864, respectively, to US$1.00, calculated as the average ofthe noon buying rates on the last day of each month during each applicableyear.  The following table sets forth thehigh and low noon buying rates between RMB and the US dollar (in RMB per USdollar) and Hong Kong dollar and the US dollar (in Hong Kong dollar per USdollar) for each month during the previous six months:

 
| **Period**         |   | **High**               |   | **Low**                |   | **High** |   | **Low** |   |
|--------------------|--------|------------------------|--------|------------------------|--------|----------|--------|---------|--------|
|               |   | **(RMB per  US$1.00)** |   | **(HK$ per  US$1.00)** |   |
| December 2003 |   | 8.2772                 |   | 8.2765                 |   | 7.7670   |   | 7.7628  |   |
| January 2004  |   | 8.2772                 |   | 8.2767                 |   | 7.7775   |   | 7.7632  |   |
| February 2004 |   | 8.2773                 |   | 8.2769                 |   | 7.7845   |   | 7.7686  |   |
| March 2004    |   | 8.2774                 |   | 8.2767                 |   | 7.7980   |   | 7.7842  |   |
| April 2004    |   | 8.2772                 |   | 8.2768                 |   | 7.8000   |   | 7.7870  |   |
| May  2004          |   | 8.2773                 |   | 8.2768                 |   | 7.8010   |   | 7.7895  |   |

 

### ***B.***                                    Capitalizationand Indebtedness

### *** ***

Not applicable.

 

### ***C.***                                    Reasonsfor the Offer and Use of Proceeds

### *** ***

Not applicable.

 

### ***D.***                                    RiskFactors

### *** ***

**RisksRelating to Our Business**

** **

***Our cellular businessesface intense competition from China Mobile Communications Corporation, or ChinaMobile, China Telecom Corporation Limited, or China Telecom, and China NetworkCommunications Group Corporation, or China Netcom.  Such competition may result in slower subscriber growth, lowertariffs and higher customer acquisition costs for us, which would adverselyaffect our results of operations, financial condition and growth prospects.***

*** ***

Our cellular businessesface intense competition from China Mobile. China Mobile is the largest cellular operator in China and in ourcellular service areas and has competitive advantages over us in customer base,overall network coverage and quality, financial resources, network management,technical

 

5

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expertise and brandrecognition.  We are experiencingintense competition from China Mobile in many of our cellular service areas,and such competition may continue and further intensify.  In particular, continued price competitionbetween China Mobile and us in many service areas has accelerated the declineof the average revenue per user per month, or ARPU, of our cellular services,and adversely affected our profitability.

 

In addition, our cellularservices also compete with the local wireless telecommunications services ofChina Telecom and China Netcom, known as “Little Smart” services, that arebased on their fixed line networks and primarily utilize the personalhandyphone system, or PHS, technology. They are offered as extensions of fixed line services and, with suchfeatures as calling-party-pays arrangements, carry significantly lower tariffsthan cellular services.  The “LittleSmart” services were previously offered primarily in small- to medium-sizedcities, but have been introduced in most major cities nationwide in 2003.  According to public reports, these serviceshave attracted over 40 million users in China and their subscriber base iscontinuing to grow quickly.

 

Increased competitionfrom the cellular services of China Mobile and the “Little Smart” services ofChina Telecom and China Netcom may lead to slower subscriber growth, lowerusage of our services, continued price pressure and higher costs of customeracquisition, which would adversely affect our results of operations, financialcondition and growth prospects.

 

***Our CDMA services mayfail to gain sufficient market share.***

*** ***

We launched our CDMAservices in January 2002 and introduced CDMA 1X wireless data services inMarch 2003.  Prior to theintroduction of our CDMA services, digital cellular services in China weremostly based on the global system for mobile communications, or GSM,technology.  The majority of cellularsubscribers in China today continues to be GSM subscribers.  CDMA cellular services compete with GSMservices for cellular subscribers, who may be reluctant to switch to CDMAcellular services because of the need to obtain a new CDMA handset and phonenumber.  As of March 31, 2004, thetotal number of our CDMA subscribers has reached 21.62 million in our serviceareas. Nevertheless, CDMA technology and services have yet to gain broadermarket acceptance in China.  Inaddition, as Unicom Group only began to construct CDMA networks in 2001, thepresent coverage of CDMA networks may not be as extensive in some areas as thecoverage of existing GSM networks, including those of our competitor, ChinaMobile.  CDMA services are alsoperceived to have limitations in international roaming due to the lack of CDMAnetworks in many countries.

 

Whether our CDMA servicescan gain broader market acceptance will continue to be subject to a number ofuncertainties, including:

 

•                                          whetherwe can attract quality CDMA cellular subscribers in sufficient numbers,

 

•                                          whetherthe high-speed CDMA 1X wireless data services can attract sufficient targetedcustomers,

 

•                                          whetherwe can effectively promote our CDMA services and successfully execute ourstrategy of promoting the service as “enterprise, infotainment,health-conscious and trendy” services to mid- to high-end cellular subscribers,

 

•                                          whetherwe can successfully market a sufficient quantity and variety of high-qualityCMDA handsets through our sales channels, and

 

6

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•                                          whetherwe can further improve the coverage of the CDMA networks in certain serviceareas to provide quality services necessary to attract our targeted customers.

 

As a result of theseuncertainties, the growth and profitability of our CDMA cellular services andour overall business results of operation and financial condition, may beadversely affected.

 

***The development of ourCDMA and GSM services may not be coordinated effectively.***

*** ***

The majority of ourcurrent cellular services users subscribe to cellular services based on the GSMstandard.  We mainly target our new CDMAservice offerings to mid- to high-end cellular subscribers.  At the same time, our GSM cellular servicesprimarily target the mass market.  Tothe extent the development of the two services is not effectivelycoordinated, our CDMA cellular services may compete with our GSM services forsubscribers.  In 2003, a majority of ourCDMA subscribers were subscribers to the GSM cellular services of our maincompetitor, new users of cellular services or subscribers who subscribed to ourCDMA services in addition to their GSM services, but some of our CDMAsubscribers were subscribers of our GSM services.  In addition, the CDMA business may also compete for ourfinancial, management, human and other resources otherwise allocated to our GSMcellular services.  If the developmentof our CDMA and GSM services is not coordinated effectively or we cannot obtainadequate resources for both our GSM and CDMA cellular services, the growth andprofitability of these businesses and our results of operations, financialcondition and growth prospects may be adversely affected.

 

***Our churn rates have beenincreasing.***

*** ***

In accordance with theindustry trend, the churn rates of our GSM and CDMA cellular businesses havebeen increasing.  In 2003, the churnrate of our GSM cellular services increased to 29.1% from 14.6% in 2002, andthe churn rate of our CDMA cellular services reached 11.52% after itsintroduction in 2002.  The increase inthe churn rate of our GSM services was mainly due to the following factors:

 

•                                          withthe revocation of one-time connection fees and the decline in prices for SIMcards, cellular subscribers’ cost of switching networks has been lowered;

 

•                                          dueto high competition from “Little Smart” services in the mass market, cellularoperators have responded by lowering prices for cellular services, resulting inthe frequent switching of networks by cost-sensitive subscribers; and

 

•                                          aspre-paid services grew, the frequency of changes in phone numbers by the samecustomer increased, which contributed to the churn rate.

 

The increase in the churnrate of our CDMA cellular services was primarily due to the following factors:

 

•                                          thetermination of CDMA services by some CDMA subscribers at the end of theircontract periods under the CDMA handset rental programs we began in 2002;

 

•                                          theintroduction of pre-paid CDMA services, which are characterized by a higherchurn rate than post-paid services, led to an increase in the proportion ofpre-paid services subscribers; and

 

•                                          theincrease in the proportion of cost-sensitive subscribers among new subscribersas a result of continuing expansion of our CDMA cellular services in the massmarket.

 

7

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Increased churn rate mayadversely affect our market share and increase our costs of additional customeracquisitions and bad debt, which would adversely affect our results ofoperations, financial condition and growth prospects.

 

***In order to acceleratethe growth of our CDMA business, we offered CDMA handset promotional packages,which increased our operating expenses in the short-term and may adverselyaffect our profitability.***

*** ***

In order to acceleratethe development of the CDMA business and subscriber growth during the productintroduction period, we began to offer certain CDMA handset promotionalpackages in the second half of 2002. Under those arrangements, CDMA handsets were provided to the subscribersfor their use at no additional cost to them during the specified contractperiods as long as such subscribers agreed to incur a minimum amount of servicefees during the contract period.  Thecost of the handsets provided to subscribers under these contractualarrangements, treated as deferred customer acquisition costs, were deferred, tothe extent recoverable, and amortized over the contractual periods to matchwith minimum contract revenue.  As ofDecember 31, 2003, amortization of such deferred customer acquisitioncosts amounted to approximately RMB5,837 million and the carrying amount ofsuch costs amounted to RMB4,447 million for our wholly-owned operatingsubsidiaries, China Unicom Corporation Limited, or CUCL, Unicom New Century andUnicom New World.  These promotionalpackages tend to increase our operating expenses and require us to maintain aninventory of CDMA handsets with the associated inventory risk.  In addition, some of those subscribersterminated our CDMA services at the end of their contractual periods andtherefore increased our churn rate. While we significantly reduced the use of such arrangements in 2003 andhave decreased the carrying amount of the deferred customer acquisition costssubstantially, the carrying amount of such costs remain significant.  As of March 31, 2004, the carryingamount of such costs amounted to RMB3,487 million for CUCL, Unicom New Centuryand Unicom New World.  As a result,although the use of these CDMA promotional packages has accelerated the growthof our CDMA business, they may adversely affect the profitability of our CDMAbusiness and our overall results of operations.

 

***Our long distance,data and Internet businesses remain relatively small*** comparing tothe fixed line operators, and competition from China Telecom and ChinaNetcom may adversely affect our growth and profitability in these businesses.

*** ***

The fixed line operatorsof China Telecom and China Netcom currently hold a dominant market position inthe public switched long distance telephony and data services markets in Chinain their respective service areas.  Theyare also the dominant providers of Internet protocol telephony, or IPtelephony, and Internet access services in China.  China Telecom and China Netcom havecompetitive advantages over us in customer base, financial resources, networkcoverage and “last-mile” access.  Thegrowth of our long distance, data and Internet businesses has been hindered byour lack of licenses to operate local telephony networks.  Competition from China Telecom and ChinaNetcom may continue to adversely affect the growth and profitability of our longdistance, data and Internet businesses and consequently our overall results ofoperations, financial condition and growth prospects.

 

***Failure or inability tocontinue to expand and upgrade our networks timely and effectively and changesin telecommunications technology and technological standards could hinder ourgrowth.***

*** ***

The growth of ourbusinesses depends on whether we are able to continue to expand the coverageand capacity of our networks, to upgrade the technology and to improve thequality of our networks in a timely and effective manner.  Rapid growth of our cellular subscribers insome of our cellular service areas had in the past resulted in our reaching orexceeding our existing network capacity, which limited our

 

8

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subscriber growth inthose areas.  Theability to attract corporate customers for our long distance, data and Internetservices often depends on our ability to construct metropolitan area networksand local access networks connecting these customers and their offices with ournationwidenetworks.  We also need tocontinue to improve the quality of our existing networks in order to enhancethe quality of our services.

 

In addition, thetelecommunications industry in China and elsewhere in the world is subject torapid and significant changes in technology and technological standards.  Such changes may render our networks andsystems obsolete or inadequate.  As aresult of such changes, we may need to make significant changes to existingnetworks and infrastructure or build new networks, which may requiresubstantial capital expenditures.

 

Our ability to expand andimprove our networks is subject to a number of uncertainties, including ourability to achieve the following on a timely basis and on acceptable terms:

 

•                                          obtainadequate financing,

•                                          retainexperienced management and technical personnel,

•                                          obtainrelevant government permits and approvals and gain access to office towers,residential buildings and other sites for network construction,

•                                          enterinto interconnection and other arrangements with other operators, and

•                                          obtainadequate network equipment and software.

 

Difficulties we mayencounter in expanding and upgrading our networks, if not adequately resolvedon a timely basis, could adversely affect our competitive position, resultsof operations, financial condition and growth prospects.

 

***Obstacles ininterconnection with networks of other operators could jeopardize ouroperations.***

*** ***

The effective provisionof our cellular, long distance telephony and other services requires theinterconnection between our networks and the networks of China Telecom, ChinaNetcom, China Mobile and other operators. Any obstacles in existing interconnection arrangements or anysignificant change of their terms, as a result of natural events, accidents, orfor regulatory, technological, competitive or other reasons, could lead totemporary service disruptions and increased costs that can seriously jeopardizeour operations and adversely affect our growth and profitability.  Difficulties in the execution of newinterconnection arrangements on a timely basis and on acceptable terms,including the inability to promptly establish additional interconnection linksor increase interconnection bandwidths as required, could also adversely affectour operations, growth and profitability.

 

***Unicom Group, as ourcontrolling shareholder, can exert influence on us and cause us to makedecisions that may not always be in the best interests of our othershareholders.***

*** ***

Unicom Group indirectlycontrols an aggregate of 77.42% of our issued share capital.  As our controlling shareholder, it is ableto influence our major business decisions through its control of our board ofdirectors.  The interests of UnicomGroup as our controlling shareholder could conflict with the interests of theother holders of our shares and ADSs. Some of our executive directors and executive officers also serve asdirectors or executive officers of Unicom Group.  In addition, our operations depend on a number of servicesprovided by Unicom Group.  It leases tous, on an exclusive basis, capacity on the CDMA network located in our cellularservice areas, provides us with access to international gateways, supplies uswith SIM cards and calling cards and provides equipment procurement services tous.  In addition, Unicom Group and weprovide a number of services to each other, including interconnection androaming services, sales agency and collection services, customer services andprovision of premises.  See“Relationship with Unicom Group” under Item 7 of this annual report.  The interests of Unicom Group and ourinterests in

 

9

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these transactions maydiffer and Unicom Group may cause us to make decisions that conflict with theinterests of our other shareholders.

 

***The internalreorganization of Unicom Group for the A Share offering has created a two-stepvoting mechanism that will require the approval of the minority shareholders ofboth our Company and the A Share Company for significant connected transactionsbetween us and Unicom Group.***

*** ***

In October 2002,Unicom Group completed an internal reorganization of its shareholding in ourcompany and the initial public offering in China of the ordinary shares, or AShares, of its newly established subsidiary, China United TelecommunicationsCorporation Limited, or A Share Company. As part of this restructuring, a portion of Unicom Group’s indirectshareholding in our company was transferred to the A Share Company, whosebusiness is limited to indirectly holding the equity interest of our companywithout any other direct business operations. A voting mechanism was established to allow public shareholders of the AShare Company to indirectly participate in our shareholders’ meetings and atwo-step voting mechanism was established for the approval of connectedtransactions.  See “FurtherRestructuring of Unicom Group and Initial Public Offering of the A ShareCompany in 2002” under Item 4 below.  Asa result, significant connected transactions between us or our subsidiaries andUnicom Group or its subsidiaries will require the separate approval of theindependent minority shareholders bothof our company and of the A Share Company. Connected transactions approved by our independent minority shareholdersnevertheless cannot proceed if they are not approved by the independentminority shareholders of the A Share Company. This adds another necessary step of approval process for thosetransactions.

 

***Our inability to fund ourcapital expenditure requirements may adversely affect our growth andprofitability.***

*** ***

Although we havegradually reduced our capital expenditure in recent years, we continue to havea reasonable level of capital expenditure requirements.  We expect to require approximately RMB19.35billion for capital expenditure in 2004. As of December 31, 2003, the sum of our long-term and short-terminterest bearing debt exceeded the amount of our cash, cash equivalents andshort-term bank deposits by RMB44.25 billion. See “Liquidity and Capital Resources - Capital Expenditures” under Item5.  In the future we may be unable toobtain the necessary financing on a timely basis and on acceptable terms, andour failure to do so may adversely affect our financial position, competitiveposition, growth and profitability.  Ourability to obtain acceptable financing at any time may depend on a number offactors, including:

 

•                                          ourfinancial condition and results of operations,

•                                          thecondition of the economy and the telecommunications industry in China,

•                                          conditionsin relevant financial markets in China and elsewhere in the world, and

•                                          ourability to obtain any required government approvals for our market financings.

 

***Fluctuationsin the value of the Renminbi could adversely affect our share price andprofitability and changes in the interest rate could adversely affect our costof financing.***

*** ***

***Substantiallyall of our revenues and operating expenses are denominated in Renminbi, while aportion of our***borrowings, equipment purchases and other capitalexpenditures are denominated in foreign currencies.  Although the exchange rate between Renminbi and US dollars hasbeen stable, the exchange rate of the Renminbi may become volatile against theUS dollar or other currencies in the future. Fluctuations of the Renminbi could adversely affect the value in foreigncurrency terms of cash flow generated from our operations or any dividendspayable on our shares and ADSs, and therefore the price of

 

10

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***our shares and ADSs.  Any future Renminbi devaluations could alsoincrease our equipment acquisition costs and operating expenses or lead tosignificant fluctuations in the exposure of our foreign-currency-denominatedliabilities, thereby adversely affecting our profitability.***

*** ***

***Most of ourbank loans are borrowed from domestic banks at interest rates that vary inaccordance with the standard guidance interest rates announced by relevantChinese government authorities.  Inaddition, we entered into a US$700 million term loan facility with 13 financialinstitutions in September 2003, with variable interest rates based on theUS$ LIBOR.  As a result, a significantincrease in interest rates would increase our cost of new debt and the interestcost of our outstanding borrowings, which could have a material adverse effecton our financial position.***

*** ***

***Our doubtful debt ratiomay continue to increase.***

*** ***

China has yet todevelop an effective credit control system, and with more intense competitionin the market, our doubtful debt ratio for cellular services in our serviceareas, calculated as the amount of provision for doubtful debt divided byrevenue from cellular services, has been showing an increasing trend.  As of December 31, 2003, such ratio is 2.9%,compared to 2.7% in 2002 and 2.0% in 2001. If the ratio continues to increase, our results of operations andfinancial condition could be adversely affected.

 

**RisksRelating to the Overall Telecommunications Industry in China**

** **

***New regulations orregulatory changes relating to telecommunications tariffs and other matters mayadversely affect our results of operations.***

*** ***

The Chinese governmentcurrently regulates many aspects of the telecommunications industry inChina.  Deregulation of thetelecommunications industry or changes in regulations and policies anduncertainties with respect to their implementation, including any regulatorymeasures relating to calling-party-pays arrangements or other tariffadjustments, fulfillment of telecommunications service providers’universal service obligations and the associated expenses, usage of numbersor frequency resources and the associated fees, or standards of interconnectionsettlement, could significantly affect our results of operations, financialcondition and growth prospects.  Forexample, in 2001 the government deregulated the tariffs for IP telephonyservices, leading to significant tariff decline for international long distancetelephony services via IP telephony. Further, the “Little Smart” services of China Telecom and China Netcom,which were previously offered primarily in small- to medium-sized cities, havebeen introduced in major cities nationwide. If the Chinese government deregulates or reduces state tariff ratesapplicable to some of our services or modifies other regulations of thetelecommunications industry in China, our results of operations and financialcondition could be adversely affected.

 

***The***telecommunicationssector in China may not sustain its pace of rapid growth, which may adverselyaffect the growth and profitability of our business.

*** ***

The telecommunicationsindustry in China has experienced rapid growth in the last several years,especially in the cellular communications sector.  The total number of cellular subscribers in China increased from43.2 million at the end of 1999 to 268.69 million by December 31, 2003,representing a compound annual growth rate of 57.8%.  Cellular penetration increased from 3.0% to 20.9% nationwideduring the same period.  The rapid rateof growth in cellular subscribers may slow down as cellular penetrationcontinues to increase in our cellular service areas.  In addition, average revenue per user per month, or ARPU, for thecellular communications market in China continues to decline.  For example, ARPU of our GSM subscribersdeclined from RMB67.3 in 2002 to RMB56.7 in 2003.  Any slow-down in the growth in China’s telecommunicationssector may adversely affect the growth and profitability of our business.

 

11

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***New entrants in thetelecommunications industry in China may further intensify industry competitionand adversely affect our results of operations.***

*** ***

Since mid-1990s, the Chinese government hastaken various measures, including licensing more providers of telecommunicationsservices, to encourage competition in the telecommunicationsindustry.  Currently,the Chinese telecommunications market has six basic telecommunications serviceproviders – China Telecom, China Mobile, China Netcom, China SatelliteCommunications Corporation, or China Satcom, China Railway Communications Co.,Ltd., or China Railcom, and our company – and thousands of value-added serviceproviders.  In addition, thegovernment may grant additional telecommunications service licenses in thefuture, including additional licenses to provide cellular services.

 

After its accession tothe World Trade Organization, or WTO, in December 2001, China promulgatedthe Administrative Regulations on Telecommunications Companies with ForeignInvestment, implementing its commitments to the WTO.  Those commitments include the gradual reduction of foreignownership restrictions in the telecommunications industry and the step-by-stepopening of the telecommunications market in China to foreign operators.  When the government licenses additionaltelecommunications service providers in the future, licensees may includeoperators with foreign investment. Foreign-invested operators entering into China’s telecommunicationsmarket may have competitive advantages over us in financial resources, networkmanagement and technical expertise.

 

Increased competitionfrom new entrants in China’s telecommunications services industry could impedethe growth of our businesses, further increase competition for skilled andexperienced employees, result in or exacerbate price competition and increaseour customer acquisition costs and other operating expenses, and therebyadversely affect our results of operations, financial condition and growthprospects.

 

***Actual or perceivedhealth risks associated with the use of mobile devices could impair our abilityto retain and attract customers, reduce cellular service usage or result inlitigation.***

*** ***

Concerns have beenexpressed in some countries that the electromagnetic signals emitted bywireless telephone handsets and base stations may pose health risks at exposurelevels below existing guideline levels, and interfere with the operation ofelectronic equipment.  In addition,cellular operators have been subject to lawsuits alleging various healthconsequences as a result of cellular handset usage or proximity to basestations or seeking protective or remedial measures.  While we are not aware that such health risks have beensubstantiated, there can be no assurance that the actual, or perceived, risksassociated with the transmission of electromagnetic signals will not impair ourability to retain customers and attract new customers, reduce cellular serviceusage or result in litigation.

 

**Other Risks**

** **

***If the Chinese governmentrevises the current regulations that allow a foreign investment enterprise topay foreign exchange in current account transactions, our subsidiaries’ abilityto satisfy their foreign exchange obligations and to pay dividends to us inforeign currencies may be restricted.***

*** ***

The ability of ourwholly-owned operating subsidiaries, CUCL, Unicom New Century and Unicom NewWorld, to satisfy their foreign exchange obligations and to pay dividends to usdepends on existing and future foreign exchange regulations in China.  The Renminbi is currently convertible byforeign investment enterprises in China to settle transactions under thecurrent account, which include trade and service related foreign exchangetransactions and payments of dividends and interest on foreign loans.  Renminbi currently cannot be freelyconverted without regulatory approval for transactions under the capitalaccount, which include outbound foreign investment and principal payments onforeign loans.  CUCL, Unicom New

 

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Century and Unicom NewWorld, which hold substantially all of our assets and through which we conductsubstantially all of our business, are foreign investment enterprises inChina.  This status allows them topurchase foreign exchange at designated foreign exchange banks for settlementof current account transactions without the approval of the StateAdministration for Foreign Exchange. However, the relevant Chinese government authorities may in the futureimpose limitation on the ability of foreign investment enterprises to purchaseforeign exchange to satisfy their foreign exchange obligations or to paydividends in the future.  In that event,our subsidiaries’ ability to satisfy their foreign exchange obligations and topay dividends to us in foreign currencies may be restricted.

 

***Uncertainties in theChinese legal system could limit the legal protections available to us and toforeign investors.***

*** ***

Our wholly-ownedoperating subsidiaries, CUCL, Unicom New Century and Unicom New World, areorganized under the laws of China and are generally subject to laws andregulations applicable to foreign investment enterprises in China.  The Chinese legal system is a civil lawsystem based on written statutes. Unlike common law systems, it is a system in which decided legal casesmay be cited for reference but have limited precedential value.  Since 1979, the Chinese government haspromulgated laws and regulations dealing with economic matters such as foreigninvestment, corporate organization and governance, commerce, taxation and trade.  However, because these laws and regulationsare relatively new, and because of the limited volume of published cases andtheir non-binding nature, interpretation and/or enforcement of these laws andregulations involves uncertainties. Therefore, the Chinese legal system may not afford the same legalprotection available to investors in the United States or elsewhere.

 

***Any future outbreak ofsevere acute respiratory syndrome or similar illnesses in various parts ofmainland China, Hong Kong and elsewhere may have a material adverse effect onour business and prospects.***

*** ***

***From November 2002 to mid-2003, mainland China, HongKong and certain other countries, largely in Asia, experienced an outbreak of anew and highly contagious form of atypical pneumonia, now known as severe acuterespiratory syndrome, or SARS.  Thisoutbreak resulted in significant disruption to the lifestyles of the affectedpopulation and business and economic activity generally in the affected areasduring its peak in 2003.  Areas in mainlandChina that were affected include areas where we have substantial business andmanagement operations.  On July 5,2003, the World Health Organization declared that the SARS outbreak had beencontained.  However, new SARS cases werereported in***certain areasof China since then.  We cannot predict at this time whether thesituation may again deteriorate or the extent of its effect on our business andoperations.  We cannot assure you thatany new outbreak of SARS or SARS-like illnesses will not significantly disruptour staffing or otherwise generally disrupt our operations, result in higheroperating expenses for us, severely restrict the level of economic activitygenerally, or otherwise adversely affect our services and usage levels of ourservices in affected areas, all of which may result in a material adverseeffect on our business and prospects.

*** ***

## **Item4**.  Information onthe Company

## ** **

### ***A.***                                    Historyand Development of the Company

### *** ***

**IndustryRestructuring and Grant of New Licenses**

** **

Since 1993, the Chinesegovernment has implemented a number of measures to restructure and introducecompetition in the telecommunications industry.  Prior to June 1994, China Telecom was the sole provider oftelecommunications services in China. In June 1994, Unicom Group was established in accordance with theState Council’s approval to introduce competition in the telecommunicationsindustry.

 

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Since then, the Chinesegovernment has approved Jitong Network Communications Company Limited, orJitong, and China Netcom Corporation Ltd., or CNCL, to provide IP telephony,Internet and data services.  It has alsoapproved China Railcom to provide most telecommunications services other than cellularservices.

 

In 1999, the State Councilapproved a plan to restructure the former China Telecom along four businesslines: fixed line, cellular, paging and satellite communications.  As a result of the restructuring, ChinaTelecom retained the fixed line, data and Internet businesses, while ChinaMobile assumed the cellular business previously operated by China Telecom.  In 2002, the Chinese government furtherseparated China Telecom into two companies, with the southern company retainingthe name of China Telecom and assets and businesses in 21 provinces in southernand western China and the northern company retaining assets and businesses in10 provinces in northern China and merging with CNCL and Jitong to form ChinaNetcom.  As a result of the Chinesegovernment’s efforts to introduce competition in the telecommunicationsindustry, there is currently more than one service provider in most of thesectors within the telecommunications industry.  See “Competition” under Item 4.

 

**Historyof Unicom Group**

** **

As part of its efforts tointroduce orderly competition to the telecommunications sector in China, theState Council approved the establishment of Unicom Group in December 1993and authorized it to build and operate cellular networks and local and longdistance networks.  Unicom Group firstdeveloped a nationwide cellular network using GSM technology and a nationwidelong distance telephony network.

 

In May 1997, the StateCouncil granted approval to Unicom Group to provide data services.  The MII licensed Unicom Group to begin toprovide Internet services in July 1999 and IP telephony services on atrial basis in 12 cities in April 1999 and on a nationwide basis inMarch 2000.  Unicom Group alsooffers local telephony services in the municipalities of Chengdu, Chongqing andTianjin.  It offers satellitetransmission services through its subsidiary, China United TelecommunicationsSatellite Communication Co. Ltd., or Unisat.

 

**China-China-ForeignArrangements of Unicom Group**

** **

Following its formation,Unicom Group commenced cooperation with foreign companies to develop itsnationwide cellular network.  Afinancing structure widely known as China-China-Foreign, or CCF arrangements, wasdeveloped and used by Unicom Group and its foreign partners.  Under a typical CCF structure, the foreignpartner first established a joint venture with a Chinese enterprise.  The joint venture then provided financingand technical support to a project of Unicom Group through a projectcooperation contract.  In return, thejoint venture obtained the right to receive a percentage of the cash flowgenerated by the project for a fixed number of years.  Altogether, Unicom Group adopted this CCF structure for more than40 projects in a number of provinces and municipalities.

 

In August 1999, theMII officially announced that the CCF structure had contravened existingChinese government policies and regulations and required that all CCFcooperation contracts be rectified and terminated.  All CCF contracts related to GSM cellular networks in our serviceareas have been terminated.

 

As part of thetermination of CCF contracts by Unicom Group, other parties to the CCFcontracts received cash payments in an amount representing their originalfunding plus an agreed amount of compensation. In addition, we granted some of these parties or their designeeswarrants to purchase our shares.  Theaggregate number of shares issuable upon exercise of these warrants wasapproximately 313

 

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million shares.  The exercise period for all warrants terminatedon June 22, 2001 and none was exercised prior to termination of theexercise period.

 

**TheRestructuring of Unicom Group and Our Initial Public Offering in 2000**

** **

We are a company limitedby shares incorporated under the Companies Ordinance of Hong Kong onFebruary 8, 2000.  Our registeredoffice and principle executive offices are located at 75th Floor, The Center,99 Queen’s Road Central, Hong Kong (telephone number: 852-2126-2018).

 

Under a reorganizationagreement, dated April 21, 2000, between Unicom Group and CUCL, UnicomGroup transferred to CUCL all of its assets, rights and liabilities inconnection with the following telecommunications businesses:

 

•                                          itscellular businesses in 12 provinces and municipalities, including Guangdong,Jiangsu, Zhejiang, Fujian, Liaoning, Shandong, Hebei, Hubei and Anhui provincesand Beijing, Shanghai and Tianjin municipalities,

 

•                                          its99.67% shareholding interest in Guoxin Paging,

 

•                                          itsnationwide long distance telephony business, including its IP telephony business,and

 

•                                          itsnationwide data and Internet businesses.

 

Under an equity transferagreement, dated April 21, 2000, among us, Unicom Group, China Unicom(Hong Kong) Group Limited and China Unicom (BVI) Limited, or Unicom BVI, UnicomGroup transferred to us its 100% equity interest in CUCL, which became ourwholly-owned operating subsidiary in China. In return, we issued 9,725 million shares to Unicom BVI, then anindirect wholly-owned subsidiary of Unicom Group.

 

We subsequently purchasedthe remaining 0.33% interest in Guoxin Paging from its minority shareholders,raising our ownership interest in Guoxin Paging to 100%.

 

In June 2000, wesuccessfully completed our initial public offering of shares, or IPO, raisingapproximately US$5.65 billion.  Upon completionof our IPO, our shares became listed and traded on the Hong Kong Stock Exchangeand ADSs representing our shares became listed and traded on the New York StockExchange.

 

**FurtherRestructuring of Unicom Group and Initial Public Offering of the A ShareCompany in 2002**

** **

After our IPO, UnicomBVI, which was a wholly-owned subsidiary of China Unicom (Hong Kong) GroupLimited, or Unicom HK, a wholly-owned subsidiary of Unicom Group, directly held77.47% of our outstanding shares.  In October 2002,Unicom Group completed an internal restructuring of its shareholding in ourcompany.  Unicom HK transferred thetotal issued capital of Unicom BVI held by it to Unicom Group and Unicom BVIbecame a direct wholly-owned subsidiary of Unicom Group.   Unicom Group then transferred 51% of itsequity interest in Unicom BVI to the A Share Company, a newly establishedholding company and subsidiary of Unicom Group.  The A Share Company’s business is limited to indirectly holding theequity interest of our company without any other direct business operations.

 

Following therestructuring, Unicom Group successfully completed the IPO of the A Shares ofthe A Share Company in mainland China and the listing of the A Shares on theShanghai Stock Exchange.

 

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After the IPO of the AShare Company, the A Share Company transferred all of its net offering proceedsto Unicom Group in return for an additional 22.84% equity interest in UnicomBVI.  UnicomGroup currently holds a 74.60% equity interest in the A Share Company.  The A Share Company in turn holds 73.84%of the total equity interest in Unicom BVI, with the remaining 26.16% helddirectly by Unicom Group.  Unicom BVIcontinues to hold 77.42% of our outstanding shares and Unicom Group remains ourultimate controlling shareholder.  Seealso “Acquisition of Unicom New World and the Sale of Guoxin Paging” below forthe current shareholding structure of our company.

 

Inaccordance with the articles ofassociation of the A Share Company and Unicom BVI, before Unicom BVI votes on acertain proposal at our shareholders’ meeting, the A Share Company must firstconvene its shareholders’ meeting to consider the same proposal and has theright to direct Unicom BVI to vote the shares in our company indirectly held bythe A Share Company through Unicom BVI. Unicom Group can similarly direct the voting in respect of its directequity interest in Unicom BVI.  This mechanismfor voting is designed to allow public shareholders of the A Share Company toindirectly participate in our shareholders’ meeting.

 

Thevoting mechanism described above, however, will not apply to the approvalprocess for any connected transactions between us or our subsidiaries andUnicom Group or its subsidiaries, on which Unicom BVI will not be permitted tovote under the Listing Rules of the Hong Kong Stock Exchange.  Instead, our significant connectedtransactions would require the separate approvals of the public shareholdersboth of our company and of the A Share Company.  According to the two-step voting arrangements we and the A ShareCompany have established, each connected transaction between us or oursubsidiaries and Unicom Group or its subsidiaries will consist of an initialagreement and a further agreement.  The initialagreement would be entered into by Unicom Group or its subsidiaries (excludingthe A Share Company and its subsidiaries) and the A Share Company or UnicomBVI.  This agreement would contain thefollowing terms:

 

•                                          theclosing of the initial agreement would be subject to the (i) successfultransfer of all rights and obligations of the A Share Company or Unicom BVIunder the initial agreement to us or our subsidiaries, and (ii) the approval ofthe further agreement by our independent shareholders, and

 

•                                          UnicomGroup or its subsidiaries (excluding the A Share Company and its subsidiaries)would agree and acknowledge that all rights and obligations under the initialagreement can be transferred to us or our subsidiaries without any furtherconsent requirements.

 

Theinitial agreement will constitute a connected transaction of the A ShareCompany and, if certain thresholds are met, will require the approval of thepublic or independent shareholders of the A Share Company under the rules ofthe Shanghai Stock Exchange.  Thefurther agreement would be entered into by the A Share Company or Unicom BVIand us or our subsidiaries, and would provide for the transfer of all rightsand obligations of the A Share Company or Unicom BVI under the initialagreement to us or our subsidiaries. The further agreement will constitute a connected transaction of ourcompany and, if certain thresholds are met, will require the approval of ourpublic or independent shareholders under the Listing Rules of the Hong KongStock Exchange.  This two-step structurewill be used in all future connected transactions between us and Unicom Groupand will effectively require the separate approvals of the public orindependent shareholders both of our company and of the A Share Company for suchconnected transactions.

 

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**Restructuringand Acquisition of Unicom New Century**

** **

OnDecember 31, 2002, in accordance with the two-step approach outlinedabove, we successfully completed the acquisition from Unicom Group of UnicomNew Century, which holds cellular telecommunications businesses (including GSMassets and businesses and CDMA businesses) in the following nine provinces,autonomous regions and municipalities in China:  Jilin, Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuanprovinces, Guangxi Zhuang Autonomous Region, Xinjiang Uygur Autonomous Regionand Chongqing municipality.  The totalpurchase price was HK$4,523,181,304 (approximately RMB4.8 billion), payable incash.

 

**Acquisitionof Unicom New World and the Sale of Guoxin Paging**

** **

On December 31,2003, we successfully completed the acquisition from Unicom Group of Unicom NewWorld, which holds cellular telecommunications businesses (including GSM assetsand businesses and CDMA businesses) in the following nine provinces andautonomous regions in China: Shanxi, Hunan, Hainan, Yunnan, Gansu and Qinghaiprovinces and Inner Mongolia, Ningxia Hui and Xizang autonomous regions.  The total purchase price wasHK$3,014,886,000 (approximately RMB3.2 billion), payable in cash.  On the same date, we also completed the saleof the entire equity interests of Guoxin Paging to Unicom Group for a totalsale price of HK$2,590,917,656 (approximately RMB2.75 billion), and suchproceeds were applied to our general working capital.  Both the acquisition of Unicom New World and the sale of GuoxinPaging were completed in accordance with the two-step approach outlined above.

 

Set forth below is our shareholding structureand principal operating subsidiaries after the completion of the acquisition ofUnicom New World and sale of Guoxin Paging.

 

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**OurRelationship with Unicom Group**

** **

Unicom Group continues toown and manage the international gateways that provide internationalconnections to our long distance network. Unicom Group also continues to operate the following telecommunicationsnetworks:

 

•                                          itscellular networks in Guizhou province,

 

•                                          itslocal telephony networks in Chengdu, Chongqing and Tianjin municipalities,

 

•                                          thesatellite transmission networks operated through Unisat, and

 

•                                          thepaging networks operated through Unicom Paging and Guoxin Paging.

 

Unicom Group holds thelicenses required for our telecommunications businesses and we derive ourrights to operate our businesses from our status as a majority owned subsidiaryof Unicom Group.  Under the respectivereorganization agreements entered into by CUCL, Unicom New Century and UnicomNew World with Unicom Group referred to above, Unicom Group undertook to holdand maintain all licenses received from the MII in connection with ourbusinesses solely for our benefit during the term of the licenses and at nocost to us.  In addition, Unicom Groupundertook to take all actions necessary to obtain and maintain for our benefitsuch governmental licenses or approvals as we shall require to continue tooperate our businesses.  Unicom Groupalso agreed not to engage in any business which competes with our businessesexcept for the then-existing competing businesses of Unicom Group and to grantus a right of first refusal in relation to any government authorization,license or permit, or other business opportunity to develop any newtelecommunications technology, product or service.  Finally, Unicom Group also gave us an undertaking not to seek anoverseas listing for any of its businesses or the businesses of itssubsidiaries in which we are engaged or may engage in the future, exceptthrough us.

 

In connection with therestructuring of Unicom Group and the acquisitions of Unicom New Century andUnicom New World, we entered into a number of agreements with Unicom Grouppursuant to the two-step process described in “Further Restructuring of UnicomGroup and the Initial Public Offering of A Shares” above.  These include arrangements forinterconnection and roaming services between the telecommunications networksowned by us and Unicom Group and for the provision or sharing of telecommunicationsand ancillary services and facilities between us and Unicom Group.  Unicom Group also retains its interests inits other subsidiaries that provide ancillary services to us, including theprocurement of telecommunications equipment and the supply of SIM cards andcalling cards.  See “B. Related PartyTransactions” under Item 7.

 

Unicom Group hasconstructed nationwide cellular networks based on CDMA technology. The firstphase of the construction was completed at the end of 2001.  We entered into lease agreements with UnicomGroup to lease a portion of the network capacity and began to offer CDMAcellular services on an exclusive basis in our cellular service areas in early2002.  In March 2003, Unicom Groupsubstantially completed the second phase of the CDMA network construction,which included the upgrade of the network to CDMA 1X technology.  Wireless data services that utilize CDMA 1Xtechnology have been introduced throughout our service areas.  Unicom Group operates its CDMA networksoutside of our cellular service areas, in Guizhou province.  We also have an option to acquire the CDMAnetworks from Unicom Group.  See “B. RelatedParty Transactions – Leasing of CDMA Network Capacity – Lease of CDMA NetworkCapacity” under Item 7.

 

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**CapitalExpenditures and Divestitures**

 

See “Liquidity andCapital Resources - CapitalExpenditures” under Item 5 for information concerning our principal capitalexpenditures for the previous three years and those planned for 2004.  We have not undertaken any significantdivestitures.

 

### ***B.***                                    BusinessOverview

### *** ***

**General**

** **

We are an integratedtelecommunications operator in China, offering a wide range of telecommunicationsservices, including cellular, international and domestic long distance,data, Internet and, until December 31, 2003, paging services all of whichare based on our advanced, uniform nationwide network system.

 

Prior to the acquisition of Unicom New Centuryon December 31, 2002, we offered cellular communications servicesbased on both GSM and CDMA technologies in 12 provinces and municipalities in China throughour wholly-owned operating subsidiary CUCL. Afterthe acquisition of Unicom New Century and until our acquisition of Unicom NewWorld on December 31, 2003, our cellular service area encompassed a totalof 21 provinces, autonomous regions and municipalities.   See“A.  History and Development of theCompany – Restructuring and Acquisition of Unicom New Century” above.  After the acquisition of Unicom New World,our cellular service area encompassed a total of 30 provinces, autonomousregions and municipalities (i.e., all provinces, autonomous regions andmunicipalities in China except for Guizhou province).   See “A.  History and Development of the Company –Acquisition of Unicom New World and the Sale of Guoxin Paging” above and“Cellular Services – Cellular Services of Unicom New World and of the CombinedGroup” below under this Item 4.

 

We and China Mobile arethe two cellular service providers in our cellular service areas.  We had a total of 63.92 millionGSM cellular subscribers in the cellular service areas of CUCL and Unicom NewCentury at the end of 2003, representing a 19.54% increase from 53.47 millionsubscribers at the end of 2002. Our GSM cellular business is our largest business, having contributed60.9% of our total operating revenue in the year endedDecember 31, 2003.  We beganto offer CDMA services in January 2002 and had approximately 16.91 millionsubscribers in the cellular service areas of CUCL and Unicom New Century as ofDecember 31, 2003.  During2003, we increased our market share from 33.1% to 34.6% in the cellular service areas ofCUCL and Unicom New Century, attracting approximately 39.3% of net subscriberadditions in those service areas.

 

We provide traditionalpublic switched and IP telephony international and domestic long distance, dataand Internet services nationwide in China. All of these services were launched in 2000, with the exception of ourIP telephony long distance service, which was launched in 1999.  These businesses currently represent arelatively small portion of our overall business, but are growing in absoluteterms and relative to the market.  Ourlong distance, data and Internet businesses contributed 8.4% of our totaloperating revenue in 2003, compared to 13.7% in 2002.

 

Outgoing public switchedand IP telephony long distance calls totaled 8.44billion and 11.39 billion minutes, respectively, in 2003, compared to 6.37billion and 6.88 billion minutes, respectively, in 2002.  Our market share increased from approximately 11.6% in 2002 to 14.0%in terms of total outgoing long distance call minutes in 2003.  Our incoming international longdistance calls (including incoming calls from Hong Kong, Macau and Taiwan)totaled 1.91 billion minutes in 2003, up from 1.47 billion minutes in 2002.

 

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Our data and Internetbusiness expanded rapidly in 2003. Total leased bandwidth of our data services increased from 1466x2 Mbpsin 2002 to 7194x2 Mbps in 2003, and our Internet subscribers reached 12.43million from 7.29 million in 2002.

 

Our fiber optictransmission network continued to expand in 2003.  As of December 31, 2003, the totalcable length of our transmission network reached 569,000 km, including 115,000km for our backbone transmission network, representing an increase of 17.1%and 4.7%, respectively, from the end of 2002.

 

**RecentDevelopments**

 

As ofMarch 31, 2004, the total number of our GSM subscribers in all of ourcellular service areas, including those of CUCL, Unicom New Century and UnicomNew World, has increased to 75.67 million, including 40.03 million post-paidsubscribers and 35.64 million pre-paid subscribers.  As of March 31, 2004, we also had a total of 21.62 millionsubscribers to our CDMA services. Average minutes of usage, or MOU, for GSM services in the combinedservice areas of CUCL, Unicom New Century and Unicom New World were 186.5minutes for the three months ended March 31, 2004.  Average MOU for CDMA services in the combinedservice areas of CUCL, Unicom New Century and Unicom New World were 295.2minutes for the three months ended March 31, 2004.  ARPU for GSM services in the combinedservice areas of CUCL, Unicom New Century and Unicom New World was RMB53 forthe three months ended March 31, 2004. ARPU for CDMA services in the combined service areas of CUCL, Unicom NewCentury and Unicom New World was RMB93.7 for the three months endedMarch 31, 2004.

 

For the three monthsended March 31, 2004, outgoing public switched long distance callstotaled 2.281 billion minutes, including 2.248 billion minutes of domesticlong distance calls and 0.034 billion minutes of international long distancecalls (including calls to Hong Kong, Macau and Taiwan).  Outgoing IP telephony long distance callstotaled 3.072 billion minutes for the first three months of 2004, including3.042** **billion minutes ofdomestic long distance calls and 0.031 billion minutes of international longdistance calls (including calls to Hong Kong, Macau and Taiwan).  As of March 31, 2004, our Internetsubscribers reached 12.82 million.

 

**CellularServices**

** **

Our cellular business isour largest business, with our GSM and CDMA businesses together havingcontributed 88.4% of our total operating revenue in 2003.  Prior to the acquisition of Unicom NewWorld, we offered cellular services in Guangdong, Jiangsu, Zhejiang, Fujian,Liaoning, Shandong, Anhui, Hebei, Hubei, Jilin,Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces, GuangxiZhuang Autonomous Region, Xinjiang Uygur Autonomous Region andBeijing, Shanghai, Tianjin and Chongqing municipalities.  These cellular service areas hostedapproximately 30.1% of China’s total cellular subscriber population at the endof 2003 and are economically more developed and generally more prosperous thanother areas in China.  After the acquisition ofUnicom New World, effective on December 31, 2003, our cellular serviceareas expanded to include Shanxi, Hunan, Hainan, Yunnan, Gansu and Qinghaiprovinces and Inner Mongolia, Ningxia Hui and Xizang autonomous regions.  These areas hosted approximately 34.1% ofChina’s total cellular subscriber population at the end of 2003.  See “A. History and Development of the Company–Acquisition of Unicom New World and the Sale of Guoxin Paging” above and “–Cellular Services – Cellular Services of Unicom New World and of the CombinedGroup” below under this Item 4.

 

We offer both GSM andCDMA cellular services.  We began tooffer GSM cellular services in 1995 and currently most of our existing cellularusers subscribe to our GSM cellular services. We began to offer CDMA cellular services in January 2002.  After a trial period of three months, welaunched our CDMA services in April 2002.  In August 2003, we introducedpre-paid CDMA services, which are currently provided in 17 cellular serviceareas.  With such advantages as bettervoice quality, better security, lower

 

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handset radiotransmitting power and, in the case of CDMA 1X services, high data transmissionrates, we have positioned our CDMA services as “enterprise, infotainment,health-conscious and trendy” services. We have positioned our GSM services as “price-sensitive and mass market”services.  We also offer GSMinternational roaming services in conjunction with 165 operators in 80countries and regions and CDMA international roaming services in conjunctionwith 15 operators in 10 countries and regions.

 

We also offer SMS and anumber of other value-added services to our cellular subscribers, includingCDMA 1X wireless data services and GSM wireless data services under the servicebrand of “U-Max” and sub-brand of “Uni-Info”.

 

In 2003, our market sharein the cellular service areas of CUCL and Unicom New Century continued to grow,from 33.1% in 2002 to 34.6% in 2003. The continued growth is due to the following reasons:

 

•                                          theexpansion of our network service areas, improvements in service quality andnetwork quality,

 

•                                          continuedintroduction of new technologies and new services, and

 

•                                          effectivemarketing strategies.

 

***GSM Cellular Services***

*** ***

We centrally plan andoversee our provincial GSM cellular businesses, which are operatedby provincial branches of our operating subsidiaries, CUCL, Unicom New Century and, afterDecember 31, 2003, Unicom New World.  We centrally manage the key aspects of network construction suchas network planning and design and selection of major equipment.  We also centrally devise the overall businessstrategies to be carried out by the provincial operating branches.

 

We have enhanced thequality of our GSM networks through optimization and improved networkmanagement. Our GSM cellular networks reach all cities, county centers,major highways and railways in our cellular service areas.  We continue to selectively deploy GSMsystems that operate in the 1800 MHz frequency band in high-density populationcenters to supplement our GSM networks operating in the 900 MHz frequencyband.  In 2003, we focused on ensuringthe operational security and stability of our GSM networks, and will continueto manage our GSM networks to support the development of our various cellularservices.

 

*Post-paid Services and Pre-paid Services*

* *

We offer two maincategories of GSM cellular services: post-paid and pre-paid services that target different consumersegments.  We began to offer pre-paidservices in 1999.  Generally, we promoteour pre-paid services to migrant population and temporary residents as well aslow-end subscribers and target our post-paid services at long-term residentsand mid-end subscribers in our cellular service areas.

 

To subscribe for ourpost-paid services, a customer generally needs to produce proof of localresidency or a guarantee from a local resident and sign a servicecontract.  A post-paid subscriber pays amonthly fee and per-minute usage and roaming charges.  In many of our cellular service areas, we require most post-paidsubscribers to pay a deposit directly to us or to give a direct debitauthorization to one of the commercial banks that collect service charges forus.

 

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To subscribe for ourpre-paid services, a customer simply purchases a SIM card with a pre-paidamount of service charges.  The customercan add to the pre-paid balance by purchasing recharge cards.  A customer of pre-paid services does notneed to register with us.  Pre-paidservices are therefore more suitable than post-paid services for migrantpopulation and temporary residents in a cellular service area.  In addition, pre-paid services do not havemonthly fees, but carry higher per-minute usage and roaming charges.  This fee structure is generally moreattractive to lower-usage subscribers.

 

We and Unicom Groupprovide pre-paid services under the service brand of “Ru Yi Tong”.  These services are generally supported byintelligent networks built by us.  Theintelligent networks enable us to offer nationwide roaming services and monitorin real time the account balance of pre-paid subscribers.  We also offer pre-paid services in someservice areas that are based on the local billing systems and use local servicebrands.

 

*Subscribers and Usage*

* *

The following table setsforth selected historical information about our GSM cellular operations and oursubscriber base for the periods indicated.

 
|                                                   |   | **CUCL and  Unicom New  Century only,  as of or for the  year ended December 31,** |   | **Unicom New  World only,  as of or for the  year ended  December 31,** |   | **CUCL,  Unicom  New Century and  Unicom New  World,  as of or for the  three months  ended March 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|                                                   |   | **2001 (5)**                                                                            |   | **2002**                                                                     |   | **2003**                                                                                                     |   | **2003** |   | **2004** |   |
| Number  of subscribers (in thousands)                  |   | 27,033                                                                                  |   | 53,465                                                                       |   | 63,923                                                                                                       |   | 8.647 |   | 75,666 |   |
| Post-paid                                              |   | 16,489                                                                                  |   | 29,718                                                                       |   | 32,458                                                                                                       |   | 7,105 |   | 40,031 |   |
| Pre-paid                                               |   | 10,544                                                                                  |   | 23,747                                                                       |   | 31,465                                                                                                       |   | 1,542 |   | 35,635 |   |
| Estimated  market share in our service areas (1)       |   | 28.5                                                                                    | %      | 29.8                                                                         | %      | 27.4                                                                                                         | %      | 27.1 | % | 26.4 | % |
| Average  churn rate (2)                                |   | 16.3                                                                                    | %      | 15.5                                                                         | %      | 29.1                                                                                                         | %      | 46.9 | % | 7.7 | % |
| Average  minutes of usage per subscriber per month (3) |   | 161.2                                                                                   |   | 165.49                                                                       |   | 173.70                                                                                                       |   | 204.55 |   | 186.5 |   |
| Average  revenue per subscriber per month (in RMB) (4) |   | 86.3                                                                                    |   | 67.34                                                                        |   | 56.74                                                                                                        |   | 58.34 |   | 53.0 |   |
| SMS  Volume                                            |   | 1.080                                                                                   |   | 8.495                                                                        |   | 25.034                                                                                                       |   | 2.959 |   | 7.845 |   |

 

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(1)                  Market share in a given area isdetermined by dividing the number of our GSM subscribers in the area by thetotal number of cellular subscribers in the area.  *Source*:  Ministry of Information Industry.

 

(2)                  Average churn rate is the rate ofsubscriber disconnections from our GSM cellular network, which we havedetermined by dividing the sum of voluntary and involuntary deactivationsduring the period by the average of the number of our GSM subscribers duringthe period.

 

(3)                  Average minutes of usage per subscriberper month is calculated by dividing the total minutes of usage during theperiod by the average of the number of our GSM subscribers during the period,and dividing the result by the number of months in the relevant period.

 

(4)                  Average revenue per subscriber per month,or ARPU, is calculated by dividing the sum of GSM cellular services revenueduring the relevant period by the average of the number of our GSM subscribersduring the period, and dividing the result by the number of months in theperiod.

 

(5)                  CUCL only.

 

*SubscriberIncrease:*  Oursubscriber count continued to grow rapidly. As of December 31, 2003, the total number of GSM subscribers in thecellular service areas of CUCL and Unicom New Century increased to 63.92million, including 32.46 million post-paid subscribers and 31.47 millionpre-paid subscribers.  Our share of thecellular market in terms of total cellular subscribers in the cellular serviceareas of CUCL and Unicom New Century was 27.4% as of December 31,2003.  We attracted 19.4% of the

 

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net cellular subscriberadditions in those service areas during 2003. We believe that this growth was attributable to a number of factors,including:

 

•                                          continuedgrowth of the Chinese cellular telecommunications market, driven by economicgrowth and reduction in the cost of cellular handsets and services,

•                                          continuedimprovement in the coverage of our GSM networks,

•                                          flexiblemarketing, sales and distribution, and

•                                          competitivepricing of our services,

•                                          ourcontinuing focus on customer service.

 

*Pre-paidSubscribers:*  The rateof increase in our pre-paid subscribers continues to exceed the rate ofincrease in our post-paid subscribers. As of December 31, 2003, we had 31.47 million pre-paid subscribersin the cellular service areas of CUCL and Unicom New Century, representing49.2% of our total subscriber base, up from 44.4% at the end of 2002.  Pre-paid subscribers represented 73.8%of our net subscriber additions in the cellular service areas of CUCL andUnicom New Century during 2003.

 

*MOU andARPU:*  Our totalminutes of usage, or MOU, and average revenue per subscriber per month, or ARPU,were 123.39 billion minutes and RMB56.7, respectively, in 2003.  The average MOU per subscriber per month was173.7 minutes in 2003, an increase from 165.5 minutes in 2002.  The increase in MOU was attributable toincreased tariff competition with our competitor, which resulted in theprovision of more free minutes to subscribers. The decreasing tariffs as a result of such competition also spurredhigher usage among subscribers.  OurARPU continued to decline in 2003 as the cellular penetration in our cellularservice areas increased.  The decline inARPU was attributable to intensified market competition and regionalpromotional activities that led to a decline in effective tariffs.  Our pre-paid subscribers in general havelower MOUs and ARPUs compared to our post-paid subscribers.  For the year ended December 31, 2003,the average MOU and ARPU were 108.0 minutes and RMB46.0, respectively, for ourpre-paid subscribers, compared to 231.8 minutes and RMB66.2, respectively, forour post-paid subscribers.

 

*ChurnRate:*  For the yearended December 31, 2003, the churn rate for GSM services in the cellularservice areas of CUCL and Unicom New Century increased from 15.5% in 2002 to29.1%.  Our calculation of churn ratereflects those subscribers who switch to services of other operators and thosewhose services we disconnect as a result of account inactivity or paymentdelinquency.  The churn rate alsoincludes those subscribers who switched among our cellular services and, as aresult, obtained a new phone number. For example, the calculation of the churn rate includes thosesubscribers who switched between our pre-paid and post-paid services andbetween our GSM and CDMA services.

 

The increase in the churnrate for GSM services was attributable to the following reasons:

 

•                                          therevocation of one-time connection fees, which lowered the cost of switchingnetworks for cellular subscribers;

 

•                                          dueto high competition from “Little Smart” services in the low-end user market,cellular operators have responded by lowering prices for cellular services,thereby facilitating the frequent switching of networks by cost-sensitivesubscribers; and

 

•                                          thegrowth in pre-paid services, which is characterized by frequent changes inphone numbers by the same customer, with each change contributing to the churnrate.

 

The Chinese governmenteliminated connection fees in 2001 and, as competition continues to intensify,our churn rate from subscribers voluntarily discontinuing our services mayincrease in the future.  The churn rate forour pre-paid services is generally higher than that for our post-paid servicesbecause of

 

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the migrant and temporarynature of most pre-paid subscribers.  Itis also difficult for us to develop and maintain customer relationships withpre-paid subscribers from whom we do not require registration.

 

*PaymentDelinquency:*  Paymentdelinquency in general is on the rise due to intensifying competition.  As of December 31, 2003, the doubtfuldebt ratio for GSM cellular services in the cellular service areas of CUCL andUnicom New Century, calculated as the amount of provision for doubtful debtdivided by revenue from GSM cellular services, is 2.8%, compared to 2.9% at theend of 2002 for CUCL.  In some of ourcellular service areas we require our post-paid subscribers to deposit servicecharges and maintain a certain level of account balances with us or withcommercial banks that collect service fees for us.  We classify the creditworthiness of our subscribers into variouslevels and have adopted other credit control measures.  We also closely manage payment delinquenciesthrough confirmation of customer address and other registration information,expansion of collection channels, advance notification of inadequate deposits,close monitoring of call patterns and account balances and prompt terminationof services.

 

*Tariffs*

* *

Generally we charge ourpost-paid cellular subscribers the following categories of tariffs:  basic monthly fees, usage charges for bothincoming and outgoing calls, roaming charges, long-distance call charges andcharges for value-added services. Pre-paid subscribers do not pay monthly fees but pay higher per-minuteusage and roaming charges.

 

The cellular tariffs aresubject to regulation by various government authorities, including the MII, theNational Development and Reform Commission and provincial price regulatoryauthorities.  The following tablesummarizes the present State guidance tariff rates for post-paid and pre-paidcellular services:

 
|                                  |   | **Post-paid  Services** |   | **Pre-paid  Services** |   |
|---------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                  |   | **RMB**                 |   | **RMB**                |   |
| Basic  monthly fee                    |   | 50                      |   |                   | 0      |   |   |
|                                  |   |                    |   |                   |   |   |   |
| Basic  usage charge (per minute)      |   | 0.4                     |   |                   | 0.6    |   |   |
|                                  |   |                    |   |                   |   |   |   |
| Domestic  roaming charge (per minute) |   | 0.6                     |   |                   | 0.8    |   |   |

 

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*Source:* MII.

 

Intense competition inour cellular service areas has resulted in tariff discounts and servicepromotions offered by both us and our main competitor from time to time, whichmay lower effective tariffs.  Thesediscounts and promotions have taken many forms, including promotional tariffrates, free call minutes, off-peak discounts or discounts for high-usagesubscribers and package service plans with fixed monthly fees.  While various features of our packageservice plans are coordinated on a nationwide basis, the tariff structure ofthe various plans are determined by our provincial and local branches based onthe local competitive environment.  See“Risks Relating to the Overall Telecommunications Industry in China – Newregulations or regulatory changes relating to telecommunications tariffs andother matters may adversely affect our results of operations” under Item 3.

 

We have introduced anumber of package service plans in our cellular service areas.  Under these plans, subscribers pay a fixedmonthly fee for a specified number of call minutes.  The plans vary in the level of the fixed monthly fee, the numberof specified call minutes and the tariff rates for call minutes in

 

25

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excess of the specifiedcall minutes.  The terms of these plansalso vary depending on the local markets and generally offer some pricediscounts to similar plans of our main competitor.  We have also introduced in selected cities promotional plans forcertain qualified subscribers, which allow such subscribers to receive incomingcalls without incurring per-minute usage charges in exchange for a fixedmonthly fee.

 

In 1997, the Chinesegovernment granted us preferential treatment by allowing us to reduce ourtariffs by up to 10% below the State guidance tariff rates.  In the past, this preferential treatment hashelped us capture a significant number of cellular subscribers by allowing usto market our cellular services at discounted rates.  As we and our competitor, China Mobile, introduced variouspackage service plans and other promotional programs, the tariff structure hasbecome more complex.  While we continueto maintain tariff levels that are generally lower than those of our maincompetitor, the more complex tariff structure has, to some extent, made ourprice advantages less obvious to subscribers compared to previous tariffschemes that were largely based on simple per-minute charges.  In 2003, as we continued to offer packageservice plans in our service areas, we increased the variety of such plans inorder to offer our subscribers more choices and stopped offering service plansthat:

 

•                                          didnot include settlement fees,

 

•                                          permittedunlimited usage,

 

•                                          werecharacterized as low usage, and

 

•                                          werenot profitable.

 

***CDMA Cellular Services***

*** ***

Our controllingshareholder, Unicom Group, currently has the exclusive license to offer CDMAcellular services in China.  It hasconstructed CDMA networks nationwide through its wholly-owned subsidiary,Unicom Horizon.  It completedconstruction of the initial phase of its CDMA network at the end of 2001.  We, including CUCL, Unicom New Century andUnicom New World, have leased capacity on the network and operate the CDMAnetwork in our cellular service areas. After a trial period of three months, we formally launched our CDMAservices in April 2002.  InMarch 2003, Unicom Group substantially completed the second phase of theCDMA network construction, which included the upgrade of the network to CDMA 1Xtechnology, and we introduced wireless data services that utilize CDMA 1Xtechnology.  In August 2003, weintroduced pre-paid CDMA services, which are currently available in 17 cellularservice areas.  Although our CDMAbusiness over all recorded a loss for the year endedDecember 31, 2003, in the third quarter of 2003, our CDMA businessrecorded profit for the first time.

 

*Unicom Group’s Construction of CDMA Networks*

* *

In May 2001, throughUnicom Horizon, Unicom Group awarded supply contracts to a number of foreignand domestic equipment suppliers, and began to build CDMA networksnationwide.  The networks are expectedto be expanded in phases.  The numberand size of each phase will depend upon actual and forecast CDMA subscribergrowth and anticipated capacity requirements. In the first phase of the construction, which was completed by the endof 2001, the networks achieved a nationwide coverage of approximately330 cities in China, with a total capacity of 15.81 millionsubscribers.  The portion of thisnetwork within the combined cellular service areas of CUCL, Unicom New Centuryand Unicom New World has a total capacity of approximately 15.62 millionsubscribers.

 

26

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Through a competitivebidding process, Unicom Group was able to obtain highly attractive terms forits CDMA equipment supply contracts. The construction of the first phase of its CDMA networks utilized to asignificant extent the existing GSM infrastructure, such as base stations,switching centers and transmission capacity.

 

In March 2003,Unicom Group substantially completed the second phase of the CDMA networkconstruction, which included the upgrade of the network to CDMA 1Xtechnology.  The second phase of theconstruction also added capacity for 20.69 million additional subscribers,bringing the total capacity of the nationwide CDMA networks to approximately36.50 million subscribers.  The portionof the CDMA networks within the combined cellular service areas of CUCL, UnicomNew Century and Unicom New World has a capacity of approximately20.38 million subscribers.  Inaddition, the second phase of the construction focused on improving the depthof network coverage, by deepening coverage to the level of almost all of thecounty-level towns and cities and increasing indoor coverage.

 

*Our Lease of CDMA Networks from Unicom Group*

* *

Our wholly-ownedoperating subsidiary, CUCL, entered into a lease agreement with Unicom Groupand its subsidiary Unicom Horizon, dated November 22, 2001, whichsets forth the principal terms of the network capacity leasing arrangementbetween us and Unicom Group.  Unicom NewCentury and Unicom New World have also entered into lease agreements, datedNovember 20, 2002 and November 20, 2003, respectively, with UnicomGroup and Unicom Horizon on similar terms and conditions.  We lease network capacity from Unicom Groupand operate these CDMA networks in our cellular service areas on an exclusivebasis and receive all revenue generated from the operation.  We may terminate the lease arrangements upongiving at least six months’ prior notice to Unicom Group.

 

The term of each lease isfor an initial period of one year and may be renewed for further one-year termsat our option.  We leased networkcapacity in our cellular service areas on a quarterly basis during the firstyear and, thereafter, will lease network capacity on an annual basis, with theability to request to (i) lease additional lease capacity for any initial oradditional lease term and (ii) reduce lease capacity for any additional leaseterm.  See “B. Related Party Transactions– Leasing of CDMA Network Capacity – Lease of CDMA Network Capacity” under Item7. We have leased capacity for 26.05****million,subscribers in the cellular service areas of CUCL, Unicom New Century andUnicom New World, for the first half of 2004.

 

Under these leasingarrangements, we are required to make quarterly lease payments to Unicom Groupfor the actual amount of network capacity we lease.  The lease fee is charged on a per line basis and determined so asto enable Unicom Group to recover its total investment in constructing thenetwork in seven years, if the full network capacity is leased, together with arate of return on its investment of 8%. To the extent that we have not leased or do not lease in the future thefull capacity of the CDMA network in the particular period, we do not have tocompensate Unicom Group for unused capacities not leased by us.  The quarterly lease fee for the first phaseof the CDMA networks in the cellular service areas of CUCL and Unicom NewCentury was RMB56.4 per subscriber line leased in 2003.  The quarterly lease fee for the second phaseof the CDMA network in our combined cellular service areas is RMB61.5 persubscriber line leased.

 

In addition to leasingnetwork capacity, we will also have the option, exercisable at any time duringthe lease period and for an additional year thereafter, but not later thanseven years following the commencement of the lease, to purchase the CDMAnetwork in our cellular service areas. The acquisition price will be negotiated between Unicom Group andus.  It will be based on thedetermination of an independent asset appraiser in accordance with applicablePRC laws and regulations and take into account the then prevailing marketconditions and other factors.  However,the purchase price will not exceed an amount which will, taking into accountall lease fee payments made by us to Unicom Horizon and lease fee

 

27

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discounts as a result ofdelay of delivery, enable Unicom Horizon to recover its total networkconstruction costs, together with an internal rate of return of 8%.  The exercise of the purchase option will besubject to the relevant provisions of the listing rules of the Hong Kong StockExchange governing connected transactions, including approvals of our minorityshareholders.  Also see “B. RelatedParty Transactions - Leasing ofCDMA Network Capacity - Lease of CDMANetwork Capacity” under Item 7.

 

*Services*

* *

The CDMA services weoffer in our cellular service areas include basic voice and value addedservices such as call forwarding and voicemail, caller identity display, SMSservices and CDMA 1X data services.  Inaddition to post-paid CDMA services, we launched pre-paid CDMA services underthe service brand of “Ru Yi 133” in 17 cellular service areas inAugust 2003.  The features of ourpre-paid and post-paid CDMA services are similar to pre-paid and post-paid GSMservices.  See “B. Business Overview –Cellular Services – GSM Cellular Services – Post-paid Services and Pre-paid Services”under this Item 4.  We have begunoperations of the CDMA 1X networks in all of the major cities in our cellularservice areas.

 

*Subscriber Base*

* *

The following table setsforth selected historical information about our CDMA cellular operations and oursubscriber base for the periods indicated.

 
|                                                   |   | **CUCL and  Unicom New  Century only,  as of or for the  year ended December 31,** |   | **Unicom New  World only,  as of or for the  year ended  December 31,** |   | **CUCL,  Unicom  New Century and  Unicom New  World,  as of or for the  three months  ended March 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|--------|
|                                                   |   | **2001(5)**                                                                             |   | **2002**                                                                     |   | **2003**                                                                                                     |   | **2003** |   | **2004** |   |
| Number  of subscribers (in thousands)                  |   |                                                                                    |   | 6,245                                                                        |   | 16,910                                                                                                       |   | 2,036 |   | 21,619 |   |
| Post-paid                                              |   | —                                                                                  |   | 6,245                                                                        |   | 16,046                                                                                                       |   | 1,934 |   | 20,308 |   |
| Pre-paid                                               |   | —                                                                                  |   | —                                                                       |   | 864                                                                                                          |   | 102 |   | 1,311 |   |
| Estimated  market share in our service areas (1)       |   | —                                                                                  |   | 3.5                                                                          | %      | 7.2                                                                                                          | %      | 6.4 | % | 7.5 | % |
| Average  churn rate (2)                                |   | —                                                                                  |   | 0.8                                                                          | %      | 11.5                                                                                                         | %      | 25.9 | % | 2.7 | % |
| Average  minutes of usage per subscriber per month (3) |   | —                                                                                  |   | 328.1                                                                        |   | 337.5                                                                                                        |   | 335.4 |   | 295.3 |   |
| Average  revenue per subscriber per month (in RMB) (4) |   | —                                                                                  |   | 172.2                                                                        |   | 128.4                                                                                                        |   | 123.4 |   | 93.7 |   |
| SMS  Volume                                            |   | —                                                                                  |   | 0.516                                                                        |   | 6.231                                                                                                        |   | 0.623 |   | 2.664 |   |

 

----

(1)                  Market share in a given area isdetermined by dividing the number of our CDMA subscribers in the area by thetotal number of cellular subscribers in the area.  *Source*:  Ministry of Information Industry.

 

(2)                  Average churn rate is the rate ofsubscriber disconnections from our CDMA cellular network, which we havedetermined by dividing the sum of voluntary and involuntary deactivationsduring the period by the average of the number of our CDMA subscribers duringthe period.

 

(3)                  Average minutes of usage per subscriberper month is calculated by dividing the total minutes of usage during theperiod by the average of the number of our CDMA subscribers during the period,and dividing the result by the number of months in the relevant period.

 

(4)                  Average revenue per subscriber per month,or ARPU, is calculated by dividing the sum of CDMA cellular services revenueduring the relevant period by the average of the number of our CDMA subscribersduring the period, and dividing the result by the number of months in theperiod.

 

(5)                  No CDMA services.

 

 

 

28

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As of December 31,2003, our total CDMA subscriber base in the cellular service areas of CUCL andUnicom New Century reached 16.91 million, including 16.05 million post-paidsubscribers and 0.86 million pre-paid subscribers.  Pre-paid subscribers represented 5.1% of the total number of CDMAsubscribers in 2003.  We believe the rapidgrowth in our CDMA subscriber base was primarily attributable to:

 

•                                          theadvantages of the CDMA technology, including the lower radio transmitting powerof CDMA handsets as compared to GSM handsets, better voice quality and enhancedsecurity,

 

•                                          increasedbrand awareness,

 

•                                          ourpromotions and marketing efforts, which include our handset promotionalpackages begun in 2002 (the use of which was reduced in 2003), and encouragingthe active involvement of our agents in CDMA handset sales in order to facilitatethe marketing of our CDMA services, and

 

•                                          thelaunch of “U-Max” services in an effort to use CDMA 1X value-added services tofacilitate CDMA subscriber growth.

 

*MOU, ARPU and Churn Rate*

* *

In2003, MOU for our CDMA services was 43.70 billion minutes, an increase from8.278 billion minutes in 2002, and ARPU for our CDMA services was RMB128.4, adecrease from RMB172.2 in 2002.  AverageMOU for our CDMA services was 337.5 minutes, 45.6% higher than the average MOUof 231.8 minutes for GSM post-paid services, while our CDMA ARPU was 94.0%higher than the ARPU of RMB66.2 for our post-paid GSM subscribers.  The reasons for the increase in MOU and thedecrease in ARPU for our CDMA services in 2003 are similar to the reasons forsimilar trends in GSM services.  See “B.Business Overview – Cellular Services – GSM Cellular Services – MOU and ARPU”under this Item 4.

 

Thechurn rate for our CDMA services is calculated in the same way as the churnrate for our GSM services and was 11.5% in 2003, higher than the 0.8% in 2002,but significantly lower than the 29.1% churn rate for our GSM services.  Loss of CDMA subscribers was primarilyattributable to the following reasons:

 

•                                          increasedcompetition as the focus of growth gradually shifts from new subscribers toincreased usage;

 

•                                          thetermination of some CDMA subscribers at the end of their contract periods underthe CDMA handset rental programs we began in 2002; and

 

•                                          theintroduction of pre-paid CDMA services, which are characterized by a higherchurn rate than post-paid services and led to some subscribers switching frompost-paid services to pre-paid services.

 

*Payment Delinquency*

* *

As ofDecember 31, 2003, the doubtful debt ratio for CDMA cellular services inthe cellular service areas of CUCL and Unicom New Century, calculated as theamount of provision for doubtful debt divided by revenue from CDMA cellularservices, is 2.4%, compared to 1.4% in 2002 for CDMA cellular services in thecellular service areas of CUCL.  We havetaken various measures to control payment delinquency for our CDMA services,which measures are similar to the ones taken to control payment delinquency forour 

 

29

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GSM services.  See “B. Business Overview – CellularServices – GSM Cellular Services – Payment Delinquency” under this Item 4.

* *

*Tariffs and Promotion*

* *

The tariff rates for ourCDMA services are generally the State guidance rates for cellular serviceswithout the 10% discount we are permitted to adopt for GSM services.  However, we have adopted other promotionalprograms.  Generally we charge ourpost-paid cellular subscribers the following categories of tariffs:  basic monthly fees, usage charges for bothincoming and outgoing calls, roaming charges, long-distance call charges andcharges for value-added services. Pre-paid subscribers do not pay monthly fees but pay higher per-minuteusage and roaming charges.

 

To accelerate the growthin our CDMA subscriber base, we began offering special handset promotional packages in thesecond half of 2002.  We andUnicom Group purchased CDMA handsets directly from several suppliers, orthrough Unicom Guomai Communications Co., Ltd., (or Guomai, a company listed onthe Shanghai Stock Exchange which was an indirect, non-wholly-owned subsidiaryof our company prior to our sale of Guoxin Paging to Unicom Group).  Underthe handset promotional packages, CDMA mobile handsets purchased by us fromhandset suppliers were given to certain CDMA subscribers for their use at noadditional cost during specified contract periods, ranging from 6 months to 2 years. In return, subscriberswere required to incur a minimum amount of service fees during the contractperiod. If the contractual subscribers can fulfill the minimum contractspending amounts, they will not need to repay the remaining costs of the CDMAhandsets. To secure contract performance, these subscribers were also requiredto (1) prepay certain non-refundable amounts of service fees or deposits,(2) maintain a bank deposit in designated commercial banks to secure theirminimum contract amounts, or (3) provide a guarantor who will compensateus for any loss in the event of the subscribers’ non-performance of contractobligations.

 

Due to the high cost ofthe handset promotional packages, we stopped the use of such packages in thesecond half of 2003, and concentrated on alternative promotional programs todevelop our CDMA services.  We focusedon expanding the distribution network for our CDMA services by significantlyincreasing the number of sales agents.  We also launched several marketing campaigns in the second half of2003, which included increased advertising for our CDMA services, promotion ofvarious customized package service plans that gave subscribers more choices,and promotion of our CDMA 1X value-added services.

 

See “Risk Factors -Risks Relating to Our Business - Our new CDMAservices may fail to gain sufficient market share” under Item 3.

 

***SMS Services***

*** ***

We began to offer SMSservices in 2000.  SMS volume has beenincreasing rapidly.  A total number of25.03 billion short messages were transmitted by GSM subscribers and 6.23billion short messages by our CDMA subscribers in the cellular service areas ofCUCL and Unicom New Century in 2003. Our SMS services are offered under a uniform service brand of “Uni-Info”and mainly include the following services: SMS transmission and receipt throughhandsets, operator-assisted SMS, automated SMS platform, voice SMS, stockquotes, weather, flight information.  Wecontinue to promote the use of SMS as a convenient and cost effective method ofbusiness and personal communication. The SMS platform of our GSM network and the SMS platform of our CDMAnetwork are interconnected with each other and with China Mobile’s GSM network.

 

 

30

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***Other Value-added Services***

*** ***

On August 1, 2001,Unicom Group and we launched our nationwide GSM wireless data services underthe service brand of “Uni-Info”.  TheUni-Info services are presently based on a nationwide wireless information servicesplatform.  Uni-Info offers a variety ofservices in the categories of games, downloads and other entertainmentservices, information and notification services, personal informationmanagement and transactions services. We and Unicom Group cooperate with a number of national and regionalcontent providers that supply our subscribers with Uni-Info services.

 

In March 2003, we launched CDMA 1X wireless dataservices under the service brand of “U-Max”, with individual services offeredunder various sub-brands, including “Uni-Info”, “U-Info”, “U-Net”, “U-Mail”,“U-Magic” and “U-Map”, which can enable much higher data transmission rates andmore stable connectivity than the GPRS services offered by our maincompetitor.  “Uni-Info” services aresimilar to the GSM services offered under the same brand described above.  “U-Info” services allow users to connect toand browse the Internet on their CDMA handsets.  “U-Net” services give personal computer users wireless connectionto the Internet using an Internet connection card and provide Virtual PrivateData Network (or VPDN) services. “U-Mail” services allow users to send and receive e-mails, either fromother e-mail accounts or from the Internet. This service also allows users to download and read documents in variousapplications that are attached to the e-mail sent to the user’s handset.  “U-Magic” services allow users to downloadring tones, pictures, games, entertainment services and other forms of imageand sound.  “U-Map” services providelocation-based information to users’ handsets. Retail users can find locations and research information with respect toa particular location (including transportation options, entertainment,sightseeing and dining locations as well as the locations of hospitals andother landmarks).  This service alsooffers industrial applications, such as the logistics industry and sea rescueservices.

 

In 2003, in order to develop our CDMA 1X value addedservices, we took the following measures:

 

•                                          Throughthe launch of the “U-Max” services, more staff training, advertising andpromotions, trial programs and our various other efforts, we strengthenedmarketing efforts for our CDMA 1X services;

 

•                                          Weimproved the content of our CDMA 1X services, through strengthening cooperationwith content providers and service providers, in order to increase the appealof these services;

 

•                                          Weincluded the growth of our CDMA 1X services as a measure of staff performanceevaluation; and

 

•                                          Throughshort-term free trials and promotional packages, we sought to reduce theobstacles for subscriber usage of our CDMA 1X services.

 

We have designed a fee structure under which we earntransmission fees from the use of our GSM and CDMA value added services andgenerally retain a certain percentage of application fees charged by contentproviders that we collect for them.

 

We are currently testing our dual-mode cellularservices and plan to launch these services on a nationwide basis in the secondhalf of 2004 under the “Worldwind” brand. With the launch of dual-mode handsets, we will be able to offer morewireless data services to both our GSM and CDMA subscribers under the“Worldwind” brand.  “Worldwind” servicesoffer the following features:

 

 

31

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•                                          Userscan switch between our GSM and CDMA networks in China, thereby giving userscoverage in areas of the country covered by only one of these networks;

 

•                                          Whenroaming in areas outside of China, users can freely use the cellular servicesof local operators, whether they are GSM or CDMA, who signed roaming agreementswith us; and

 

•                                          OurGSM users who sign up for “Worldwind” can continue to use the basic GSMservices, while enjoying the additional benefits of the CDMA 1X services.

 

***Cellular Services of Unicom New World and of the CombinedGroup***

 

*UnicomNew World*

* *

Effective December 31, 2003, we acquired the GSMcellular assets and businesses and CDMA businesses of Unicom New World fromUnicom Group.  See “A. History andDevelopment of the Company 3⁄4Acquisition of Unicom New World and the Sale of Guoxin Paging” under thisItem 4.

 

As of December 31, 2003, the total number of GSM andCDMA cellular subscribers in the nine provinces and autonomous regions coveredby Unicom New World was 10.68 million, including 8.65 million GSM subscribersand 2.04 million CDMA subscribers. Unicom New World’s market share of total cellular subscribers in itsservice areas was 33.5% as of December 31, 2003, and its average market shareof net subscriber additions in these areas was 33.8%.  The SMS volume for GSM and CDMA services totaled 3.58 billionmessages in 2003 in these service areas.

 

*GSMBusiness. *As of December 31, 2003, there were8.65 million GSM subscribers in Unicom New World’s service areas, an increaseof 22.3% from 7.07 million at the end of 2002. Out of the total GSM subscribers in these areas, post-paid subscribersaccounted for 7.10 million, an increase of 17.7% from 6.03 million at the endof 2002, and pre-paid subscribers accounted for 1.54 million, as compared to1.04 million in 2002. The proportion of pre-paid subscribers increased from14.7% at the end of 2002 to 17.8% at the end of 2003. The MOU for GSMsubscribers amounted to 19.69 billion minutes, a 45.6% increase from 13.52billion minutes in 2002.

 

In 2003, averageMOU for Unicom New World’s GSM business was 204.6 minutes, an increase of 1.4%from 201.8 minutes in 2002.  ARPU forthe GSM business was RMB58.3, a decline of 15.0% from RMB68.6 in 2002.

 

*CDMABusiness*.  As ofDecember 31, 2003, there were 2.04 million CDMA subscribers in Unicom NewWorld’s service areas, an increase of 129.2% from 0.89 million at the end of2002.  Out of the total CDMA subscribersin these areas, post-paid subscribers accounted for 1.93 million, an increase of116.9% from 0.89 million at the end of 2002, while pre-paid subscribersaccounted for 0.102 million.  Theproportion of pre-paid subscribers reached 5.0%. The MOU for CDMA subscribersamounted to 5.45 billion minutes, a significant increase from 0.82 billionminutes in 2002.

 

In 2003, average MOU for Unicom New World’s CDMAbusiness was 335.4 minutes, an increase of 5.1% from 319.0 minutes in2002.  ARPU for the CDMA business wasRMB123.4, a decline of 31.3% from RMB179.7 in 2002.

 

*CombinedBusinesses of CUCL, Unicom New Century and Unicom New World*

* *

As of December 31, 2003, there were 91.52 millioncellular subscribers in the combined service areas of CUCL, Unicom New Centuryand Unicom New World, of which GSM subscribers accounted for

32

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72.57 million andCDMA subscribers accounted for 18.95 million. Our average market share of total****cellularsubscribers in the combined service areas was 34.5% as of December 31, 2003,and our average market share of net subscriber additions in the combined serviceareas was 38.5%.  The SMS volume for GSMand CDMA services in these areas totaled 34.84 billion messages in 2003.

 

*GSMBusiness.  *As of December 31, 2003, there were72.57 million GSM subscribers in the combined service areas of CUCL, Unicom NewCentury and Unicom New World, an increase of 19.9% from 60.54 million at theend of 2002. Of the total number of GSM subscribers, post-paid subscribersaccounted for 39.56 million, an increase of 10.7% from 35.75 million at the endof 2002, and pre-paid subscribers rose from 24.79 million at the end of 2002 to33.01 million in 2003, representing an increase of 33.2%.  The proportion of pre-paid subscribersincreased from 40.9% at the end of 2002 to 45.5% at the end of 2003.  MOU for GSM subscribers amounted to 143.08billion minutes in 2003, an increase of 38.0% from 103.69 billion minutes in2002.  Average MOU in the combinedservice areas was 177.4 minutes and APRU was RMB56.3 in 2003.

 

*CDMABusiness*.  As ofDecember 31, 2003, there were 18.95 million CDMA subscribers in the combinedservice areas of CUCL, UnicomNew Century and Unicom New World, an increase of 165.8% from 7.13million at the end of 2002.  Of thistotal, post-paid subscribers accounted for 17.98 million, an increase of 152.2%from 7.13 million at the end of 2002, while pre-paid subscribers accounted for0.96 million.  The proportion ofpre-paid subscribers reached 5.1%. The MOU for CDMA subscribers amounted to49.15 billion minutes, a significant increase from 9.10 billion minutes in2002.  Average MOU in the combinedservice areas was 337.3 minutes and ARPU was RMB125.8.

 

**Long Distance, Data andInternet Services**

** **

We offer international and domestic long distanceservices in China based on both the traditional public switched telephonystandard and the IP telephony standard. Our long distance services are based on our advanced, uniform nationwidenetwork system.  We leverage our abilityto integrate our long distance services with a broad range of services totarget different customer segments.  Wehave also developed a nationwide video-conferencing network that reaches over300 cities.  We launched our data andInternet services throughout China in 2000. Similar to our long distance services, our data and Internet servicesare supported by our advanced, unified nationwide network system.

 

The following table setsforth the total number of outgoing call minutes for our long distance servicesand our data and Internet services for the periods indicated.

 
|                                |   | **As of or for the year ended December 31,** |       |
|-------------------------------------|--------|----------------------------------------------|------------|
|                                |   | **2001**                                     |       | **2002** |   | **2003** |   |
|                                |   | **(in billions of minutes)**                 |       |
| Public switched  telephony:         |   |                                         |       |   |   |   |   |
| Domestic                            |   | 2.64                                         |       | 6.23 |   | 8.31 |   |
| International                       |   | 0.08                                         |       | 0.14 |   | 0.13 |   |
| Total                               |   | 2.73                                         |       | 6.37 |   | 8.44 |   |
| IP telephony:                       |   |                                         |       |   |   |   |   |
| Domestic                            |   | 3.52                                         |       | 6.75 |   | 11.25 |   |
| International                       |   | 0.17                                         |       | 0.13 |   | 0.14 |   |
| Total                               |   | 3.69                                         |       | 6.88 |   | 11.39 |   |
| Data Services                       |   |                                         | ** ** |   | ** ** |   | ** ** |
| **Customer ports**                  |   | **802**                                      | ** ** | **2,876** | ** ** | **6,603** | ** ** |
| Internet  Services                  |   |                                         |       |   |   |   |   |
| Dial-up  subscribers (in thousands) |   | 3,540                                        |       | 7,270 |   | 12,385 |   |
| Dedicated access subscribers        |   | 4,555                                        |       | 22,596 |   | 47,750 |   |

 

33

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***Public Switched Telephony Services***

*** ***

We offer public switched long distance services tobusiness and residential customers who register their telephone numbers withus.  They can access our services bydialing a prefix of “193”.  We alsodistribute pre-paid long distance calling cards that purchasers can use toaccess our services by dialing a prefix of “193300”.  For some corporate and government customers, we also offer ourpublic switched long distance services over dedicated lines, frequently as partof our integrated offerings of long distance and data services. We also offerlong distance services to our cellular subscribers.

 

The following table setsforth selected information about our public switched long distance telephonyservices for the periods indicated.

 
|                                                     |   | **As of or for the year ended on December 31,** |   |
|----------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                     |   | **2002**                                        |   | **2003** |   |
| Number of cities  reached                                |   | 329                                             |   | 329 |   |
| Number of  customers (in million)                        |   | 21.83                                           |   | 28.21 |   |
| Minutes of  outgoing long distance calls (in billion)    |   | 6.37                                            |   | 8.44 |   |
| Market share of  outgoing long distance call minutes (1) |   | 11.45                                           | %      | 14.33 | % |
| Minutes of  incoming international calls (in billion)    |   | 1.31                                            |   | 1.78 |   |

 

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(1)                  *Source*: MII. In calculating market share, the total minutes of outgoing long distancecalls include ours and those of the incumbent operators.

 

Tariff rates for public switched long distancetelephony services of incumbent fixed line operators are set by the Chinesegovernment.  Other fixed line operators,including us, can adopt tariffs that are different from the State tariff ratesupon approval by the MII as long as they do not offer services at tariff ratesbelow cost.  The following table setsforth our present tariff rates (including rates applicable to domestic andinternational long distance calls made by our cellular subscribers):

** **
|                                          |   | **Regular Tariff Rates** |   | **Discount Rates** |   |
|-----------------------------------------------|--------|--------------------------|--------|--------------------|--------|
|                                          |   | **RMB per six seconds**  |   |
| Public switched  Domestic Long Distance:      |   | 0.06                     |   | 0.03               |   |
| Public switched  International Long Distance: |   |                     |   |               |   |
| To Hong Kong,  Taiwan and Macau               |   | 0.18                     |   | 0.15               |   |
| To all other  international destinations      |   | 0.72                     |   | 0.38               |   |

 

The discount period is every day from 10pm to 7am of the following day,with two more hours for the Tibet and Xinjiang autonomous regions.  Effective August 21, 2001, we adjusted thediscount rates set forth in the table above as follows:

 

 

34

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•                                          RMB0.04per six seconds every day from 8pm to 10pm;

 

•                                          RMB0.03per six seconds every day from 10pm to 7am of the following day; and

 

•                                          RMB0.04per six seconds on public holidays and weekends from 7am to 8pm.

 

Settlement of outgoing and incoming international calls withinternational operators is conducted through negotiated contracts suchindividual international operators, which contracts must be approved by theMII.

 

We have adopted a number of measures to increase thenumber of our registered long distance customers, including utilizing ourpaging call center resources to launch direct-marketing calls, organizing salesagents to promote our services in residential areas, and cross-selling our longdistance services with our cellular services at our service centers.

 

***IP Telephony Services***

*** ***

We offer domestic and international long distance IPtelephony services through interconnection of our IP network with the Internetand other telecommunications networks based on a manageable IP networkconfiguration to enhance service quality. The following table sets forth selected information about our IPtelephony services for the periods indicated.

 
|                                                  |   | **As of or for the year ended  December 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                  |   | **2001**                                      |   | **2002** |   | **2003** |   |
| Number of cities reached                              |   | 320                                           |   | 337 |   | 337 |   |
| Minutes of  outgoing IP telephony calls (in billion)  |   | 3.69                                          |   | 6.88 |   | 11.39 |   |
| Domestic                                              |   | 3.52                                          |   | 6.75 |   | 11.25 |   |
| International,  Hong Kong, Macau & Taiwan         |   | 0.17                                          |   | 0.13 |   | 0.14 |   |
| Market share of  outgoing IP calls minutes (1)        |   | 18.2                                          | %      | 11.7 | % | 13.8 | % |
| Minutes of  incoming international calls (in billion) |   | 0.07                                          |   | 0.16 |   | 0.13 |   |

 

----

(1)*Source:*MII.

 

Our IP telephony services including the followingservices:

 

•                                          IPtelephony services using the “17910” access code, which allows users to diallong distance phone numbers as follows: “17910 + IP card number + password +long distance number”.  There are threetypes of such services:  (a) users canregister for an IP card, pay the accumulated charges on the card on a monthlybasis after receipt of a bill from us, (b) users can purchase an IP cardwith a pre-paid value, which can be re-filled after the user has used up thevalue on the card, or (c) users can purchase an IP card with a one-time-onlypre-paid value.

 

•                                          IPtelephony services using the “17911” access code, which allows users to diallong distance phone numbers as follows: “17911 + long distance number”. There are two types of such services: (a) users can register for our services at any of our offices or ourdesignated agents’ offices free of charge, or (b) users can purchase a pre-paidIP card from us, input the card number and password the first time the IP cardis used, and thereafter dial international calls only with the 17911 prefix.

 

•                                          DedicatedIP telephony services – users of these services only need to dial the longdistance phone number to be connected.

 

35

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•                                          DirectIP telephony services – Pursuant to authorization from the MII, we areproviding fixed long distance direct-dialing IP telephony services nationwideon a trial basis.  As ofDecember 31, 2003, we have set up more than 20,000 “IP convenientstores” nationwide.  “IP convenientstores” are fixed-line long distance call centers in locations with a highconcentration of callers who do not otherwise have access to fixed or wirelesstelephony services.  These call centersprovide long distance telephony services to customers on a pre-paid basis.

 

In February 2001, the Chinese government ceasedregulatory control of tariffs for IP telephony long distance calls and allowedoperators to set their own rates.  Mostproviders of IP telephony services, including us, significantly lowered theirinternational long distance tariffs shortly after the tariffs werederegulated.  The following table setsforth our present tariff rates for our IP telephony services (including ratesapplicable to IP long distance calls made by our cellular subscribers).  

** **
|                                      |   | **Our Tariff  Rates (RMB)** |   |
|-------------------------------------------|--------|-----------------------------|--------|
| IP Telephony  Domestic Long Distance      |   | 0.30 per minute             |   |
| IP Telephony  International Long Distance |   |                        |   |
| To Hong Kong,  Taiwan and Macau           |   | 1.5 per minute              |   |
| To U.S. and  Canada                       |   | 2.6 per minute              |   |
| To other  international destinations      |   | 3.6 per minute              |   |

 

Effective September 1, 2001, we adjusted our tariff rates for our IPtelephony services for certain international destinations.  The tariff rate for calls to 14 countries,including India, was adjusted to RMB4.60 per minute, and the tariff rate forcalls to the U.S. and Canada was adjusted to RMB2.40 per minute.

 

We rely primarily on our network of sales agents tosell IP telephony cards.  We also marketregistered IP telephony services and IP telephony services through dedicated lines.

 

***Data Services***

*** ***

We presently provide data services in 316 cities inChina.  We target high volume businessor government users of integrated voice, data and video communications andoffer them data services as part of our integrated offerings of long distance,data and Internet services.  As ofDecember 31, 2003, the total leased bandwidth of our ATM and FR dataservices was 7,194 x 2 Mbps.

 

Our data service offeringsmainly consist of broadband, managed data services, including:

 

•                                          Framerelay, or FR, services, which provide high speed and cost effective datacommunications services linking remote business sites using FR technology, and

 

•                                          Asynchronoustransfer mode, or ATM, services, which employ ATM technology and are able tohandle high bandwidth, integrated voice, video, data and Internet traffic.

 

•                                          Broadbandvideo-conferencing and video-telephony services, which are provided under thebrand name of “Uni-Video”.  Theseservices currently include video-conferencing, video-telephony, video conferenceroom leasing and video public telephony services.  These services are based on our existing unified data networkplatform.  Two or more users can use ourservices by connecting to the Internet or our data network throughvideo-conferencing terminals or computer terminals.

 

36

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The following table sets forth selected informationabout our data services for the periods indicated.

 
|                      |   | **As of or for the year ended December 31,** |   |
|---------------------------|--------|----------------------------------------------|--------|
|                      |   | **2001**                                     |   | **2002** |   | **2003** |   |
| Number of cities  reached |   | 273                                          |   | 297 |   | 316 |   |
| Number of  customers      |   | 802                                          |   | 2,876 |   | 6,603 |   |

 

We provide data services through an advanced, unifiednationwide network system, the backbone of which is our advanced nationwidefiber optic transmission network.  Thisnetwork is the second largest fiber optic transmission network in China.  We have also built metropolitan areanetworks in many****cities throughoutChina.  These networks provide localtransmission capacity for our different services.  See “- Networks -Transmission Network” below.

 

We believe that our ability to offer integrated accessto customers’ premises is important to the success of our data services.  We continue to build integrated accessnetworks linking major office buildings to our networks in major cities.  See “-Networks - Long Distance, Data and Internet Networks”below.

 

Our charges for ATM and FR services include up-frontcharges for installation materials (currently RMB270 per port) and testing(currently RMB270 per circuit or port), a monthly port fee and a monthlycircuit fee.  Our tariff charges aregenerally offered at a 10% discount from the State guidance tariffs.  The following table sets forth our tariffrates for monthly port fees and monthly circuit fees for data services ofselected bandwidths and selected distance categories.  

** **
| **Bandwidth** |   | **Tariff Rates (RMB per month)** |   |
|---------------|--------|----------------------------------|--------|
|          |   | **Port  Fee**                    |   | **Circuit Fee** |   |
|          |   |                             |   | **Local  (intra-district)** |   | **Local  (inter-district)** |   | **Domestic  long distance** |   | **Hong Kong,  Macau &  Taiwan** |   | **International   long distance  (Asia)** |   | **International  long distance  (outside of  Asia)** |   |
| 64kbps        |   | 234                              |   | 495 |   | 720 |   | 1,530 |   | 2,340 |   | 13,050 |   | 13,140 |   |
| 128kbps       |   | 270                              |   | 630 |   | 900 |   | 1,890 |   | 3,060 |   | 16,200 |   | 16,560 |   |
| 256kbps       |   | 360                              |   | 720 |   | 1,035 |   | 1,980 |   | 3,150 |   | 17,100 |   | 17,640 |   |
| 384kbps       |   | 405                              |   | 765 |   | 1,215 |   | 2,070 |   | 3,420 |   | 18,000 |   | 18,450 |   |
| 512kbps       |   | 450                              |   | 900 |   | 1,305 |   | 2,250 |   | 3,690 |   | 20,070 |   | 20,790 |   |
| 1Mbps         |   | 675                              |   | 1,125 |   | 1,800 |   | 2,700 |   | 4,680 |   | 26,010 |   | 27,045 |   |
| 2Mbps         |   | 900                              |   | 1,350 |   | 1,980 |   | 3,600 |   | 6,300 |   | 35,100 |   | 35,100 |   |

 

Effective April 2003, we began charging our corporate customers feesfor our “Uni-Video” services based on package service plans, including up-frontcharges for testing, a monthly fee and telecommunications charges.  Retail customers of our “Uni-Video” servicespurchase re-chargeable cards to pay for such services.

 

Our target customer groups are government offices,financial institutions, multinational or multi-regional corporations, large-and medium-sized enterprises in China, and Internet service providers andInternet content providers that provide telecommunications services.  We market our data services through ourdedicated teams and our sales agents.

 

37

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***Internet Services***

*** ***

We offer the following Internet services:

 

•                                          DedicatedInternet Access.  We began to offerbusiness customers high speed Internet access through dedicated lines in2000.  As of December 31, 2003, we had atotal of 47,750 subscribers for dedicated Internet access.  We package this service with voice and dataservices to provide integrated communications solutions to our businesscustomers and cooperate with cable operators and real estate developers tooffer broadband access to residential customers.

 

•                                          Dial-upInternet Access.  We began to offerdial-up Internet access services to customers in 2000.  As of December 31, 2003, the totalnumber of our dial-up subscribers increased to 12.38 from 7.27 million in 2002.

 

•                                          “RuyiMailbox” Services.  This service allowsour cellular subscribers to use their cellular phone numbers as e-emailaddress.  As of December 31, 2003, thenumber of “Ruyi Mailbox” subscribers increased to 7.81 million from 6.24million in 2002.

 

•                                          IDCServices.  We have built Internet datacenters (or IDC) in Shanghai, Shenzhen, Beijing, Guangzhou and Zhejiangprovince, and provide server hosting, server rental, virtual servers and otherIDC services to commercial customers and virtual IDC operators.

 

•                                          Unicom’sInternet Plaza Services.  Beginning inSeptember 2003, pursuant to a license from the MII, we launched a nationwidechain of upscale Internet cafes under the “Unicom’s Internet Plaza” brandname.  To date, we have opened more than100 such Internet cafes nationwide.

 

•                                          Others.   Other Internet services we offer includeinternational Internet Protocol-Virtual Private Network (or IP-VPN), VPN,Virtual Private Data Network (or VPDN), Virtual Internet Service Provider (orVISP), Uninet international roaming and corporate e-mail services.

 

The following table sets forth selected historicalinformation about our Internet service operations and our subscriber base forthe periods indicated.

 
|                                                                     |   | **As of December 31,** |   |
|--------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                     |   | **2001**               |   | **2002** |   | **2003** |   |
| Number of cities  reached by our dedicated Internet access services      |   | 255                    |   | 317 |   | 323 |   |
| Number of cities  reached by our dial-up Internet access services        |   | 276                    |   | 305 |   | 325 |   |
| Number of  subscribers of dedicated Internet access services             |   | 4,555                  |   | 22,596 |   | 47,750 |   |
| Number of  subscribers of dial-up Internet access services (in thousand) |   | 3,540                  |   | 7,270 |   | 12,385 |   |
| Market share of  Internet subscribers(1)                                 |   | 9.7                    | %      | 14.7 | % | 23.2 | % |

 

----

(1)                  *Source*: MII.

 

 

 

38

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Our tariff charges for registered dial-up accessinclude a network usage fee and a fixed telecommunications fee.  In addition, those registered accounts thatcharge based on usage volume include an up-front account set-up fee and thoseaccounts that charge based on monthly usage include a monthly fee.  Our tariff charges for dial-up access throughpre-paid cards include only a network usage fee and a fixed telecommunicationsfee.  The following table sets forth thevarious tariff charges for our dial-up access services:

 
|                                 |   | **Registered  Accounts**       |   | **Pre-Paid  Cards**         |   |
|--------------------------------------|--------|--------------------------------|--------|-----------------------------|--------|
|                                 |   | **Volume-Based  Service Plan** |   | **Monthly  Service  Plans** |   |   |   |
| Account Set-up  Fee (RMB)            |   | 100                            |   | —                      |   | — |   | — |   |
| Monthly Fee  (RMB)                   |   | —                         |   | 50                          |   | 100 |   | — |   |
| Network Usage  Fee                   |   |                           |   |                        |   |   |   |   |   |
| Local Fee  (RMB/Hour)                |   | 2.7                            |   | 2.2                         |   | 1.8 |   | 2.5 |   |
| Roaming Fee  (RMB/Hour)              |   | 3.0                            |   | 3.0                         |   | 3.0 |   | 2.8 |   |
| Telecommunications  Fee (RMB/Minute) |   | 0.02                           |   | 0.02                        |   | 0.02 |   | 0.02 |   |

 

The network usage fee is discounted, at an amount equal to half of theamounts set forth above, on legal holidays, weekends and everyday from 11pm to8am of the following day.

 

Our tariff charges for dedicated Internet accessinclude a network usage fee, an account set-up fee and a fixedtelecommunications fee.  Network usagefee is calculated based on monthly service plans.  The account set-up fee is RMB100.  The fixed telecommunications charge is based on the relevanttariff for the particular type and bandwidth of leased lines****used to access the Internet.  The following table summarizes the monthlynetwork usage fees for selected bandwidths denoted as “R.”  

** **
|                      |   | **Network usage fees (RMB per month)** |   |
|---------------------------|--------|----------------------------------------|--------|
| R<64Kbps               |   | 2,700-3,600                            |   |
| 64Kbps<R<128Kbps    |   | 3,600-4,900                            |   |
| 128Kbps<R<256Kbps   |   | 4,800-6,600                            |   |
| 384Kbps  <R<512Kbps |   | 8,500-12,000                           |   |
| 1024Kbps<R<2Mbps    |   | 18,000-27,000                          |   |
| 8Mbps  <R<10Mbps    |   | 59,400-70,000                          |   |
| 20Mbps<R<34Mbps     |   | 165,900-195,200                        |   |
| 34Mbps  <R<45Mbps   |   | 210,000-250,000                        |   |
| 45Mbps<R<100Mbps    |   | 428,400-504,000                        |   |
| 100Mbps<R<155Mbps   |   | 664,100-781,200                        |   |

 

Our provincial and local branches are permitted to make tariffdecisions within the range set forth above. For customers who lease a high number of dedicated access lines, weprovide discounts of up to 20% of the tariffs set forth in the table above.

 

We charge a monthly usage fee for our “Ruyi Mailbox”services, which is currently RMB6/month. We do not charge for SMS notifications of e-mail receipt.  Other e-mail functions performed through SMSare charged based on the SMS tariff rates for our “Uni-Info” services.

 

The network code for our nationwide dial-up Internetservices is “165.”  We distributedial-up Internet access services through a variety of methods.  A customer can pre-register for our dial-upservices or purchase dial-up passwords with a pre-paid amount of on-linecharges that can be used nationwide to access the Internet.  We also have arrangements with somecommercial banks that allow the banks’ customers to access our dial-up servicesusing their bank account numbers, with on-line charges being automaticallydebited from their bank accounts.  Ourcellular subscribers can also access our dial-up services using their cellularnumbers, with on-line charges being collected together with their cellularusage fees.

 

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***Leased Line Services***

*** ***

We began to lease transmission lines to large businesscustomers and other telecommunications operators in April 2000.  Our leased line services provide customerswith dedicated digital links directly connecting customer sites.  As of December 31, 2003, we had a totalleased bandwidth of an equivalent of 26,449 x 2 Mbps circuits, representing a206.9% increase from 8472 x 2 Mbps circuits at the end of 2002.

 

Leased line tariffs are primarily based on thebandwidths of the lines leased and the distance of transmission.  The following table sets forth State tariffrates for monthly fees of selected types and bandwidths of leased lines andselected distance categories:  

 
|                     |   | **State  Tariff Rates (RMB per month)** |   |
|--------------------------|--------|-----------------------------------------|--------|
|                     |   | **Local (intra-district)**              |   | **Local (inter-district)** |   | **Long distance** |   |
| Digital Line (2  Mbps)   |   | 2,000                                   |   | 4,000 |   | 6,000 |   |
| Digital Line (34  Mbps)  |   | 16,000                                  |   | 31,000 |   | 47,000 |   |
| Digital Line  (155 Mbps) |   | 44,000                                  |   | 88,000 |   | 132,000 |   |

 

----

*Source:* MII.

 

Similar to public switched long distance telephonyservices, operators other than incumbent operators, including us, can adopttariffs that are different from the above State tariff rates upon approval bythe MII as long as they do not offer services at tariff rates below cost.  We generally offer leased line services at a10% discount to the State tariff rates and market these services to institutionalcustomers through our own dedicated teams and our sales agents.

 

***Sale and Lease of Other Network Elements***

*** ***

We have substantially completed the construction ofour nationwide transmission network. See “- Networks -Transmission Network” below.  We havestarted to offer some network elements such as optic fibers or fiber channelsfor lease to other telecommunications operators or corporate customers.

 

**Paging Services**

** **

In 2003, our paging business provided the followingservices:

 

•                                          traditionalpaging services, and

 

•                                          value-addedservices and services tailored for existing cellular subscribers, including “Paging-CellularInterlink”, “Unicom Assistant”, “Unicom Paging Information Services”,“Operator-assisted Short Messages” and “Secretarial Services through OperatorAssistance”.

 

40

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On June 30, 2003, our operating subsidiaries, CUCL andUnicom New Century, transferred assets related to their customer servicesoperations to Guoxin Paging.  After suchtransfer, Guoxin Paging’s principal businesses included: the paging business,the cellular subscriber value-added business, customer services and agencyservices.  In order for our company toconcentrate our existing resources on the expansion of our cellulartelecommunications operation, to improve the quality of our assets, to allowstrategic integration and specialisation of our customer services and toresolve the issue of competition between Guoxin Paging and Unicom Paging, apaging business operated by Unicom Group, we sold the entire equity interest inGuoxin Paging to Unicom Group, effective December 31, 2003.

 

*Subscribersand ARPU*

* *

The following table sets forth selected operating datarelating to our paging businesses for the periods indicated.

 
|                                                  |   | **As of or for the year ended December 31,** |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                  |   | **2001**                                     |   | **2002** |   | **2003** |   |
| Paging  subscribers (in million)                      |   | 32.91                                        |   | 17.68 |   | 8.56 |   |
| Average revenue  per subscriber per month (in RMB)(1) |   | 9.4                                          |   | 7.3 |   | 4.1 |   |

 

----

(1)                  Average revenue per subscriber per monthis calculated by dividing the sum of paging services revenue during therelevant period by the average of the number of subscribers during the periodand dividing the result by the number of months in the period.

 

In 2003, the total number of our paging subscribersdeclined by 51.6% from 17.68 million as of December 31, 2002 to 8.56 million asof December 31, 2003.  However, subscribersto the “Unicom Assistant” service reached 22.91 million in 2003.  The churn rate of our traditional pagingservices increased from 66.3% in 2002 to 143.0% in 2003.  In 2003, the ARPU of our traditional pagingservices decreased to RMB4.1 from RMB7.3 in 2002.

 

**Interconnection andRoaming Arrangements**

** **

***Interconnection***

*** ***

Interconnection refers to various arrangements thatpermit the connection of our telecommunications networks to othernetworks.  Our cellular and longdistance networks interconnect with Unicom Group’s cellular networks.  Under current arrangements, settlementbetween Unicom Group and us is based on an internal settlement standard thattakes into account either the internal costs of the relevant networks or thegovernment standard applicable between third-party operators, whichever is themore favorable to us.

 

Unicom Group’s cellular networks, our cellularnetworks and our long distance networks interconnect with the public switchedtelephone networks of China Telecom, China Netcom and China Railcom.  Unicom Group’s cellular networks and ourcellular networks also interconnect with China Mobile’s cellular networks.  Our Internet network interconnects with theInternet networks of China Telecom and China Netcom.  Although we continue to encounter some difficulties in theexecution of our interconnection arrangements with other operators in someservice areas, the situation improved in 2003 due to improved regulatorysupervision by the Chinese government in this area.

 

41

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In October 2003, the MII issued regulations relatingto settlement between telecommunications networks.  These new regulations contain provisions regarding revenuesharing methods and settlement mechanisms for interconnection arrangementsbetween us and other operators.  Theseinterconnection arrangements under the new regulations are described in “-Regulatory and Related Matters - InterconnectionArrangements” under Item 4.

 

Unicom Group entered intointerconnection arrangements with China Telecom, China Netcom and China Mobilewith the following agreements, which equally apply to us.

 

•                                          Frameworkinterconnection and settlement agreement between Unicom Group and the formerChina Telecom, dated September 30, 2001, the rights and obligations of whichwere divided and continued after the former China Telecom was split into ChinaTelecom and China Netcom pursuant to an agreement among Unicom Group, ChinaTelecom and China Netcom, dated April 23, 2002.  These interconnection and settlement arrangements with ChinaTelecom and China Netcom were superseded by the interconnection and settlementagreement between Unicom Group and China Telecom, dated March 29, 2004 and theinterconnection and settlement agreement between Unicom Group and China Netcom,dated April 2, 2004.  The 2004agreements contained more detailed provisions relating to interconnectionquality, pursuant to new MII directives in this area.

 

•                                          Interconnectionand settlement agreement between Unicom Group and the former China Telecomrelating to the interconnection between Unicom Group’s cellular networks andChina Telecom’s telecommunications networks, including its local fixed linetelephony networks, domestic long distance telephony networks, internationaltelephony networks and IP telephony network, dated September 30, 2001, therights and obligations of which were divided and continued after the formerChina Telecom was split into China Telecom and China Netcom pursuant to anagreement among Unicom Group, China Telecom and China Netcom, dated April 23,2002.

 

•                                          Agreementbetween Unicom Group, China Telecom and China Netcom, relating to thecontinuation and division of rights and obligations of the parties under UnicomGroup’s prior interconnection agreement with the former China Telecom, datedApril 23, 2002.

 

•                                          Interconnectionand settlement agreements between Unicom Group and China Mobile relating to theinterconnection between Unicom Group’s GSM and CDMA cellular networks and ChinaMobile’s GSM cellular networks, both dated November 14, 2001, which wereamended by the parties on December 31, 2003.

 

•                                          Interconnectionand settlement agreement between Unicom Group and China Mobile regarding theinterconnection of point-to-point short messaging services, dated April 1, 2002.

 

•                                          Interconnectionand settlement agreement between Unicom Group and China Mobile regarding theinterconnection between China Mobile’s GSM cellular networks and Unicom’stelecommunications networks, including its local fixed line telephony networks,domestic long distance telephony networks, international telephony networks andIP telephony network, and the interconnection between China Mobile’sinternational gateways and IP telephony network and Unicom Group’s cellularnetworks and local fixed line telephony networks, dated December 31, 2003.

 

•                                          Agreementbetween Unicom Group and China Mobile regarding the mutual provision of openservice platforms, dated October 31, 2003.

 

42

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Unicom Group has also entered into the followinginterconnection arrangements, which equally apply to us.

 

•                                          Interconnectionand settlement agreements between Unicom Group and China Railcom relating tothe interconnection of Unicom Group’s cellular networks and local fixed linetelephony networks and China Railcom’s local fixed line telephony networks,domestic long distance networks and IP telephony networks, dated January 25,2002 and April 9, 2002.

 

•                                          Supplementalagreements between Unicom Group and China Railcom, which allows each party tooffer its domestic and international long distance telephony services and IPtelephony services to the cellular or fixed line telephony service subscribersof the other party, dated April 23, 2003.

 

•                                          Interconnectionand settlement agreement between Unicom Group and China SatelliteCommunications Corp, or China Satcom, relating to the interconnection betweenUnicom Group’s networks and China Satcom’s “Global Star” satellite mobilecommunications network, dated September 27, 2003.

 

•                                          Frameworkinterconnection and settlement agreement between Unicom Group and China Satcomrelating to the interconnection between Unicom Group’s cellular networks andChina Satcom’s IP telephony networks, dated September 24, 2003.

 

•                                          Interconnectionagreement among major Internet operators, including Unicom Group, and threenational Internet switching centers relating to the interconnection of Internetbackbone networks, dated December 20, 2001.

 

See“B. Related Party Transactions – Mutual Provision of Ongoing Telecommunicationsand Ancillary Services and Facilities – Interconnection Arrangements andRoaming Arrangements” under Item 7 below for the interconnection and settlementarrangements between Unicom Group and us.

 

***Roaming***

*** ***

We have entered into roaming arrangements with UnicomGroup.  In addition, as of December 31,2003, our cellular subscribers can roam on cellular networks in Europe, NorthAmerica and other Asian countries and regions through Unicom Group’sinternational roaming agreements with 165 GSM operators in 80 countriesand regions and 15 CDMA operators in 10 countries and regions.  Unicom Group has agreed to arrange for us toparticipate in its future international roaming arrangements.

 

A cellular subscriber using roaming services ischarged at our roaming usage rate for both incoming and outgoing calls, plusapplicable long distance tariffs.  Underour roaming agreement with Unicom Group, our subscribers who roam on UnicomGroup’s networks are charged for each call made or received.  We collect this tariff, retain RMB0.20 andpay the remaining amount to Unicom Group. On the other hand, when Unicom Group’s subscribers roam on our networks,Unicom Group collects the roaming tariff, retains only RMB0.04 and pays us theremaining amount.

 

43

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The following table is a summary of roaming settlementbetween Unicom Group and us:  

** **
| **For our subscribers roaming on  Unicom  Group’s networks** |   | **Roaming Tariff** |   | **Paid to Unicom  Group** |   | **Retained by Us** |   |
|-------------------------------------------------------------------|--------|--------------------|--------|---------------------------|--------|--------------------|--------|
| GSM pre-paid  users (RMB/minute)                                  |   | 0.80               |   | 0.60                      |   | 0.20               |   |
| GSM post-paid  users (RMB/minute)                                 |   | 0.60               |   | 0.40                      |   | 0.20               |   |
| CDMA users  (RMB/minute)                                          |   | 0.60               |   | 0.40                      |   | 0.20               |   |

 
| **For Unicom Group’s subscribers  roaming on  our networks** |   | **Roaming Tariff** |   | **Paid to Us** |   | **Retained by  Unicom Group** |   |
|-------------------------------------------------------------------|--------|--------------------|--------|----------------|--------|-------------------------------|--------|
| GSM pre-paid  users (RMB/minute)                                  |   | 0.80               |   | 0.76           |   | 0.04                          |   |
| GSM post-paid  users (RMB/minute)                                 |   | 0.60               |   | 0.56           |   | 0.04                          |   |
| CDMA users  (RMB/minute)                                          |   | 0.60               |   | 0.56           |   | 0.04                          |   |

 

With respect to international roaming, we settleroaming revenue with international operators through Unicom Group in accordancewith roaming agreements between Unicom Group and each of the internationaloperators.

 

See “B. Related PartyTransactions – Mutual Provision of Ongoing Telecommunications and AncillaryServices and Facilities – Interconnection Arrangements and RoamingArrangements” under Item 7 below for further information regarding the roamingarrangements between Unicom Group and us.

 

**Networks**

** **

We operate an advanced network system to support ourintegrated operations.  The backbone ofthe system is a nationwide fiber optic transmission network, which serves asthe common platform for our cellular, long distance, data and Internet networksand, until December 31, 2003, paging networks. In addition, we continue to develop management and network supportsystems to enhance the quality and reliability of our networks and improve ourcustomer service and operating efficiency. We utilize a relatively centralized network planning and equipmentselection process, which ensures uniform nationwide design and networkcompatibility.

 

***Transmission Network***

*** ***

We own and operate an advanced nationwide fiber optictransmission network (except for the Xizang autonomous region, in which welease capacity from other operators). As of December 31, 2003, our fiber optic transmission network reached326 cities with a total cable length of 569,000 km, of which fiber opticbackbone transmission network accounted for 115,000 km.

 

Our fiber optic transmissionnetwork is designed for broadband capacity with superior security and reliability,which supports our integrated telecommunications services and allows us tolease capacity to other telecommunications operators and corporatecustomers.  The network deploys:

 

•                                          synchronousdigital hierarchy, or SDH, architecture with protective two- or four-fiberrings, a self-healing system that allows for instantaneous rerouting,automatically protects service circuits and minimizes down time in the event ofa fiber cut or equipment malfunction;

 

•                                          densewave division multiplexing, or DWDM, technology, a means of increasingtransmission capacity by transmitting signals over multiple wavelengths througha single fiber; and

 

•                                          digitalcross connection, or DXC, system, a specialized high-speed data channelexchange and connection system that effectively manages the routing andchanneling of our services.

 

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Our SDH fiber rings have transmission bandwidths of2.5 Gb/s in most routes and 10 Gb/s for the fiber ring that covers the easternand southern coastal areas of China.  Wedeploy mainly transmission equipment and technology supplied by Siemens,Nortel, Lucent, Alcatel, Huawei, ZTE and other vendors.

 

Concurrent with the construction and expansion of ourdomestic backbone transmission network, we also seek to expand ourinternational bandwidth.  Through ourparticipation in the Asia Pacific Cable Network No. 2 Project (APCN 2), atrans-pacific submarine cable project that connects major countries and regionsin eastern Asia and southeastern Asia and links them to North America throughJapan, and our membership in the US-Japan Sub-marine Cable Organization, we arelinked with 11 operators in Japan, U.S., South Korea, Singapore and Taiwan with155x18 Mbps capacity.  We also lease720Mbps of international broadband transmission capacity.  We have also opened transmission lines onland with the main operators in Hong Kong and Macau, with 2.5x3 Gbps and 622x1Mbps of transmission capacity.  As ofthe end of 2003, we have 10Gbps of international broadband transmissioncapacity.

 

As of March 31, 2004, our metropolitan area networkscover more than 300 cities throughout China, with a total length of 514,000km.  These networks provide a unified,high-speed local transmission platform for our cellular, data and Internetservices.

 

***Cellular Networks***

*** ***

A cellular network consists of:

 

•                                          cellsites, which are physical locations, each equipped with a base station thathouses transmitters, receivers and other equipment used to communicate throughradio channels with subscribers’ cellular handsets within the range of a cell;

 

•                                          basestation controllers, which connect to, and control, the base stations;

 

•                                          mobileswitching centers, which control the base station controllers and the routingof telephone calls; and

 

•                                          transmissionlines, which link the mobile switching centers, base station controllers, basestations and the public switched telephone network.

 

We own most of the GSM cellular transmission networkat the local and provincial level.  Welease a portion of our inter-provincial transmission capacity for our cellularnetworks as well as the CDMA cellular transmission network.  We also use our own backbone fiber optictransmission network to provide transmission capacity for our cellularnetworks.  We continue to focus on themanagement and operation of our cellular networks.

 

 

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*GSM Cellular Networks.* The following table sets forth selectedinformation regarding our GSM cellular networks in the service areas of CUCLand Unicom New Century as of the dates indicated.

 
|                                                       |   | **As of December 31,** |   |
|------------------------------------------------------------|--------|------------------------|--------|
|                                                       |   | **2001****(1)**        |   | **2002** |   | **2003** |   |
| Network  subscriber capacity (in thousands of subscribers) |   | 37,464                 |   | 60,920 |   | 68,050 |   |
| Base stations                                              |   | 27,877                 |   | 48,111 |   | 56,653 |   |
| Base station  controllers                                  |   | 800                    |   | 1,197 |   | 1,345 |   |
| Mobile switching  centers                                  |   | 259                    |   | 405 |   | 426 |   |

 

----

(1) The information as ofDecember 31, 2001 is only for the GSM cellular networks in the service areas ofCUCL.

 

Currently our GSM cellular network mainly operates at900 MHz.  We have deployed GSMtechnology that operates at 1800 MHz in some major metropolitan areas tosupplement the capacity of our existing cellular network.  We have the right to use 6 x 2 MHz ofspectrum in the 900 MHz frequency band and 10 x 2 MHz in the 1800 MHz frequencyband for our GSM network.

 

Our cellular networks are supported by an advanced SS7signaling system, which fosters efficient use of network capacity, reduces callset up time and enhances transmission capabilities.  We have also installed intelligent networks that enable us toprovide pre-paid services and a wide range of call features and value-addedservices.

 

*CDMA Cellular Networks. *Unicom Group completed theconstruction of the first phase of its nationwide CDMA network at the end of2001.  We have leased a portion of thecapacity of its network in our cellular service areas and have the exclusiveright to operate its network in those areas. The CDMA networks share some of the infrastructures of the existing GSMnetwork, such as base stations, mobile switching centers and transmissioncapacity.  The first phase of the CDMAnetwork has a total capacity of 15.62 million subscribers in the service areasof CUCL, Unicom New Century and Unicom New World.  The second phase of construction was substantially completed byMarch 2003 with an additional capacity of 20.69 million subscribersnationwide.  We have the right to use10x2 MHz of spectrum in the 800 MHz frequency band for our CDMA services.  In March 2003, Unicom Group substantiallycompleted the second phase of the CDMA network construction, which included theupgrade of the network to CDMA 1X technology. The CDMA networks constructed in the second phase did not share as muchinfrastructure with the GSM network. Wireless data services that utilize CDMA 1X technology were introducedin major cities in our cellular service areas in March 2003.

 

***Long Distance, Data and Internet Networks***

*** ***

By the end of 2003, our public switched long distancenetwork reached 329 cities, while the coverage of our Internet networks,including our IP telephony networks, included 337 cities throughout China.

 

*Long Distance Network.*  Our public switched long distance network isbased on a flat architecture with only three layers.  It also uses the latest switching technology.  Our long distance network is supported by anationwide billing system and an intelligent network, which allows us toprovide multiple services.  Our cellularsubscribers can access these services directly through our cellular networks,but our other customers typically access our long distance telephony, IPtelephony and Internet services through the public switched telephone networksof China Telecom and China Netcom.

 

*Data and Internet Networks.*  Our broadband data and Internet networksutilize a unified IP and ATM design, which is particularly suited forreal-time, multimedia applications such as video and voice.  ATM switches perform high-speed switching ofvoice and data traffic and minimize time delay and congestion.  They can also prioritize applications thatleast tolerate time delay, such as telephony and video, over lesstime-sensitive applications such as e-mails and file transfer.

 

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*Internet Network.*  Our Internet network, called Uninet, is alsocentrally designed and has a nationwide uniform architecture.  It is supported by a nationwide, advancedbilling system that facilitates roaming access and delivery of virtual ISPservices and other value added services.

 

*IntegratedAccess Networks.*  We believe that the key to the success of ourdata services is our ability to offer integrated access to customers’premises.  We are building integratedaccess networks in many cities throughout China.  We focus the construction of our access networks on linking majoroffice buildings to our metropolitan area transmission networks.  We rely mainly on fiber optic cables to linkoffice buildings to our networks and have received permission to offernarrow-band wireless access at the 3.5 GHz frequency band in approximately 23cities on a trial basis.

 

***Integrated Management and Network SupportSystems***

*** ***

We have developed various management and networksupport systems to support our various networks.  Our customer service, billing and settlement systems are integratedinto a single system.  In addition, weare developing, and believe can complete within approximately two years, anintegrated information and management system (UNI-IT), which includesmanagement support systems (MSS) , customer relations management systems (CRM)and enterprise resource planning systems (ERP).

 

**Marketing, Sales andDistribution**

** **

We centrally plan our nationwide marketing and salesstrategies, but the implementation of these strategies is carried out at theprovincial level by operating branches tailored to their specific markets.  In 2003, we focused on the coordination ofthe development of the urban and rural markets, and paid special attention toselected key service areas in our marketing and sales activities in order tocontinue to develop our businesses.

 

***Marketing***

*** ***

We focus on developing a superior brand image for ourcompany that conveys our strengths in high quality services, nationwidecoverage, integrated offerings, advanced technology and customer focus.  We market all of our services under theChina Unicom brand name.  We placedemphasis on brand management in 2003, by developing a branding system based onour product profile so as to standardize our operations and ensure consistencyin our promotional activities.

 

Our marketing strategy utilizes our image as anintegrated telecommunications service provider and leverages on our integratedservices and nationwide sales and distribution network.  Through direct sales forces and sale agentsand active market analysis, our marketing strategy can be targeted at differentcustomer segments and tailored according the demands of different markets,enabling us to timely adjust our services. In addition, we also seek to enter into strategic alliances in order tofurther expand the breath and depth of our marketing and sales efforts.

 

We seek to formulate effective marketing strategiesthrough customer relations management and analysis of customer segmentation,customer demand and consumption trends.

 

*Cellularservices*:  We promoteour CDMA services as “enterprise, infotainment, health-conscious and trendy”services, with such advantages as better voice quality, better security, lowerhandset radio transmitting power and, in the case of CDMA 1X services, highdata transmission rates.  We promote our

 

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GSM services as“price-sensitive and mass market” services. In 2003, we changed the marketing strategies for our CDMA services, fromhandset promotional packages to more innovative strategies.  We launched several marketing campaigns inthe second half of 2003 to promote our CDMA services.  These efforts included increased advertising, promotion ofvarious customized package service plans that gave subscribers more choices,and promotion of our CDMA 1X value-added services.  These efforts accelerated the growth of our CDMA subscriber base,and helped to turn our CDMA business profitable in the third quarter of2003.  In addition, our CDMA 1X servicesdeveloped smoothly as a result of our strengthened cooperation with service andcontent providers and offerings of integrated CDMA 1X and voice services underthe principle of “single connecting point, uniformed billing and network-wideservices”.  We also continued to expandthe subscriber base for our GSM services, which is mainly based on voice andSMS services.  Our marketing strategiesfor GSM services focused on the continued development of the business.  Recognizing the importance and the needs ofour institutional customers and utilizing our advantages of being an integratedtelecommunications operator, we formulated marketing strategies for ourcellular services that were specific to our institutional customers.  In 2003, we emphasized the development ofadvanced and customized industrial applications for our institutionalcustomers.  By offering industrialsolutions, our business extended from the provision of basic telecommunicationsservices to informational services.

 

*Longdistance, data and Internet services*:  In 2003, we focused on institutionalcustomers, including financial institutions, large corporations, multi-nationalcorporations, government entities and Internet service providers and Internetcontent providers, in order to provide them “one-stop” solutions.  For example, we provided integratedlong-distance, Internet and data services under the “Uni-One” brand toinstitutional customers.  Our marketingefforts with respect to retail customers included the marketing of co-brandedlong distance telephony cards.  Underthese arrangements, our institutional partners purchased such cards from us anddistributed the cards to their employees or customers, thereby facilitating thesale of our long distance telephony services. We have also focused on the marketing of our long distance, Internet anddata services to our existing cellular customers, as well as coordinating themarketing of these services with the marketing efforts of our cellularservices.

 

*Service Bundling andCross-Marketing:*  Akey element of our sales and distribution strategy is to promote our strengthsas a provider of a broad range of integrated services.  This strategy is implemented by our servicecenters, independent sales agents and direct sales forces, which distribute andsupport our various product offerings.  For example, we cross-sell our long distance services to ourcellular subscribers.

 

***Sales and Distribution***

*** ***

*Customer Segmentation:*  We have two main categories of customers –institutional customers, comprised of mainly corporate and governmentcustomers, and individual customers.  Wehave set up dedicated direct sales and service departments for institutionalcustomers, both at our headquarters and at our provincial and local branches.  We focus on promoting our integratedsolutions to these institutional customers. For individual customers, we conduct our sales through our own servicecenters and the retail outlets of independent sales agents.

 

*DistributionNetwork:* We have a diversified distribution networkcomprising self-owned sales outlets, agent/distributor sales outlets andcooperative sales arrangements.  Wedistribute our services to our individual customers through our self-ownedsales outlets as well as retail outlets. We distribute our services to large customers through our direct salesforces and agents.  We havedeveloped a nationwide distribution network of service centers and retailoutlets, of which only a small portion are owned by us and the others are ownedby independent agents or distributors. As of December 31, 2003, we had a total of approximately 63,000 salesoutlets, of which over 4,000 were self-owned. These service centers and retail outlets distribute our cellular, longdistance, data and Internet services andprovide post-sales services such as customer inquiry, customer complaint andcollections.  We rely on amulti-level distribution system in many service areas, in which our top-leveldistributors further distribute to lower level distributors and salesagents.  We have also established directsales and customer service teams at various levels to conduct one-on-one salesto high-usage institutional customers.  These direct sales and customer serviceteams’ focus is to utilize our cellular, domestic and international longdistance, data, Internet and paging services as integrated telecommunicationsservices in order to provide differentiated and comprehensive solutions for ourcustomers.  In 2003, we alsolaunched telemarketing sales initiatives in selected service areas on a trialbasis, and accelerated our cooperation with different industries in the CDMAindustry value chain.

 

 

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*Strategic Cooperation with ChinaPost:*  Our controllingshareholder, Unicom Group, entered into a strategic cooperation arrangementwith China Post in 2001.  Thisarrangement allows us to supplement our existing distribution network withChina Post’s extensive nationwide network. China Post also provides billing, collection and other services to ourcustomers.  The arrangement uses arevenue-based commission structure for most services.  We and China Post have also agreed to use each other’s servicesand offer each other preferential treatment. We have entered into provincial-level cooperation agreements with ChinaPost in our service areas.

 

**Customer Service**

** **

We provide specialized,differentiated and “one-stop” services to our customers, based on the customerservice resources of Unicom Group.  Ourcustomer care and service centers in each service area can be accessed by ourcustomers by dialing a nationwide hotline number “1001”.  Our customer service system is a unifiedplatform providing customer services for all of our businesses.  This system is based on the paging centers,and also relies on other systems, including operations, billing, accountmanagement and network management.  Thisintegrated system allows us to provide personalized and diversified services,including service inquiry, billing inquiry, service initiation and termination,payment reminder services and emergency services, to different types ofcustomers on a 24-hour basis.  Ourcustomers can access our customer services through various means, includingtelephone calls, faxes, e-mails and SMSs. To better serve our customers, we provide such value-added services asbill payment through commercial banks, free copies of detailed statements,Internet account inquiry, a single rechargeable card for all of our servicesand mobile service centers in remote areas of China.  To better meet market demand, we continue to seek innovation inour customer services, in order to provide more pro-active, comprehensive andtargeted customer services.

 

In addition, we also analyzeour customer segments in detail, and tailor our services to the requirements ofdifferent customer segments.  While weare focused on retention of our retail customers, we provide one-on-onepersonalized services to our institutional customers and, through “customerclubs”, regional and localized services for high-net-worth individual customersand large institutional customers.

 

We seek to optimize ourcustomer service workflow and standards in order to achieve professionaloperation and management.  Weestablished our customer service workflow using a consistent set of standardsin order to timely resolve problems for our customers.  We have also strengthened our analysis andresearch of customer consumption behavior, consumption cycle and satisfactionlevels in order to understand their consumption pattern and influence theirconsumption trend.

 

 

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**Billing and Collection**

** **

We are able to leverage our strengths as an integratedservice provider to offer integrated billing and collection services.  For example, we provide our businesscustomers a single bill covering multiple services for ease of payment.  We also integrate the billing systems fordifferent services and distribute unified recharge cards that can be used torecharge various pre-paid services, including pre-paid cellular services, longdistance telephony services and Internet dial-up services.  In 2003, we improved our billing system so that our system candistinguish between customers based on the marketing method and service packageplans applicable to each customer. These additional functions would allow us to analyze customer data inmore detail, thereby improving our ability to analyze the age of our accountsand control bad debts.  The followingtable sets forth our billing and collection methods for each of our businesssegments:

 
| **Business Segment**                     |   | **Billing**                                                                                                                                                                                                                                                                                       |   | **Collection**                                                                                                                                                                                                                    |
|------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Post-paid GSM and CDMA services          |   | Centralized at the provincial level and generally by  monthly billing.                                                                                                                                                                                                                            |   | Subscribers may pre-deposit their service charges  with us or commercial banks or China Post that collect payment for us, make  payment in person at our service centers or branches of China Post, or  through commercial banks. |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| Pre-paid GSM and CDMA services           |   | Centralized on our nationwide intelligent network                                                                                                                                                                                                                                                 |   | Subscribers can purchase and/or re-chare pre-paid  cards through various channels.  They  can also re-charge cards by telephone.                                                                                             |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| PSTN long distance telephony services    |   | Through nationwide long distance telephony  settlement center and regional billing centers located in Beijing, Shanghai  and Guangzhou, which coordinates billing with local settlement centers                                                                                                   |   | Subscribers mainly go to our service centers,  commercial banks and branches of China Post for payment.                                                                                                                           |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| IP telephony services                    |   | Through our nationwide data settlement center and  various provincial-level settlement systems                                                                                                                                                                                                    |   | Subscribers mainly go to our service centers,  commercial banks and branches of China Post for payment.                                                                                                                           |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| “Uni-Video” services           |   | For each corporate customer, billing is either  through the local service centers in the locations of the branches of the customer  or centralized at one local service center chosen by the corporate  customer.  Retail customers purchase  pre-paid re-chargeable cards for our services. |   | Our corporate customers can pay either at the local  service centers in the locations of the branches of such customer or at one  local service center designated by the customer.                                                |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| Internet services                        |   | Centralized at the provincial level.  Billing methods include monthly billing,  volume-based billing and billing according to contractual provisions.                                                                                                                                        |   | Subscribers may go to our service centers,  commercial banks, and branches of China Post or use the Internet for payment.                                                                                                         |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| “Unicom’s Internet Plaza” |   | Customers of the Internet cafes either pay by  membership or pay hourly rates.                                                                                                                                                                                                                    |   | N/A                                                                                                                                                                                                                               |
|                                     |   |                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                              |
| Leased lines                             |   | Monthly billing in accordance with contractual  provisions                                                                                                                                                                                                                                        |   | Customers mainly pay at our service centers or at  commercial banks.                                                                                                                                                              |

 

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*BadDebt Controls*

* *

*CellularServices.*  Post-paidsubscribers must register with us before they can begin using our cellularservices.  Customer registration allowsus to better manage customer credit.  Ifsubscribers do not pay their bills on time, we charge a late fee and willeither call or send SMSs to the delinquent subscribers to remind them topay.  We generally suspend a post-paidsubscriber’s account if the account is more than 30 days overdue and terminatethe account if it is overdue for more than three months after that.  When an account is terminated, we will seekother remedies to collect the overdue payment, including personal visits to thesubscriber to collect payments or taking legal actions.  At the same time, we encourage oursubscribers to pre-deposit service charges with us, to be deducted againstcharges incurred in the future, or use our pre-paid services.

 

*Domesticand International Long Distance Services.*  We actively encourage customers to use ourpre-paid services.  In addition, weperform credit checks on potential customers. For high-volume users, we open telephone banking accounts at commercialbanks, set credit limits on such accounts and settle with such customers on amonthly basis.

 

*Internetservices.*  We sende-mails to delinquent customers and use other methods to collect payment fromdelinquent customers.  Accounts forindividual customers which are delinquent for 20 days are suspended, and suchaccounts will be terminated if they are delinquent for more than 40 days.  For corporate customers, our actions arebased on the credit history of each delinquent customer.

 

**Research and Development**

** **

We focus on technology innovation in coordination withthe various business departments, in order to provide technical support to thedevelopment of our various businesses. Major projects of our research and development efforts in 2003 include:

 

•                                          thetracking and research of the latest technology trends in light of the gradualtransition to 3G cellular communications technology and next-generationnetworks and our position as a provider of integrated services, includingparticipation in the Chinese Next Generation Internet (CNGI) networkconstruction project (led by the National Development and Reform Commission)and the 3G cellular technology testing project (led by the MII);

 

•                                          theinvestigation into coordinated development of the GSM and CDMA networks and thetransition to next-generation networks, including the testing of GSM and CDMAcommercial networks, the testing of integrated intelligent network technologyand other research and development of new technologies; and

 

•                                          thedevelopment of new businesses, including outsourced paging centers.

 

**Competition**

** **

***The Chinese telecommunications market has six basic telecommunicationsservice providers – China Telecom, Unicom Group, China Mobile, China Netcom,China Satcom and China Railcom – and thousands of value-added serviceproviders.  As a relatively new entrantinto this competitive landscape, we believe we owe our recent development tothe following:***

*** ***

•                                          Integrated service offerings and a uniformand advanced telecommunications network – We offering integrated cellular,domestic and international long distance, data and Internet services, and havea nationwide, uniform communications network that support voice, data, Internetand voice communications and allow us to provide integrated services to ourcustomers and utilize our network resources in a cost-effective manner.

 

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•                                          Advanced technologies – CDMA technologyoffers high bandwidth utilization, better voice quality, high data transmissioncapabilities, better security, lower handset radio transmitting power, and cancost-effectively and timely transition to 3G cellular telecommunications.  We are the only provider for CDMA servicesin 30 provinces, municipalities and autonomous regions in China, and completedthe upgrade of our CDMA network in 2003, from CDMA95 technology to CDMA 1Xtechnology, which has higher data transmission capabilities.  Our GSM services utilize 2G technology thatis widely accepted internationally and we believe our GSM network coverage andvoice quality meet international standards. Our uniform network platform (Unione) utilizes ATM+IP technologysolutions to offer quality support to our voice, data, Internet, videoconference, video telephony and mobile data services.

 

•                                          Unique service offerings – Through ouradvanced integrated network platform and the implementation of our innovativemarketing strategies, we introduced a series of value-added services such asCDMA 1X data services, “Uni-Video” services and “Ruyi Mailbox” services, inorder to satisfy the differentiated demand of our various customer segments.

 

•                                          Professional and quality customer service –Using the customer service resources of Unicom Group, we have built up a strongbrand image in customer service that can be characterized as professional,differentiated and “one-stop” service.

 

However,the development of our business is also affected by certain competitivedisadvantages, including:

 

•                                          Market position – As a relatively new entrantto the market, we are still behind the traditional operators in such areas asmarket share and branding.  Due to ourlate entry, we still need to strengthen our market position through expendituresto capture mid- to high-end customers. In addition, we are reliant on the dominant operators in terms ofinterconnection and settlement.

 

•                                          Financial resources – In comparison to thedominant operators, our capital scale is relatively small, our debt ratio isrelatively high, and our share of the market operating revenue and profit isrelatively low.

 

•                                          Network coverage and network number resources– Even though we have made significant improvements in network construction inrecent years, network coverage in certain areas still need improvement.  In addition, we do not have sufficientnetwork number resources, which has affected the development of our PSTN longdistance telephony, IP telephony, data and Internet services.

 

***Cellular Competition***

*** ***

Our main competitor in the cellular communicationsbusiness is China Mobile.  China Mobilecontinues to have competitive advantages over us in brand name, market share,financial resources and network management experience.  To compete against China Mobile, we continueto improve our network coverage and voice quality, enhance network quality,develop value-added services (such as our CDMA 1X wireless data services),improve customer service and customize our package service plans to meet ourvarious subscribers’ specific needs.  Wealso seek to leverage our position as a fully integrated telecommunicationsoperator to provide “one-stop” telecommunications solutions for oursubscribers.  In addition, we seek tocompete against China Mobile’s GPRS wireless data services by the developmentof our CDMA 1X wireless data services, which offers such advantages as bettervoice quality, better security, and high data transmission rates.

 

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Our cellular services also compete with the wirelesslocal communications services of China Telecom and China Netcom, known as“Little Smart”, which are based on their fixed line networks and primarilyutilize PHS technology.  These serviceswere previously offered primarily in small- to medium-sized cities, but havebeen introduced in most major cities nationwide.  The “Little Smart” services reportedly have attracted asubstantial subscriber base in China and compete with us mostly in the lowerend of the cellular market.  Althoughmany cellular users use “Little Smart” services as a supplement, rather than analternative, to their existing cellular services, the availability of “LittleSmart” services has reduced the overall usage volume of our cellularservices.  The main advantage of “LittleSmart” services is their lower tariff rates. However, they generally have limited network coverage and roamingcapability.

 

Since the launch of our CDMA cellular services in2002, we have pursued a policy of coordinated development of our GSM and CDMAcellular businesses.  While our GSM cellularbusiness focuses on the mass market, with customers who are moreprice-sensitive and require basic voice and message services, our CDMA servicesprimarily focuses on customers who require voice and data services and places apremium on high-technology, high-speed and high-security services.  Accordingly, usage fees and package serviceplans for our CDMA cellular services are generally higher than those for ourGSM cellular services. In 2003, a majority of our CDMA new subscribers wereusers migrating from the GSM services of our competitor, first-time cellularusers, and users who subscribed to our CDMA services in addition to GSMservices.

 

***Long Distance Telephony Competition***

*** ***

The Chinese government restructured the fixed lineincumbent China Telecom in 2002. Pursuant to the restructuring, the telecommunications assets of theformer China Telecom in 10 northern provinces in China were split off in May2002 and merged with CNCL and Jitong to form China Netcom.  China Telecom retained the telecommunicationsassets in the remaining 21 provinces and the brand name of “ChinaTelecom.”  Currently, both China Netcomand China Telecom provide fixed line telecommunications services.  In addition, China Railcom is also licensedto provide public switched long distance services in China and launched itslong distance services in China in 2001.

 

China Telecom and China Netcom are the dominantproviders and our primary competitors in the public switched long distancebusiness in their respective service areas. They have advantages over us in their respective service areas in brandname, market share, financial resources, service area coverage, extensiveaccess networks and experience in fixed line telecommunications business.  However, the separation of China Telecominto two companies along geographic lines weakened the competitiveness of theresulting entities on a nationwide basis.

 

We started to provide public switched long distancetelephony services in 2000 and reached a market share of 14.0% in terms oftotal outgoing long distance call minutes in 2003.  Since our network has been constructed recently and is equippedwith the latest technology and advanced features, it enables us to offer avariety of high-quality services.  Ourlong distance telephony services are also supported by a centralized billingsystem.  Our services are hindered byour lack of fixed line telephone number resources.

 

Our IP telephony services currently face intensecompetition from China Telecom, China Netcom, China Mobile, China Railcom andChina Satcom.  Currently, China Telecomand China Netcom are the market leaders in their respective service areas.  Ever since the MII deregulated the tariffsof this market in 2001, competition in this market has been intensifying.

 

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***Data and Internet Competition***

*** ***

China Telecom, China Netcom and China Railcom are ourmajor competitors in the data services business in their respective serviceareas.  Other competitors include China Satcom.  While China Telecom, China Netcom, ChinaRailcom, China Mobile, China Satcom and we are the only Internet backboneoperators in China, there are many retail Internet service providers throughoutChina.  China Telecom and ChinaNetcom have leading positions in the Internet access market and are the largestwholesale Internet service providers in their respective service areas.  However, the separation of the fixed lineincumbent China Telecom into China Telecom and China Netcom in 2002 has servedto enhance our competitive advantage. Our data and Internet networks have nationwide access, which offersconvenience and flexibility to our institutional customers, whereas therespective networks of China Telecom and China Netcom only extend to theirrespective service areas.  We haveobtained approval to operate and franchise a nationwide chain of Internet cafesand, to date, have opened more than 100 upscale Internet cafes nationwide.

 

The advanced features and design of our backbonenetwork allow us to provide nationwide high quality virtual private networkservices, which are specifically tailored to the high-usage corporate customersand retail Internet service providers that we target.  We are also building advanced metropolitan area networks andintegrated access networks that allow us to connect to key commercial buildingsthroughout China.  We also continue tocooperate with medium- to small-sized Internet service providers and othercompanies that have broadband access to concentrated residential areas andcable operators to expand our broadband services.

 

**Trademarks**

** **

We conduct our businesses under the Unicom name andlogo.  Unicom Group is the registeredproprietor in China of the “Unicom” trademark in English and the trademarkbearing the Unicom logo.  Unicom Grouphas also applied and became the registered proprietor of the trademark of theword “Unicom” in Chinese.  Unicom Grouphas granted us the right to use these trademarks on a royalty-free basis, andto license to us any trademark that it registers in China in the future whichincorporates the word Unicom.

 

**Regulatory and RelatedMatters**

** **

The telecommunications industry in China is subject toa high degree of government regulation. The primary regulatory authority of the Chinese telecommunicationsindustry is the MII.  The State Council,the National Development and Reform Commission (the former State DevelopmentPlanning Commission), the Ministry of Commerce (formerly, the Ministry ofForeign Trade and Economic Cooperation) and other governmental authorities alsomaintain regulatory responsibilities over certain aspects of the Chinesetelecommunications industry.

 

The MII, under the supervision of the State Council,is responsible for, among other things:

 

•                                          formulatingand enforcing industry policies and regulations, as well as technicalstandards,

•                                          grantingtelecommunications service licenses,

•                                          supervisingthe operations and quality of service of telecommunications service providers,

•                                          allocatingand administering telecommunications resources such as spectrum and numberresources,

•                                          togetherwith other relevant regulatory authorities, formulating tariff standards fortelecommunications services,

•                                          formulatinginterconnection and settlement arrangements between telecommunicationsnetworks, and

•                                          maintainingfair and orderly market competition among service providers.

 

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The MII has established a TelecommunicationsAdministration Bureau in each province, which is mainly responsible forenforcement of telecommunications policies and regulations in that province.

 

The MII is in the process of drafting atelecommunications law that, once adopted by the National People’s Congress,will become the basic telecommunications statute and provide the principallegal framework for telecommunications regulations in China.  It is currently uncertain when the law willbe adopted and become effective.

 

***TelecommunicationsRegulations***

** **

The State Council promulgated the TelecommunicationsRegulations, which became effective as of September 25, 2000.  The Telecommunications Regulations aresubstantially consistent with, and are primarily intended to streamline andclarify, the existing rules and policies for the telecommunications industry.  They provide the current primary regulatoryframework for China’s telecommunications industry in the interim period priorto the adoption of the proposed telecommunications law.

 

The Telecommunications Regulations are intended todevelop a transparent and fair regulatory environment to foster orderlycompetition and encourage development in the telecommunications industry.  The Telecommunications Regulations addressall key aspects of the telecommunications industry, including entry into theindustry, scope of business, tariff setting, interconnection arrangements,quality of services, technology standards and allocation of telecommunicationsresources.

 

***Entry into theIndustry***

** **

The Telecommunications Regulations adopt the existingregulatory distinction between basic and value added telecommunicationservices.  An addendum to theTelecommunications Regulations sub-categorizes basic and value addedtelecommunication services.  In February2003, the MII revised the addendum to the Telecommunications Regulations; andthe revised addendum took effect in April 2003.  Basic telecommunications services include, among others, fixedline local and domestic long distance telephony services, internationaltelecommunications services, IP telephony services, mobile voice and dataservices, Internet and other public data transmission services, lease or saleof network elements, and paging services. Value added telecommunications services include, among others, e-mail,voice mail, electronic data interchange, Internet access, Internet content andvideo conferencing services.  Providersof any basic telecommunications services as well as providers of value addedservices in two or more provinces in China must apply for licenses from theMII.  Licenses for basictelecommunications services will be granted through a tendering process.

 

 

55

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After its accession to the WTO in December 2001, Chinapromulgated the Administrative Regulations on Telecommunications Companies withForeign Investment, effective on January 1, 2002, implementing its commitmentsto the WTO.  Those commitments includethe gradual reduction of foreign ownership restrictions in thetelecommunications industry and the step-by-step opening of thetelecommunications market in China to foreign operators.  However, the presence or absence of foreigninvestments in an applicant for telecommunications licenses will presumablybear no direct relation to the decision on whether to issue licenses, in asmuch as the issuance of new licenses is governed by a separate set of rules andregulations.  The specificmarket-opening commitments China made to the WTO regarding fixed line services,mobile services and value-added telecommunication services are as follows.

 

•                                          Forfixed line services:

 

(1)                                  Withinthree years after accession: foreign service providers will be permitted toestablish joint venture enterprises and provide services in and between thecities of Shanghai, Guangzhou and Beijing; foreign ownership in such jointventures shall be no more than 25%;

 

(2)                                  Withinfive years after accession: the services areas will be expanded to includeservices in and between an additional 14 cities of Chengdu, Chongqing,Dalian, Fuzhou, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhou, Xiamen,Xi’an, Taiyuan and Wuhan, or, the additional 14 cities; foreign ownership shallbe no more than 35%; and

 

(3)                                  Withinsix years after accession: there will be no geographic restriction and foreignownership shall be no more than 49%.

 

•                                          Formobile voice and data services:

 

(1)                                  Uponaccession: foreign service providers will be permitted to establish jointventure enterprises and provide services in and between the cities of Shanghai,Guangzhou and Beijing; foreign ownership in such joint ventures shall be nomore than 25%;

 

(2)                                  Withinone year after accession: the services areas will be expanded to includeservices in and between the additional 14 cities; foreign ownership shallbe no more than 35%;

 

(3)                                  Withinthree years after accession: foreign ownership shall be no more than 49%; and

 

(4)                                  Withinfive years after accession: there will be no geographic restriction and theforeign ownership shall be no more than 49%.

 

•                                          Forvalue-added telecommunication services:

 

(1)                                  Uponaccession: foreign service providers will be permitted to establish jointventure enterprises and provide services in and between the cities of Shanghai,Guangzhou and Beijing; foreign ownership in such joint ventures shall be nomore than 30%;

 

(2)                                  Withinone year after accession: the services areas will be expanded to includeservices in and between the additional 14 cities; foreign ownership shallbe no more than 49%; and

 

(3)                                  Withintwo years after accession: there will be no geographic restriction, foreignownership shall be no more than 50%.

 

56

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The MII promulgated Measures on the Administration ofTelecommunication Business Licenses, which took effect on January 1, 2002.  Those rules apply to the application for,examination and approval of, telecommunications business licenses in China.

 

*Spectrumand Network Number Resources*

* *

The MII allocates all telecommunications-relatedfrequencies, including those used in cellular, paging and microwaveoperations.  The 800 MHZ, 900 MHZ and1,800 MHZ frequency bands have been reserved for mobile cellular applicationsand parts of the 150 MHZ and 280 MHZ frequency bands have been reserved forpaging applications.  The frequencyassigned to a licensee may not be leased or transferred without obtaining theapproval of the MII.

 

From July 1, 2002, the standard spectrum usage feesfor GSM networks and CDMA networks will be charged at the annual rate of RMB15million per MHz of frequency per year (upward and downward frequencies arecharged separately) progressively over a period of three years and a period offive years, respectively.  The currentallocation of spectrum usage fees between Unicom Group and us based on thenumber of subscribers remains unchanged.

 

The MII is also responsible for the administration ofnetwork number resources within China, including cellular network numbers andsubscriber numbers.  In January 2003, itissued the Administrative Rules for Telecommunications Network Numbers, whichtook effect on March 1, 2003.  Accordingto these rules, the telecommunications network number resources are propertiesof the Chinese government, and the use of number resources by anytelecommunications operator is subject to the approval of MII.   Users of number resources, including us, arerequired to pay a usage fee to the Chinese government.  However, the standard for the usage fee has not yet beendetermined.  It is also not clear whenthe standard for the usage fee will be determined and when we will be requiredto pay such fee.  The new rules alsoprovide for procedures for application for the use, upgrade and adjustment ofnumber resources by telecommunications operators.

 

*TariffSetting and Price Controls*

* *

The levels and categories of our current tariffs aresubject to regulation by various government authorities, including the MII, theNational Development and Reform Commission (the former State Development andPlanning Commission), and, at the local level, the relevant provincialTelecommunications Administration Bureaus and price regulatory authorities.  Under the Telecommunications Regulations,telecommunications tariffs are categorized into State-fixed tariffs,State-guidance tariffs and market-based tariffs.  For example, there are State-guidance tariffs for cellularservices, fixed line telephony services and leased lines services that are setjointly by the MII and the National Development and Reform Commission.  Tariffs for telecommunications serviceswhere adequate competition has already developed may be set by the service providersas market-based tariffs.  In 1997, theChinese government granted us preferential treatment by allowing us to vary ourcellular tariffs by up to 10% from the state-guidance rates.

 

The government is required to hold public hearingsbefore setting or changing important State-tariff rates, which are attended bytelecommunication operators, consumers and others.  Operators are required to provide complete and adequate cost dataand other materials for those hearings.

 

In December 2000, the MII, the former StateDevelopment Planning Commission and the Ministry of Finance jointly issued atariff adjustment circular, which provides for tariff adjustments for a widerange of telecommunications services. Effective from February 21, 2001, we have adopted these governmenttariff adjustments.

 

57

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In June 2003, the Ministry of Finance and the MIIjointly issued a circular to revoke certain fees including one-timeinstallation fees charged to the fixed line telephone users and one-timeactivation fees charged to the cellular subscribers.

 

*InterconnectionArrangements*

* *

In 1999, the MII issued provisional regulations oninterconnection and settlement arrangements. These regulations contain specific provisions regarding, among otherthings, revenue sharing methods and settlement mechanisms and interconnectionagreements among telecommunications service providers.  The Telecommunication Regulations reaffirmedthe obligations of dominant telecommunications operators in China to provideinterconnection with other operators. The MII adjusted the interconnection revenue sharing and settlementarrangements, effective from March 21, 2001, and further adjusted them onOctober 28, 2003.  We have entered intointerconnection and settlement agreements with China Telecom, China Netcom,China Mobile and China Railcom that implement the regulatory requirements.

 

The following table sets forth our interconnectionrevenue sharing and settlement arrangements with fixed line operators and ChinaMobile for local calls before and after the regulatory adjustment in 2003.

** **
| **Network  from  which calls originated**            |   | **Network at  which calls terminated**               |   | **Old Settlement  Arrangement****(under 2001 regulations)**                                                                                            |   | **New Settlement Arrangement****(under 2003 regulations)**                                                                                         |
|------------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   |                                                 |   |                                                                                                                                                   |   |                                                                                                                                               |
| Unicom’s cellular network                       |   | Fixed line operators’ public fixed line network |   | (1)  Unicom  collects the local cellular usage charge from its subscribers

(2)  Unicom  pays RMB0.006 per 6 seconds to fixed line operators |   | (1)  Unicom  collects the local cellular usage charge from its subscribers

(2)  Unicom  pays RMB0.06 per minute to fixed line operators |
|                                                 |   |                                                 |   |                                                                                                                                                   |   |                                                                                                                                               |
| Fixed line operators’ public fixed line network |   | Unicom’s cellular network                       |   | No revenue sharing or settlement                                                                                                                       |   | No revenue sharing or settlement                                                                                                                   |
|                                                 |   |                                                 |   |                                                                                                                                                   |   |                                                                                                                                               |
| Unicom’s cellular network                       |   | China Mobile’s cellular network                 |   | No revenue sharing or settlement                                                                                                                       |   | (1) Unicom collects the cellular usage charge from  its subscribers

(2)  Unicom  pays RMB0.06 per minute to China Mobile                     |
|                                                 |   |                                                 |   |                                                                                                                                                   |   |                                                                                                                                               |
| China Mobile’s cellular network                 |   | Unicom’s cellular network                       |   | No revenue sharing or settlement                                                                                                                       |   | (1) China Mobile collects the cellular usage charge  from its subscribers

(2)  China  Mobile pays RMB0.06 per minute to Unicom               |

 

 

58

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The following table sets forth our interconnectionrevenue sharing and settlement arrangement with fixed line operators and ChinaMobile for domestic long distance calls before and after the regulatoryadjustment in 2003.

 
| **Network  from  which calls originated**                       |   | **Network at  which calls terminated**                                                                                            |   | **Old Settlement Arrangement****(under 2001 regulations)**                                                                                                                                                                                                                                                       |   | **New Settlement Arrangement****(under 2003 regulations)**                                                                                                                                                                                                                                               |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Unicom’s cellular network at area A                        |   | Fixed line operators’ public fixed line network at  area B, if through the long distance network of such fixed line operator |   | (1)  Unicom  collects the domestic long distance tariff and local call tariff from its  subscribers

(2)  Unicom  keeps RMB0.006 per 6 seconds and pays the rest of the domestic long distance  tariff to fixed line operators                                                                         |   | (1)  Unicom  collects the domestic long distance tariff and local call tariff from its  subscribers

(2)  Unicom  keeps RMB0.06 per minute and pays the rest of the domestic long distance  tariff to fixed line operators                                                                     |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Unicom’s cellular network  at area A                       |   | Fixed line operators’  public fixed line network at area B, if through the long distance network of  Unicom                  |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers

(2)  Unicom pays RMB0.06 per minute to fixed  line operators, and keeps the rest of the domestic long distance tariff                                                                              |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers

(2)  Unicom pays RMB0.06 per minute to fixed  line operators, and keeps the rest of the domestic long distance tariff                                                                      |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Fixed line operators’  public fixed line network at area A |   | Unicom’s cellular network  at area B, if through the long distance network of Unicom                                         |   | (1)  Fixed line operators collect the domestic  long distance tariff from their subscribers

(2)  Fixed line operators keep RMB0.006 per 6  seconds and pay the rest to Unicom                                                                                                                         |   | (1)  Fixed line operators collect the domestic  long distance tariff from their subscribers

(2)  Fixed line operators keep RMB0.06 per  minute and pay the rest to Unicom                                                                                                                     |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Fixed line operators’  public fixed line network at Area A |   | Unicom’s cellular network  at area B, if through the long distance network of such fixed line operator                       |   | (1)  Fixed line operators collect the domestic  long distance tariff from their subscribers  (2)  Fixed line operators pay RMB0.06 per  minute to Unicom and keep the rest                                                                                                                        |   | (1)  Fixed line operators collect the domestic  long distance tariff from their subscribers.

(2)  Fixed line operators pay RMB0.06 per  minute to Unicom and keep the rest                                                                                                                    |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Fixed line operators’  public fixed line network at area A |   | Fixed line operators’  public fixed line network at area B, if through the long distance network of  Unicom                  |   | (1)  Fixed line operators on the originating  end collect the domestic long distance tariff from their subscribers

(2)  Fixed line operators keep RMB0.006 per 6  seconds and pay the rest to Unicom

(3)  Unicom then pays RMB0.006 per 6 seconds to  fixed line operators on the receiving end |   | (1)  Fixed line operators on the originating  end collect the domestic long distance tariff from their subscribers

(2)  Fixed line operators keep RMB0.06 per  minute and pay the rest to Unicom

(3)  Unicom then pays RMB0.06 per minute to  fixed line operators on the receiving end |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| Unicom’s cellular network at  area A                       |   | China Mobile’s cellular  network at area B, if through the long distance network of China Mobile                             |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers

(2)  Unicom keeps RMB0.006 per 6 seconds and  pays the rest of the domestic long distance tariff to China Mobile                                                                                   |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers

(2)  Unicom keeps RMB0.06 per minute and pays  the rest of the domestic long distance tariff to China Mobile                                                                               |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                                                     |
| China Mobile’s cellular  network at area A                 |   | Unicom’s cellular network  at area B, if through the long distance network of Unicom                                         |   | (1)  China Mobile collects the domestic long  distance tariff and local call tariff from its subscribers

(2)  China Mobile keeps RMB0.006 per 6 seconds  and pays the rest of the domestic long distance tariff to Unicom                                                                             |   | (1)  China Mobile collects the domestic long  distance tariff and local call tariff from its subscribers

(2)  China Mobile keeps RMB0.06 per minute and  pays the rest of the domestic long distance tariff to Unicom                                                                         |

 

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The following table sets forth our interconnectionrevenue sharing and settlement arrangement with fixed line operators forinternational long distance calls through their international gateways beforeand after the regulatory adjustment in 2003.

 
| **Type of  calls**                                                                                                              |   | **Old Settlement Arrangements****(under 2001 regulations)**                                                                                                                                                                                                                                                                               |   | **New Settlement Arrangements****(under 2003 regulations)**                                                                                                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                            |   |                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                       |
| Outgoing calls from Unicom’s cellular network, if  through the international long distance network of fixed line operators |   | (1) Unicom collects the international long distance  tariff and local call  tariff from its subscribers

(2) Unicom keeps RMB0.006 or RMB0.054 per 6 seconds  (depending on whether through Unicom’s domestic long distance transmission  line) and pays the rest of the international long distance tariff to fixed  line operators |   | (1) Unicom collects the international long distance  tariff and local call  tariff from its subscribers

(2) Unicom keeps RMB0.06 or RMB0.54 per minute  (depending on whether through Unicom’s domestic long distance network) and  pays the rest of the international long distance tariff to fixed line  operators |
|                                                                                                                            |   |                                                                                                                                                                                                                                                                                                                                      |   |                                                                                                                                                                                                                                                                                                                       |
| Incoming calls to Unicom’s cellular network, if  through the international long distance network of fixed line operators   |   | (1)  Unicom  receives RMB0.006 or RMB0.054 per 6 seconds from fixed line operators  (depending on whether through Unicom’s domestic long distance transmission  line)                                                                                                                                                           |   | (1)  Unicom  receives RMB0.06 or RMB0.54 per minute from fixed line operators (depending  on whether through Unicom’s domestic long distance network)                                                                                                                                                            |

 

The following table sets forth our interconnectionrevenue sharing and settlement arrangements with fixed line operators for IPtelephony long distance calls through our network before and after theregulating adjustment in 2003.

 
| **Network  from which  calls originated**                            |   | **Network at which calls  terminated**                                                                          |   | **Old Settlement  Arrangement****(under 2001 regulations)**                                                                                                                                                                                                                      |   | **New Settlement  Arrangement****(under 2003 regulations)**                                                                                                                                                                                                             |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                 |   |                                                                                                            |   |                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                    |
| Unicom’s cellular network at area A                             |   | Fixed line operators’ public fixed line network at  area B (if through Unicom’s IP telephony network) |   | (1)  Unicom  collects the IP telephony long distance charges and local call tariff from its  subscribers

(2)  Unicom  pays RMB0.006 per 6 seconds to fixed line operators on the receiving end                                                                   |   | (1)  Unicom  collects the IP telephony long distance charges and local call tariff from its  subscribers

(2)  Unicom  pays RMB0.06 per minute to fixed line operators on the receiving end                                                                   |
|                                                                 |   |                                                                                                            |   |                                                                                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                                    |
| Fixed line operators’ public fixed line network at  area A |   | Fixed line operators’ public fixed line network at  area B (if through Unicom’s IP telephony network) |   | (1)  Unicom  collects the IP telephony long distance charges from its subscribers

(2)  Unicom  pays RMB0.006 per 6 seconds to fixed line operators on the receiving end

(3)  No  settlement between Unicom and fixed line operators on the originating end |   | (1)  Unicom  collects the IP telephony long distance charges from its subscribers

(2)  Unicom  pays RMB0.06 per minute to fixed line operators on the receiving end

(3)  No  settlement between Unicom and fixed line operators on the originating end |

 

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*TechnicalStandards*

* *

The MII sets industry technical standards for theChinese telecommunications industry. Most of the standards set by the MII conform to the standardsrecommended by the International Telecommunications Union and other internationaltelecommunications standards organizations. In cases where the MII has not set certain industry technical standards,we set our own enterprise technical standards. The MII also requires all network operators in China to purchase onlytelecommunications equipment certified by the MII, including cellular andpaging equipment, radio equipment and interconnection terminal equipment.

 

*UniversalServices*

* *

Telecommunications service providers in China arerequired to fulfill universal service obligations in accordance with relevantregulations to be promulgated by the Chinese government, and the MII has theauthority to delineate the scope of its universal service obligations.  The MII may also select universal service providersthrough a tendering process.  The MII,together with the finance and pricing authorities, is also responsible forformulating administrative rules relating to the establishment of a universalservice fund and compensation schemes for universal services.  These ruleshave not yet been promulgated and there are currently no regulatoryrequirements relating to the provision of universal services in China.

 

The MII hasrecently required all Chinese telecommunication service providers to providetelephone services in a number of remote villages in China as transitionalmeasures prior to the formalization of a universal service obligationframework.  The MII and other relevant government authoritiesare still in the process of finalizing the regulations relating to the provisionof such universal services.  Suchregulations, if promulgated, may require us to incur significant relevantexpenses to fulfill our universal service obligations.

 

*CapitalInvestment*

* *

Unicom Group is authorized to approve a project with atotal investment of less than RMB200 million. Any investment project involving a total capital investment in excess ofRMB200 million is required to be reviewed by the National Development andReform Commission and approved by the State Council.

 

*Others*

 

As a company with substantially all of our operations in China, we,along with our controlling shareholder, Unicom Group, are subject to various regulationsof the PRC government in addition to those regulating the telecommunicationsindustry.  PRC regulatory authorities,such as the State Bureau of Taxation, National Audit Office, StateAdministration of Industry and Commerce and local price bureaus, exerciseextensive control over various aspects of our businesses and conduct variousregular inspections, examinations and/or audits on us and Unicom Group.  In addition, as one of the key State-ownedenterprises under the direct supervision of the State-owned Assets Supervisionand Administration Commission, Unicom Group is also subject to periodic auditby the National Audit Office, or the NAO. The NAO is currently conducting an audit on Unicom Group and itssubsidiaries, including us.  As the NAOaudit has not yet been completed, we cannot predict at this time the results ofsuch audit or the extent of its possible effect on our company.

 

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### ***C.            OrganizationalStructure***

### *** ***

We are incorporated in Hong Kong and are 77.42%indirectly owned by the Unicom Group and 22.58% owned by public shareholders asof the date of this annual report.  See“A. History and Development of the Company” under this Item 4.  Set forth below are details of oursignificant subsidiaries:

 
| **Name of Subsidiary**                                                            |   | **Country of Incorporation** |   | **Ownership Interest** |   |
|-----------------------------------------------------------------------------------|--------|------------------------------|--------|------------------------|--------|
| China Unicom  Corporation Limited                                                 |   | China                        |   | 100                    | %      |
|                                                                              |   |                         |   |                   |   |
| Unicom New Century  Telecommunications Corporation Limited, or Unicom New Century |   | China                        |   | 100                    | %      |
|                                                                              |   |                         |   |                   |   |
| Unicom New World  Telecommunications Corporation Limited, or Unicom New World*    |   | China                        |   | 100                    | %      |

 

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*                  Held through Unicom New World (BVI) Limited, ourdirect wholly-owned subsidiary.

 

### ***D.            Properties***

### *** ***

Our principal executive offices are located in HongKong.  We also maintain executiveoffices in Beijing.  We own and lease alarge number of offices, retail outlets, equipment rooms and base stationsthroughout China.  For some of thoseproperties we own, we have not obtained land use rights certificates orbuilding ownership certificates.  Insome cases, we have not entered into formal lease agreements with the lessorsor the lessors do not possess requisite title certificates.  We believe that it is unlikely that we wouldbe denied our right to use a large number of these properties at any giventime.  Our controlling shareholder,Unicom Group, has agreed to indemnify us against any loss or damages incurredby us that are caused by or arising from any challenge of, or interferencewith, our right to use these properties.

 

## **Item 5.  Operating and Financial Review andProspects**

## ** **

You should readthe following discussion and analysis together with the selected financial dataset forth in Item 3 and the consolidated financial statements included in thisannual report.  The financial statementshave been prepared in accordance with HK GAAP, which differs in certainrespects from US GAAP.  Note 41****to the consolidated financial statementssummarizes the nature and effects of significant differences between HK GAAPand US GAAP as they relate to our financial statements and provides areconciliation to US GAAP of our net income and shareholders’ equity.  In addition, Note 41 to our consolidated financial statementsincludes our condensed consolidated financial information prepared andpresented in accordance with US GAAP for the relevant periods.  Our consolidated financial statementspresent, and the discussion and analysis under this Item5 pertain to, our consolidatedfinancial position and results of operations as of and for the years endedDecember 31, 2001, 2002 and 2003.  OnDecember 31, 2002 and 2003, we completed the acquisition of Unicom New Centuryfrom Unicom Group, and the acquisition of Unicom New World from Unicom Groupand sale of Guoxin Paging to Unicom Group, respectively.  Our consolidated financial statements forthe financial year ended December 31, 2003 reflect the results of operations ofUnicom New Century and Guoxin Paging but do not include the results ofoperations of Unicom New World.  Ourconsolidated financial statements for the financial year ended December 31,2002 do not include the results of operations of Unicom New Century.  See “—Acquisitions of Unicom New Century andUnicom New World and the Sale of Guoxin Paging” below under this Item 5.

 

 

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***Overview***

** **

We are an integrated provider of telecommunicationsservices in China and offer a wide range of telecommunications services,including the following, which also constitute our major operating segments:

 

•                                          GSMcellular service in 21 provinces, 5 autonomous regions and 4 municipalities (15provinces, 2 autonomous regions and 4 municipalities prior to the acquisitionof Unicom New World);

 

•                                          CDMAcellular service in 21 provinces, 5 autonomous regions and 4 municipalities (15provinces, 2 autonomous regions and 4 municipalities prior to the acquisitionof Unicom New World);

 

•                                          Publicswitched international and domestic long distance service nationwide in China;

 

•                                          IPtelephony based international and domestic long distance and data and Internetservices nationwide in China; and

 

•                                          UntilDecember 31, 2003, paging services nationwide in China.

 

The table below sets forth operating revenue from ourmajor businesses and the respective percentage of our total operating revenuein 2001, 2002 and 2003.

 
|                                   |   | **For the  year ended December 31,** |   |
|----------------------------------------|--------|--------------------------------------|--------|
|                                   |   | **2001**                             |   | **2002** |   | **2003** |   |
|                                   |   | **RMB in  millions**                 |   | **% of  Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of  Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of  Total  Operating  Revenue** |   |
| Total operating revenue                |   | 29,393                               |   | 100.0 | % | 40,577 |   | 100.0 | % | 67,636 |   | 100.0 | % |
| Total service revenue                  |   | 28,156                               |   | 95.8 | % | 38,333 |   | 94.5 | % | 64,040 |   | 94.7 | % |
| GSM                                    |   | 20,505                               |   | 69.8 | % | 27,388 |   | 67.5 | % | 40,304 |   | 59.6 | % |
| CDMA                                   |   | —                               |   | — |   | 3,225 |   | 7.9 | % | 16,623 |   | 24.6 | % |
| Long distance revenue                  |   | 1,489                                |   | 5.1 | % | 2,766 |   | 6.8 | % | 2,273 |   | 3.4 | % |
| Data and Internet revenue              |   | 1,820                                |   | 6.2 | % | 2,793 |   | 6.9 | % | 3,437 |   | 5.1 | % |
| Paging                                 |   | 4,342                                |   | 14.7 | % | 2,161 |   | 5.4 | % | 1,403 |   | 2.0 | % |
| Sales from telecommunications products |   | 1,237                                |   | 4.2 | % | 2,244 |   | 5.5 | % | 3,596 |   | 5.3 | % |

 

Our service revenue comes primarily from thefollowing:

 

•                                          Usagefees for our GSM, CDMA, long distance and data and Internet services,including, for our cellular subscribers, roaming-out fees for calls made bythem outside their local service areas. We recognize usage fee revenue when the service is rendered.

 

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•                                          Monthlyfees, of fixed amounts, charged to certain of our GSM, CDMA, data and Internetand paging subscribers for access to the relevant service.  We recognize monthly fee revenue in themonth during which the services are rendered.

 

•                                          Connectionfees are one-time activation fees charged to our GSM cellular and pagingsubscribers prior to July 2001 (no longer charged).  We recognize connection fee revenue upon activation of serviceunder HK GAAP.

 

•                                          Interconnectionrevenue from other telecommunications operators, including Unicom Group, forcalls made from their networks to our networks and roaming-in fees for callsmade by cellular subscribers of other operators using our cellularnetworks.  We recognize interconnectionrevenue when the relevant calls are made by subscribers.

 

•                                          Leasedline rental revenue from leases of transmission lines on our networks to UnicomGroup, business customers and other telecommunications carriers in China.  We recognize leased line rental revenue on astraight-line basis over the relevant lease term.

 

•                                          Otherrevenue primarily from valued-added services, such as short messageservices.  We recognize revenue forvalued-added services when the services are rendered.

 

•                                          Salesof telecommunication calling cards, representing pre-paid service fees, arerecorded as advances from customers and recognized as revenue when the serviceis rendered upon actual use of the cards.

 

Along with the rapid growth of China’stelecommunications industry, particularly in the cellular communicationssector, our total operating revenue in 2003 increased by 66.7% from 2002.  This increase was primarily the result ofthe continued growth in revenue of our cellular business, includingthe strong growth of our CDMA service since its introduction in 2002,and the growth of our long distance, data and Internet services, as well as theeffect of including revenue attributable to Unicom New Century, which weacquired effective December 31, 2002. Our paging revenue has declined over this period as China’s pagingmarket continued to decline.  Webelieve that the growth of our cellular businesses and our long distance, dataand Internet businesses have resulted in developments in our revenue structurethat reflect our strategy of targeting high growth, high margin areas ofChina’s telecommunications industry. Service revenue from our cellular businesses as a percentage of totaloperating revenue increased from 75.4%****in2002 to****84.2%****in 2003.  Service revenue from long distance, data andInternet businesses fell to 8.4% of operating revenue in 2003, from 13.7% ofour total operating revenue in 2002. Paging service revenue fell by 35.1% in 2003.  We aim to further leverage our position as an integratedtelecommunications operator in order to continue to drive the growth of our GSM and CDMAcellular businesses and long distance, data and Internet businesses.

 

64

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The following table sets forth our major operatingexpense items and operating income,****bothin terms of amount and as a percentage of total operating revenue in 2001, 2002and 2003.

 
|                                        |   | **For the  year ended December 31,** |   |
|---------------------------------------------|--------|-------------------------------------------|--------|
|                                        |   | **2001**                                  |   | **2002** |   | **2003** |   |
|                                        |   | **RMB in  millions**                      |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   |
| Total Operating  Revenue                    |   | 29,393                                    |   | 100.0 | % | 40,577 |   | 100.0 | % | 67,636 |   | 100.0 | % |
|                                        |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Total Operating  Expenses                   |   | 24,129                                    |   | 82.1 | % | 33,253 |   | 82.0 | % | 59,122 |   | 87.4 | % |
|                                        |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Leased line and  network capacities         |   | 853                                       |   | 2.9 | % | 1,583 |   | 3.9 | % | 4,320 |   | 6.4 | % |
| Interconnection  charges                    |   | 2,073                                     |   | 7.1 | % | 3,230 |   | 8.0 | % | 5,921 |   | 8.8 | % |
| Depreciation and  amortization              |   | 8,262                                     |   | 28.1 | % | 11,256 |   | 27.7 | % | 16,385 |   | 24.2 | % |
| Personnel                                   |   | 2,487                                     |   | 8.5 | % | 3,335 |   | 8.2 | % | 4,575 |   | 6.8 | % |
| Selling and  marketing                      |   | 3,613                                     |   | 12.3 | % | 5,981 |   | 14.7 | % | 15,157 |   | 22.4 | % |
| General,  administrative and other expenses |   | 5,499                                     |   | 18.7 | % | 5,632 |   | 13.9 | % | 9,112 |   | 13.5 | % |
| Cost of  telecommunications products sold   |   | 1,342                                     |   | 4.6 | % | 2,236 |   | 5.5 | % | 3,652 |   | 5.4 | % |
| Operating income                            |   | 5,264                                     |   | 17.9 | % | 7,324 |   | 18.0 | % | 8,514 |   | 12.6 | % |

 

Our major operating expenses include the following:

 

•              Leasedline and network capacities charges, representing lease expenses fortransmission capacity from other operators and CDMA network capacities fromUnicom Group;

 

•              Interconnectionexpenses, representing amounts paid to other operators, including Unicom Group,for calls from our networks to their networks and roaming-out fees paid toother operators, including Unicom Group, for calls made by our subscribersroaming in their networks;

 

•              Depreciationand amortization expenses, mainly relating to our property, plant and equipmentand other assets (other than deferred customer acquisition costs of certainCDMA contractual subscribers, which are recorded under selling and marketingexpenses);

 

•              Personnelexpenses, representing staff salaries and wages, bonuses and medical benefits,contributions to defined contribution pension schemes and housing benefits;

 

•              Sellingand marketing expenses, including commissions, promotion and advertisingexpenses and, beginning in 2002, amortization of deferred customer acquisitioncosts of certain CDMA contractual subscribers;

 

•              General,administrative and other expenses, primarily including operating leaseexpenses, repair and maintenance costs, provision for doubtful debts andprovisions for impairment in the value of property, plant and equipment.  Other components of general, administrativeand other expenses include utilities, general office expenses and travelexpenses; and

 

•              Costsof telecommunications products sold.

 

65

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As a percentage of total operating revenue, totaloperating expenses in 2003 were 87.4% compared to 82.0% in 2002. ** **Wecontinue to aim to strengthen management, integrate our businesses and controlcosts to achieve greater overall efficiency.

 

For the first three monthsof 2004, our unaudited total revenue was RMB19.59 billion, includingRMB11.78 billion from GSM cellular services, RMB5.73 billion fromCDMA cellular services, RMB0.94 billion from long distance services,RMB0.37 billion from data and Internet services and RMB0.78 billionfrom the sale of telecommunications products.

 

***Acquisitionsof Unicom New Century and Unicom New World and the Sale of Guoxin Paging***

 

In December 2003, we acquired from Unicom Groupthe GSM cellular assets and businesses and CDMA businesses of Unicom New Worldin the following 9 provinces and autonomous regions in China: Shanxi, Hunan,Hainan, Yunnan, Gansu and Qinghai provinces and Inner Mongolia, Ningxia Hui andXizang autonomous regions.  The totalpurchase price was HK$3,014,886,000 (approximately RMB3.2 billion), payable incash.  On the same date, we alsocompleted the sale of the entire equity interests of Guoxin Paging to UnicomGroup for a total sale price of HK$2,590,917,656 (approximately RMB2.75billion), and such proceeds were applied to our general working capital.

 

Under HK GAAP, we have adopted the purchase method toaccount for our acquisition from Unicom Group of Unicom New World, which becameeffective on December 31, 2003. Under the purchase method, in accordance with HK GAAP, our consolidatedfinancial statements incorporate the results of operations of Unicom New Worldonly from the date of the acquisition. Since the effective date of the acquisition was December 31, 2003,our consolidated financial statements included in this annual report do notinclude the results of operations of Unicom New World.  Our consolidated balance sheet as ofDecember 31, 2003 includes the financial position of Unicom New World,with the difference between the cost of the acquisition and the fair value ofthe identifiable assets and liabilities acquired being recognized as goodwill,which is amortized on a straight line basis over its beneficial life of 20years.  We expect the acquisition tohave a material impact on our overall results of operations going forward.

 

Under US GAAP, theacquisition of Unicom New World is accounted for as a transfer of businessesunder common control.  Under thismethod, the acquired assets and liabilities are accounted for at theirhistorical cost under US GAAP and the consolidated financial statements preparedunder US GAAP for all periods presented are retroactively restated as if UnicomNew World had always been part of our company since inception.  This method is reflected in the significantdifferences between HK GAAP and US GAAP provided in Note 41 to ourconsolidated financial statements.

 

Under HK GAAP, the sale of Guoxin Paging by us to theUnicom Group, which became effective on December 31, 2003, has beenaccounted for as a sale of discontinued operation. The difference between thesale proceeds and the carrying amount of net assets of Guoxin Paging as ofDecember 31, 2003 was recorded as the loss on sale of discontinuedoperation in our consolidated income statement for the year endedDecember 31, 2003. The operating results of Guoxin Paging from January 1,2003 to the effective date of the sale of Guoxin Paging were included in ourconsolidated income statement for the year ended December 31, 2003.

 

Under US GAAP, the sale of Guoxin Paging to UnicomGroup is considered a transfer of business between entities under commoncontrol and accounted for at historical cost of the net assets transferred,after reduction, if appropriate, for an indicated impairment of value. Inaddition, under US GAAP, the results of operations of a component or segment ofan entity that has been disposed of should be reported in discontinuedoperations as a separate component of income, separately from continuingoperations, in the period in which the disposal occurred and in prior periods.Accordingly, all the operating results of Guoxin Paging have been grouped intoand reported in the income statement as “Discontinued operation – Loss fromdiscontinued operation” under US GAAP.

 

On December 31, 2002, we completed theacquisition of Unicom New Century from Unicom Group.  Similar to the treatment of the acquisition of Unicom New Worlddescribed above, we adopted the purchase method under HK GAAP, under which theresults of operations of Unicom New Century were included in our consolidatedfinancial statements for the fiscal year ended December 31, 2003 only.

 

The acquisitions of UnicomNew Century and Unicom New World and the sale of Guoxin Paging have had amaterial impact on our overall results of operations.  In particular, our financial results in 2003 were significantlyaffected by the inclusion of the results of operations for Unicom New Centurywe acquired effective December 31, 2002. By comparison, our financial results in 2002 did not include the resultsof operations of Unicom New Century. See “- Operating Results - Year Ended December 31, 2003Compared to Year Ended December 31, 2002” below.  These acquisitions have, among other things,significantly expanded the size of the telecommunications markets we serve andincreased the number of our subscribers and usage of our services.  As a result, our operating revenue andoperating expenses have also increased significantly.

 

66

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The following are certain summary consolidated resultsof operation information for the years ended December 31, 2001, 2002 and2003 and financial position information as of December 31, 2002 and 2003for us and Unicom New World, as separate entities and on a combined basis afterthe acquisition of each entity, prepared under US GAAP.  The financial information prepared underUS GAAP reflect retroactive restatement for the acquisition andreconciliation for other differences from HK GAAP to US GAAP.

 
|                                                 |   | **The Group  (before the  acquisition of  Unicom New  World)** |   | **Unicom New  World** |   | **Elimination**  |   | **The Group  (after the  acquisition of  Unicom New  World)** |   |
|------------------------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------|--------|------------------|--------|---------------------------------------------------------------|--------|
|                                                 |   | **RMB’000**                                               |   | **RMB’000**      |   | **RMB’000** |   | **RMB’000**                                              |   |
| **For  the year ended December 31, 2001**       |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                              |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating  revenue (Turnover)                        |   | 30,024,754                                                     |   | 2,905,547             |   | (428,980         | )      | 32,501,321                                                    |   |
| Net income from  continuing operations               |   | 5,784,497                                                      |   | 81,174                |   | —           |   | 5,865,671                                                     |   |
| Net loss from  discontinued operation                |   | (710,176                                                       | )      | —                |   | —           |   | (710,176                                                      | )      |
| Net income                                           |   | 5,074,321                                                      |   | 81,174                |   | —           |   | 5,155,495                                                     |   |
| Basic earnings  per share (RMB)                      |   | 0.404                                                          |   | —                |   | —           |   | 0.411                                                         |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| **As of/for the year ended  December 31, 2002** |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                              |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating  revenue (Turnover)                        |   | 45,800,199                                                     |   | 5,238,615             |   | (623,566         | )      | 50,415,248                                                    |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Net income from  continuing operations               |   | 5,611,683                                                      |   | (116,694              | )      | (2,185           | )      | 5,492,804                                                     |   |
| Net loss from  discontinued operation                |   | (422,213                                                       | )      | —                |   | —           |   | (422,213                                                      | )      |
| Effect to change  in accounting policy               |   | (42,175                                                        | )      | —                |   | —           |   | (42,175                                                       | )      |
| Net income                                           |   | 5,147,295                                                      |   | (116,694              | )      | (2,185           | )      | 5,028,416                                                     |   |
| Basic earnings  per share (RMB)                      |   | 0.410                                                          |   | —                |   | —           |   | 0.401                                                         |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Financial  position:                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Non-current  assets                                  |   | 118,644,755                                                    |   | 12,571,854            |   | —           |   | 131,216,609                                                   |   |
| Current assets                                       |   | 31,921,101                                                     |   | 2,153,980             |   | (655,797         | )      | 33,419,284                                                    |   |
| Total assets                                         |   | 150,565,856                                                    |   | 14,725,834            |   | (655,797         | )      | 164,635,893                                                   |   |
| Non-current  liabilities                             |   | 41,673,150                                                     |   | 8,025,450             |   | —           |   | 49,698,600                                                    |   |
| Current  liabilities                                 |   | 44,609,442                                                     |   | 6,200,210             |   | (653,612         | )      | 50,156,040                                                    |   |
| Total  liabilities                                   |   | 86,282,592                                                     |   | 14,225,660            |   | (653,612         | )      | 99,854,640                                                    |   |
| Minority  interests                                  |   | 566,257                                                        |   | —                |   | —           |   | 566,257                                                       |   |
| Net assets                                           |   | 63,717,007                                                     |   | 500,174               |   | (2,185           | )      | 64,214,996                                                    |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| **As of/for the year ended  December 31, 2003** |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                              |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating  revenue (Turnover)                        |   | 65,055,706                                                     |   | 8,116,512             |   | (1,213,965       | )      | 71,958,253                                                    |   |
| Net income from  continuing operations               |   | 5,719,316                                                      |   | 348,762               |   | 2,185            |   | 6,070,263                                                     |   |
| Net loss from  discontinued operation                |   | (1,341,840                                                     | )      | —                |   | —           |   | (1,341,840                                                    | )      |
| Net income                                           |   | 4,377,476                                                      |   | 348,762               |   | 2,185            |   | 4,728,423                                                     |   |
| Basic earnings  per share (RMB)                      |   | 0.349                                                          |   | —                |   | —           |   | 0.377                                                         |   |
|                                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Financial  position:                                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Non-current  assets                                  |   | 115,104,870                                                    |   | 13,064,550            |   | —           |   | 128,269,420                                                   |   |
| Current assets                                       |   | 20,941,127                                                     |   | 2,278,122             |   | (975,965         | )      | 22,243,284                                                    |   |
| Total assets                                         |   | 136,045,997                                                    |   | 15,342,672            |   | (975,965         | )      | 150,412,704                                                   |   |
| Non-current  liabilities                             |   | 34,908,769                                                     |   | 5,684,779             |   | —           |   | 40,593,548                                                    |   |
| Current  liabilities                                 |   | 37,478,355                                                     |   | 7,404,263             |   | (975,965         | )      | 43,906,653                                                    |   |
| Total  liabilities                                   |   | 72,387,124                                                     |   | 13,089,042            |   | (975,965         | )      | 84,500,201                                                    |   |
| Net assets                                           |   | 63,658,873                                                     |   | 2,253,630             |   | —           |   | 65,912,503                                                    |   |

 

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***Critical AccountingPolicies***

*** ***

The preparation of our financial statements and thisannual report requires us to make estimates and assumptions that affect thereported and disclosed amounts of assets and liabilities, including contingentassets and liabilities, as at the relevant dates and revenue and expenses forthe relevant periods.  We have identifiedthe accounting policies and estimates below as critical to our businessoperations and an understanding of our results of operations and financialposition.  The impact and any associatedrisks related to these policies on our business operations are discussedthroughout this Item 5 where such policies affect our reported and expectedfinancial results.  For a discussion ofthe application of these and other accounting policies, see Notes 2 and 3 toour consolidated financial statements included in this annual report.  There can be no assurance that actualresults will not differ from those estimates and assumptions.

 

**Deferralof CDMA Customer Acquisition Costs**

 

We have been operating the CDMA business since thebeginning of 2002.  In order toaccelerate the development of the CDMA business and subscriber growth, we beganto offer certain promotional packages in the second half of 2002.  As part of the contractual arrangements withcertain CDMA contractual subscribers under these special promotional packages,CDMA handsets were provided to the subscribers for their use at no additionalcharge during the specified contract periods, which range from 6 months to 2years.  In return, the subscribers arerequired to incur a minimum amount of service fees during the contractperiod.  If the contractual subscriberscan fulfill the minimum contract spending amounts by the end of the contractperiod, they will not be obliged to repay the remaining costs of the CDMAhandsets given for their use.  Inaddition, to secure contract performance, these subscribers are required undertheir contracts to (1) prepay certain non-refundable amounts of servicefees or deposits, (2) maintain a bank deposit in one of the designatedcommercial banks to secure their minimum contract amounts, or (3) providea guarantor who will compensate us for any loss in the event of thesubscriber’s non-performance of related contractual obligations.

 

 

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We consider the costs of the CDMA handsets provided tocontractual subscribers under these promotional packages as part of thecustomer acquisition costs for the development of these new CDMA contractualsubscribers.  Such customer acquisitioncosts are deferred, to the extent recoverable, and amortized over thecontractual periods to match with the minimum contract revenue.

 

We determined our accounting policy of deferredcustomer acquisition costs of certain CDMA subscribers after a carefulevaluation of our specific facts and circumstances, and believe that thecapitalization of such costs appropriately matches with the future contractualrevenues due to (1) the historically high ARPUs and low churn, default or baddebt rates of these subscribers; (2) our established procedures and therelative low cost of enforcement of contracts in default; and (3) the existenceof specified contract periods with minimum contract spending amounts andbuilt-in contractual safeguarding measures such as non-refundable prepayments,bank deposits, and guarantees received, as well as penalty clauses imposed on subscribers.

 

Therefore, we believe that the deferred customeracquisition costs are recoverable from future revenue to be derived from thesepromotional packages, and the capitalization and amortization of these customeracquisition costs to match future revenue is an appropriate accountingpolicy.  Furthermore, we continuouslyassess and evaluate the recoverability of these deferred customer acquisitioncosts, based on the detailed review of historical subscriber churn rates andthe estimated default rate. Based on our current assessment and evaluation, webelieve that there is no significant problem in recovering the carrying amountsof the deferred customer acquisition costs as at December 31, 2003.

 

We have made the above recoverability assessments basedon the current legal and operating environment relating to the subscribers’contract performance and other information currently available to us.  Actual results may differ significantly fromthe current situation and our current estimates.  If the situation changes significantly in the future, we may needto expense off additional non-recoverable deferred customer acquisition costsbased on conditions at that time.

 

**Leaseof CDMA Network Capacity**

** **

We have entered into a CDMA network capacity leaseagreement with Unicom Group and Unicom Horizon.  Pursuant to this CDMA lease agreement, Unicom Horizon has agreedto lease the capacity of the CDMA network to us covering the nine provinces ofGuangdong, Jiangsu, Zhejiang, Fujian, Liaoning, Shandong, Anhui, Hebei, Hubeiand the three municipalities of Beijing, Shanghai and Tianjin.  This lease became effective on January 8, 2002.

 

In addition, on December 31, 2002 and 2003, weacquired all the equity interests in Unicom New Century and Unicom New World,respectively, which together operate GSM and CDMA cellular businesses inanother 12 provinces, one municipality and five autonomous regions inChina.  Each of Unicom New Century andUnicom New World has also entered into a CDMA lease agreement with Unicom Groupand Unicom Horizon on similar terms and conditions.  These lease agreements and our existing lease agreement will bereferred to as the CDMA Lease Agreements.

 

According to the terms of the CDMA Lease Agreements,the initial lease period is for one year, renewable for additional one-yearterms at our own option.  InJanuary 2004, we renewed the CDMA Lease Agreements for CUCL and Unicom NewCentury for an additional one-year term.

 

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We have assessed the appropriate lease classificationat the inception of the CDMA Lease Agreements. Factors and related implicationswe have considered include whether we have the risks and rewards of ownershipof the CDMA assets.  Furthermore, wehave considered whether the existence of the purchase option and the annualrenewal options, combined with the related economic penalties, risks andbenefits, have caused us to take on risks and rewards similar to those that anowner of these assets would bear.

 

Unicom Horizon has the legal ownership of the CDMAnetwork, is directly responsible for the planning, financing and constructionof the CDMA network, and directly enters into all contracts with suppliers andconstructors.  We believe we only bearthe risks associated with the operation of our CDMA business during therelevant leasing periods and are free from any ownership risks of the CDMAnetwork.  According to the terms of theCDMA Lease Agreements, our initial lease period is only one year, with renewalfor additional one-year terms at our own option.  Accordingly, there is no pre-determined lease period and minimumnetwork capacity to be leased in future periods.  We have the option to determine whether we will renew andcontinue the leases and how much capacity to lease.  We also have the option to decide whether we will exercise thepurchase option based on market environment and the future operatingperformance of the CDMA business subject to approvals obtained from our independentminority shareholders.

 

Accordingly, if the CDMA business turns out to beunsuccessful, we do not have the obligation to continue the CDMA leasearrangement or to exercise the purchase option.  On the other hand, we could continue to lease nominal capacity inorder to ensure that no other operator takes possession of the assets tocompete with us in our service areas.

 

In general, the classification of leases is dependenton whether the risks and rewards of ownership of the leased assets restsubstantially with the lessor or the lessee. Leases that substantially transfer to the lessee all the risks andrewards of ownership of the leased assets are accounted for as finance leases;and leases where substantially all the risks and rewards of ownership of theleased assets remain with the lessor are accounted for as operatingleases.  When performing thisassessment, we have considered the various factors above that requiredsignificant judgment.

 

From the inception of the CDMA Lease Agreements, therehas been a high degree of uncertainty related to the market condition andexisting operating results of the CDMA business.  It remains highly uncertain whether we will continue to lease thenetwork in the future or to estimate the future network capacity to be leased.  We are also unable to determine whether ornot we will exercise the purchase option. Given these uncertainties and due to the fact that the risks associatedwith the ownership of the CDMA assets substantially remain with Unicom Groupand Unicom Horizon, we account for the leasing of CDMA network capacity asoperating leases for the initial lease periods, estimated to be three years, soas to reflect the respective rights and obligations of the relevant parties tothe CDMA Lease Agreements.  At the endof the effective lease term, we will reassess the appropriate classificationbased on the relevant facts and circumstances available at that time.

 

Based on the above assessment, only the operatinglease expenses are recorded in our statements of income since the commencementof the CDMA Lease Agreements, whereas the carrying value of the CDMA assets andthe related liabilities are not reflected in our balance sheet.  For the years ended December 31, 2002and 2003, we recorded lease expenses of approximately RMB0.89 billion andRMB3.52 billion, respectively, under the CDMA Lease Agreements.

 

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**Impairmentof Assets**

** **

As of the end of each year, we conduct a full reviewof various information to identify indications that the carrying values of ourproperty, plant and equipment, construction-in-progress and other long-termassets may be impaired.  If such anindication exists, we will also estimate the related asset’s recoverableamount.  To the extent that theestimated recoverable amount of an asset is lower than its carrying amount, animpairment loss is recognized.  Theinformation used to identify indications of impairment might be subjective innature and the interpretation and application of such information requiresjudgment, the result of which directly affects our estimate of any impairmentprovision considered necessary as at any given balance sheet date.  To the extent our assumptions andestimations differ significantly from actual events and circumstances, we mayneed to make additional impairment provisions in the future.

 

In 2002, despite the fact that the revenue andsubscriber number of the paging business continued to decline, it managed tomaintain net cash inflows from operations. Our paging business did not improve significantly because thetraditional paging business was still declining, whereas the new value-addedpaging businesses were at their initial development stage, and thus, the realvalue of the paging business was not yet fully realized.  At that time, we were confident about thefuture prospects of these new value-added paging businesses, and we believedthat they could generate sufficient future economic benefits to recover thecarrying values of the existing paging assets. Consequently, we believed that it was not necessary to make additionalimpairment provision for 2002.

 

Later on, in the first half of 2003, we conducted are-assessment of the recoverable amount of the paging assets based on the bestestimates of the discounted net future cash flows expected to be generated fromthe paging business in the foreseeable future years.  Management made key assumptions and estimations on theappropriate discount rate adopted (8% per annum), the period covered by thecash flow forecast, the impact of the continuous decline of traditional pagingbusiness, the future loss of subscribers, the expected trend in average revenueper subscriber, as well as incremental cash flows arising from new pagingbusinesses and the effects of the adoption of cost reduction plans.  All these assumptions and estimations weremade based on historical trends adjusted for the current market situation(including the physical condition of these assets) and the forecast of thefuture development of the new value-added paging businesses.

 

In the first half of 2003, based on our updatedanalysis and the worsening decline of the traditional paging business, weexpected that the related incremental future cash inflows to be generated fromthe new value-added paging services, despite their continuous growth, were unlikelyto offset the effects of the rapid decline of the traditional paging businessin the future.  Consequently, based onthe latest estimate of the discounted future net cash flows expected to arisefrom the continuing operations of the paging business, after considering theunexpected rapid decline of the traditional paging business in the first halfof 2003, we concluded that the carrying amount of paging assets as atJune 30, 2003 had exceeded their expected recoverable amounts.  Accordingly, we recorded an additionalimpairment loss for property, plant and equipment of the paging businessamounting to approximately RMB528 million in the first half of 2003.  Subsequently, we sold the paging business toour ultimate parent company, Unicom Group, effective on December 31,2003.  The disposal loss of thisdiscontinued operation, representing the difference between the sales proceedsand the carrying amount of the net assets of the paging business as of the effectivedate of the disposal which amounted to approximately RMB663 million, wasrecognized and charged to the income statement in 2003.

 

**Provisionfor Doubtful Debts**

** **

Accounts receivables are stated at cost, lessprovision for doubtful debts.  Weevaluate specific accounts receivable where there are indications that thereceivable may be doubtful or is not collectible.  We record a provision based on our best estimates to reduce thereceivable balance to the amount that is expected to be collected.  For the remaining receivable balances as ofeach period-end, we make a general provision based on the aging pattern of thereceivable amounts and by applying reasonable percentages to the outstandingreceivables.  We make such estimatesbased on our past experience, historical collection patterns, subscribers’credit worthiness and collection trends. For the general subscribers of our cellular, long distance, data andInternet services, we make a full provision for receivables aged over 3 months,which is consistent with our credit policy with respect to relevantsubscribers.

 

 

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Our estimates described above are based on ourhistorical experience, subscribers’ credit worthiness and collectiontrends.  If circumstances change (e.g.due to factors including developments in our business and the external marketenvironment), we may need to re-evaluate our policies on doubtful debts, andmake additional provisions in the future.

 

**IncomeTax and Deferred Taxation**

** **

Income tax is provided for based on income before taxfor statutory financial reporting purposes, adjusted for income and expenseitems that are not assessable or deductible for tax purposes and taking intoconsideration any preferential tax treatment to which we are entitled.

 

Deferred taxation is provided in full, using theliability method, on temporary differences arising between the tax basis ofassets and liabilities and their carrying amounts in the financialstatements.  Deferred tax assets arerecognized to the extent that it is probable that future taxable profit will beavailable against which the temporary differences can be utilized.

 

In the preparation of our financial statements, weestimate our income tax provision and deferred taxation in accordance with theprevailing tax rules and regulations, taking into account any special approvalsobtained from relevant tax authorities and any preferential tax treatment towhich we are entitled in each location or jurisdiction in which weoperate.  This process involvesestimation made by us about our current tax exposure together with anassessment of temporary differences resulting from different treatment of itemsfor tax and accounting purposes in order to determine the amount of taxprovisions for the period.  We believewe have recorded adequate tax provisions based on our best estimates andassumptions.  For the evaluation oftemporary differences, we have assessed the likelihood that our deferred taxescould be deferred and recovered.  Majordeferred tax components include interests on loans from CCF joint ventures,loss arising from terminations of CCF arrangements, provisions for doubtfuldebts and write-down of inventory to net realizable value and additionaldepreciation deductible for tax purpose. Due to the effects of these temporary differences on income tax, we haverecorded deferred tax assets amounting to RMB1.82 billion and RMB1.20 billionas of December 31, 2002 and 2003, respectively.  Deferred tax assets are recognized based on our estimates andassumptions that they will be recovered from taxable income from continuingoperations in the foreseeable future.

 

We believe we have recorded adequate current anddeferred taxes based on prevailing tax rules and regulations and our currentbest estimates and assumptions.  In theevent that future tax rules and regulations or related circumstances change,adjustments to current and deferred taxes may be necessary.

 

***Operating Results***

*** ***

**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

 

Our results of operationsin 2003 were materially affected by our acquisition of Unicom New Centuryeffective December 31, 2002.  Inparticular, our operating revenue and operating expenses increasedsignificantly in 2003. This was primarily due to the inclusion of the resultsof operations of Unicom New Century.  Bycomparison, our results in 2002 did not include the results of operations ofUnicom New Century.  As result, ourresults of operations in 2003 are not directly comparable with those in prioryears.  See “-Overview - Acquisitions of Unicom New Century and UnicomNew World and the Sale of Guoxin Paging” above.  See also “A. The History and Development of the Company -Restructuring and Acquisition of Unicom New Century” under Item 4 above.

 

 

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In 2003, ouroperating revenue continued to increase, by 66.7% from RMB40.58billion in 2002 toRMB67.64 billion in 2003.  This growth wasprincipally due to the strong growth of our CDMA cellular business andcontinued growth of our GSM cellular business, as well as the inclusion ofrevenue attributable to Unicom New Century, which we acquired effectiveDecember 31, 2002.  Our cellular businesses continued toincrease in their percentage contribution to our overall business.  Our long distance, data and Internetbusinesses also continued to grow in terms of operating revenues and in theircontribution to our business.

 

Due tofactors discussed below, in 2003 our operating expenses grew 77.8%.  As a result, our operating income increased by 16.3% to RMB8.51 billion, whileour operating margin decreased to 12.6%, as compared with 18.0% in 2002.  Operatingmargin in our GSM cellular business decreased from 27.2% in 2002 to 21.2% in 2003.  Our CDMAbusiness recorded an operating income for the first time in the third quarterof 2003, and continued to grow for the remainder of the year.  In our long distance business,operating income decreased 31.6% in 2003 and operating margin, at 30.6% in 2003, decreased from 36.8%in 2002.  In our data and Internet businesses,operating income increased by 95.3% over 2002.  Our traditional paging business continued to decline, and despite ourfocus on cost reduction and development of new value-added paging services, itstill experienced an operating loss in 2003.

 

Our net income in2003 decreased****by8.3% to RMB4.22 billion, for reasons discussedbelow.

 

***Operating Revenue***

*** ***

Operating revenue from our GSM cellular business grewsteadily in 2003 and continued to be the major force behind our total operatingrevenue growth, contributing almost half of such growth in 2003, whileoperating revenue from our CDMA cellular business grew rapidly in 2003,significantly increasing its share of our total operating revenue for theyear.  Our CDMA cellular business,introduced in January 2002, reached RMB18.58 billion in operating revenuein 2003, contributing 55.2% of our total operating revenue growth in that year.** **Operatingrevenues from our GSM and CDMA cellular businesses represented 88.4% of ourtotal operating revenue in 2003, as compared with 78.3% in 2002.  The growth of the CDMA cellular business canbe seen in its share of our total operating revenue, which increased from 9.0%in 2002 to 27.5% in 2003, while the share of operating revenue from the GSMcellular business in our total operating revenue decreased from 69.3% in 2002to 60.9% in 2003.  Operating revenuesfrom our long distance and data and Internet businesses increased steadily,contributing 0.5% of our total operating revenue growthin 2003.  Operating revenues from ourlong distance business and our data and Internet businesses represented 3.3%and 5.1%, respectively, of our total operating revenue in 2003, as comparedwith 6.8% and 6.9%, respectively, in 2002. The growth in our total operating revenue, however, was partially offsetby the continued significant decline in operating revenue from our pagingbusiness, which also declined as a percentage of our total operating revenuefrom 8.0% in 2002 to 3.2% in 2003.  Webelieve the changes in our operating revenue composition reflect our focus onthe development of our cellular businesses.

 

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***Cellular Revenue***

*** ***

For the reasons discussed below, operating revenuesfrom our GSM and CDMA cellular businesses (including revenues from sales oftelecommunications products) together increased by 88.1%, from RMB31.76 billionin 2002 to RMB59.75 billion in 2003.

 

*GSM Cellular Business *Operating revenue from our GSMcellular business increased by 46.5%, from RMB28.11 billion in 2002 to RMB41.17billion in 2003, primarily due to the continued increase in the total number ofour total GSM cellular subscribers as a result of organic subscriber growth andthe effect of our acquisition of Unicom New Century.  As a result of continuing cellular penetration expansion, anincrease in the proportion of low-usage subscribers among new subscribers, anincreased number of pre-paid subscribers, and increasing market competitionnegatively affecting effective pricing, ARPU from this business declined 15.8%,from RMB67.3in 2002 to RMB56.7 in 2003.  Post-paidARPU decreased by 19.5%, from RMB82.2 in 2002 to RMB66.2 in 2003, whilepre-paid ARPU decreased by 15.0%, from RMB54.1 in 2002 to RMB46.0in 2003.  The average MOU per subscriberper month increased 5.0%, from 165.5 minutes in 2002 to 173.7minutes in 2003.  (The foregoingoperational statistics do not include the effects of the acquisition of UnicomNew World.)

 

Revenue from pre-paid GSMcellular service was RMB15.33 billion in 2003, a 52.1%increase from RMB10.08 billion in 2002. Revenue from pre-paid services accounted for 37.2% of the service revenue from ourGSM cellular business in 2003, an increase****from 35.9% of the total service revenuefrom the GSM cellular business in 2002. Pre-paid subscribers accounted for 73.8% of our new customers in 2003,compared to 81.1% in 2002 primarily due to the lower percentage of pre-paidsubscribers of Unicom New Century, which was acquired by us onDecember 31, 2002, compared to the percentage of our pre-paid subscribersbefore the acquisition.

 

The table below sets forth the revenue composition ofour GSM cellular business and each revenue item’s respective shareof total GSM operating revenue in the years ended December 31, 2001, 2002and 2003.

 
|                                 |   | **2001**            |   | **2002**                            |   | **2003**            |   |
|--------------------------------------|--------|---------------------|--------|-------------------------------------|--------|---------------------|--------|
|                                 |   | **RMB in  million** |   | **As****percentage****of****total** |   | **RMB in  million** |   | **As****percentage****of****total** |   | **RMB in  million** |   | **As****percentage****of****total** |   |
| Operating Revenue                    |   | 21,326              |   | 100.0                               | %      | 28,109              |   | 100.0 | % | 41,166 |   | 100.0 | % |
| Service Revenue                      |   | 20,505              |   | 96.2                                | %      | 27,388              |   | 97.4 | % | 40,303 |   | 97.9 | % |
| Usage Fee                            |   | 14,938              |   | 70.0                                | %      | 20,275              |   | 72.1 | % | 29,072 |   | 70.6 | % |
| Monthly Fee                          |   | 3,660               |   | 17.2                                | %      | 4,169               |   | 14.8 | % | 7,042 |   | 17.1 | % |
| Connection fee                       |   | 205                 |   | 1.0                                 | %      | —              |   | — |   | — |   | — |   |
| Interconnection Revenue              |   | 1,262               |   | 5.9                                 | %      | 1,710               |   | 6.1 | % | 1,927 |   | 4.7 | % |
| Others                               |   | 440                 |   | 2.1                                 | %      | 1,234               |   | 4.4 | % | 2,262 |   | 5.5 | % |
| Sales of Telecommunications Products |   | 821                 |   | 3.8                                 | %      | 721                 |   | 2.6 | % | 863 |   | 2.1 | % |

 

Due to the growth in total usage of our GSM cellularservices (including the effects of our acquisition of Unicom New Century) andthe increasing proportion of pre-paid cellular subscribers (who do not paymonthly fees), usage fees for GSM cellular services increased by 43.3% fromRMB20.28 billion in 2002 to RMB29.07 billion in 2003, and represented 72.1% oftotal GSM service revenue as compared with 74.0% in 2002.  For the same reasons, monthly fees increasedby 68.9%, from RMB4.17 billion in 2002 to RMB7.04 billion in 2003, andrepresented 17.5% of total GSM service revenue as compared with 15.2% in 2002.  Interconnection revenue increased by 12.9%from RMB1.71 billion in 2002 to RMB1.93 billion in 2003, and represented 4.8%of total service revenue as compared with 6.2% in 2002.

 

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While continuing to meet the diverse needs of ourcustomers in the mass market, our GSM cellular business aims to actively pursuemid- to high-end customers through the development and promotion of value-addedservices.  Revenue from our GSMvalue-added cellular services increased 146.4%, from RMB0.84billion in 2002 to RMB2.07 billion in 2003. Its share of total GSM service revenue increased from 3.1%in 2002 to 5.0% in 2003.  Of the totalrevenue from GSM value-added cellular services, revenue from short messagingservices increased 197.8% from RMB0.46 billion in 2002 to RMB1.37billion in 2003, and its share of total GSM service revenue grew from 1.7%in 2002 to 3.4% in 2003.  Revenuefrom value-added services contributed significantly to the increase of ourtotal GSM cellular revenue and, we believe, will continue to enhance ourcompetitiveness in this business.

 

*CDMA**Cellular**Business. *We began to provide CDMA cellularservices on a trial basis on January 8, 2002.  Since then, our CDMA subscriber base has expanded rapidly as themarket became more familiar with our CDMA services.  In the third quarter of 2003, our CDMA cellular business becameprofitable.  Since then, the growth inour CDMA subscriber base greatly boosted revenue from the CDMA cellularbusiness.  Operating revenue from ourCDMA cellular business reached RMB18.58 billion in 2003, a 409.3% increase overRMB3.65 billion in 2002.  This increasewas primarily due to the rapid expansion of our CDMA cellular business as wellas the effect of including revenue attributable to Unicom New Century, which weacquired effective December 31, 2002. Our CDMA marketing strategy, which seeks to differentiate our CDMAservices from our GSM services, has resulted in a rapid increase in the CDMAsubscriber base, while successfully positioning the CDMA business in themarketplace as “enterprise, infotainment, health-conscious and trendy”services.  ARPU for our CDMA cellularbusiness reached RMB128.4 in 2003, RMB62.2 higher than the ARPU of RMB66.2 forGSM post-paid cellular services.

 

The table below sets forth the revenue composition ofour CDMA cellular business and each revenue item’s respective shareof total CDMA operating revenue for the years ended December 31, 2002 and2003.

 
|                                 |   | **2002**           |   | **2003**                          |   |
|--------------------------------------|--------|--------------------|--------|-----------------------------------|--------|
|                                 |   | **RMB in million** |   | **As percentage********of total** |   | **RMB in million** |   | **As percentage********of total** |   |
| Operating  Revenue                   |   | 3,648              |   | 100.0                             | %      | 18,580 |   | 100.0 | % |
| Service Revenue                      |   | 3,225              |   | 88.4                              | %      | 16,624 |   | 89.5 | % |
| Usage Fee                            |   | 2,231              |   | 61.2                              | %      | 11,672 |   | 62.8 | % |
| Monthly Fee                          |   | 713                |   | 19.5                              | %      | 3,488 |   | 18.8 | % |
| Interconnection  Revenue             |   | 184                |   | 5.0                               | %      | 608 |   | 3.3 | % |
| Others                               |   | 97                 |   | 2.7                               | %      | 856 |   | 4.6 | % |
| Sales of Telecommunications Products |   | 423                |   | 11.6                              | %      | 1,956 |   | 10.5 | % |

 

CDMA usage fees increased by 423.3% from RMB2.23billion in 2002 to RMB11.67 billion in 2003, and represented 70.2% of totalCDMA service revenue as compared with 69.2% in 2002.  Monthly fees increased by 391.5%, from RMB0.71 billion in 2002 toRMB3.49 billion in 2003, and represented 21.0% of total CDMA service revenue ascompared with 22.1% in 2002. Interconnection revenue increased by 238.9% from RMB0.18 billion in 2002to RMB0.61 billion in 2003, and represented 3.7% of total service revenue ascompared with 5.7% in 2002.

 

With the introduction of our CDMA IX wireless dataservices in March 2003, we are also actively developing our CDMA wirelessdata business, by making efforts to convert the competitive edge of the CDMAtechnology into a competitive edge in operations in order to enhancecompetitiveness in the market and our appeal to subscribers.  Revenue from value-added CDMA cellularservices reached RMB0.78 billion in 2003, an increase of 875.0%from RMB0.08billion in 2002, and accounted for 4.7% of total service revenue from the CDMAcellular business, an increase of 2.2% from 2002.

 

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***Long Distance and Data andInternet Revenue***

*** ***

Operating revenue from our long distance and data andInternet businesses reached RMB5.73 billion, an increase of 2.8% from2002.  We believe the steady growth inour long distance and data and Internet businesses demonstrates our positivelong-term development outlook as an integrated telecommunications operator.

 

*Long Distance Business.** *Operating revenuefrom our traditional public switched long distance business decreased by 17.7%,from 2002 to RMB2.29 billion in 2003. Such decrease is primarily due to the decrease in interconnectionrevenue from Unicom New Century caused by our acquisition of Unicom NewCentury.

 

*Data and InternetBusiness.** *Wehave fully leveraged the technological advantage of our multi-businessesintegrated network platform.  Along witheffectively expanding international and domestic call volume for IP telephonyservices, we have been targeting business subscribers and corporate subscribersin promoting services with distinctive features such as “UNI-VIDEO”, and wealso have been targeting the mass market in promoting new services, such as“Ruyi Mailbox”.  At the same time, wehave been continuing to develop integrated data, voice and video connectionservices, and dedicated and dial-up connection services.  As a result of these efforts, revenue fromour data and Internet businesses rose by 23.1% from 2002 to RMB3.44 billion in2003.

 

***Paging Revenue***

 

In 2003, revenue from our paging business (includingrevenues from sales of telecommunications products) was RMB2.16 billion.  Paging service revenue (i.e., excludingsales of paging-related telecommunications products) fell by 35.1% to RMB1.40billion in 2003.  This decline is due tothe continued decline in the traditional paging business.  Revenue from value-added and other servicesof the paging business reached RMB0.79 billion and accounted for 56.2% of theservice revenue from the paging business. We disposed of our paging business, effective December 31, 2003.

 

***Operating Expenses***

*** ***

Operating expenses in 2003 were RMB59.12 billion,representing an increase of 77.8%, which was greater than the 66.7% growth inoperating revenue for the same period. As discussed below, a 172.9% increase in leased lines and networkcapacities expenses, a 153.4% increase in selling and marketing expenses and a83.3% increase in the interconnection charges were the primary factors in theincrease in operating expenses. Due to the launch of our CDMA business, sellingand marketing expenses (which include the amortized portion of deferredcustomer acquisition costs under special promotional packages with certain CDMAcontractual subscribers) and leased lines and network capacities expenses(which include the expenses from the CDMA network leases) increased faster thanour operating revenue in 2003.  Inaddition, as our various business segments continued to develop,interconnection charges also increased faster than our operating revenue in2003 since the interconnection rates remain unchanged while our effectivetariffs have been declining due to continued price competition.  Our operating expenses as a percentage oftotal revenue increased to 87.4% in 2003, as compared with 82.0% in 2002.  We will continue to focus on cost controland optimization of our expense structure in order to ensure continued growthin earnings.

 

 

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The table below illustrates the major expense itemsfrom 2001, 2002 and 2003 and their respective shares of total operatingrevenue.

 
|                                                                 |   | **For the  year ended December 31,** |   |
|----------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                 |   | **2001**                                  |   | **2002** |   | **2003** |   |
|                                                                 |   | **RMB in****million**                     |   | **%****of  Total Revenue** |   | **RMB in****million** |   | **%****of  Total Revenue** |   | **RMB in  million** |   | **%****of  Total Revenue** |   |
| Total Operating  Expenses                                            |   | 24,129                                    |   | 82.1 | % | 33,253 |   | 82.0 | % | 59,122 |   | 87.4 | % |
| Leased lines and  network capacities                                 |   | 853                                       |   | 2,9 | % | 1,583 |   | 3.9 | % | 4,320 |   | 6.4 | % |
| Interconnection  charges                                             |   | 2,073                                     |   | 7.1 | % | 3,230 |   | 8.0 | % | 5,921 |   | 8.7 | % |
| Depreciation and  amortization                                       |   | 8,262                                     |   | 28.1 | % | 11,256 |   | 27.7 | % | 16,385 |   | 24.2 | % |
| Personnel                                                            |   | 2,487                                     |   | 8.5 | % | 3,335 |   | 8.2 | % | 4,575 |   | 6.8 | % |
| Selling and  marketing                                               |   | 3,613                                     |   | 12.2 | % | 5,981 |   | 14.8 | % | 15,157 |   | 22.4 | % |
| General,  administrative and other expenses                          |   | 5,499                                     |   | 18.7 | % | 5,632 |   | 13.9 | % | 9,112 |   | 13.5 | % |
| Include: Impairment loss and assets write-off of the Paging Business |   | 665                                       |   | 2.3 | % | 116 |   | 0.3 | % | 557 |   | 0.8 | % |
| Cost of telecommunications  products sold                            |   | 1,342                                     |   | 4.6 | % | 2,236 |   | 5.5 | % | 3,652 |   | 5.4 | % |

 

*LeasedLines and Network Capacities*. With the significant increasein our CDMA subscribers, the lease expense for CDMA network capacitiesincreased 295.5%, from RMB0.89 billion in 2002 to RMB3.52 billion in2003.  In addition, the effect ofincluding leased line expenses for transmission lines used by Unicom NewCentury we acquired effective December 31, 2002 also contributed to the increasein our leased line expenses.  As result,the aggregate amount of our leased line expenses and network capacity leaseexpenses increased to RMB4.32 billion, representing an increase of 173.4% from2002.  Leased lines and networkcapacities expenses as a percentage of total operating revenue rose from 3.9%to 6.4% in 2003.

 

*InterconnectionCharges.* Interconnection charges reached RMB5.92 billion in2003, representing an increase of 83.3% from 2002, primarily due to theincrease in interconnection traffic volume as a result of the development ofour GSM and CDMA cellular business and long distance business, as well as theeffect of including interconnection expenses of Unicom New Century, which weacquired effective December 31, 2002. Interconnection charges for our CDMA cellular business increased by 502.9%.  Interconnection charges increased by 61.8%for our GSM cellular business. Interconnection charges for long distance, data and Internet businessincreased by 54.0%. As our various business segments continued to develop,interconnection charges as a percentage of total operating revenue alsoincreased from 8.0% in 2002 to 8.7% in 2003.

 

*Depreciationand Amortization.* Depreciation and amortization expensesincreased 45.6% to RMB16.39 billion in 2003, a lower growth rate than thegrowth in operating revenue.  Theincrease in depreciation and amortization expenses resulted from expandednetwork capacity, primarily in connection with the development of the GSMcellular business, the expansion of assets scale, and the effect of includingdepreciation expenses attributable to Unicom New Century, which we acquired onDecember 31, 2002.  Depreciationand amortization expenses as a percentage of total operating revenue decreasedfrom 27.7%in 2002 to 24.2% in 2003.

 

*Personnel.*As of the end of 2003, we had 38,728 employees, an increase of 32.0% from29,332 at the end of 2002 (excluding employees in the nine provinces,autonomous regions and municipalities we acquired through Unicom New Century atthe end of 2002).  This increase wasprimarily due to the effect of including employees of Unicom New Century, whichwe acquired on December 31, 2002. Our personnel expenses were RMB4.57 billion in 2003, its share as apercentage of total operating revenue dropping from 8.2% in 2002 to 6.8% in 2003. Inorder to align the interest of our employees with that of our shareholders, wehave set up an employee share option scheme and granted options to qualifiedemployees. During 2003, total share options involving 105,956,000 shares in ourcompany were granted under the share option scheme.

 

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*Sellingand Marketing*. Our major selling and marketing expensesincluded commissions, promotion and advertising expenses and amortization ofcustomer acquisition costs of contractual CDMA subscribers. Selling andmarketing expenses totaled RMB15.16 billion in 2003, an increase of 153.4% from2002. Amortization of CDMA subscribers acquisition costs in 2003 were RMB5.84billion, an increase of 320.1% from 2002. The balance of unamortized deferred CDMAsubscriber acquisition costs fell from RMB5.99 billion as of the end of 2002 toRMB4.04 billion as of the end of 2003. Due to the continued growth in thesubscriber base of our various business segments (including the effect of ouracquisition of Unicom New Century), the commissions to distributors and salesagents rose to RMB7.29 billion, an increase of 99.2%. Promotion and advertisingexpenses were RMB2.04 billion, an increase of 108.2%. Selling and marketingexpenses as a percentage of operating revenue increased from 14.8%in 2002 to 22.4% in 2003.

 

*General,Administrative and Other Expenses*. Our general,administrative and other expenses were RMB9.11 billion in 2003, which includesan impairment loss and assets write-off of the paging business in the amount ofRMB0.56 billion.  Total expenses in thiscategory increased by 61.8% from 2002. Excluding the impairment loss and assets write-off of the pagingbusiness, total expenses for this category increased by 51.9% from 2002.  General, administrative and other expensesas a percentage of total operating revenue decreased from 13.9% in 2002 to13.5% in 2003.  In 2003, the provisionfor doubtful debts was RMB1.75 billion, an increase of 80.4% from 2002. Provision fordoubtful debts as a percentage of service revenue increased slightly from 2.5%in 2002 to 2.7% in 2003. This has also given rise to an increase in ourgeneral, administrative and other expenses.

 

*Cost ofTelecommunications Products Sold.* The cost oftelecommunication products sold increased to RMB3.65 billion in 2003, anincrease of 62.9% from RMB2.24 billion in 2002. The share of cost oftelecommunications products sold as a percentage of operating revenue decreasedfrom 5.5%in 2002 to 5.4% in 2003.

 

***Operating Income***

*** ***

In 2003, our operating revenue increased by 66.7%,while our operating expenses increased by 77.8%.  As a result, our operating income reached RMB8.51 billion, anincrease of only 16.3% from 2002 and our operating margin only decreased from18.0% in 2002 to 12.6% in 2003.

 

*GSM Cellular Business.*  In our GSM cellular business, operatingincome reached RMB8.72 billion in 2003, which is an increase of 14.2%from 2002.  The growth in the operatingincome of our GSM cellular business is slower than the overall increase in ouroperating income, mainly reflecting the 15.8% decline in the ARPU for ourGSM cellular business.  Our operatingmargin in the GSM cellular business decreased****from 27.2% in 2002 to 21.2%in 2003.

 

*CDMA Cellular Business.*  We incurred a total operating loss ofRMB0.29 billion in 2003 for our CDMA business. While we incurred an operating loss of RMB0.57 billion for the first six monthsof 2003, we achieved an operating income of RMB0.28 billion in the second half of2003, reflecting improving performance as that business became profitable inthe third quarter of 2003.

 

*Long Distance Business.*  In our long distance business, operatingincome decreased 31.4%, from RMB1.02 billion in 2002 to RMB0.70 billion in2003, primarily because of a reduction in the inter connection revenue after weacquired Unicom New Century in December 2002.  As a result, the operating margin in our long distance business,at 22.2%in 2003, decreased from 29.5% in 2002.

 

*Dataand Internet Business.* In our data and Internet businesses, we had an operating income ofRMB0.75 billion in 2003, a 97.4% increase from 2002.  This resulted from the continued rapid growth in operatingrevenues in this business, together with our successful efforts to centralizeoperating expenses, which grew 56.9%.

 

 

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*Paging Business.*  As our traditional paging business continued todecline, our operating losses from our paging business grew from RMB0.62billion in 2002 to RMB1.20 billion in 2003.

 

***Net Income***

*** ***

*Loss on Sale of DiscontinuedOperation (Guoxin Paging)*.  The sale of Guoxin Paging toUnicom Group in 2003 resulted in a disposal loss in the amount of RMB0.66billion.

 

*Financial**Income and**Expenses.*  Our financial income decreased****fromRMB0.47 billion in 2002 to RMB0.17 billion in 2003, mainly due to adecline in interest income resulting from a reduction in our cash and overallreduced applicable interest rates.  Ourfinancial expenses****increased from RMB1.47 billion in 2002 toRMB1.93 billionin 2003, primarily due to the acquisition of Unicom New Century.  The above factors resulted in a netfinancial expense of RMB1.76 billion in 2003, an increase of 76% from the net financial expense ofRMB1.0billion in 2002.

 

*Income**Tax.*  Our income taxincreased from to RMB1.89 billion in 2003, an increase of 9.8%from 2002.  Our effective tax rates in2002 and 2003 were 27.3% and 31.0%, respectively.  The higher effective tax rate in 2003, as compared with 2002, wasmainly due to the investment tax credits we received in 2002 in connection withthe acquisition of certain domestic equipments.

 

*Net**Income.*  For reasonsanalyzed in the above discussion, our net income fell to RMB4.22 billion in2003.  Excluding the RMB0.56 billion inimpairment loss and assets write-off of the paging business and the RMB0.66billion loss on the sale of Guoxin Paging, our net income would have beenRMB5.08 billion, representing an increase of 10.5% from 2002.  Earnings per share decreased 7.7%,from RMB0.366in 2002 to RMB0.336 in 2003.

 

***Impact of Differences between HK GAAP and US GAAP***

*** ***

In addition to the above management discussion andanalysis of our results of the operation under HK GAAP between the years endedDecember 31, 2003 and 2002, in connection with the preparation andreconciliation of our consolidated financial statements in accordance with USGAAP, we believe the following significant accounting differences between HKGAAP and US GAAP would have a significant impact on our management discussionand analysis of the results of our operation between the years endedDecember 31, 2003 and 2002 under US GAAP. See also Note 41 to the consolidated financial statements for a moredetailed summary of all significant accounting differences between HK GAAP andUS GAAP that are relevant to us.

 

Under HK GAAP, the acquisition of Unicom New World onDecember 31, 2003 has been accounted for under the purchase method.Accordingly, the acquired results of operations have been incorporated into ouroperating results only from the date of the acquisition. In contrast, under USGAAP, our acquisition of Unicom New World has been accounted for as a transferof businesses under common control. Under this method, the acquired assets andliabilities have been accounted for at historical cost under US GAAP and theconsolidated financial statements prepared under US GAAP for all periodspresented have been retroactively restated as if Unicom New World had alwaysbeen part of our company.

 

Under HK GAAP, the sale of Guoxin Paging to the UnicomGroup is accounted for as a sale of discontinued operation. The differencebetween the sale proceeds and the carrying amount of net assets of GuoxinPaging as of December 31, 2003 was recorded as a loss on sale ofdiscontinued operation in our

 

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consolidated income statement for the year ended December 31,2003. The operating results of Guoxin Paging from January 1, 2003 to theeffective date of the sale of Guoxin Paging were included in our consolidatedincome statement for the year ended December 31, 2003.  Under US GAAP, the sale of Guoxin Paging isconsidered a transfer of business between entities under common control andaccounted for at historical cost of the net assets transferred, afterreduction, if appropriate, for an indicated impairment of value. In addition,under US GAAP, the results of operations of a component or segment of an entitythat has been disposed of should be reported in discontinued operations as aseparate component of income, separately from continuing operations, in theperiod in which the disposal occurred and in prior periods. Accordingly, allthe operating results of Guoxin Paging have been grouped into and reported inthe income statement as “Discontinued operation – Loss from discontinued operation”under US GAAP.

 

In addition, under HK GAAP, we recognized upfrontnon-refundable revenue, such as connection fee, when received upon completionof activation services. Under US GAAP, this upfront non-refundable revenue andthe related direct incremental costs incurred are deferred and recognized overthe estimated customer service periods.

 

Other than the above, there are no major materialdifferences between HK GAAP and US GAAP that would have a significant impact onthe discussion and analysis of our results of operations between the yearsended December 31, 2003 and 2002. Taking into account the operatingresults of the acquired business and the disposed business, our combinedoperating revenue under US GAAP increased from RMB50.42billion in 2002, to RMB71.96 billion in 2003, representing an increase of 42.7%.Our net income under US GAAP decreased from RMB5.03 billion in 2002 to RMB4.73billion in 2003, representing a decrease of 6.0%.

 

**YearEnded December 31, 2002 Compared to Year Ended December 31, 2001**

** **

In 2002, ouroperating revenue continued to increase rapidly, by 38.0% from RMB29.39billion in 2001 toRMB40.58 billion in 2002.  This growth wasprincipally due to continued growth from our GSM cellular business, as well asthe introduction and growth of our CDMA cellular business. Our cellular businesses continued to increase in their percentagecontribution to our business.  Our longdistance and data and Internet businesses also continued to grow quickly interms of operating revenues and in their contribution to our business.

 

Due tofactors discussed below, in 2002 our operating expenses grew 37.8%.  As a result our operating income increased by 39.1% to RMB7.32 billion, while ouroperating margin remained steady at 18.0%, as compared with 17.9% in 2001.  Operating margin in our GSM cellularbusiness improved slightly, from 26.3% in 2001 to 27.2% in 2002.  Our CDMA business recorded an operating lossfor its first year, but operating results in the second half of 2002 showedimprovement from the first half as that business continued to develop.  In our long distance business,operating income increased 4.9% in 2002 and operating margin, while remaininghigh at 29.5% in 2002, decreased from 41.4% in 2001.  In our data and Internet businesses, continued rapid growth inoperating revenues, together with our successful efforts to control growth inoperating expense, resulted in improvement from an operating loss in 2001 to anoperating profit in 2002.  Ourtraditional paging business continued to decline, and despite our focus on costcutting and development of new value-added paging services, it stillexperienced an operating loss in 2002.

 

Our net income in2002 decreased slightly by 0.08% to RMB4.60 billion for reasons as discussedbelow.

 

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***Operating Revenue***

*** ***

Operating revenue from our GSM cellular business grew rapidly andcontinued to be the major force behind our total operating revenue growth,contributing over half of such growth in 2002. Our CDMA business, introduced in January 2002, reached RMB3.65billion in operating revenue in 2002, contributing 32.6% of our total operatingrevenue growth in that year. ** **Operatingrevenues from our GSM and CDMA cellular businesses represented 69.3% and 9.0%,respectively, and 78.3% together, of our total operating revenue in 2002, ascompared with 72.5% for our GSM business in 2001.  Operating revenues from our long distance and data and Internetbusinesses also increased rapidly, together contributing 20.9% of our total operatingrevenue growth in 2002.  Operating revenues from our longdistance and data and Internet businesses represented 6.8% and 6.9%,respectively, of our total operating revenue in 2002, as compared with 5.1% and6.2%, respectively, in 2001.  The growthin our total operating revenue was offset by the continued significant declinein operating revenue from our paging business, which also declined as apercentage of our total operating revenue from 16.2% in 2001 to 8.0% in2002.  We believe the changes in ouroperating revenue composition reflect our focus on high growth businesses.

 

***Cellular Revenue***

*** ***

For the reasons discussed below, operating revenues from our GSMand CDMA cellular businesses (including revenues from sales of telecommunicationsproducts) together increased by 48.9%, from RMB21.33 billion in 2001 toRMB31.76 billion in 2002.

 

*GSM Cellular Business*Operating revenuefrom our GSM cellular business increased by 31.8%, from RMB21.33 billion in2001 to RMB28.11 billion in 2002, primarily due to a 42.9% increase in oursubscriber base, from 27.03 million at the end of 2001 to 38.62 million at theend of 2002, and continued growth in total usage, as well as growth in revenuefrom value-added services.  As a resultof continuing cellular penetration expansion, an increase in the proportion oflow-usage subscribers among new subscribers, an increased number of pre-paidsubscribers, and increasing market competition negatively affecting effectivepricing, ARPU from this business declined 20.0%, from RMB86.3 in 2001 toRMB69.0 in 2002.  Post-paid ARPUdecreased by 13.3%, from RMB94.8 in 2001 to RMB82.2 in 2002, while pre-paidARPU decreased by 14.7%, from RMB63.4 in 2001 to RMB54.1 in 2002.  Average MOU decreased 3.3%, from 161.2 in2001 to 155.8 in 2002.  These rates ofdecline were slower in 2002 than in 2001. (The foregoing operational statistics do not include the effects of theacquisition of Unicom New Century.)

 

Revenue from pre-paid GSMcellular service was RMB10.08 billion in 2002, a 145.9%increase from RMB4.10 billion in 2001. Revenue from pre-paid services accounted for 35.9% of the service revenue from ourGSM cellular business in 2002, an increase from 19.2% of the total service revenuefrom cellular business in 2001. Pre-paid subscribers accounted for 81.1% of our new customers in 2002,compared to 58.7% in 2001.

 

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The table below sets forth the revenue composition ofour GSM cellular business and each revenue item’s respective shareof total GSM operating revenue in the years 2000, 2001 and 2002.

 
|                                 |   | **2000**            |   | **2001**                            |   | **2002**            |   |
|--------------------------------------|--------|---------------------|--------|-------------------------------------|--------|---------------------|--------|
|                                 |   | **RMB in  million** |   | **As****percentage****of****total** |   | **RMB in  million** |   | **As****percentage****of total** |   | **RMB in  million** |   | **As****percentage****of****total** |   |
| Operating Revenue                    |   | 12,884              |   | 100.0                               | %      | 21,326              |   | 100.0 | % | 28,109 |   | 100.0 | % |
| Service Revenue                      |   | 12,188              |   | 94.6                                | %      | 20,505              |   | 96.2 | % | 27,388 |   | 97.4 | % |
| Usage Fee                            |   | 8,212               |   | 63.7                                | %      | 14,938              |   | 70.0 | % | 20,275 |   | 72.1 | % |
| Monthly Fee                          |   | 2,476               |   | 19.2                                | %      | 3,660               |   | 17.2 | % | 4,169 |   | 14.8 | % |
| Connection Fee                       |   | 518                 |   | 4.0                                 | %      | 205                 |   | 1.0 | % | — |   | — |   |
| Interconnection Revenue              |   | 754                 |   | 5.9                                 | %      | 1,262               |   | 5.9 | % | 1,710 |   | 6.1 | % |
| Others                               |   | 228                 |   | 1.8                                 | %      | 440                 |   | 2.1 | % | 1,234 |   | 4.4 | % |
| Sales of Telecommunications Products |   | 696                 |   | 5.4                                 | %      | 821                 |   | 3.8 | % | 721 |   | 2.6 | % |

 

Due to the growth in total usage of our GSM cellularservices and the increasing proportion of pre-paid cellular subscribers (who donot pay monthly fees), usage fees for GSM cellular services increased by 35.7%,from RMB14.94 billion in 2001 to RMB20.28 billion in 2002, and represented74.0% of total GSM service revenue in 2002, as compared with 72.8% in2001.  For the same reasons, monthlyfees for GSM cellular services increased by 13.9%, from RMB3.66 billion in 2001to RMB4.17 billion in 2002, and represented 15.2%of total GSM service revenue in 2002, as compared with 17.9% in2001.  Interconnection revenue increasedby 35.5%,from RMB1.26 billion in 2001 to RMB1.71 billion in 2002, and as a percentage oftotal GSM cellular service revenue, stayed roughly the same at 6.2%.  The increase in interconnection revenueresulted from rapid growth in incoming traffic from other networks as cellularcoverage and subscriber bases continued to expand.

 

While continuing to meet the diverse needs of ourcustomers in the mass market, our GSM cellular business aims to actively pursuemid- to high-end customers through the development and promotion of value-addedservices.  Revenue from our GSMvalue-added cellular services increased six-fold, from RMB0.14 billion in 2001to RMB0.84 billion in 2002.  Its shareof total GSM service revenue increased from 0.7% in 2001 to 3.1% in 2002.  Of the total revenue from GSM value-addedcellular services, revenue from short messaging services increased 4.6 timesfrom RMB0.10 billion in 2001 to RMB0.46 billion in 2002, and its share of totalGSM service revenue grew from 0.5% in 2001 to 1.7% in 2002.  Revenue from value-added servicescontributed significantly to the increase of our total GSM cellular revenueand, we believe, will continue to enhance our competitiveness in this business.

 

*CDMA**Cellular**Business. *We began to provide CDMA cellularservices on a trial basis on January 8, 2002.  Since then, our CDMA subscriber base has expanded rapidly as themarket became more familiar with our CDMA services.  The growth in our CDMA subscriber base boosted revenue from theCDMA cellular business.  Operatingrevenue from our CDMA cellular business reached RMB3.65 billion in 2002,RMB3.19 billion of which was realized in the second half of 2002, an increaseof 600% from the first half of the year. Our CDMA marketing strategy, which seeks to differentiate our CDMAservices from our GSM services, has resulted in a rapid increase in the CDMAsubscriber base, while successfully positioning the CDMA business in themarketplace as a service that targets mid- and high-end and young,style-conscious customers, but at the same time encompasses the massmarket.  ARPU for our CDMA cellularbusiness reached RMB172.3 in 2002, RMB90.1 higher than the ARPU of RMB82.2 forGSM post-paid cellular services.

 

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The table below sets forth the revenue composition ofour CDMA cellular business and each revenue item’s respective shareof total CDMA operating revenue in the first half of 2002 and for the full yearended December 31, 2002.

 
|                                 |   | **For the  six months ended  June 30,****2002 (Unaudited)** |   | **For the  year ended  December 31,****2002** |   |
|--------------------------------------|--------|-------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                 |   | **RMB in  million**                                         |   | **As  percentage  of total**                  |   | **RMB in  million** |   | **As  percentage  of total** |   |
| Operating  Revenue                   |   | 454                                                         |   | 100.0                                         | %      | 3,648 |   | 100.0 | % |
| Service Revenue                      |   | 354                                                         |   | 78.0                                          | %      | 3,225 |   | 88.4 | % |
| Usage Fee                            |   | 244                                                         |   | 53.8                                          | %      | 2,231 |   | 61.2 | % |
| Monthly Fee                          |   | 86                                                          |   | 18.9                                          | %      | 713 |   | 19.5 | % |
| Interconnection  Revenue             |   | 18                                                          |   | 4.0                                           | %      | 184 |   | 5.0 | % |
| Others                               |   | 6                                                           |   | 1.3                                           | %      | 97 |   | 2.7 | % |
| Sales of Telecommunications Products |   | 100                                                         |   | 22.0                                          | %      | 423 |   | 11.6 | % |

 

CDMA usage fees reached RMB2.23 billion in 2002,representing 69.3% of CDMA service revenue, while CDMAmonthly fees reached RMB0.71 billion, representing 22.2% of CDMA service revenue.  Service revenue as a percentage of operatingrevenue from CDMA cellular business increased from 78.0% in the first half of2002 to 88.4% for the year ended 2002. At the same time, revenue from sales oftelecommunications products as a percentage of operating revenue from CDMAcellular business decreased from 22.0% in the first half of 2002 to 11.6% forthe year ended 2002.

 

***LongDistance and Data and Internet Revenue***

 

Operating revenue fromour long distance and data and Internet businesses (including revenues from sales oftelecommunications products) reached RMB5.58 billion, an increase of68.6% from 2001.  We believe the rapidgrowth in our long distance and data and Internet businesses demonstrates ourpositive long-term development outlook as an integrated telecommunicationsoperator.

 

*Long Distance Business.** *Operating revenuefrom our traditional circuit switched long distance business increased by 86.7%,from RMB1.49 billion in 2001 to RMB2.78 billion in 2002, as our nationwide longdistance coverage expanded and interconnection improved.

 

*Data and Internet Business.** *We fully leveragedour competitive advantages as an integrated telecommunications operator and, byusing our uniform and advanced integrated data communication platform, wecontinued to effectively expand the usage of our IP telephony services (bothdomestic and international) while also focusing on the development ofvalue-added data services such as FR, ATM and VPN services.  At the same time, we actively pursued thedevelopment of integrated data, voice and video connection services.  As a result of these efforts, operatingrevenue from our data and IP telephony services increased 40.6% from RMB1.55billion in 2001 to RMB2.18 billion in 2002.

 

Operating revenue from our Internet business increasedfrom RMB0.27 billion in 2001 to RMB0.62 billion in 2002, an increase of129.6%.  This growth resulted from ourefforts to continue to develop dedicated and dial-up connection services, andalso explore other markets according to demand, such as VPN/VPDN, IDC, in-boundand out-bound international roaming and actively developed mobile Internetbusinesses, such as “Ruyi Mailbox,” short message download and mobilepayment.

 

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***Paging Revenue***

 

Paging operating revenue (including revenues from sales oftelecommunications products) declined 31.9%, from RMB4.76 billion in2001 to RMB3.24 billion in 2002.  Pagingservice revenue (excluding sales of paging-related telecommunications products)declined 50.2%, from RMB4.34 billion in 2001 to RMB2.16 billion in 2002.  This decline was due to continued decline in thetraditional paging business, while new value-added paging businesses werestill at their initial development stage. We have continued to focus on developing new value-added pagingbusinesses, including by leveraging our other services and overall strengths asan integrated telecommunications operator. Operating revenues from valued-added services grew 241.7%, from RMB0.12billion in 2001 to RMB0.41 billion in 2002 (including inter-segment revenuesfrom other business segments).

 

In accordance with the terms of a CDMA handsetprocurement framework agreement between Unicom Group and Guomai, Unicom Groupagreed to purchase CDMA handsets through Guomai in an effort to accelerate thegrowth of the CDMA handset market and CDMA services. This connected transactionresulted in an increase of revenue from sales of telecommunication productsfrom RMB0.42 billion in 2001 to RMB1.08 billion in 2002.

 

***Operating Expenses***

 

Our operating expenses increased by RMB9.12 billion,or 37.8%, to RMB33.25 billion in 2002 from RMB24.13 billion in 2001.  As discussed below, a 36.2% increase indepreciation and amortization expenses, though not as fast as the increase inour total operation revenue, was the single biggest factor in the increase inoperating expenses.  In addition, due tothe launch of our CDMA business, selling and marketing expenses (which includethe amortized portion of deferred customer acquisition costs under special promotionalpackages with certain CDMA contractual subscribers), leased lines and networkcapacities expenses (which include the expenses from the CDMA network leases)and cost of telecommunication equipment sales (which includes the costs of CDMAhandsets sold) all increased faster than our operating revenue in 2002.  Nevertheless, due to our focus on tighteningcost control, increasing operational efficiency from economies of scale andsharing of networks, businesses, subscribers and sales resources, our operatingexpenses as a percentage of total revenue stayed roughly the same at 82.0% in2002, as compared with 82.1% in 2001. We will continue to focus on cost control and optimization of ourexpense structure in order to ensure continued growth in earnings.

 

 

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The table below illustrates the major expense items inthe years 2000, 2001 and 2002 and their respective share of total operatingrevenue.

 
|                                        |   | **For the  year ended December 31,** |   |
|---------------------------------------------|--------|--------------------------------------|--------|
|                                        |   | **2000**                             |   | **2001** |   | **2002** |   |
|                                        |   | **RMB in****million**                |   | **%****of  Total  Revenue** |   | **RMB in****million** |   | **%****of  Total  Revenue** |   | **RMB in  million** |   | **%****of  Total  Revenue** |   |
| Total Operating  Expenses                   |   | 18,470                               |   | 78.0 | % | 24,129 |   | 82.1 | % | 33,253 |   | 82.0 | % |
| Leased lines and  network capacities        |   | 1,158                                |   | 4.9 | % | 853 |   | 2.9 | % | 1,583 |   | 3.9 | % |
| Interconnection  charges                    |   | 1,380                                |   | 5.8 | % | 2,073 |   | 7.1 | % | 3,230 |   | 8.0 | % |
| Depreciation and  amortization              |   | 5,734                                |   | 24.2 | % | 8,262 |   | 28.1 | % | 11,256 |   | 27.7 | % |
| Personnel                                   |   | 1,770                                |   | 7.5 | % | 2,487 |   | 8.5 | % | 3,335 |   | 8.2 | % |
| Selling and  marketing                      |   | 2,492                                |   | 10.5 | % | 3,613 |   | 12.2 | % | 5,981 |   | 14.8 | % |
| General,  administrative and other expenses |   | 3,743                                |   | 15.8 | % | 5,499 |   | 18.7 | % | 5,632 |   | 13.9 | % |
| Cost of  telecommunications products sold   |   | 2,193                                |   | 9.3 | % | 1,342 |   | 4.6 | % | 2,236 |   | 5.5 | % |

 

*Leased**Lines and**Network**Capacities.*  Weeffectively reduced our leased lines expenses by extending and optimizing ournationwide fiber optic network and improving the allocation and coordination ofnetwork resources.  However, as a resultof the additional lease expense of RMB0.89 billion incurred in connection withthe lease of CDMA network capacities from Unicom Group beginning in January2002, our leased lines and network capacities expense increased by 85.5%, fromRMB0.85 billion in 2001 to RMB1.58 billion in 2002.  Leased lines and network capacities expense as a percentage oftotal operating revenue increased from 2.9% in 2001 to 3.9% in 2002.** **Theforegoing factors, as well as decreased paging service volumes, resulted in a55.7% decrease in leased line expenses in our paging business, from RMB0.31billion in 2001 to RMB0.14 billion in 2002.

 

*Interconnection Charges.*  Interconnection charges increased by 55.8%,from RMB2.07 billion in 2001 to RMB3.23 billion in 2002, primarily due togrowth of such expense in our cellular businesses, including from the launch ofour CDMA cellular business, as well as in our long distance business.  The growth in this expense was primarily dueto the growth of our service volumes in these businesses, including from theexpansion of our networks and our subscriber base, and as a result, increasedinterconnection traffic volume. Interconnection charges as a percentage of total operating revenueincreased from 7.1% in 2001 to 8.0% in 2002.

 

*Depreciation and Amortization.*  Depreciation and amortization expensesincreased by RMB3.0 billion, or 36.2%, from RMB8.26 billion in 2001 to RMB11.26billion in 2002.  The increase indepreciation and amortization expenses constituted 32.9% of the RMB9.12 billiontotal increase in our operating expenses, making this expense the biggestfactor in the increase in total operating expenses.  Rising depreciation and amortization expenses resulted fromexpanded network capacity, primarily in connection with the development of theGSM cellular business, and further growth in overall assets.  The share of depreciation and amortizationexpenses as a percentage of total operating revenue decreased from 28.1% in2001 to 27.7% in 2002.

 

*Personnel. *Despite the consistent and rapid growth of ourvarious business segments, we have emphasized efficient and rational allocationof human resources and fully utilized incentive based employeecompensation.  Through our compensationstructure, which is tied to both *individual*performance and our financial results, we are able to promote competition,retain and attract talented employees and make our company more dynamic, andthus steadily raise our productivity. As of the end of 2002, we employed 29,332 employees, a decrease of 2.1%from 29,973 at the end of 2001.  Ourpersonnel expenses were RMB3.34 billion in 2002, constituting 8.2% of totaloperating revenue, a decrease from 8.5% in 2001.  Personnel costs in our paging business declined by 40.8%, fromRMB0.94 billion in 2001 to RMB0.56 billion in 2002, reflecting a decreasednumber of employees in the business. Such employees were in many cases redeployed to our other growingbusinesses, to improve customer service and otherwise address the personnelneeds of such businesses.  This increasein personnel at such businesses was a factor, in the increased personnel costsin those businesses in 2002.

 

 

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*Selling and Marketing.*  Selling and marketing expenses increased byRMB2.37 billion, or 65.5%, from RMB3.61 billion in 2001 to RMB5.98 billion in2002.  The increase in selling andmarketing expenses constituted 26.0% of the RMB9.12 billion total increase inour operating expenses, making this expense the second biggest factor in theincrease in total operating expenses. Selling and marketing expenses as a percentage of total operatingrevenue increased from 12.2% in 2001 to 14.8% in 2002, mainly due to thecontinued growth in the customer base of our various business segments, whichconsequently increased our commission payments to sales agents, and marketingexpenditures in connection with the promotion for our CDMA cellularbusiness.  Of the total amount of theincrease in selling and marketing expenses, RMB1.39 billion were amortizationexpenses related to the customer acquisition costs of certain CDMA contractualsubscribers.

 

Sales commissions increased by 29.8%, from RMB2.82billion in 2001 to RMB3.66 billion in 2002. Advertising and promotion expenses increased by 24.1%, from RMB0.79billion in 2001 to RMB0.98 billion in 2002. Sales and marketing expenses in our GSM cellular business increased by7.1%, from RMB2.49 billion in 2001 to RMB2.66 billion in 2002.  Sales and marketing expenses in our longdistance business increased by 94.5%, from RMB0.16 billion in 2001 to RMB0.31billion in 2002.  Sales and marketingexpenses in our data and Internet business increased by 18.1%, from RMB0.55billion in 2001 to RMB0.65 billion in 2002. The increase in sales and marketing expenses was partially offset by a50.1% decrease in such expenses in our paging business, from RMB0.48 billion in2001 to RMB0.24 billion in 2002.

 

*General, Administrative and OtherExpenses.*  Primarilyas a result of cost cutting in our declining paging business, as well as ourstrict control of administrative expenses in our cellular businesses, ourgeneral, administrative and other expenses increased by only 2.4%, from RMB5.50billion in 2001 to RMB5.63 billion in 2002. As a percentage of total operating revenue, general, administrative andother expenses decreased from 18.7% in 2001 to 13.9% in 2002.

 

Our provision for doubtful debts increased 79.7%, fromRMB0.54 billion in 2001 to RMB0.97 billion in 2002.  The increase mostly occurred in our GSM cellular business, mainlyas a result of revenue growth, increasing market competition and increasedcellular penetration resulting in a greater proportion of lower-end users amongnew GSM cellular subscribers.  Provisionfor doubtful debts as a percentage of total service revenue increased from 1.9%in 2001 to 2.5% in 2002, while provision for doubtful debts as a percentage oftotal service revenue in our GSM cellular business increased from 2.5% in 2001to 2.9% in 2002.  Provision for doubtfuldebts as a percentage of total service revenue in our CDMA cellular businesswas 1.3% in 2002.

 

General, administrative and other expenses in our GSMcellular business increased 10.7% from 2001 to 2002, mainly due to an increasein provision for doubtful debts. General, administrative and other expenses increased 75.7% from 2001 to2002 in our long distance business, and 64.7% in our data and Internet business.

 

*Cost of Telecommunications ProductsSold.*  The cost oftelecommunications products sold increased by 66.6%, from RMB1.34 billion in2001 to RMB2.24 billion in 2002, mainly due to our entry into the CDMA handsetsales market in connection with our launch of the CDMA services since January2002.  These costs of telecommunicationsproducts related to the CDMA handsets that were sold independently, without anyservice contract promotions.

 

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***Operating Income***

 

In 2002, our operating revenue increased by 38.0%,while our operating expenses increased by 37.8%.  As a result, our operating income increased 39.1%, from RMB5.26billion in 2001 to RMB7.32 billion in 2002, and our operating margin increasedslightly from 17.9% in 2001 to 18.0% in 2002.

 

*GSM Cellular Business.*  In our GSM cellular business, operatingincome increased by 36.0%, from RMB5.61 billion in 2001 to RMB7.64 billion in2002, reflecting the 31.8% growth in operating revenue, as well as our effortsto control operating expenses, which increased 30.3%.  Our operating margin in our GSM cellular business increased from26.3% in 2001 to 27.2% in 2002

 

*CDMA Cellular Business.*  We incurred an operating loss of RMB0.99billion in 2002 for our CDMA business. We incurred an operating loss of RMB0.60 billion for the first sixmonths of 2002 and an operating loss of RMB0.39 billion in the second half of2002, reflecting improving performance as that business continued to developfrom its launch in January 2002.

 

*Long Distance Business.*  In our long distance business, althoughoperating revenue grew 47.0% in 2002, operating income increased 4.9%, fromRMB0.97 billion in 2001 to RMB1.02 billion in 2002, primarily because of fasterincreases in interconnection expenses, sales and marketing expenses and generaland administrative expenses.  As aresult, our operating margin in our long distance business, while remaininghigh at 29.6% in 2002, decreased from 41.4% in 2001.

 

*Data and Internet Business.*  In our data and Internet businesses, we hadan operating income of RMB0.38 billion in 2002, as compared to an operatingloss of RMB0.27 billion in 2001.  Thisresulted from the continued rapid growth, at 58.2%, in operating revenues inthis business, together with our successful efforts to control operatingexpenses, which grew 24.3%.

 

*Paging Business.*  As our traditional paging business continued todecline, our focus on the development of new value-added paging servicesresulted in operating losses declining from RMB0.97 billion in 2001 to RMB0.62billion in 2002.

 

***Net Income***

 

*Financial**Income and**Expenses.*  Our financial income decreased from RMB2.10billion in 2001 to RMB0.47 billion in 2002, mainly due to a decline in interestincome resulting from a reduction in our short term bank deposits (which werelargely original proceeds from our initial public offering) and overall reducedapplicable interest rates.  Ourfinancial expenses decreased by 23.1%, from RMB1.92 billion in 2001 to RMB1.47billion in 2002, primarily reflecting lower applicable interest rates.  The above factors resulted in a netfinancial expense of RMB1.00 billion in 2002, as compared to net financialincome of RMB0.18 billion in 2001.

 

*Income**Tax.*  Our income taxincreased from RMB0.90 billion in 2001 to RMB1.72 billion in 2002. Oureffective tax rates in 2001 and 2002 were 16.4% and 27.3%, respectively.  The higher effective tax rate in 2002, ascompared with 2001, was mainly due to the greater proportion, in income beforetax for 2001, represented by interest income from short-term bank deposits inHong Kong (largely proceeds from our initial public offering), which was notsubject to income tax in 2001. Upon the adoption of HK SSAP 12 in 2003, we haverecognized the deferred tax assets relating to the provision for doubtful debtspreviously not recognized. This change in accounting policy has resulted in adecrease in income tax by approximately RMB145 million and RMB31 million forthe years ended December 31, 2001 and 2002, respectively. See Note 3(a) to theconsolidated financial statements for further details.

 

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*Net**Income.*  For reasonsanalyzed in the above discussion, our net income decreased slightly by 0.08%,from RMB4.601billion in 2001 to RMB4.598 billion in 2002. Earnings per sharewas reduced by 0.27%, from RMB0.367 in 2001 to RMB0.366 in 2002.

 

***Impact of Differences between HK GAAP and US GAAP***

 

In addition to the above management discussion andanalysis of our results of the operation under HK GAAP between the years endedDecember 31, 2002 and 2001, in connection with the preparation andreconciliation of our consolidated financial information in accordance with USGAAP, we believe the following significant accounting differences between HKGAAP and US GAAP would have a significant impact on our management discussionand analysis of the results of our operation between the years ended December31, 2002 and 2001 under US GAAP.  Seealso Note 41 to the consolidated financial statements for a complete summary ofall significant accounting differences between HK GAAP and US GAAP that arerelevant to us.

 

Under HK GAAP, the acquisition of Unicom New Centuryon December 31, 2002 has been accounted for under the purchase method.Accordingly, the acquired results of operations have been incorporated into ouroperating results only from the date of the acquisition. In contrast, under USGAAP, our acquisition of Unicom New Century has been accounted for as atransfer of businesses under common control. Under this method, the acquiredassets and liabilities have been accounted for at historical cost under US GAAPand the consolidated financial statements prepared under US GAAP for allperiods presented have been retroactively restated as if the acquired entityhad always been part of the acquirer.

 

In addition, under HK GAAP, we recognized upfrontnon-refundable revenue, such as connection fee, when received upon completionof activation services. Under US GAAP, this upfront non-refundable revenue andthe related direct incremental costs incurred are deferred and recognized overthe estimated customer service periods.

 

Under HK GAAP, goodwill is amortized over the expectedeconomic lives of the acquired businesses. Under US GAAP, upon the adoption ofStatements of Financial Accounting Standards No. 142 “Goodwill and OtherIntangible Assets” (“SFAS 142”) by us on January 1, 2002, we no longer amortizegoodwill but, rather, assess the goodwill of each identified reporting unit forimpairment annually.  The adoption ofSFAS 142 has resulted in a cumulative effect of accounting change ofRMB42,175,000 (net of tax impact in the amount ofRMB20,773,000) on January 1, 2002 and has been reflected in our condensedconsolidated statement of income for the year ended December 31, 2002 under USGAAP.

 

Other than the above, there are no major materialdifferences between HK GAAP and US GAAP that would have a significant impact onthe discussion and analysis of our results of operations between the yearsended December 31, 2002 and 2001. Taking into account the operating results ofthe acquired business, our combined operating revenue under US GAAP increasedfrom RMB32.50 billion in 2001 to RMB50.42 billion in 2002, representingan increase of 55.1%. Our net income under US GAAP decreased by 2.5% from RMB5.16billion in 2001 to RMB5.03 billion in 2002.

 

***Liquidity and Capital Resources***

 

***Working Capital and Cash Flows***

 

As of the end of 2003, we had RMB9.22 billion of cashand cash equivalents and RMB0.91 billion of short-term bank deposits.  As of the end of 2003, we had negativeworking capital (current assets minus current liabilities) of RMB21.66 billion,compared to negative working capital of RMB12.71 billion at the end of 2002.  The decrease in working capital resulted primarilyfrom (i) the increase in short-term bank loans to replace long-term bank loans;(ii) the cash payment for the acquisition of Unicom New World; and (iii)increased indebtedness as a result of the indebtedness of the newly-acquiredUnicom New World.  We believe that wewill have access to financing, in particular bank financing in the PRC andelsewhere, which together with net cash inflows from operations will besufficient to fund our capital and liquidity needs.

 

 

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The following table sets forth cash inflows andoutflows in 2001, 2002 and 2003.

 
|                                                     |   | **For the  year ended December 31,** |   |
|----------------------------------------------------------|--------|--------------------------------------|--------|
|                                                     |   | **2001**                             |   | **2002** |   | **2003** |   |
|                                                     |   | **(RMB in  millions)**               |   |
| Net cash inflows  from operating activities              |   | 11,078                               |   | 13,054 |   | 22,565 |   |
| Net cash  outflows from investing activities             |   | (46,125                              | )      | (5,166 | ) | (19,051 | ) |
| Net cash  (outflows) inflows before financing activities |   | (35,047                              | )      | 7,888 |   | 3,514 |   |
| Net cash inflows  (outflows) from financing activities   |   | 8,743                                |   | (11,868 | ) | (8,778 | ) |
| Net decrease in  cash and cash equivalents               |   | (26,304                              | )      | (3,980 | ) | (5,264 | ) |

 

Net cash inflows from operating activities increasedby 73.0%, from RMB13.05****billion in2002 to RMB22.57 billion, mainly reflecting the growth in our business andreduction in our capital expenditure. Net cash inflows from operations increased from RMB15.68 billion in 2002to RMB26.45 billion in 2003.  Thisincrease was offset by an increase in net cash outflows from returns oninvestments and servicing of finance and taxation, from RMB2.62 billion in 2002to RMB3.88 billion in 2003.  Thisincrease in outflows in 2003 principally reflected net interest paid in theamount of RMB2.34 billion in 2003, as compared with net interest paid in theamount of RMB1.27 billion in 2002.

 

Net cash outflows from investing activities wereRMB19.05 billion in 2003, compared to RMB5.17 billion in 2002.  This increase in net cash outflows frominvesting activities in 2003 primarily reflected the net cash effects from thepurchase of Unicom New World and the purchase of other assets, partially offsetby the net cash effects from the sale of Guoxin Paging.

 

Net cash outflows from financing activities wereRMB8.78 billion in 2003, a decrease from the outflow of RMB11.87 billion in2002, resulting primarily from a decrease in payables to Unicom Group, RMB0.72billion in 2003 as compared to RMB1.39 billion in 2002, and more proceeds fromlong-term bank loans, RMB11.08 billion in 2003, as compared to RMB7.76 billionin 2002.

 

***Indebtedness and Capital Structure***

 

The following table sets forth the amount of cash,assets, short-term and long-term debt, equity as well as debt-to-assets anddebt-to-equity ratios as of the end of 2001, 2002 and 2003.

 
|                                                   |   | **As of  December 31,**                    |   |
|--------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                   |   | **2001**                                   |   | **2002** |   | **2003** |   |
|                                                   |   | **(RMB in  millions, except percentages)** |   |
| Cash and cash  equivalent and short-term bank deposits |   | 43,335                                     |   | 19,259 |   | 10,133 |   |
| Total assets                                           |   | 128,278                                    |   | 149,628 |   | 149,838 |   |
| Short-term debt                                        |   | 7,933                                      |   | 15,330 |   | 18,173 |   |
| Long-term debt                                         |   | 36,337                                     |   | 37,686 |   | 36,213 |   |
| Minority  interests                                    |   | 829                                        |   | 566 |   | — |   |
| Shareholders’  equity                             |   | 62,054                                     |   | 66,653 |   | 69,615 |   |
| Debt-to-assets  ratio(1)                               |   | 42.1                                       | %      | 44.6 | % | 43.9 | % |
| Debt-to-equity  ratio(2)                               |   | 72.7                                       | %      | 80.4 | % | 78.1 | % |

 

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(1)      Debt-to-assets ratio = (long term debt + short terminterest bearing debt + minority interests)/(long term debt + short terminterest bearing debt + minority interests + shareholders’ equity).

 

(2)      Debt-to-equity ratio = (long term debt + short terminterest bearing debt + minority interests)/shareholders’ equity.

 

 

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Our debt-to-assets ratio decreased****from 44.6% at the end of2002 to 43.9% at the end of 2003. Our debt-to-equity ratio decreased****from 80.4% at the end of 2002 to 78.1%at the end of 2003.  The sum of ourlong-term and short-term interest bearing debt exceeded****the amount of our cash andcash equivalents and short-term bank deposits by RMB44.25 billion as of December 31,2003.  We continue to seek to optimizeour capital structure, develop multiple financing sources and reduce overallfinancing costs.

 

Outstanding short-term and long-term bank loans,denominated in RMB or the U.S. dollar, increased****from RMB53.02 billion at theend of 2002 to RMB54.39 billion at the end of 2003.  Our long-term bank loans generally bearfloating interest rates that ranged from 0.28% to 0.44% per annum in 2003 with maturitythrough 2010.** **The loan agreementsdo not include financial performance or other covenants which materiallyrestrict our operations or those of CUCL, Unicom New Century or Unicom NewWorld, our principal operating subsidiaries in China.  As of December 31, 2003, short-term bank loans of approximatelyRMB70million and long-term bank loans of approximately RMB11.6billion were guaranteed by Unicom Group.

 

In September 2003 we entered into a US$700 millionterm loan facility with 13 financial institutions, which is consisted of threetranches: a three-year US$200 million tranche, with an interest rate of 0.28%over the US$ LIBOR per annum, a five-year US$300 million tranche, with aninterest rate of 0.35% over the US$ LIBOR per annum, and a seven-year US$200million tranche , with an interest rate of 0.44% over the US$ LIBOR per annum.

 

In February 2004, our operating entity, CUCL, enteredinto a US$500 million term loan facility with 11 financial institutions, whichis repayable in three years at an interest rate of 0.40% over the US$ LIBOR perannum.

 

***Contractual Obligations and Commercial Commitments***

 

The following tables set forth the amount of ouroutstanding contractual cash obligations as of December 31, 2003.  

 
|                          |   | **Payments  Due by Period (RMB in millions)** |   |
|-------------------------------|--------|-----------------------------------------------|--------|
| **Contractual  Obligations**  |   | **Total**                                     |   | **Due in  2004** |   | **Due in  2005** |   | **Due in  2006** |   | **Due in  2007** |   | **Due in  2008** |   | **Due after  2008** |   |
| Long-term bank  Loans(1)      |   | 43,411                                        |   | 7,198 |   | 15,550 |   | 11,700 |   | 3,021 |   | 4,117 |   | 1,825 |   |
| Finance lease  obligations(2) |   | 125                                           |   | 25 |   | 8 |   | 7 |   | 7 |   | 6 |   | 72 |   |
| Capital  Commitments(3)       |   | 7,907                                         |   | 7,907 |   | — |   | — |   | — |   | — |   | — |   |
| Operating  Leases(3)(4)       |   | 9,495                                         |   | 7,150 |   | 468 |   | 357 |   | 302 |   | 264 |   | 954 |   |
| Other  Commitments(3)(5)      |   | 920                                           |   | 920 |   | — |   | — |   | — |   | — |   | — |   |
| Total  obligations            |   | 61,858                                        |   | 23,200 |   | 16,026 |   | 12,064 |   | 3,330 |   | 4,387 |   | 2,851 |   |

 

----

(1)      See consolidated financial statements, Note 28  “Long-term Bank Loans”.

 

(2)      See consolidated financial statements, Note 29  “Obligations Under Finance Leases”.

 

(3)      See consolidated financial statements, Note 37  “Contingencies and Commitments”.

 

(4)      The operating leases commitment as disclosed aboveinclude the CDMA network capacity leasing arrangement entered into with UnicomGroup and its subsidiary Unicom Horizon by our wholly-owned subsidiaries, CUCL,Unicom New Century and Unicom New World, in our cellular service areas.  See “Critical Accounting Policies 3⁄4Lease of CDMA Network Capacity”; “Business Overview 3⁄4Cellular Services 3⁄4 CDMA Cellular Services - OurLeasing of CDMA Networks from Unicom Group” under Items 4, “Major Shareholdersand Related Party Transactions 3⁄4 Related Party Transactions -Leasing of CDMA Network Capacity” under Item 7 and Note 37(b)  “Contingencies andCommitments 3⁄4 Operating Lease Commitment” to theconsolidated financial statements for details.

 

(5)      Other commitments represented our commitment topurchase CDMA handsets from vendors. See Note 37(c)“Contingencies and Commitments 3⁄4 Commitment to purchase CDMA handsets” tothe consolidated financial statements.

 

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***Capital Expenditures***

 

The following table sets forth our historical andplanned capital expenditure requirements for the periods indicated.  Actual future capital expenditures maydiffer from the amounts indicated below. 

 
|                              |   | **For the  years ended December 31,** |   |
|-----------------------------------|--------|---------------------------------------|--------|
|                              |   | **2002**                              |   | **2003** |   | **2004** |   |
|                              |   | **(RMB in  billions)**                |   |
| Cellular(1)                       |   | 7.9                                   |   | 8.91 |   | 6.53 |   |
| Long distance,  data and Internet |   | 1.94                                  |   | 2.13 |   | 1.50 |   |
| Transmission  network(2)          |   | 4.65                                  |   | 4.55 |   | 3.43 |   |
| Paging                            |   | 0.21                                  |   | 0.04 |   | — |   |
| Others(3)                         |   | 4.24                                  |   | 4.13 |   | 7.89 |   |
| Total                             |   | 18.94                                 |   | 19.76 |   | 19.35 |   |

 

----

(1)      The capital expenditures for 2002 reflect capitalexpenditures for our cellular business in 12 provinces, municipalities andautonomous regions; while capital expenditures for 2003 represent 21 provinces,municipalities and autonomous regions; and capital expenditures for 2004onwards represent 30 provinces, municipalities and autonomous regions,including the 9 provinces and autonomous regions which we acquired at the endof 2003.

 

(2)      Expenditures on transmission network refers to investment in theinter-province and intra-province backbone transmission network, the localnetwork and the access network.

 

(3)      Other expenditures represent investment in telecom equipmentbuildings, supporting systems and miscellaneous items.

 

Capital expenditures in 2003totaled RMB19.76 billion.  Capital expenditures attributableto the GSM cellular business, the long distance, data and Internet businesses,the paging business, the transmission network and other projects were RMB8.91billion, RMB2.13 billion, RMB0.04 billion, RMB4.55 billion, and RMB4.13billion, respectively.  Expenditures forother projects were mainly related to the set up of the billing, customerservice and information system, office building, operational maintenance andresearch and development.

 

***Projected capital expenditures for 2004 is RMB19.35 billion(RMB17.87 billion for the businesses of CUCL and Unicom New Century and RMB1.48billion for the businesses of Unicom New World), which will be used mostly toimprove the GSM network and network transmission infrastructure.***

 

***We expect to fund our capital expenditure needs with cashgenerated from operating activities, capital market financing and short-term andlong-term bank loans.  See “Risk Factors– Risks Relating to Our Business – Our inability to fund our capitalexpenditure requirements may adversely affect our growth and profitability”under Item 3.***

 

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**US GAAP Reconciliation**

 

Our consolidated financial statements are prepared inaccordance with HK GAAP, which differs in certain material respects from USGAAP.  Significant differences relateprimarily to the effect of the acquisitions of Unicom New Century, Unicom NewWorld and the sale of Guoxin Paging, treatments of the upfront non-refundablerevenue and the related direct incremental costs, employees’ housing benefits,revaluation of properties performed in connection with the reorganization,impairment of long-lived assets and goodwill, and additional disclosurerequirements for share options scheme and measurement of costs in investment inequity securities.  Reconciliationbetween HK GAAP and US GAAP which affect our net income and shareholders’ equityarising from the aforementioned differences are included in Note 41 tothe consolidated financial statements included in this annual report.  In addition, additional disclosures on thecondensed financial information under US GAAP, including condensed statementsof income, changes in shareholders’ equity and cash flows information, as wellas condensed balance sheets information and other additional financialinformation which have been restated for relevant periods presented to reflectthe impact of the effects of the acquisitions of Unicom New Century and UnicomNew World and the sale of Guoxin Paging under common control are included inNote 41to the consolidated financial statements presented in this annual report.

 

## **Item 6**.  Directors, Senior Management and Employees

 

***A.***            ***Directors and Senior Management***

 

The following table sets forth certain informationconcerning our current directors and executive officers.  

 
| **Name**              |   | **Age** |   | **Position**                                                                                |
|-----------------------|--------|---------|--------|---------------------------------------------------------------------------------------------|
| Wang Jianzhou         |   | 55      |   | Chairman of the Board of Directors; Executive Director;  Chief Executive Officer; President |
| Tong Jilu             |   | 45      |   | Executive Director; Chief Financial Officer                                                 |
| Zhao Le               |   | 48      |   | Executive Director; Vice President                                                          |
| William Lo Wing Yan   |   | 43      |   | Executive Director; Vice President                                                          |
| Ye Fengping           |   | 40      |   | Executive Director; Vice President                                                          |
| Liu Yunjie            |   | 61      |   | Non-Executive Director                                                                      |
| Wu Jinglian           |   | 74      |   | Independent Non-Executive Director                                                          |
| Craig O. McCaw        |   | 54      |   | Independent Non-Executive Director                                                          |
| Shan Weijian          |   | 50      |   | Independent Non-Executive Director                                                          |
| C. James Judson       |   | 59      |   | Alternate Director to Craig O. McCaw                                                        |
| Linus Cheung Wing Lam |   | 55      |   | Independent Non-Executive Director                                                          |

 

Wang Jianzhou was appointed in April 2000 as an Executive Director ofour company and subsequently became our President responsible for ourday-to-day management andoperations. Mr. Wang was elected as the Chairman of the Board ofDirectors and Chief Executive Officer on August 28, 2003, responsible for ouroverall management. Mr. Wang,a professor-level senior engineer, graduated in 1985 from the Department ofManagement Engineering at Zhejiang University with a master’s degree. From 1992to 1996, Mr. Wang served as Deputy Director General and later Director Generalof the Posts and Telecommunications Bureau of Hangzhou City and as DeputyDirector General of the Posts and Telecommunications of Zhejiang Province. From1996, Mr. Wang served as Director General of the Department of Planning andConstruction of the MPT and later as Director General of the Department of GeneralPlanning of the MII.  Since February1999, Mr. Wang has served as Director and Executive Vice President of UnicomGroup and was appointed as President in February 2001. Mr. Wang was appointedthe Chairman of Unicom Group in June 2003. With many years of experience in the telecommunications industry inChina, Mr. Wang has extensive knowledge and experience in telecommunicationsoperations and management.

 

 

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Tong Jilu was appointed in February 2004 as anExecutive Director and Chief Financial Officer of our company. He assists thePresident in handling issues relating to finance. Mr. Tong graduated in 1987from the Department of Economic Management at the Beijing University of Postsand Telecommunications. He holds a Master Degree in Business Administrationfrom National University of Australia; and is an Executive Director of theAssociation of Chief Accountants in China. From August 1989 to October 1998, heserved as Deputy Director and later Director of the Finance Bureau of the Postsand Telecommunications Administration of Liaoning Province. From November 1998to June 2000, Mr. Tong served as Deputy Director General of the Posts andTelecommunications Administration and the Posts Office of Liaoning Province.Mr. Tong joined Unicom Group in July 2000 and served as Chief Accountant ofUnicom Group from July 2000 to February 2001. Since March 2001, Mr. Tong hasserved as Vice President of Unicom Group. He is now a Director in Unicom Groupand China United Telecommunications Corporation Limited (“A Share Company”); anda Director and Vice President in China Unicom Corporation Limited (OperationCompany). Mr. Tong has extensive experience in telecommunications managementand finance management of listed company.

 

Zhao Le was appointed in February 2004 as an ExecutiveDirector and Vice President of our company. He assists the President inmanaging day-to-day operations. Mr. Zhao is a senior engineer, graduated in1989 from the Schools of Economics & Management at Tsinghua University withMaster Degree in Industrial Management. From 1990 to 1992, Mr. Zhao served asthe Station-In-Charge of the Earth Station of Satellite Communication of LongDistance Telecommunication Bureau of Shanghai. From 1992 to 1994, Mr. Zhaoserved as Deputy Chief Economist of Long Distance Telecommunication Bureau ofShanghai. From 1995 to 1998, Mr. Zhao served as Director of the PlanningDepartment of the Posts and Telecommunications Administration of Shanghai. Mr.Zhao joined Unicom Group since 1999. From 1999 to 2003, he served as GeneralManager of China Unicom Shanghai Branch. Mr. Zhao is now the Chairman of ChinaUnited Telecommunications (Hong Kong) Ltd; and Executive Director and VicePresident of China Unicom (Hong Kong) Group Limited. Mr. Zhao has been in themanagement role of telecommunications operations for a long period and hasextensive telecommunications management experience.

 

William Lo Wing Yan was appointed in July 2002 as anExecutive Director and Vice President of our company.  Mr. Lo assists the President in handling investor relations andissues relating to international co-operation. Mr. Lo graduated from Cambridge University in 1987, with a PhD degree inGenetic Engineering. From 1988 to 1990, Mr. Lo was a management consultant withMcKinsey & Company. From 1994 to 1998, Mr. Lo was the Founding ManagingDirector of Hongkong Telecom IMS Limited. From 1998 to 1999, Mr. Lo served as Chief Executive Officer ofCitibank’s Global Consumer Banking Business for Hong Kong and Macau. Mr. Lo isat present the non-executive Chairman of WPP Greater China and also serves as anon-executive director on the board of a number of publicly listed companies inHong Kong and New York, including Softbank Investment International Ltd, OceanGrand Chemicals Holdings Ltd, Panorama International Holdings Ltd and Nam TaiElectronics, Inc. In 1999, Mr. Lo was appointed as a Justice of the Peace (JP)of Hong Kong. In 2003, Mr. Lo was appointed as Committee Member of ShantouPeople’s Political Consultative Conference. Mr. Lo has extensive workexperience and management expertise in the areas of information technology,telecommunications and banking industry.

 

Ye Fengping was appointed in January 2003 as an Executive Director and VicePresident of our company. Mr. Ye assists the President in handling general administrationand media relations. Mr. Ye, a senior engineer, graduated from NanjingPosts and Telecommunications Institution in 1984, with a major inTelecommunications Engineering and obtained a Master of Business Administrationdegree from the University of Minnesota’s Carlson School. From 1984 to 1998,Mr. Ye worked for the Shenzhen Posts and Telecommunications Bureau andonce served as Deputy Department Head in the Materials Management Departmentand General Manager of the Materials Supply Company of the Bureau. From 1998 to2000, Mr. Ye worked for the Shenzhen Telecommunications Bureau as Chief of theCorporate Development Department. Mr. Ye joined China Unicom in April 2000 asDeputy General Manager and later General Manager of China Unicom CorporationLimited’s Shenzhen Branch. He also served as Deputy General Manager of ChinaUnicom Corporation Limited’s Guangdong Branch and General Manager of the Salesand Marketing Department of Unicom Group. Mr. Ye has twenty years of experiencein the telecommunications industry and extensive experience in marketingplanning and management.

 

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Liu Yunjie was appointed in February 2004 as a Non-Executive Director of ourcompany.  Mr. Liu is a senior engineerand graduated from the Department of Applied Physics at Beijing University in1968. From 1983 to 1995, Mr. Liu served as Deputy Director General and laterDirector General of the Institute of Data Communication Research of the MPT.  From 1995 to 1998, Mr. Liu served as DeputyDirector General of the Directorate General of Telecommunications and asDirector General of the Bureau of Data Communications of the MPT.  Mr. Liu was also President of the Instituteof Postal Science Research and Planning of the MPT from 1998 to 1999. SinceApril 1999, Mr. Liu has served as the Chief Engineer and later Vice Presidentof Unicom Group.  Mr. Liu wasVice President of our company from May 2000 to January 2004.  He is now a director of the A Share Companyand Vice President of Unicom New Century Telecommunications.  Mr. Liu has extensive experience intelecommunications technology and management, particularly in the area of datacommunications.

 

Wu Jinglian was appointed in April 2000 as an Independent Non-ExecutiveDirector of our company. Mr. Wu is a senior researcher at the DevelopmentResearch Center of the State Council (DRC) and a professor at the GraduateSchool of the Chinese Academy of Social Sciences and China Europe InternationalBusiness School (CEIBS). Mr. Wu graduated from Fudan University, and waspreviously an Executive Director of the DRC and Deputy Director of theProgramming Office for Economic Reform of the State Council. Mr. Wu has alsobeen a visiting scholar at Yale University, a visiting professor at the Asia-PacificResearch Center of Stanford University and a visiting researcher at theMassachusetts Institute of Technology.

 

Craig O. McCaw was appointed in May 2000 as a Non-Executive Director of ourcompany, and subsequently became an Independent Non-Executive Director in June2002. Mr. McCaw is Chairman, Chief Executive Officer and President of EagleRiver Investments LLC, a private company that makes strategic investments intelecommunications ventures. He is a significant shareholder of NextelCommunications, Inc., a company that he successfully reorganized, as well asNextel Partners Inc. He isalso the Chairman of the board of ICO Global Communications (Holdings)Limited.  Mr. McCaw established McCawCellular Communications, Inc. and XO Communications, Inc.  Mr. McCaw has actively participated in bothcellular and cable television trade associations over the years and is a memberby Presidential appointment of the United States National SecurityTelecommunications Advisory Committee. Mr. McCaw graduated from Stanford University in 1973.

 

C. James Judson was appointed in March 2001 as an Alternate Director to Craig O.McCaw of our company.  Mr. Judson is aSenior Lawyer with Davis Wright Tremaine, a Seattle-based law firm with tenoffices worldwide. Mr. Judson was Vice President and General Counsel of EagleRiver, Inc. and a member of Eagle River Investments, LLC, a Kirkland-basedventure capital fund formed by Craig O. McCaw to focus on investmentopportunities in communications. Mr. Judson also serves on the boards of PortBlakely Tree Farms, LP, Garrett and Ring Inc., The Joshua Green Corporation,Sonata Capital and Airbiquity, Inc. Mr. Judson attended Stanford University,graduating in 1966 with a Bachelor of Arts degree (*cum laude*).  Subsequently,Mr. Judson graduated from Stanford University Law School in 1969 with a JurisDoctor degree. While in law school, he was the Executive Editor of the StanfordLaw Review.

 

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Shan Weijian wasappointed in May 2003 as an Independent Non-Executive Director of ourcompany.  Mr. Shan is Managing Directorof Newbridge Capital.  Mr. Shan serveson the boards of Bank of China (Hong Kong), Korea First Bank, Taiwan CementCorporation International, Baoshan Iron and Steel, among others.  Before joining Newbridge, Mr. Shan was aManaging Director at J.P. Morgan.  Priorto J.P. Morgan, he was a professor at the Wharton School of University of Pennsylvania.  His earlier employers include the WorldBank, Grahman and James, a law firm based in San Francisco, and BeijingUniversity of International Business and Economics.  Mr. Shan holds a Ph.D. from the University of California-Berkeley.

 

Linus Cheung Wing Lam was appointed in May 2004 as an Independent Non-Executive Director of our company.  Prior to his appointment, Mr. Cheung wasDeputy Chairman of PCCW Limited.  Priorto the merger of Pacific Century Cyberworks Limited and Cable & WirelessHKT Limited (Hongkong Telecom), Mr. Cheung was the Chief Executive of HongkongTelecom and an Executive Director of Cable & Wireless plc in the UnitedKingdom.  Mr. Cheung also worked atCathay Pacific Airways for 23 years before departing as Deputy ManagingDirector.  In 1990 he was appointed anOfficial Justice of the Peace and in 1992 he was appointed a Non-officialJustice of the Peace.  Mr. Cheung iscurrently a member of the Chinese People’s Political Consultative Conferencefor the Tianjin Municipal Government. He received a bachelor’s of social science degree with honors and adegree in Management Studies from the University of Hong Kong.  Mr. Cheung is also an Honorary Fellow of theUniversity of Hong Kong and of The Chartered Institute of Marketing in theUnited Kingdom.

 

***B.***            ***Compensation***

 

The aggregate compensation paid by us to our directorsand executive officers as a group in 2003 was approximately RMB20.74****million, including retirement and otherbenefits.  Each of our executive directors andexecutive officers enters into a bonus agreement with us that ties the amountof bonus the director or officer will receive at the end of a year to ouroperating results of the year and the job performance of the director orofficer.  Some of our directorsand executive directors also hold options to purchase shares in ourcompany.  See “E.  Share Ownership” below for detaileddescriptions of our share option schemes and options granted to our directorsand executive officers.

 

***C.***            ***Board Practices***

 

**General**

 

Pursuant to our Articles of Association, at eachannual general meeting, one-third of our directors retire from office byrotation except for any director holding office as Chairman or Chief ExecutiveOfficer.  The retiring Directors areeligible for re-election.  The Board mayat any time appoint a new director to fill a vacancy or as an additionaldirector.  The Board may also appointand remove our executive officers. Messrs. Wang, Wu and McCaw were appointed as directors in 2000.  Mr. Tong was appointed as an ExecutiveDirector and Chief Financial Officer in February 2004.  Mr. Zhao was appointed as an ExecutiveDirector and Vice President in February 2004. Mr. Judson was appointed as analternate director to our independent non-executive director Craig O. McCaw inMarch 2001.  Mr. Lo was appointed as anExecutive Director and Vice President in July 2002.  Mr. Ye was appointed as an Executive Director and Vice Presidentin January 2003.  Mr. Shan was appointedas an Independent Non-Executive Director in May 2003.  Mr. Liu was appointed as a Non-Executive Director in February2004.  Wang Jianzhou, Lee Hon Chiu andWu Jinglian were re-appointed as directors in May 2002.  Tan Xinghui resigned as Executive Directorand Vice President in June 2002 and January 2003, respectively.  Yang Xian Zu resigned as Executive Director,Chairman and Chief Executive Officer in August 2003.  In February 2004, Shi Cuiming resigned as Executive Director andExecutive Vice President, Ge Lei resigned as Non-Executive Director and Mr. Liuresigned as Vice President.  Mr. Cheungwas appointed as an Independent Non-Executive Director in May 2004 to replacethe former Independent Non-Executive Director Lee Hon Chiu.  No benefits are payable to our directors orexecutive officers upon termination of their service with us in accordance withthe provisions of their service agreement.

 

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**Audit Committee**

 

The audit committee reviews and supervises ourfinancial reporting process and internal financial controls.  The duties of the audit committee includethe following:

 

•              consideringand approving the appointment, resignation and removal of our external auditorand the auditor’s fees;

 

•              reviewingour interim and annual financial statements and disclosure before submission tothe board of directors;

 

•              discussingwith the auditor any problems and reservations arising from the audit of theinterim and final results;

 

•              reviewingany correspondence from the auditor to the management and the responses of themanagement; and

 

•              reviewingthe relevant reports concerning our internal controls and procedures.

 

The Board of Directors recently approved certainamendments to the duties of the audit committee, including strengthening ofresponsibilities in the following areas:

 

•              supervisingthe external auditor, who will directly report to the committee;

 

•              pre-approvingthe audit and non-audit services to be provided by the external auditor, anddetermining whether any non-audit services would affect the independence of theauditor; and

 

•              discussingwith the management the timing and procedures for the rotation of the partnerof the auditing firm responsible for the audit of our company and the partnerresponsible for the review of audit-related documents.

 

As of May 31, 2004, the members of the audit committeeare Shan Weijian, Chairman of the committee, Wu Jinglian and Linus Cheung WingLam.

 

**Remuneration Committee**

 

The remuneration committee meets regularly to considerhuman resources issues, issuance of share options and other matters relating tocompensation.  In particular, theremuneration committee makes recommendations to the Board on executivecompensation.  The primary duties of theremuneration committee are to make recommendations to the board regarding theremuneration structure of the executive directors and to determine specificremuneration packages for the executive directors on behalf of the board. Theremuneration committee is also responsible for operating our employee shareoption scheme and any other incentive scheme as they apply to the executivedirectors, including determining the granting of

 

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options to executive directors.  As of May 31, 2004, the members of theremuneration committee are Wu Jianlian, Chairman of the committee, Liu Yunjieand Linus Cheung Wing Lam.

 

### ***D.            Employees***

 

As of December 31, 2003, we had 38,728 employees,which was similar to the 38,250 employees of our company at the end of 2002(including employees in the nine provinces, autonomous regions andmunicipalities we acquired through Unicom New Century at the end of 2002).  These employees are classified by functionas follows:

 
| **By Function**                                 |   | **Number of  Employees** |   |
|-------------------------------------------------|--------|--------------------------|--------|
| Management and  administration                  |   | 6,544                    |   |
| Other general  administration                   |   | 7,631                    |   |
| Marketing and  sales                            |   | 7,135                    |   |
| Technical,  engineering and network maintenance |   | 14,509                   |   |
| Retail and  customer service                    |   | 2,503                    |   |
| General support                                 |   | 406                      |   |
| Total:                                          |   | 38,728                   |   |

 
| **By Business Segment** |   | **Number of  Employees** |   |
|-------------------------|--------|--------------------------|--------|
| Cellular                |   | 28,956                   |   |
| GSM                     |   | 20,281                   |   |
| CDMA                    |   | 8,675                    |   |
|                    |   |                     |   |
| Long distance           |   | 2,092                    |   |
| Data                    |   | 3,285                    |   |
| Internet                |   | 1,621                    |   |
| Paging                  |   | 2,775                    |   |
| Total:                  |   | 38,728                   |   |

 

As of December 31, 2003, we also employed approximately 62,000 temporaryemployees.

 

### ***E.            ShareOwnership***

 

As of May 31, 2004, our directors and executiveofficers as a group do not own any shares in our company.

 

As of May 31, 2004, our directors and executiveofficers as a group hold options for 5,465,200****shares, or less than 0.1% ofour issued and outstanding share capital, including the following optionsgranted under our pre-global offering share option scheme and share optionscheme:

 

*Optionsgranted under the share option scheme*

 
| **Name**              |   | **Number of  Shares Covered** |   | **Expiration  Date**                     |   | **Exercise  Price** |              | **Consideration  Paid** |          |
|-----------------------|--------|-------------------------------|--------|------------------------------------------|--------|---------------------|-------------------|-------------------------|---------------|
| Wang Jianzhou         |   | 420,000  420,000              |   | July 9, 2008  May 20, 2009               |   | HK$  HK$            | 6.18  4.30        |                    | HK$  HK$      | 1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Tong Jilu             |   | 292,000  292,000  292,000     |   | May 31, 2010  July 9, 2008  May 20, 2009 |   | HK$  HK$  HK$       | 15.42  6.18  4.30 |                    | HK$  HK$  HK$ | 1.00  1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Zhao Le               |   | 136,000  204,000              |   | July 9, 2008  May 20, 2009               |   | HK$  HK$            | 6.18  4.30        |                    | HK$  HK$      | 1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Lo Wing Yan,  William |   | 292,000                       |   | May 20, 2009                             |   | HK$                 | 4.30              |                    | HK$           | 1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Ye Fengping           |   | 136,000  132,000  204,000     |   | May 31,2010  July 9, 2008  May 20, 2009  |   | HK$  HK$  HK$       | 15.42  6.18  4.30 |                    | HK$  HK$  HK$ | 1.00  1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Liu Yunjie            |   | 292,000                       |   | May 20, 2009                             |   | HK$                 | 4.30              |                    | HK$           | 1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Wu Jinglian           |   | 292,000  292,000              |   | July 9, 2008  May 20, 2009               |   | HK$  HK$            | 6.18  4.30        |                    | HK$  HK$      | 1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Craig O. McCaw        |   | 292,000  292,000              |   | July 9, 2008  May 20, 2009               |   | HK$  HK$            | 6.18  4.30        |                    | HK$  HK$      | 1.00  1.00 |   |
|                  |   |                          |   |                                     |   |                |              |                    |          |   |   |
| Shan Weijian          |   | 292,000                       |   | May 20, 2009                             |   | HK$                 | 4.30              |                    | HK$           | 1.00 |   |

 

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*Optionsgranted under the pre-global offering share option scheme*

 
| **Name**      |   | **Number of  Shares Covered** |   | **Expiration  Date** |   | **Subscription  Price** |   | **Consideration  Paid** |   |
|---------------|--------|-------------------------------|--------|----------------------|--------|-------------------------|--------|-------------------------|--------|
| Wang Jianzhou |   | 396,200                       |   | May 31, 2010         |   | HK$                     | 15.42  |                    | HK$    | 1.00 |   |
|          |   |                          |   |                 |   |                    |   |                    |   |   |   |
| Liu Yunjie    |   | 292,600                       |   | May 31, 2010         |   | HK$                     | 15.42  |                    | HK$    | 1.00 |   |
|          |   |                          |   |                 |   |                    |   |                    |   |   |   |
| Zhao Le       |   | 204,400                       |   | May 31, 2010         |   | HK$                     | 15.42  |                    | HK$    | 1.00 |   |

 

**Stock Incentive Schemes**

 

We retained a compensation consulting firm to help usdesign stock incentive schemes that align the interests of our management andemployees with those of our shareholders and link their compensation with ouroperating results and share performance.

 

*Share Option Scheme.*  We adopted a share option scheme on June 1,2000 and amended the scheme on May 13, 2002. The amended scheme provides for the grant of options to our employees,including executive directors and non-executive directors.  Any grant of share options to a “connected person”(as defined in the Hong Kong Listing Rules) of Unicom requires approval by ourindependent non-executive directors, excluding any independent non-executivedirector who is the grantee of the option. We plan to grant options****thatcover a total number of ordinary shares not exceeding 10% of the total numberof our issued and outstanding shares as of May 13, 2002.  The option period commences on any dateafter the date on which an option is offered, but may not exceed 10 years fromthe offer date.  The subscription priceof a share in respect of any particular option granted under this share optionscheme will be determined by our board of directors in its discretion at thegrant date, which shall be no less than the higher of: (i) the nominal valueof the shares; (ii) the closing price of the shares on the Hong Kong StockExchange on the grant date in respect of such option; and (iii) theaverage closing price of the shares on the Hong Kong Stock Exchange for thefive trading days immediately preceding the grant date.  As of May 31,****2004, 138,312,800 options granted by us were outstanding andheld by 9 directors and approximately 2,500 of our employees.  As of May 31, 2004, 8,600,000 options withan exercise price of HK$6.18 had been exercised and 194,000 options with anexercise price of HK$4.30 had been exercised.

 

*Pre-Global Offering Share OptionScheme.*  We alsoadopted a pre-global offering share option scheme on June 1, 2000.  As of May 31, 2004, 25,436,600 optionsgranted by us were outstanding and held by 3 directors and approximately 250 ofour employees.  We do not expect togrant further options under this scheme. OnMay 13, 2002, this scheme was amended along with the amendment of the shareoption scheme described above.  Theamended terms of the pre-global offering share option scheme are substantiallythe same as the share option scheme, except for the following:

 

•                                          Thesubscription price of a share in respect of any particular option granted underthe pre-global offering share option scheme is HK$15.42, the offer price in theHong Kong

 

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public offering portionof our initial public offering, excluding brokerage fees and transaction levy.

 

•                                          Theperiod during which an option may be exercised commences two years from thedate of grant and ends 10 years from June 22, 2000.

 

As of December 31, 2003, no options granted under thisscheme had been exercised.

 

## **Item 7**.  Major Shareholders and Related PartyTransactions

 

### ***A.            MajorShareholders***

 

As of the date of this annual report, our controllingshareholder, Unicom Group, through its 26.16% direct interest in Unicom BVI,and its majority-owned subsidiary, China United Telecommunications CorporationLimited, which in turn holds 73.84% of Unicom BVI, beneficially owned9,725,000,020 shares of Unicom, or 77.42% of our total outstanding shares.  See “History and Development of the Company”under Item 4 above.** **Unicom Group is controlled by the Ministry of Financeand a group of approximately fifteen companies, most of which are state-ownedenterprises in China.  Shares owned byUnicom Group do not carry voting rights different from our other issued shares.

 

As of May 31, 2004, most of our record shareholderswere located outside of the United States. In addition, as of May 31, 2004, there were approximately 24.24 millionADSs outstanding, each representing 10 shares and together representing 1.93%of our total outstanding shares or 8.55% of our total outstanding shares notheld by our controlling shareholder.

 

### ***B.            Related PartyTransactions***

 

Principal transactions between us and our controllingshareholder, Unicom Group, include the following categories:

 

•                                          agreementsrelating to the restructuring in connection with our initial public offering;

•                                          agreementsrelating to the restructuring in connection with the acquisition of Unicom NewCentury from Unicom Group;

•                                          agreementsrelating to the acquisition of Unicom New World from Unicom Group and the saleof Guoxin Paging to Unicom Group;

•                                          provisionof ongoing telecommunications and ancillary services by Unicom Group to us;

•                                          mutualprovision of ongoing telecommunications and ancillary services and facilitiesbetween Unicom Group and us;

•                                          mutualprovision of premises between Unicom Group and us;

•                                          leasingof CDMA network capacity by us from Unicom Group and related interconnectionand roaming arrangements; and

•                                          guaranteeof our bank loans by Unicom Group and short-term loans from Unicom Group.

 

**Agreements Relating tothe Restructuring in Connection with Our Initial Public Offering**

** **

***The Reorganization Agreement***

*** ***

In relation to the restructuring in connection withour initial public offering, our wholly-owned subsidiary, CUCL, entered into areorganization agreement with Unicom Group dated April 21, 2000.  This agreement includes the following terms:

 

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(a)                                  UnicomGroup’s agreement to transfer to CUCL the assets and liabilities attributableto the businesses as described “A. History and Development of the Company -The Restructuring of Unicom Group and Our Initial Public Offering in 2000”under Item 4,

 

(b)                                 mutualwarranties and indemnities given by Unicom Group and CUCL in relation to theassets and liabilities transferred to CUCL and in relation to the restructuring,

 

(c)                                  undertakingsby Unicom Group in favor of CUCL, including undertakings:

 

•                                          tohold and maintain all licenses received from the MII in connection with any ofour businesses for our benefit, and to allocate spectrum and to provide otherresources to us;

 

•                                          subjectto applicable Chinese laws and regulations in effect at the relevant time, totake all actions necessary to obtain, maintain, renew and otherwise extend toor for our benefit such governmental or regulatory licenses, consents, permitsor other approvals as we shall require to continue to operate our businesses;

 

•                                          toarrange for us to participate in its international roaming arrangements;

 

•                                          notto engage in any business which competes with our businesses except for theexisting competing businesses of Unicom Group;

 

•                                          togrant us a right of first refusal in relation to any government authorization,license or permit, or other business opportunity to develop any newtelecommunications technology, product or service;

 

•                                          inorder to minimize the risk of competition with our Internet business, to takesteps to dispose of its interest in Beijing Shi Hua within twenty-four monthsfollowing receipt of a notification from us that we intend to provide Internetservices which we consider similar to those provided by Beijing Shi Hua;

 

•                                          toensure that we can continue to use premises for which title documentationcannot be obtained at this time for a period of three years following therestructuring;

 

•                                          notto dispose of any of our shares it beneficially owns or to take or permit anyother actions, including primary issuances of securities by us or CUCL, whichwould result in us or CUCL no longer constituting majority owned subsidiariesof Unicom Group; and

 

•                                          notto seek an overseas listing for any of its businesses or the businesses of itssubsidiaries in which we are engaged or may engage in the future except throughus,

 

(d)                                 anoption granted by Unicom Group to us to acquire Unicom Group’s interest in anytelecommunications interest such as Unicom Paging, Unicom Xingye and UnicomGroup’s CDMA telephony license and business, and

 

(e)                                  acommitment by Unicom Group that it will provide continuous financial support tous when necessary.

 

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***Equity Transfer Agreement***

*** ***

In relation to the restructuring in connection withour initial public offering, we, Unicom Group, China Unicom (Hong Kong) GroupLimited and China Unicom (BVI) Limited entered into an equity transferagreement, dated April 21, 2000.  Thisagreement includes the following terms:

 

(a)                                  UnicomGroup’s agreement to transfer all of its equity interest in CUCL to us;

 

(b)                                 ouragreement to issue shares to China Unicom (BVI) Limited, China Unicom (BVI)Limited’s agreement to issue shares to China Unicom (Hong Kong) Group Limitedand China Unicom (Hong Kong) Group Limited’s agreement to issue shares toUnicom Group;

 

(c)                                  UnicomGroup’s and our agreement that:

 

•                                          weshall be entitled to apply in Hong Kong, Macau, Taiwan and in all placesoutside of China for all trademarks incorporating the word Unicom in Englishand Chinese and the Unicom logo; and

 

•                                          oncethese trademarks have been registered, we will sublicense these trademarks toUnicom Group, CUCL, Guoxin Paging and Guoxin Paging’s subsidiaries on aroyalty-free basis; and

 

(d)                                 warrantiesand indemnities given by Unicom Group to us in relation to CUCL.

 

***Trademark Agreement***

*** ***

Unicom Group is the registered owner of the Unicomtrademark in English and the trademark bearing the Unicom logo, which areregistered at the People’s Republic of China State Trademark Bureau.  Under a PRC trademark license agreemententered into on May 25, 2000 between Unicom Group and CUCL, CUCL and ouraffiliates were granted the right to use these trademarks on a royalty-freebasis for an initial period of five years, renewable at the option ofCUCL.  Under the terms of thisagreement, we and our affiliates are the exclusive licensees of thesetrademarks provided that Unicom Group may also license these trademarks to anyof its existing or future subsidiaries. Unicom Group also agreed to license to CUCL any trademark that itregisters in China in the future which incorporates the word Unicom.

 

CUCL entered into a service agreement with UnicomPaging on August 1, 2001.  Under theterms of the agreement, both parties agreed to license their respectivetrademarks and logos to each other on equitable terms and freeof charge.

 

**Agreements relating tothe Restructuring in connection with Acquisition of Unicom New Century fromUnicom Group**

** **

***The ReorganizationAgreement***

 

In relation to the restructuring in connection withthe acquisition by us of Unicom New Century from Unicom Group, Unicom Groupentered into a reorganization agreement with Unicom New Century, dated November18, 2002.  This agreement includes thefollowing terms:

 

(a)                                  UnicomGroup’s agreement to transfer to Unicom New Century the assets and liabilitiesattributable to the businesses as described under Item 4, “Information on theCompany -

 

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History and Developmentof the Company - Restructuring andAcquisition of Unicom New Century”;

 

(b)                                 mutualwarranties and indemnities given by Unicom Group and Unicom New Century inrelation to the assets and liabilities transferred to Unicom New Century and inrelation to the restructuring; and

 

(c)                                  undertakingsby Unicom Group in favor of Unicom New Century, including undertakings:

 

•                                          tohold and maintain all licenses received from the MII in connection with any ofthe transferred businesses for the benefit of Unicom New Century, and toallocate spectrum and to provide other resources to Unicom New Century;

 

•                                          subjectto applicable Chinese laws and regulations in effect at the relevant time, totake all actions necessary to obtain, maintain, renew and otherwise extend toor for the benefit of Unicom New Century such governmental or regulatorylicenses, consents, permits or other approvals as Unicom New Century mayrequire to continue to operate its businesses; and

 

•                                          notto engage in any business which competes with our businesses except for theexisting competing businesses of Unicom Group.

 

***Conditional Sale and Purchase Agreement***

*** ***

In relation to the acquisition by us of Unicom NewCentury from Unicom Group, we and Unicom BVI entered into a conditional saleand purchase agreement, dated November 20, 2002.  This agreement includes the following terms:

 

(a)                                  UnicomBVI’s agreement to transfer all of its equity interest in Unicom New Century(BVI) Limited, which holds 100% of the equity interest in Unicom New Century,to us;

 

(b)                                 ouragreement to pay Unicom BVI a cash consideration in the amount ofHK$4,523,181,304 (approximately RMB4.8 billion); and

 

(c)                                  warrantiesgiven by Unicom BVI****to us inrelation to Unicom New Century.

 

***Trademark Agreement***

*** ***

Under a trademark license agreement entered into onNovember 20, 2002 between the A Share Company and Unicom New Century, UnicomNew Century and our affiliates were granted the right to use the Unicomtrademarks and logo on a royalty-free basis for an initial period of ten years,renewable for a further ten-year term at the option of Unicom New Century.  The parties will negotiate the royaltypayments during the renewed term; however, in no event will such payment exceedthe royalty payments, if any, paid by Unicom Group’s other wholly- ormajority-owned subsidiaries.  The AShare Company has also agreed to license to Unicom New Century any trademarkthat Unicom Group registers in China in the future which incorporates the wordUnicom.

 

**Agreements relating to theAcquisition of Unicom New World from Unicom Group and the Sale of Guoxin Pagingto Unicom Group**

 

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***The ReorganizationAgreement***

 

In relation to the restructuring in connection withthe acquisition by us of Unicom New World from Unicom Group, Unicom Groupentered into a reorganization agreement with Unicom New World, dated November4, 2003.  This agreement includes thefollowing terms:

 

(a)                                  UnicomGroup’s agreement to transfer to Unicom New World the assets and liabilitiesattributable to the businesses as described under “A. History and Developmentof the Company -Acquisition of Unicom New World and Sale ofGuoxin Paging” under Item 4;

 

(b)                                 mutualwarranties and indemnities given by Unicom Group and Unicom New World inrelation to the assets and liabilities transferred to Unicom New World and inrelation to the restructuring; and

 

(c)                                  undertakingsby Unicom Group in favor of Unicom New World, including undertakings:

 

•                                          tohold and maintain all licenses received from the MII in connection with any ofthe transferred businesses for the benefit of Unicom New World, and to allocatespectrum and to provide other resources to Unicom New World;

 

•                                          subjectto applicable Chinese laws and regulations in effect at the relevant time, totake all actions necessary to obtain, maintain, renew and otherwise extend toor for the benefit of Unicom New World such governmental or regulatorylicenses, consents, permits or other approvals as Unicom New World may requireto continue to operate its businesses; and

 

•                                          notto engage in any business which competes with our businesses except for theexisting competing businesses of Unicom Group.

 

***Conditional Sale and Purchase Agreement withrespect to Unicom New World***

*** ***

In relation to the acquisition by us of Unicom NewWorld from Unicom Group, we and Unicom BVI entered into a conditional sale andpurchase agreement, dated November 20, 2003. This agreement includes the following terms:

 

(a)                                  UnicomBVI’s agreement to transfer all of its equity interest in Unicom New World(BVI) Limited, which holds 100% of the equity interest in Unicom New World, tous;

 

(b)                                 ouragreement to pay Unicom BVI a cash consideration in the amount ofHK$3,014,886,000 (approximately RMB3.2 billion); and

 

(c)                                  warrantiesgiven by Unicom BVI****to us inrelation to Unicom New World.

 

***Conditional Saleand Purchase Agreement with respect to Guoxin Paging***

 

In relation to the saleby us of Guoxin Paging to Unicom Group, CUCL and the A Share Company enteredinto a conditional sale and purchase agreement, dated November 20, 2003.  This agreement includes the following terms:

 

(a)                                  CUCL’sagreement to sell to the A Share Company, and the A Share Company’s agreementto acquire from CUCL, all of CUCL’s equity interest in Guoxin Paging;

 

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(b)                                 theA Share Company’s agreement to pay CUCL a cash consideration in the amount ofHK$2,590,917,656 (approximately RMB2.75 billion); and

 

(c)                                  warrantiesgiven by CUCL to the A Share Company in relation to Guoxin Paging.

 

***Trademark Agreement***

*** ***

Under a trademark license agreement entered into onNovember 20, 2003 between the A Share Company and Unicom New World, Unicom NewWorld and our affiliates were granted the right to use the Unicom trademarksand logo on a royalty-free basis for an initial period of ten years, renewablefor a further ten-year term at the option of Unicom New World.  The parties will negotiate the royaltypayments during the renewed term; however, in no event will such payment exceedthe royalty payments, if any, paid by Unicom Group’s other wholly- ormajority-owned subsidiaries.  The AShare Company has also agreed to license to Unicom New World any trademark thatUnicom Group registers in China in the future which incorporates the wordUnicom.

 

**Provision of OngoingTelecommunications and Ancillary Services by Unicom Group to Us**

** **

***Leasing of Satellite Transmission Capacity***

*** ***

We lease satellite transmission capacity from a 95.00%owned subsidiary of Unicom Group.  Weuse this capacity to supplement our long distance network.

 

That subsidiary of Unicom Group and CUCL entered intoa satellite transmission channel leasing agreement, dated May 25, 2000.  Under this agreement, CUCL is entitled tolease satellite transmission capacity from Unicom Group.

 

Payments for leasing of satellite transmissioncapacity are calculated on the basis of tariffs set by the MII.  We pay the minimum applicable tariff for therelevant volume and duration less a discount of up to 10%.  The discount will not be less than thatoffered to any third party leasing similar transmission capacity.  The total leasing charges for satellitetransmission capacity for 2003 was approximately RMB26.40****million.

 

***Supply of International Gateway Services***

*** ***

Unicom Group provides us with access to internationalconnections for our international long distance service through itsinternational gateways.  CUCL and UnicomGroup entered into a services agreement, dated May 25, 2000, under which UnicomGroup agrees to supply international gateway services to us for an initial termending at the end of 2002, renewable at CUCL’s option.  At the end of both 2002 and 2003, theservice agreement was automatically renewed for an additional term of oneyear.  Unicom Group has undertaken not tosupply international gateway services to third parties.  The charge for these services are based onUnicom Group’s cost of operation and maintenance of the international gatewayfacilities, including depreciation, plus a margin of 10% over cost.  We retain all revenues generated by ourinternational long distance service. Total charges for the supply of international gateway services in 2003were approximately RMB8.63****million.

 

***Supply of SIM Cards, UIM Cards, IP TelephonyCards and Rechargeable Calling Cards***

*** ***

Through its subsidiary, Unicom Xingye, Unicom Groupagreed to supply SIM cards, UIM cards, IP telephony cards and rechargeablecalling cards to CUCL for an initial term of three years, renewable at CUCL’soption.  Charges for the supply of thesecards are based on the actual cost incurred by Unicom

 

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Xingye in supplying the cards plus a margin over costto be agreed upon from time to time, but in any case not to exceed 20%, subjectto specified volume discounts.  Underthe services agreement, prices and volumes will be reviewed by the parties onan annual basis.

 

In connection with the acquisitions of Unicom NewCentury and Unicom New World, Unicom Group has also agreed to supply SIM cards,UIM cards, IP telephony cards and rechargeable calling cards to Unicom NewCentury and Unicom New World through Unicom Xingye, in each case for a periodof one year from the completion of each acquisition.  The terms of the agreements with respect to Unicom New Centuryand Unicom New World are similar to those with respect to CUCL.

 

Total charges for the supply of SIM cards, IPtelephony cards and rechargeable calling cards for 2003 was approximatelyRMB1.19 billion.

 

***Supply of Equipment Procurement Services***

*** ***

Prior to the restructuring in connection with ourinitial public offering, Unicom Import and Export Co. Ltd., a 96.7% ownedsubsidiary of Unicom Group, handled most procurement of foreign and domestictelecommunications equipment and other materials required for construction ofUnicom Group’s networks.  CUCL isallowed to continue to use Unicom Group’s procuring service at the rate of:

 

•                                          0.7%of the contract value in the case of imported equipment, or

 

•                                          0.5%of the contract value in the case of domestic equipment.

 

In connection with the acquisitions of Unicom NewCentury and Unicom New World, Unicom Group has also agreed to provide equipmentprocurement services to Unicom New Century and Unicom New World through UnicomImport and Export Co. Ltd.  The terms ofthe agreements with respect to Unicom New Century and Unicom New World aresimilar to those with respect to CUCL.

 

Our total payment to Unicom Group for equipmentprocurement services for 2003 was approximately RMB17.90 million.

 

***Supply of CellularSubscriber Value-added Services***

 

Prior to the sale of Guoxin Paging to Unicom Group, itprovided operator-based value-added services to our cellular subscribersthrough its paging network, equipment and operators.  Such services include the “Unicom Assistant” services.  In addition, Guoxin Paging provided suchservices to cellular subscribers of Unicom Group.  For the year ended December 31, 2003 approximately RMB629 millionwas settled with Guoxin Paging for services provided to our Company and thenetworks in the nine provinces and autonomous regions we acquired throughUnicom New World at the end of 2003. Following the sale of Guoxin Paging to Unicom Group, Unicom Group hasagreed to provide (through Guoxin Paging) to us cellular subscriber value-addedservices as agreed from time to time, for an initial term of one year,renewable at our option, pursuant to a Comprehensive Operator ServicesAgreement.  The various local branchesof Guoxin Paging and us will agree on the proportion for sharing the revenuederived and actually received by us from such value-added services, providedthat the agreed-upon proportion for Guoxin Paging may not be higher than theaverage agreed-upon proportion for independent valued-added telecommunicationscontent providers who provide value-added communications content to us in thesame region.  The revenue sharingproportions will be adjusted annually.

 

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The supply of cellular subscriber value-addedservices, under the Comprehensive Operator Services Agreement, is a new servicearrangement between Guoxin Paging and us. Therefore, there is no information available with respect to servicefees paid in 2003.

 

***Supply of CustomerServices***

 

Unicom Group has agreed to provide (acting on its ownor through Guoxin Paging) to us customer services, for an initial term of oneyear, renewable at our option.  Thesecustomer services include business inquiries, tariff inquiries, accountmaintenance, complaints handling, customer interviews and subscriberretention.  Service fees payable by usto Unicom Group or Guoxin Paging will be calculated on the basis of the costsof the customer service plus a profit margin of no more than 10%.  The costs of the customer service will bethe costs per operator seat multiplied by the number of effectively operatingoperator seats.  The cost per operatorseat in economically developed areas, such as Beijing and Shanghai, will be theactual wages, administration expenses, operation and maintenance expenses,depreciation of equipment and leasing fees for premises attributable to thecustomer service in such area for the previous year.  The cost per operator seat in other areas will be agreed uponbetween the local branches of Guoxin Paging and us, subject to our finalconfirmation, provided that such cost may not exceed the nationwide (other thanBeijing and Shanghai) weighted average of such costs plus 10%.  The number of effectively operating operatorseats will be confirmed by us, based on data provided by Unicom Group or GuoxinPaging and criteria set forth in the relevant MII regulations.

 

The supply of customer services is a new servicearrangement between Guoxin Paging and us. Therefore, there is no information available with respect to servicefees paid in 2003.

 

***Supply of AgencyServices***

 

Unicom Group has agreed to provide (through GuoxinPaging) to us subscriber development services, including by telephone orthrough other channels utilizing Guoxin Paging’s paging network, equipment andoperators, for an initial term of one year, renewable at our option.  Agency fees payable by us to Unicom Group orGuoxin Paging may not exceed the average of agency fees payable to any thirdparty agent providing subscriber development services to us in the same region.

 

The supply of agency services is a new servicearrangement between Guoxin Paging and us. Therefore, there is no information available with respect to servicefees paid in 2003.

 

**Mutual Provision ofOngoing Telecommunications and Ancillary Services and Facilities**

** **

***Interconnection Arrangements and RoamingArrangements***

*** ***

Our cellular and long distance networks interconnectwith Unicom Group’s cellular and long distance networks.  The services agreement between CUCL andUnicom Group provides for their interconnection arrangements.  These arrangements were for an initial termof three years, renewable at CUCL’s option. Interconnection settlement between Unicom Group’s networks and our networksis based on relevant standards established from time to time by the MII.  However, in the case of calls betweencellular subscribers of different networks in different provinces, settlementis based on either the relevant standards established by the MII or an internalsettlement arrangement applied by Unicom Group prior to the restructuring inconnection with our initial public offering, whichever is more favorable tous.  The internal settlementarrangement, which is based on the parties’ respective internal costs ofproviding this service, is currently more favorable to us than the settlementarrangement prescribed by the MII.  Wehave also entered into similar interconnection arrangements with Unicom Groupfor our CDMA services.

 

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In connection with the acquisitions of Unicom NewCentury and Unicom New World, Unicom Group and each of Unicom New Century andUnicom New World have entered into similar arrangements for the interconnectionof Unicom New Century’s and Unicom New World’s GSM and CDMA cellular networkswith Unicom Group’s GSM and CDMA cellular and fixed line networks, in each casefor a period of one year from the completion of each acquisition.  The terms of the arrangements with respectto Unicom New Century and Unicom New World are similar to those with respect toCUCL.

 

We and Unicom Group provide roaming services to eachother.  In addition, we make our longdistance network available to Unicom Group in its implementation of its roamingarrangements with other operators. These roaming arrangements are governed by the services agreementbetween CUCL and Unicom Group for an initial term of three years, renewable atCUCL’s option.  Charges for theseroaming services between us and Unicom Group are based on our respective internalcosts of providing these services, and will be on no less favorable terms thanthose available to any third party.  Wereceive 50% of Unicom Group’s roaming revenue from third party operators forcalls using our long distance network. We have also entered into similar roaming arrangements with Unicom Groupfor our CDMA services in relation to the CDMA networks outside of our cellularservice areas.

 

In connection with the acquisitions of Unicom NewCentury and Unicom New World, Unicom Group and each of Unicom New Century andUnicom New World have entered into similar arrangements for the provision ofroaming services to their respective GSM and CDMA cellular subscribers, in eachcase for a period of one year from the completion of each acquisition.  The terms of the agreements with respect to UnicomNew Century and Unicom New World are similar to those with respect to CUCL.

 

Interconnection and roaming revenue andinterconnection and roaming expense derived from these arrangements with UnicomGroup for 2003 was approximately RMB1.00 billion and approximately RMB316.27million, respectively.

 

***Leasing of Transmission Line Capacity***

*** ***

Unicom Group leases fixed-line transmission capacityfrom CUCL.  Under our servicesagreement, this arrangement had an initial term of three years, renewable atCUCL’s option.  Lease charges are basedon tariffs stipulated by the MII from time to time less a discount of up to10%.  The discount given by CUCL toUnicom Group must not be more than what CUCL offers to other third partylessees for a similar lease.  When newtariffs are adopted by the MII, the discount rate will be reviewed.  In 2003, we received total leasing fees ofRMB185.09****million.

 

**Mutual Provision ofPremises**

** **

Unicom Group and CUCL provide to each other premisesfrom time to time pursuant to services agreements between Unicom Group andCUCL.  Unicom Group also providespremises to Unicom New Century and Unicom New World pursuant to agreements witheach of Unicom New Century and Unicom New World.  Other than premises leased from third parties, the rental ratesin each case are based on the lower of depreciation costs and market prices forsimilar premises in that locality, but CUCL may charge Unicom Group marketrates for premises leased to Unicom Group. In cases where the premises were leased from a third party, the rentalis the amount payable in the head lease. In the case of shared premises, theprice is split in proportion to the respective areas occupied by theparties.   The net charges for premisesleased to us by Unicom Group as offset by our charges for premises leased toUnicom Group for 2003 were RMB17.94****million.

 

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In connection with our provision of premises to GuoxinPaging, which is effective from January 1, 2004, the rental is based on thehigher of depreciation costs and market prices for similar premises in eachlocality.

 

**Leasing of CDMA NetworkCapacity**

** **

***Lease of CDMANetwork Capacity***

 

Our wholly-owned subsidiary, CUCL, entered into alease agreement with Unicom Group and its subsidiary Unicom Horizon, pursuantto which Unicom Horizon agreed to lease to CUCL capacity on its CDMA network inCUCL’s cellular service areas.  Thisleasing arrangement has been approved by our minority shareholders at anextraordinary shareholders’ meeting.  Wehave the exclusive right to operate the CDMA network in CUCL’s serviceareas.  The initial term of the lease isone year, renewable each year at CUCL’s option.  In addition, as part of the acquisition arrangements of UnicomNew Century and Unicom New World, Unicom New Century and Unicom New World haveeach also entered into CDMA capacity lease agreements with Unicom Group andUnicom Horizon, on November 20, 2002 and November 20, 2003, respectively.  The terms of these leasing arrangements arein all material respects the same as those contained in the CDMA LeaseAgreement entered into by CUCL as described above, except for the amount ofleased capacity.  Under these leaseagreements, Unicom Horizon agreed to lease capacity on its CDMA network to eachof Unicom New Century and Unicom New World in their respective cellular serviceareas.  Our total lease payment in 2003was RMB3.52 billion.

 

Under the leasing arrangements, Unicom Horizon agreedto plan, finance and construct the CDMA network, including the procurement ofall equipment, and ensure that the CDMA network is constructed in accordancewith the detailed specifications and timetable agreed between Unicom Horizonand us.  All payments, costs, expensesand amounts paid or incurred by Unicom Horizon that are directly attributableto the construction of the CDMA network form the total network constructioncost, which is used in calculating the lease fee payable by us, including:

 

•                                          construction,installation and equipment procurement costs and expenses,

•                                          surveyand design costs,

•                                          investmentin technology, software and other intangible assets,

•                                          insurancepremiums and capitalized interest on loans,

•                                          anytaxes levied or paid in respect of the procurement of equipment and theconstruction of the CDMA network, including import taxes and custom duties, and

•                                          allcosts incurred in relation to any upgrade of technology.

 

The network construction cost should be verified andappropriate documentation must be provided to us or our auditors forverification.  The lease fee iscalculated so as to enable Unicom Horizon to recover its total networkconstruction cost within seven years, together with an internal rate of returnof 8%.

 

We are responsible for the operation, management andmaintenance of the CDMA network in accordance with the relevant requirements ofthe lease agreement and have the exclusive right to provide CDMA services inour cellular service areas.  Alloperating revenue, including airtime charges, monthly subscription fees,interconnection charges, income from sales of UIM cards and handsets and otherincome generated from or in connection with the operation of the CDMA networkbelong to us.

 

In addition to the capacity that we agreed to lease inthe first term, subject to giving not less than 180 days’ prior notice toUnicom Horizon, we may request to lease additional capacity.  Unicom Horizon is required to ensure thatall capacity which we have so requested is supplied by the due date of deliveryof the capacity, provided that, unless otherwise agreed, Unicom Horizon willnot be obliged to expand the CDMA

 

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network beyond the first phase.  We may not reduce the amount of capacityleased during the initial one-year lease term. However, subject to providing not less than 180 days’ prior writtennotice to or with the prior written consent of Unicom Horizon, we may reducethe amount of capacity leased for any additional lease term, provided that wemust lease all capacity which it has requested or otherwise committed to leasefor at least one year following the date of delivery or renewal of the lease ofsuch capacity.

 

Subject to certain exceptions, including delay causedby a force majeure event, a material breach of the lease agreement by us orcompliance with applicable laws and regulations, if any capacity is not readyfor operational service by the relevant delivery date, then Unicom Horizonshall be liable to provide a delay discount to us, equal to the daily lease feein respect of the relevant capacity multiplied by the number of days of delay,which shall be credited against future lease fee payments.

 

We have the option to purchase the CDMA network, whichmay be exercised at any time during the initial lease term or any additionallease term of the lease and within one year thereafter.  The acquisition price will be negotiatedbetween Unicom Horizon and us, based on the appraised value of the CDMA networkdetermined by an independent assets appraiser in accordance with applicable PRClaws and regulations and taking account of prevailing market conditions andother factors, provided that it will not exceed such price as would, takinginto account all lease fee payments made by us to Unicom Horizon and all delaydiscounts of lease fee, enable Unicom Horizon to recover its total networkconstruction cost, together with an internal rate of return on its investmentof 8%.  The exercise of the purchaseoption will be subject to the relevant provisions of the listing rules of HongKong Stock Exchanges governing connected transactions.  Title to the CDMA network assets will remainvested in Unicom Horizon until the CDMA network assets are transferred to usfollowing exercise of the purchase option.

 

In consideration of our entering into the leasingarrangements, Unicom Group has unconditionally and irrevocably guaranteed thedue and punctual performance by Unicom Horizon of its obligations under thelease agreements.  Unicom Group has alsoagreed to indemnify us for any loss suffered as a result of any defect in anyof the equipment or any loss caused by any negligence, default, act or omissionof Unicom Horizon or Unicom Group under the lease agreement or in connectionwith the CDMA network.  The aggregateliability of Unicom Group for any claim shall not exceed the total amount oflease fee payments made to Unicom Horizon or, where the purchase option hasbeen exercised, the total purchase price paid for the CDMA network.  The guarantee and indemnity provided by UnicomGroup under the lease agreement will continue in force until the expiration ofthe lease agreement.

 

We may terminate the lease by not less than 180 days’prior written notice, with effect from the end of any additional term.  In addition, Unicom Group or we mayterminate the lease if the other commits any continuing or material breach ofthe lease agreement.  Unicom Group orUnicom Horizon is not otherwise permitted to terminate the lease.

 

***CDMAInterconnection and Roaming Arrangements***

** **

In connection with the CDMA network capacity leaseagreement, our operating subsidiary, CUCL, has entered into a servicesagreement with Unicom Group with respect to interconnection and roamingarrangements.  Unicom New Century andUnicom New World have entered into similar arrangements with Unicom Group.

 

*Interconnection arrangements.*  Our GSM and CDMA cellular and fixed linenetworks and Unicom Group’s GSM and CDMA cellular and fixed line networksinterconnect with each other.

 

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Interconnection settlement between Unicom Group’snetworks and our networks is based on relevant standards established from timeto time by the MII.  However, in thecase of calls between cellular subscribers in different provinces, settlement isbased on either the relevant standards established by the MII from time to timeor an agreed settlement arrangement between us and Unicom Group.  We are able to choose the more favorablearrangement.  The agreed settlementarrangement, which is based on the parties’ respective internal costs ofproviding this service, is currently more favorable to us than the settlementarrangement prescribed by the MII.

 

*Roaming arrangements.*  We and Unicom Group provide roaming servicesto each other’s CDMA cellular subscribers within its respective service areas.  In addition, we make our long distancenetwork available to Unicom Group to enable Unicom Group to give effect to itsroaming arrangements with third party operators.

 

Charges for these services between us and Unicom Groupare based on our respective internal costs of providing these services, and areon no less favorable terms than those available to any independent thirdparty.  We are paid 50% of the roamingrevenue received by Unicom Group from third party operators for making our longdistance network available to Unicom Group to give effect to its roamingarrangements with third party operators.

 

**Guarantee of Our BankLoans by Unicom Group and Short-Term Loans from Unicom Group**

** **

As of December 31, 2003, short-term bank loans ofapproximately RMB70****million andlong-term bank loans of approximately RMB11,604 million of our operatingsubsidiaries were guaranteed by Unicom Group. Such guarantees were provided for our benefit without any cost to us.

 

Short-term loans from Unicom Group represent loansprovided by Unicom Group to various branches of Unicom New Century to financethe operation of their cellular businesses. Unicom Group borrowed the funds for such loans from banks at an interestrate of 4.54%.  All of these loans wereunsecured.  As of December 31, 2003,such loans have been fully repaid by us.

 

### ***C.            Interests ofExperts and Counsel***

### *** ***

Not applicable.

 

## **Item 8**.  Financial Information

## ** **

See Item 18, “Financial Statements.”

 

**LegalProceedings**

 

We are not involved in any material litigation, arbitrationor administrative proceedings.  So faras we are aware, no such litigation, arbitration or administrative proceedingsare pending or threatened.

 

**Policyon Dividend Distribution**

 

The objective of our dividend policy is to maximizeour shareholders’ value.  Thedeclaration and payment of future dividends will depend upon, among otherthings, business prospects, future earnings, cash flow, liquidity level andcost of capital.  We believe such policywill provide our shareholders with a stable return in the long term along withthe growth of our company.  We may onlypay dividends out of our distributable profits.

 

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## **Item 9**.  The Offer and Listing

## ** **

**MarketPrice Information**

 

Our American depositary shares, each representing tenordinary shares, are listed and traded on the New York Stock Exchange.  Our ordinary shares are listed and traded onthe Hong Kong Stock Exchange.  The NewYork Stock Exchange and the Hong Kong Stock Exchange are the principal tradingmarkets for our ADSs and ordinary shares, which are not listed on any otherexchanges in or outside the United States.

 

The high and low closing prices of our ordinary shareson the Hong Kong Stock Exchange and of our ADSs on the New York Stock Exchangesince listing are as follows:

 
|                         |   | **Price per  Ordinary Share (HK$)** |   | **Price per  ADS (US$)** |   |
|------------------------------|--------|-------------------------------------|--------|--------------------------|--------|
|                         |   | **High**                            |   | **Low**                  |   | **High** |   | **Low** |   |
| Annual:                      |   |                                |   |                     |   |   |   |   |   |
| 2001                         |   | 14.00                               |   | 7.10                     |   | 18.00 |   | 9.00 |   |
| 2002                         |   | 8.90                                |   | 4.15                     |   | 11.54 |   | 5.35 |   |
| 2003                         |   | 8.00                                |   | 3.92                     |   | 10.55 |   | 5.02 |   |
| Quarterly:                   |   |                                |   |                     |   |   |   |   |   |
| First Quarter,  2002         |   | 8.90                                |   | 7.20                     |   | 11.54 |   | 9.10 |   |
| Second Quarter,  2002        |   | 7.85                                |   | 5.95                     |   | 10.34 |   | 7.70 |   |
| Third Quarter,  2002         |   | 6.25                                |   | 4.70                     |   | 8.19 |   | 5.91 |   |
| Fourth Quarter,  2002        |   | 6.25                                |   | 4.15                     |   | 7.91 |   | 5.35 |   |
| First Quarter,  2003         |   | 6.00                                |   | 4.25                     |   | 7.72 |   | 5.40 |   |
| Second Quarter,  2003        |   | 5.75                                |   | 3.92                     |   | 7.46 |   | 5.02 |   |
| Third Quarter,  2003         |   | 6.35                                |   | 5.05                     |   | 8.29 |   | 6.54 |   |
| Fourth Quarter,  2003        |   | 8.00                                |   | 6.65                     |   | 10.55 |   | 8.42 |   |
| First Quarter,  2004         |   | 10.20                               |   | 7.00                     |   | 13.18 |   | 8.93 |   |
| Monthly:                     |   |                                |   |                     |   |   |   |   |   |
| January 2004                 |   | 9.75                                |   | 7.50                     |   | 12.41 |   | 10.05 |   |
| February 2004                |   | 10.20                               |   | 8.60                     |   | 13.18 |   | 10.99 |   |
| March 2004                   |   | 10.15                               |   | 7.00                     |   | 13.12 |   | 8.93 |   |
| April 2004                   |   | 7.60                                |   | 6.10                     |   | 9.55 |   | 7.71 |   |
| May 2004                     |   | 6.05                                |   | 5.10                     |   | 7.95 |   | 6.78 |   |
| June 2004  (through June 18) |   | 6.45                                |   | 5.55                     |   | 8.05 |   | 7.08 |   |

 

## **Item 10**.  Additional Information

 

### ***A.            Share Capital***

 

Not applicable.

 

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### ***B.            Memorandumand Articles of Association***

 

**General**

 

Under our Memorandum of Association, we have thecapacity, rights, powers, liabilities and privileges of a natural person.  The following is a summary of selectedprovisions of our Articles of Association:

 

**Directors**

 

***Material Interests and Voting***

 

A director shall not vote (or be counted in thequorum) on any resolution of our board of directors in respect of any contractor arrangement or proposal in which he or any of his associates (as defined inthe Hong Kong Stock Exchange Listing Rules) is, to his knowledge, materiallyinterested, and if he shall do so, his vote shall not be counted (nor shall hebe counted in the quorum for that resolution), but this prohibition does notapply to any contract, arrangement or other proposal for or concerning:

 

•                                          thegiving of any security or indemnity either (a) to the director or any of his associatesin respect of money lent or obligations incurred by him or any of them at therequest of or for the benefit of Unicom or any of its subsidiaries or (b) to athird party in respect of a debt or obligation of Unicom or any of itssubsidiaries for which the director or any of his associates has himselfassumed responsibility or guaranteed or secured in whole or in part;

 

•                                          anoffer of shares or debentures or other securities of or by Unicom (or any othercompany which Unicom may promote or be interested in) where the director or anyof his associates is a participant in the underwriting or sub-underwriting ofthe offer;

 

•                                          anyother company in which the director or any of his associates is interestedonly, whether directly or indirectly, as an officer or shareholder or in whichthe director is beneficially interested in shares of that company, providedthat he, together with any of his associates (as defined in the Hong Kong StockExchange Listing Rules) is not beneficially interested in 5% or more of (a) theissued shares of any class of such company (or of any third company throughwhich his interest is derived) or (b) the voting rights attached to such issuedshares or securities (excluding for the purpose of calculating such 5% interestany indirect interest of such director or any of his associates by virtue of aninterest of Unicom in such company);

 

•                                          thebenefit of employees of Unicom or any of its subsidiaries including (a) theadoption, modification or operation of any employees share scheme under whichthe director or any of his associates may benefit or (b) the adoption,modification or operation of a pension fund or retirement, death or disabilitybenefits scheme which relates both to directors, their associates and employeesof Unicom or any of its subsidiaries and does not provide in respect of thedirector or any of his associates any privilege or advantage not generallyaccorded to the class of persons to which such scheme or fund relates; or

 

•                                          anycontract or arrangement in which the director or any of his associates isinterested in the same manner as other holders of shares or debentures or othersecurities of Unicom by virtue only of his interest in shares or debentures orother securities of Unicom.

 

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***Remuneration and Pensions***

*** ***

The directors of Unicom are entitled to receive by wayof remuneration for their services such sum as is from time to time determinedby Unicom in general meeting.  Thedirectors are also entitled to be repaid all traveling, hotel and otherexpenses reasonably incurred by them in or about the performance of theirduties as directors.  The board ofdirectors may grant special remuneration to any director who performs serviceswhich in the opinion of the board are outside the scope of the ordinary dutiesof a director.

 

The board may establish and maintain any contributoryor non-contributory pension or superannuation funds for the benefit of, or givedonations, gratuities, pensions, allowances or emoluments to, any persons (a)who are or were at any time in the employment or service of Unicom, or of anycompany which is a subsidiary of Unicom, or is allied or associated with Unicomor with any such subsidiary company, or (b) who are or were at any timedirectors or officers of Unicom or of any such other company above, and holdingor who have held any salaried employment or office in Unicom or such othercompany, and the wives, widows, families and dependants of any such persons andmay make payments for or towards the insurance of any such persons.  Any director holding any such employment oroffice is entitled to participate in, and retain for his own benefit, any suchdonation, gratuity, pension, allowance or emolument.

 

***Borrowing Powers***

*** ***

The directors may exercise all the powers of Unicom toborrow money and to mortgage or charge all or any part of the undertaking,property and assets (present and future) and uncalled capital of Unicom and toissue debentures, debenture stocks, bonds and other securities, whether outrightor as collateral security for any debt, liability or obligation of Unicom or ofany third party.

 

***Qualification of Directors***

*** ***

A director of Unicom is not required to hold anyqualification shares.  No person isrequired to vacate office or be ineligible for re-election or reappointment asa director, and no person is ineligible for appointment as a director, byreason only of his having attained any particular age.

 

***Rotation of Directors***

*** ***

At every annual general meeting, one-third of thedirectors for the time being, or, if the number is not three or a multiple ofthree, then the number nearest one-third, shall retire from office by rotationexcept for any director holding office as Chairman or Chief Executive Officer.  The directors to retire in every year shallbe those who have been longest in office since their last election.  In addition, a director appointed by theboard to fill in a casual vacancy or as an addition to the board shall retireat the next following general meeting and shall not be taken into account indetermining the number of directors who are to retire by rotation at eachannual general meeting.  The retiringdirectors shall be eligible for re-election.

 

**Rights Attached toOrdinary Shares**

** **

***Voting Rights***

*** ***

Under the Companies Ordinance, any action to be takenby the shareholders in a general meeting requires the affirmative vote ofeither an ordinary or a special resolution passed at the meeting.  An ordinary resolution is one passed by themajority of such shareholders as are entitled to, and do, vote in person or byproxy at a general meeting.  A specialresolution is one passed by not less than three-quarters of such shareholdersas are entitled to, and do, vote in person or by proxy at a generalmeeting.  Most shareholders

 

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decisions are passed by ordinary resolutions.  However, the Companies Ordinance and ourarticles of association stipulate that certain matters may only be passed byspecial resolutions.

 

Subject to any special rights, privileges orrestrictions as to voting that may from time to time be attached to any classor classes of shares, at any general meeting a resolution put to the vote ofthe meeting shall be decided on a show of hands unless a poll is required bythe Listing Rules of the Hong Kong Stock Exchange or is demanded by:

 

•                                          thechairman of the meeting,

 

•                                          atleast three shareholders present in person or by proxy and entitled to vote atthe meeting,

 

•                                          anyshareholder or shareholders present in person or by proxy and representing inthe aggregate not less than one-tenth of the total voting rights of allshareholders having the right to attend and vote at the meeting, or

 

•                                          anyshareholder or shareholders present in person or by proxy and holding shares conferringa right to attend and vote at the meeting on which there have been paid up sumsin the aggregate equal to not less than one-tenth of the total sum paid up onall shares conferring that right.

 

On a show of hands, every individual shareholder who ispresent in person and every corporate shareholder who is present by arepresentative duly authorized under section 115 of the Companies Ordinance hasone vote.

 

On a poll, every shareholder present in person or, ifthe shareholder is a corporation, by duly authorized representative, or byproxy has one vote for every share of which he or she is the shareholder whichis fully paid up or credited as fully paid up. However, no amount paid up or credited as paid up on a share in advanceof calls or installments is treated for the foregoing purposes as paid up onthe share.

 

Any action to be taken by the shareholders requiresthe affirmative vote of a majority of the shares at a meeting ofshareholders.  There are no cumulativevoting rights.  Accordingly, the holdersof a majority of the shares voting for the election of directors can elect allthe directors if they choose to do so.

 

***Issue of Shares***

*** ***

Under the Companies Ordinance, our board of directorsmay, without prior approval of our shareholders, offer to issue new shares toexisting shareholders proportionately according to their shareholdings.  Our board of directors may not offer toissue new shares in any other manner without the prior approval of ourshareholders in a general meeting.  Anysuch approval given in a general meeting will continue in force until theconclusion of the following annual general meeting or the expiration of theperiod within which the next annual general meeting is required by law to beheld or when revoked or varied by an ordinary resolution of our shareholders ina general meeting, whichever comes first. If such approval is given, the unissued shares shall be at the disposalof our board of directors, which may offer, allot, grant options over orotherwise dispose of them to such persons, at such times and for suchconsideration and upon such terms and conditions as our board of directors maydetermine.

 

In accordance with the Listing Rules of the Hong KongStock Exchange, any such approval given by the shareholders must be limited toshares with an aggregate nominal value not exceeding 20 per cent of theaggregate nominal value of our share capital in issue plus the aggregatenominal amount of share capital repurchased by us since the granting of suchapproval.

 

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***Dividends***

*** ***

Subject to the Companies Ordinance and as set out inour articles of association, our shareholders in a general meeting may fromtime to time by ordinary resolution declare dividends to be paid to our shareholdersaccording to their rights and interests in the profits available fordistribution, but no dividend shall be declared in excess of the amountrecommended by our board of directors.

 

In addition to any dividends declared in a generalmeeting upon the recommendation of the board of directors, our board ofdirectors may from time to time declare and pay to our shareholders suchinterim dividends as appear to our board of directors to be justified by ourfinancial position.  Our board ofdirectors may also pay any fixed dividend which is payable on any of our shareson any other dates, whenever our financial position, in the opinion of ourboard of directors, justifies such payments.

 

All dividends or bonuses unclaimed for one year afterhaving become payable may be invested or otherwise made use of by the board forthe benefit of Unicom until claimed. All dividends or bonuses unclaimed for six years after having beendeclared may be forfeited by the board and will revert to Unicom.

 

***Winding Up***

*** ***

If we are wound up, the surplus assets remaining afterpayment to all creditors shall be divided among the shareholders in proportionto the capital paid up on the shares held by them, subject to the rights of theholders of any shares which may be issued on special terms or conditions.

 

If we are wound up, the liquidator may, with thesanction of a special resolution, divide among our shareholders in specie or inkind the whole or any part of our assets or vest any part of our assets intrustees upon such trusts for the benefit of our shareholders or any of them asthe resolution shall provide.

 

***Miscellaneous***

*** ***

Shareholders are not entitled to any redemptionrights, conversion rights or preemptive rights on the transfer of ordinaryshares.

 

The transfer agent and registrar for the shares isHong Kong Registrars Limited, 19th Floor, Hopewell Centre, 183 Queen’s RoadEast, Hong Kong.

 

***Modification of Rights***

*** ***

Subject to the Companies Ordinance, any of the rightsfrom time to time attaching to any class of shares may, subject to theprovisions of the Companies Ordinance, be varied or abrogated with the consentin writing of the holders of not less than three-fourths of the issued sharesof that class or with the sanction of a special resolution passed at a separategeneral meeting of the holders of shares of that class.  The provisions of our Articles ofAssociation relating to general meetings apply to such separate generalmeetings, except that the necessary quorum is not less than two persons holdingor representing by proxy one-third in nominal value of the issued shares ofthat class, and that any holder of the shares of the class present in person orby proxy may demand a poll.

 

**Annual General andExtraordinary General Meetings**

** **

We must hold in each year a general meeting as ourannual general meeting in addition to any other meetings in that year.  The annual general meeting is held at suchtime (within a period of not more than fifteen months, or such longer period asthe Registrar of Companies of Hong Kong may authorize in

 

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writing, after the holding of the last precedingannual general meeting) and place as may be determined by the Directors.  All other general meetings are calledextraordinary general meetings.  TheDirectors may call an extraordinary general meeting at any time or upon requestin accordance with the Hong Kong Companies Ordinance.

 

Subject to the CompaniesOrdinance, an annual general meeting and a meeting called for the passing of aspecial resolution can be called by not less than twenty-one days’ notice inwriting, and any other general meeting can be called by not less than fourteendays’ notice in writing.  The noticemust specify the place, date and time of meeting, and, in the case of specialbusiness, the general nature of that business.

 

**Limitations on Rights toOwn Securities**

** **

There are no limitations on the rights to ownsecurities, including the rights of non-resident or foreign shareholders tohold or exercise voting rights on the securities, imposed by Hong Kong law orby our Memorandum of Association or our Articles of Association.

 

**Changes in Capital**

** **

We may exercise any powers conferred or permitted bythe Companies Ordinance to purchase or otherwise acquire our own shares and warrantsat any price or to give, directly or indirectly, by means of a loan, guarantee,the provision of security or otherwise, financial assistance for the purpose ofor in connection with a purchase made by any person of any shares or warrantsin Unicom.  Repurchases of our ownshares may be made either by way of a general offer to all shareholders inproportion to their shareholdings, by purchasing our shares on a stock exchangeor by an off-market contract with individual shareholders.  Any such purchase or other acquisition orfinancial assistance must be made or given in accordance with any relevantrules or regulations issued by the Hong Kong Stock Exchange or the Securitiesand Futures Commission of Hong Kong.

 

We in general meeting may, from time to time, byordinary resolution increase our authorized share capital by the creation ofnew shares, and prescribe the amount of new capital and number of newshares.  We may from time to time byordinary resolution:

 

•                                          consolidateand divide all or any of our share capital into shares of a larger amount thanour existing shares;

 

•                                          divideour shares into several classes and attach to them any preferential, deferred,qualified or special rights, privileges or conditions;

 

•                                          cancelany shares which at the date of the passing of the resolution have not beentaken or agreed to be taken by any person, and diminish the amount of our sharecapital by the amount of the shares so canceled;

 

•                                          sub-divideour shares or any to them into shares of a smaller amount than is fixed by ourMemorandum of Association, subject nevertheless to the provisions of theCompanies Ordinance; and

 

•                                          makeprovision for the issue and allotment of shares which do not carry any votingrights.

 

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### ***C.            MaterialContracts***

### *** ***

In addition to contracts we have entered into with ourcontrolling shareholder, Unicom Group, or its subsidiaries, as described in“Related Party Transactions” under Item 7, Unicom Group, we or our subsidiarieshave entered into the following contracts that are not in the ordinary courseof business within the two years preceding the date of this annual report thatare or may be material:

 

•                                          Ourshare option schemes, as described in “A. Directors, Senior Management andEmployees – E. Share Ownership – Stock Incentive Schemes” under Item 6.

 

•                                          Networkcapacity lease agreements for CDMA network capacity, see “B. Related PartyTransactions - Leasing of CDMA Network Capacity” underItem 7.

 

### ***D.            ExchangeControls***

### *** ***

The ability of our operating subsidiaries, CUCL,Unicom New Century and Unicom New World, to satisfy their respective foreignexchange obligations and to pay dividends to us depends on existing and futureexchange control regulations in China. The Renminbi is currently convertible under the current account, whichincludes trade and service related foreign exchange transactions.  Renminbi currently cannot be converted underthe capital account, which includes foreign direct investment.  CUCL, Unicom New Century and Unicom New World,our wholly-owned subsidiaries that hold substantially all of our assets, areall foreign investment enterprises.  Theforeign investment enterprise status will allow these subsidiaries to purchaseforeign exchange at designated foreign exchange banks for settlement of currentaccount transactions without the approval of the State Administration forForeign Exchange.  These current accounttransactions include payment of dividends. However, the relevant Chinese government authorities may in the futurelimit or eliminate the authorizations for a foreign investment enterprise toretain its foreign exchange to satisfy its foreign exchange obligations or topay dividends in the future. Furthermore, certain foreign exchange transactions of these subsidiariesunder the capital account still require approvals from the State Administrationfor Foreign Exchange.  This requirementaffects our subsidiaries’ ability to obtain foreign exchange through equityfinancing, including by means of capital contributions from us.

 

Under existing Hong Kong law, (i) there are no foreignexchange controls or other laws which restrict the import or export of capitaland which would affect the availability of cash and cash equivalents for ouruse, (ii) there are no foreign exchange controls or other laws, decrees orregulations that affect the remittance of interest, dividends or other paymentson our outstanding debt and equity securities to U.S. residents and (iii) thereare no limitations on the rights of non-resident or foreign owners to hold ourdebt or equity securities.

 

### ***E.            Taxation***

### *** ***

The taxation of income and capital gains of holders ofordinary shares or ADSs is subject to the laws and practices of Hong Kong andof jurisdictions in which holders of ordinary shares or ADSs are resident orotherwise subject to tax.  The followingsummary of certain relevant taxation provisions is based on current law andpractice, is subject to change and does not constitute legal or tax advice.  The discussion does not deal with allpossible tax consequences relating to an investment in the ordinary shares orADSs.  In particular, the discussiondoes not address the tax consequences under state, local and other laws, suchas non-Hong Kong and non-U.S.  federallaws.  The discussion is based upon lawsand relevant interpretations in effect as of the date of this annualreport.  There is no reciprocal taxtreaty in effect between Hong Kong and the United States.

 

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**Hong Kong**

** **

***Tax on Dividends***

*** ***

Under the current practices of the Hong Kong InlandRevenue Department, no tax is payable in Hong Kong in connection with dividendspaid by us.

 

***Profits***

*** ***

No tax is imposed in Hong Kong in respect of capitalgains from the sale of property, such as the shares and ADSs.  Trading gains from the sale of property bypersons carrying on a trade, profession or business in Hong Kong where suchgains are derived from or arise in Hong Kong from such trade, profession orbusiness will be chargeable to Hong Kong profits tax which is currently imposedat the rate of 17.5% on corporations and individuals at a maximum rate of 15.5%with effect from April 1, 2003 and 16.0% with effect from April 1, 2004.  Gains from sales of the shares effected onthe Hong Kong Stock Exchange will be considered to be derived from or arise inHong Kong.  Liability for Hong Kongprofits tax would thus arise in respect of trading gains from sales of sharesor ADSs realized by persons carrying on a business of trading or dealing insecurities in Hong Kong.

 

***Stamp Duty***

*** ***

Hong Kong stamp duty, currently charged at the rate ofHK$1.00 per HK$1,000 or part thereof on the higher of the consideration for orthe value of the shares, will be payable by the purchaser on every purchase andby the seller on every sale of shares. For example, a total of HK$2.00 per HK$1,000 or part thereof iscurrently payable on a typical sale and purchase transaction involvingshares.  In addition, a fixed duty ofHK$5 is currently payable on any instrument of transfer of shares.

 

The withdrawal of shares upon the surrender of ADRs,and the issuance of ADRs upon the deposit of shares, will also attract stampduty at the rate described above for sale and purchase transactions unless suchwithdrawal or deposit does not result in a change in the beneficial ownershipof the shares under Hong Kong law.  Theissuance of the ADRs upon the deposit of shares issued directly to The Bank ofNew York, as depositary of the ADSs, or for the account of The Bank of New Yorkdoes not attract stamp duty.  No HongKong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

 

***Estate Duty***

*** ***

The shares are Hong Kong property under Hong Kong law,and accordingly such shares may be subject to estate duty on the death of thebeneficial owner of such shares, regardless of the place of the owner’sresidence, citizenship or domicile.  Wecannot assure you that the Hong Kong Inland Revenue Department will not treatthe ADSs as Hong Kong property that may be subject to estate duty on the deathof the beneficial owner of the ADS even if the ADRs evidencing such ADSs arelocated outside Hong Kong at the date of such death.  Hong Kong estate duty is imposed on a progressive scale from 5%to 15%.  The rate of and the thresholdfor estate duty has, in the past, been adjusted on a fairly regular basis.  No estate duty is payable when the aggregatevalue of the dutiable estate does not exceed HK$7.5 million, and the maximumrate of duty of 15% applies when the aggregate value of the dutiable estateexceeds HK$10.5 million.  The rates andthresholds stated here apply to the estate of persons who died after April 1,1998.

 

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**United States**

** **

***United States Federal Income Taxation***

*** ***

This section describes the material United Statesfederal income tax consequences of owning shares or ADSs.  It applies to you only if you hold yourshares or ADSs as capital assets for tax purposes.  This section does not apply to you if you are a member of aspecial class of holders subject to special rules, including:

 

•                                          adealer in securities,

•                                          atrader in securities that elects to use a mark-to-market method of accountingfor your securities holdings,

•                                          atax-exempt organization,

•                                          aninsurance company,

•                                          aperson liable for alternative minimum tax,

•                                          aperson that actually or constructively owns 10% or more of our voting stock,

•                                          aperson that holds shares or ADSs that are a hedge or that are hedged againstcurrency risks or as part of a straddle or a conversion transaction, or

•                                          aperson whose functional currency is not the U.S. dollar.

 

This section is based on the Internal Revenue Code of1986, as amended, its legislative history, existing and proposed regulations,published rulings and court decisions, all as currently in effect.  These laws are subject to change, possibly ona retroactive basis.  In addition, thissection is based in part upon the representations of the Depositary and theassumption that each obligation in the deposit agreement and any relatedagreement will be performed in accordance with its terms.

 

You are a U.S. holder if you are a beneficial owner ofshares or ADSs and you are:

 

•                                          acitizen or resident of the United States,

•                                          acorporation organized under the laws of the United States or any States,

•                                          anestate whose income is subject to United States federal income tax regardlessof its source, or

•                                          atrust if a United States court can exercise primary supervision over thetrust’s administration and one or more United States persons are authorized tocontrol all substantial decisions of the trust.

 

You should consult your own tax advisor regarding theUnited States federal, state and local tax consequences of owning and disposingof shares and ADSs in your particular circumstances.

 

This discussion addresses only United States federalincome taxation.

 

In general, and taking into account the earlierassumptions, for United States federal income tax purposes, if you hold ADRsevidencing ADSs, you will be treated as the owner of the shares represented bythose ADSs.  Exchanges of shares forADSs, and ADSs for shares, generally will not be subject to United Statesfederal income tax.

 

***Taxation of Dividends***

*** ***

Under the United States federal income tax laws, andsubject to the passive foreign investment company, or PFIC, rules discussedbelow, if you are a U.S. holder, the gross amount of any dividend we pay out ofour current or accumulated earnings and profits (as determined for UnitedStates federal income tax

 

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purposes) is subject to United States federaltaxation. If you are a noncorporate U.S. holder, dividends paid to you afterDecember 31, 2002 and before January 1, 2009 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that youhold the shares or ADSs for more than 60 days during the 120-day periodbeginning 60 days before the ex-dividend date and meet other holding periodrequirements.  On February 19, 2004, theIRS announced that it will permit taxpayers to apply a proposed legislativechange to the holding period requirement described in the preceding sentence asif such change were already effective. This legislative “technical correction” would change the minimumrequired holding period, retroactive to January 1, 2003, to more than 60 daysduring the 121-day period beginning 60 days before the ex-dividend date.  Dividends we pay with respect to the sharesor ADSs will be qualified dividend income provided that, in the year that youreceive the dividend, the shares or ADSs are readily tradable on an establishedsecurities market in the United States.

 

The dividend is taxable to you when you, in the caseof shares, or the Depositary, in the case of ADSs, receive the dividend,actually or constructively.  Thedividend will not be eligible for the dividends-received deduction generallyallowed to United States corporations in respect of dividends received fromother United States corporations.  Theamount of the dividend distribution that you must include in your income as aU.S. holder will be the U.S. dollar value of the Hong Kong Dollar paymentsmade, determined at the spot Hong Kong/U.S. dollar rate on the date thedividend distribution is includible in your income, regardless of whether thepayment is in fact converted into U.S. dollars.  Generally, any gain or loss resulting from currency exchangefluctuations during the period from the date you include the dividend paymentin income to the date you convert the payment into U.S. dollars will be treatedas ordinary income or loss and will not be eligible for the special tax rateapplicable to qualified dividend income. The gain or loss generally will be income or loss from sources withinthe United States for foreign tax credit limitation purposes.  Distributions in excess of current andaccumulated earnings and profits, as determined for United States federalincome tax purposes, will be treated as a non-taxable return of capital to theextent of your basis in the shares or ADSs and thereafter as capital gain.

 

Special rules apply in determining the foreign taxcredit limitation with respect to dividends that are subject to the maximum 15%tax rate.  Dividends will be income fromsources outside the United States, but generally will be “passive income” or “financialservices income” which is treated separately from other types of income forpurposes of computing the foreign tax credit allowable to you.

 

***Taxation of Capital Gains***

*** ***

Subject to the passive foreign investment companyrules discussed below, if you are a U.S. holder and you sell or otherwisedispose of your shares or ADSs, you will recognize capital gain or loss forUnited States federal income tax purposes equal to the difference between theU.S. dollar value of the amount that you realize and your tax basis, determinedin U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder that is recognized on orafter May 6, 2003 and before January 1, 2009 is generally taxed at a maximumrate of 15% where the property is held more than one year.  The gain or loss will generally be income orloss from sources within the United States for foreign tax credit limitationpurposes.  Your ability to deduct capitallosses is subject to limitations.  AnyHong Kong stamp duty that you pay will not be a creditable tax for UnitedStates federal income tax purposes, but you may be able to deduct such stampduty subject to limitations under the Code.

 

***Passive ForeignInvestment Company Rules***.  We believe that we should not be treated as a passive foreigninvestment company for United States federal income tax purposes, but thisconclusion is a factual determination that is made annually and thus may besubject to change.

 

In general, if you are aU.S. holder, we will be a passive foreign investment company with respect toyou if for any taxable year in which you held our ADSs or shares:

 

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•                                          atleast 75% of our gross income for the taxable year is passive income, or

•                                          atleast 50% of the value, determined on the basis of a quarterly average, of ourassets is attributable to assets that produce or are held for the production ofpassive income.

 

Passive income generally includes dividends, interest,royalties, and rents, but not including certain rents and royalties derived inthe active conduct of a trade or business, annuities, gains from assets thatproduce passive income.  If a foreigncorporation owns directly or indirectly at least 25% by value of the stock ofanother corporation, the foreign corporation is treated for purposes of thepassive foreign investment company tests as owning its proportionate share ofthe assets of the other corporation, and as receiving directly itsproportionate share of the other corporation’s income.

 

If we are treated as a passive foreign investmentcompany, and you are a U.S. holder that does not make a mark-to-marketelection, as described below, you will be subject to special rules with respectto:

 

•                                          anygain you realize on the sale or other disposition of your shares or ADSs, and

 

•                                          anyexcess distribution that we make to you. Generally, any distributions to you during a single taxable year thatare greater than 125% of the average annual distributions received by you inrespect of the shares or ADSs during the three preceding taxable years or, ifshorter, your holding period for the shares or ADSs.

 

Under these rules:

 

•                                          thegain or excess distribution will be allocated ratably over your holding periodfor the shares or ADSs,

 

•                                          theamount allocated to the taxable year in which you realized the gain or excessdistribution will be taxed as ordinary income,

 

•                                          theamount allocated to each prior year, with certain exceptions, will be taxed atthe highest tax rate in effect for that year, and

 

•                                          theinterest charge generally applicable to underpayments of tax will be imposed inrespect of the tax attributable to each such year.

 

Special rules apply for calculating the amount of theforeign tax credit with respect to excess distributions by a passive foreigninvestment company.

 

If you own shares or ADSs in a passive foreigninvestment company that are treated as marketable stock, you may make amark-to-market election.  If you makethis election, you will not be subject to the passive foreign investmentcompany rules described above.  Instead,in general, you will include as ordinary income each year the excess, if any,of the fair market value of your shares or ADSs at the end of the taxable yearover your adjusted basis in your shares or ADSs.  You will also be allowed to take an ordinary loss in respect ofthe excess, if any, of the adjusted basis of your shares or ADSs over theirfair market value at the end of the taxable year (but only to the extent of thenet amount of previously included income as a result of the mark-to-marketelection).  Your basis in the shares orADSs will be adjusted to reflect any such income or loss amounts.  Your gain, if any, recognized upon the saleof your shares or ADSs will be taxed as ordinary income.

 

In addition, notwithstanding any election you makewith regard to the shares or ADSs, dividends that you receive from us will notconstitute qualified dividend income to you if we are a PFIC either in the

 

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taxable year of the distribution or the precedingtaxable year.  Dividends that youreceive that do not constitute qualified dividend income are not eligible fortaxation at the 15% maximum rate applicable to qualified dividend income.  Instead, you must include the gross amountof any such dividend paid by us out of our accumulated earnings and profits (asdetermined for United States federal income tax purposes) in your gross income,and it will be subject to tax at rates applicable to ordinary income.

 

If you own shares or ADSs during any year that we area passive foreign investment company, you must file Internal Revenue ServiceForm 8621.

 

### ***F.            Dividends andPaying Agents***

 

Not applicable.

 

### ***G.            Statement byExperts***

 

Not applicable.

 

### ***H.            Documents onDisplay***

 

You can read and copy documents referred to in thisannual report that have been filed with the U.S.  Securities and Exchange Commission, or the SEC, at the SEC’spublic reference room located at 450 Fifth Street, NW, Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 forfurther information on the public reference rooms and their copy charges.

 

### ***I.             SubsidiaryInformation***

 

Not applicable.

 

## **Item 11**.  Quantitative and Qualitative DisclosuresAbout Market Risks

## ** **

Our exposure to financial market risks relatesprimarily to changes in interest rates and currency exchange rates.

 

**InterestRate Risk**

 

We are subject to market risks due to fluctuations ininterest rates, principally as a result of our long-term loans, all of whichbear variable interest rates.  Theoriginal maturities of our long-term loans range from one to seven years.

 

The People’s Bank of China has the sole authority inChina to establish official interest rates for Renminbi-denominated loans.  Financial institutions in China set theireffective interest rates within the range established by the People’s Bank ofChina.  The fair value of our borrowingsis the same as the carrying value since all our bank loan interest arevariable.  Most of our bank loans aredenominated in Renminbi and borrowed from domestic banks at interest rates thatvary in accordance with the standard guidance interest rates announced byrelevant Chinese government authorities.

 

Interest rates and payment methods on loansdenominated in foreign currencies are set by financial institutions based oninterest rate changes in the international financial market, cost of funds,risk levels and other factors.  In September 2003, weentered into a US$700 million term loan facility with 13 financialinstitutions, which is consisted of three tranches: a three-year US$200 milliontranche, with an interest rate of 0.28% over the US$ LIBOR, a five-year US$300million tranche, with an interest rate of 0.35% over the

 

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US$ LIBOR, and a seven-year US$200 million tranche,with an interest rate of 0.44% per annum over the US$ LIBOR.

 

As a result, we are exposed to interest rate riskresulting from fluctuations in interest rates on our debts.  Increases in interest rates will increasethe cost of new borrowing and the interest expense with respect to ouroutstanding floating rate debt, and therefore could have a material adverseeffect on our financial position.  Fromtime to time, we may enter into interest rate swap agreements designed tomitigate our exposure to interest rate risks in connection with our borrowingsdenominated in foreign currencies, although we did not consider it necessary todo so in 2003.  We are also consideringhedging our borrowings denominated in Renminbi once interest rate swaps become availablefor Renminbi-denominated borrowings in China.

 

The following table provides information, by maturitydate, regarding our interest rate-sensitive financial instruments, whichconsist of variable rate debt obligation, as of December 31, 2003.  We do not have fixed rate debt obligation asof December 31, 2003. 

 
|                                |   | **Expected Maturity Date**                            |   | **As of December 31,  2003** |   |
|-------------------------------------|--------|-------------------------------------------------------|--------|------------------------------|--------|
|                                |   | **2004**                                              |   | **2005**                     |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                                |   | **(RMB equivalent in million, except interest rate)** |   |
|                                |   |                                                  |   |
| Variable rate bank  and other loans |   | 18,173                                                |   | 15,550                       |   | 11,700 |   | 3,021 |   | 4,117 |   | 1,825 |   | 54,386 |   | 54,386 |   |
|                                |   |                                                  |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average interest  rate(1)           |   | 4.86                                                  | %      | 4.61                         | %      | 4.01 | % | 3.38 | % | 2.56 | % | 1.89 | % | — |   | — |   |

 

----

(1)                  The interest rates for variable rate bankand other loans are calculated based on the weighted average interest rates atthe end of 2003.

 

For the year ended December 31, 2003, if the averageinterest rates for our variable rate bank and other loans had increased by 10%,we estimate that we would have incurred additional interest expenses of RMB255 million in 2003.

 

**Exchange Rate Risk**

 

The majority of our indebtedness and capitalexpenditures are in Renminbi.  Currencyexchange rate risk exists with respect to our repayment of indebtedness to ourforeign lenders, payables to equipment suppliers and contractors and ourdividend payments to holders of ordinary shares and ADSs in foreigncurrencies.  As of December 31, 2003,approximately RMB5.9****billion ofcapital commitments was authorized and contracted for in currencies other thanRenminbi and foreign currency-denominate debt outstanding, representing ourthree-tranches US$700 million term loan entered into with 13 financialinstitutions in September 2003 as described above.  In addition, we had US$192 million in bank balances and cash, andshort-term bank deposits as of December 31, 2003.  Although the Renminbi to US$ exchange rate has been relativelystable since 1994, we cannot predict nor give any assurance of its future stability.** **Fluctuationsin exchange rates may lead to significant fluctuations in the exposure of ourforeign-currency-denominated liabilities and assets.  We may, from time to time, enter into currency swap agreementsand foreign exchange forward contracts designed to mitigate our exposure toforeign currency risks, although we did not consider this to be necessary in2003.

 

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The following table provides information regarding ourforeign currency-sensitive financial instruments and transactions, whichconsist of short-term bank deposits, bank balances and cash, long-term debtobligations and capital commitments as of December 31, 2003. 

 
|                                                              |   | **Expected Maturity Date**                             |   | **As of December 31,  2003** |   |
|-------------------------------------------------------------------|--------|--------------------------------------------------------|--------|------------------------------|--------|
|                                                              |   | **2004**                                               |   | **2005**                     |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                                                              |   | **(RMB  equivalent in million, except interest rate)** |   |
| **On-balance  sheet financial instruments:**                      |   |                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  deposits with banks:                                  |   |                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in U.S. dollars                                                   |   | 913                                                    |   | —                       |   | — |   | — |   | — |   | — |   | 913 |   | 913 |   |
| in Hong Kong  dollars                                             |   | —                                                 |   | —                       |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Bank balances  and cash                                           |   |                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in U.S. dollars                                                   |   | 678                                                    |   | —                       |   | — |   | — |   | — |   | — |   | 678 |   | 678 |   |
| in Hong Kong  dollars                                             |   | 20                                                     |   | —                       |   | — |   | — |   | — |   | — |   | 20 |   | 20 |   |
| **Debts:**                                                        |   |                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate  bank and other loans (U.S. dollar)                 |   | —                                                 |   | —                       |   | 1,655 |   | — |   | 2,483 |   | 1,655 |   | 5,793 |   | 5,793 |   |
| Average interest  rate(1)                                         |   | —                                                 |   | —                       |   | 1.72 | % | — |   | 1.77 | % | 1.83 | % | — |   | — |   |
| **Off-balance  sheet commitments:**                               |   |                                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital  commitments authorized and contracted for in U.S. dollar |   | 83                                                     |   | —                       |   | — |   | — |   | — |   | — |   | 83 |   | 83 |   |

 

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(1)                  The interest rates for variable rate bankand other loans are calculated based on the weighted average interest rates atthe end of 2003.

 

## **Item 12**.  Description of Securities Other than EquitySecurities

## ** **

Not Applicable.

 

# **PART II**

# ** **

## **Item 13**.  Defaults, Dividend Arrearages andDelinquencies

## ** **

None.

 

## **Item 14**.  Material Modifications to the Rights ofSecurity Holders and Use of Proceeds

## ** **

None.

 

## **Item 15**.  Controlsand Procedures

## ** **

**(a)  *Evaluationof Disclosure Controls and Procedures***

 

Our chief executive officer and chief financialofficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(e) of the Securities Exchange

 

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Act of 1934) as of the end of the period covered bythis annual report.  They have concludedthat, as of the date of evaluation, our disclosure controls and procedures wereadequate and effective to ensure that material information relating to us andour consolidated subsidiaries was made known to them by others within ourcompany and our consolidated subsidiaries.

 

**(d)  *Changesin Internal Controls***

 

There were no significant changes in our internalcontrols over financial reporting identified in connection with the evaluationrequired by paragraph (d) of 17 CFR 240.13a-15 or 240.15d that occurred duringthe period covered by this annual report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

## **Item 16A**.  Audit Committee Financial Expert

## ** **

Our board of directors has determined that Mr. ShanWeijian, a member of our audit committee, is an audit committee financialexpert.

 

## **Item 16B**.  Code of Ethics

## ** **

We have adopted acode of ethics that applies to our chief executive officer, chief financialofficer,  president, vice-president,controller and other senior officers. We have filed this code of ethics as an exhibit to this annualreport.  In addition, we have posted thetext of such code of ethics on our Internet website at www.chinaunicom.com.hk.

 

## **Item 16C**.  Principal Accountant Fees and Services

## ** **

The following table sets forth the aggregate audit fees, audit-relatedfees and tax fees for our principal accountants billed for products andservices provided by our principal accountants for audit services,audit-related services and tax service for each of the fiscal years 2002 and2003:

 
|                |   | **For the  years ended  December 31,** |   |
|---------------------|--------|----------------------------------------|--------|
|                |   | **2002**                               |   | **2003** |   |
|                |   | **(in US  dollars)**                   |   |
| Audit fees          |   | 4,700,000                              |   | 6,528,000 |   |
| Audit-related  fees |   | 320,000                                |   | 1,900,000 |   |
| Tax fees            |   | 72,500                                 |   | 2,000 |   |
| All other fees      |   | —                                 |   | — |   |
| **Total**           |   | 5,092,500                              |   | 8,430,000 |   |

 

Audit services are defined as the standard audit work that needs to beperformed each year in order to issue an opinion on the consolidated financialstatements of our Company and of Unicom Group. It also includes audit services that only the external auditorreasonably can provide, such as pre-issuance reviews of quarterly and interimfinancial results.

 

Audit-related services include those other assurances and relatedservices provided by auditors, but not restricted to those that can onlyreasonably be provided by the external auditor signing the audit report, thatare reasonably related to the performance of the audit or review of ourCompany’s financial statements such as acquisition due diligence, consultationsconcerning financial accounting and reporting standards.

 

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Tax services include the assistance with compliance and reporting ofenterprise taxes, assistance with our assessment of new or changing taxregimes, and assistance with assessing relevant rules, regulations and factsgoing into our correspondence with tax authorities.

 

**Audit Committee’s Pre-approval Policies and Procedures**

 

The Audit Committee of our Board of Directors is responsible, amongother things, for the oversight of the external auditor subject to therequirements of the Hong Kong Company Ordinance and our Articles ofAssociation.  The Audit Committee hasadopted a policy regarding pre-approval of audit and permissible non-auditservices to be provided by our independent accountants.  Under the policy, proposed services either(i) may be pre-approved by the Audit Committee without consideration ofspecific case-by-case services; or (ii) require the specific pre-approval ofthe Audit Committee.  General approvalapplies to services of a recurring and predictable nature.  These types of services, once approved bythe Audit Committee, will not require further approval in the future, exceptwhen actual fees and expenses exceed pre-approved budget levels.  In such a case, the Audit Committee mayauthorize one of its members to approve budget increases subject to therequirement that such member provide a report on his decision to approve ordeny an application for budget increases to the Audit Committee at an AuditCommittee meeting held immediately after such member grants or denies theapproval.

 

### ***Specific pre-approval applies to all other services.  These services must be approved by the AuditCommittee on a case-by-case basis after an application including proposedbudget and scope of services to be provided by our independent auditors issubmitted to the Audit Committee.***

### *** ***

## **Item 16D**.  Exemptions from the Listing Standards forAudit Committees

## ** **

Not applicable.

 

## **Item 16E**.  Purchases of Equity Securities by the Issuerand Affiliated Purchasers

## ** **

Not applicable.

 

# **PART III**

# ** **

## **Item 17**.  Financial Statements

## ** **

We have elected to provide financial statements andrelated information specified in Item 18 in lieu of Item 17.

 

## **Item 18**.  Financial Statements

## ** **

See “Index to Consolidated FinancialStatements” for a list of all financial statements filed as part of thisannual report.

 

## **Item 19**.  Exhibits

 

| **Exhibit  Number** |   | **Description of Exhibit**                                                                                                                                                                                         |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                               |
| 1.1                 |   | Memorandum of Association of Unicom, dated January  27, 2000(1).                                                                                                                                                   |
|                |   |                                                                                                                                                                                                               |
| 1.2                 |   | Amended Articles of Association of Unicom (as  amended)(1).                                                                                                                                                        |
|                |   |                                                                                                                                                                                                               |
| 1.3                 |   | Amended Articles  of Association of Unicom (as amended on May 12, 2004).                                                                                                                                           |
|                |   |                                                                                                                                                                                                               |
| 2.1                 |   | Deposit  Agreement, among Unicom, the Bank of New York, as Depositary, and Owners and  Beneficial Owners of American Depositary Receipts issued thereunder,  including the form of American Depositary Receipt(2). |
|                |   |                                                                                                                                                                                                               |
| 2.2                 |   | Form of specimen  certificate for the shares(1).                                                                                                                                                                   |
|                |   |                                                                                                                                                                                                               |

 

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| 4.1    |   | CDMA Network  Capacity Lease Agreement among CUCL, Unicom Group and Unicom Horizon, dated  November 22, 2001(4).                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                |
| 4.2    |   | Reorganization  Agreement between Unicom Group and CUCL (together with English  translation)(1).                                                                                                    |
|   |   |                                                                                                                                                                                                |
| 4.3    |   | Services  Agreement between Unicom Group and CUCL (together with English  translation)(1).                                                                                                          |
|   |   |                                                                                                                                                                                                |
| 4.4    |   | Lease Agreement  between CUCL and Unicom Xingye Science and Technology Trade Co. Ltd.  (together with English translation)(1).                                                                      |
|   |   |                                                                                                                                                                                                |
| 4.5    |   | Transmission  Line Lease and Services Agreement between Unicom Group, CUCL and Guoxin  Paging (together with English translation)(1).                                                               |
|   |   |                                                                                                                                                                                                |
| 4.6    |   | Pre-Global  Offering Share Option Scheme, adopted by ordinary resolution of the Company  on June 1, 2000 and amended by ordinary resolution of the Company  on May 13, 2002(4). |
|   |   |                                                                                                                                                                                                |
| 4.7    |   | Share Option  Scheme, adopted by ordinary resolution of the Company on  June 1, 2000 and amended by ordinary resolution of the Company on  May 13, 2002(4).                     |
|   |   |                                                                                                                                                                                                |
| 4.8    |   | Service  Agreements between executive directors of Unicom and Unicom(3).                                                                                                                            |
|   |   |                                                                                                                                                                                                |
| 4.9    |   | Reorganization  Agreement between Unicom Group and Unicom New Century, dated November 18,  2002.  (English translation)(5).                                                                    |
|   |   |                                                                                                                                                                                                |
| 4.10   |   | Form of  Conditional Sale and Purchase Agreement between Unicom BVI and our company,  dated November 20, 2002(5).                                                                                   |
|   |   |                                                                                                                                                                                                |
| 4.11   |   | Comprehensive  Services Agreement between Unicom Group and A Share Company, dated November  20, 2002. (English translation)(5).                                                                     |
|   |   |                                                                                                                                                                                                |
| 4.12   |   | Transfer  Agreement with respect to the Comprehensive Services Agreement between A  Share Company and Unicom New Century, dated November 20, 2002.  (English translation)(5).                  |
|   |   |                                                                                                                                                                                                |
| 4.13   |   | Form of CDMA  Network Capacity Lease Agreement among Unicom Horizon, A Share Company and  Unicom Group, dated November 20, 2002(5).                                                                 |
|   |   |                                                                                                                                                                                                |
| 4.14   |   | Transfer  Agreement with respect to the CDMA Network Capacity Lease Agreement between A  Share Company and Unicom New Century, dated November 20, 2002.  (English translation)(5).             |
|   |   |                                                                                                                                                                                                |
| 4.15   |   | Reorganization  Agreement between Unicom Group and Unicom New World, dated November 4, 2003.  (English translation).                                                                                |
|   |   |                                                                                                                                                                                                |
| 4.16   |   | Conditional Sale  and Purchase Agreement between Unicom BVI and our Company, dated November 20,  2003.                                                                                              |
|   |   |                                                                                                                                                                                                |
| 4.17   |   | Conditional Sale  and Purchase Agreement between CUCL and A Share Company, dated November 20,  2003. (English translation).                                                                         |
|   |   |                                                                                                                                                                                                |
| 4.18   |   | Comprehensive  Services Agreement between Unicom Group and A Share Company, dated November  20, 2003. (English translation).                                                                        |
|   |   |                                                                                                                                                                                                |
| 4.19   |   | Transfer  Agreement with respect to the Comprehensive Services Agreement between A  Share Company and Unicom New World, dated November 20, 2003.  (English translation).                       |

 

127

----

 

| **Exhibit  Number** |   | **Description of Exhibit**                                                                                                                                                                                  |
|---------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                        |
| 4.20                |   | CDMA Network Capacity  Lease Agreement among Unicom Horizon, A Share Company and Unicom Group, dated  November 20, 2003.                                                                                    |
|                |   |                                                                                                                                                                                                        |
| 4.21                |   | Transfer  Agreement with respect to the CDMA Network Capacity Lease Agreement between A  Share Company and Unicom New World, dated November 20, 2003.  (English translation).                          |
|                |   |                                                                                                                                                                                                        |
| 4.22                |   | Comprehensive  Operator Services Agreement between Unicom Group and A Share Company, dated  November 20, 2003. (English translation).                                                                       |
|                |   |                                                                                                                                                                                                        |
| 4.23                |   | Transfer  Agreement with respect to the Comprehensive Operator Services Agreement  between A Share Company, CUCL, Unicom New Century and Unicom New World, dated  November 20, 2003. (English translation). |
|                |   |                                                                                                                                                                                                        |
| 4.24                |   | Service  Agreement between Mr. William Lo Wing Yan, executive director of Unicom, and  Unicom. (English translation).                                                                                       |
|                |   |                                                                                                                                                                                                        |
| 4.25                |   | Letter Agreement  between Mr.Wang Jianzhou, executive director of Unicom, and Unicom with  respect to the Extension of the Service Agreement between Mr. Wang and  Unicom. (English translation).           |
|                |   |                                                                                                                                                                                                        |
| 8.1                 |   | List of our  significant subsidiaries.                                                                                                                                                                      |
|                |   |                                                                                                                                                                                                        |
| 11.1                |   | Code of Ethics                                                                                                                                                                                              |
|                |   |                                                                                                                                                                                                        |
| 12.1                |   | CEO  Certification                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                        |
| 12.2                |   | CFO  Certification                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                        |
| 13.1                |   | CEO  Certification                                                                                                                                                                                          |
|                |   |                                                                                                                                                                                                        |
| 13.2                |   | CFO  Certification                                                                                                                                                                                          |

 

----

(1)    Incorporated by reference to ourRegistration Statement on Form F-1 (File No. 333-11938) filed with the SEC in connectionwith our initial public offering in June 2000.

 

(2)    Incorporated by reference to theRegistration Statement on Form F-6 (Filed No. 333-11952) filed with the SECwith respect to American Depositary Shares representing our shares.

 

(3)    Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31, 2000.

 

(4)    Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31, 2001.

 

(5)    Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31, 2002.

 

128

----

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

Date: June 24, 2004

 
|   |                 |
|--------|----------------------|
|   | CHINA UNICOM LIMITED |
|   |                 |
|   |                 |
|   | By:                  | /s/ Wang Jianzhou |   |
|   |                 |   Name: | Wang Jianzhou |   |
|   |                 |   Title: | Chief Executive Officer |   |

 

129

----

** **

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

 

**AUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**FOR THE YEARS ENDED**

 

**DECEMBER 31, 2001, 2002 AND2003**

 

----

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

** **
| **CHINA  UNICOM LIMITED AND ITS SUBSIDIARIES**                                                                         |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| Report of Independent  Auditors                                                                                        |   |
| Consolidated  statements of income for the years ended December 31, 2001, 2002 and 2003                                |   |
| Consolidated balance sheets  as of December 31, 2002 and 2003                                                          |   |
| Consolidated  statements of changes in shareholders’ equity for the years ended December  31, 2001, 2002 and 2003 |   |
| Consolidated  statements of cash flows for the years ended December 31, 2001, 2002 and 2003                            |   |
| Notes to the consolidated financial  statements                                                                        |   |

 

----

 

**Report of Independent Auditors**

 

 

**TOTHE BOARD OF DIRECTORS AND SHAREHOLDERS OF CHINA UNICOM LIMITED**

*(Incorporatedin the Hong Kong Special Administrative Region of the People’s Republic ofChina (“Hong Kong”)**with limited liability)*

 

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income, of cash flows and ofchanges in shareholders’ equity present fairly, in all material respects, thefinancial position of China Unicom Limited (the “Company”) and its subsidiaries(the “Group) at December 31, 2002 and 2003, and the results of their operationsand their cash flows for each of the three years in the period ended December31, 2003, in conformity with accounting principles generally accepted in HongKong.  These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with the standards of the Public Company Accounting OversightBoard (United States) and Statements of Auditing Standards issued by the HongKong Society of Accountants.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

Accounting principles generally accepted in Hong Kongvary in certain significant respects from accounting principles generallyaccepted in the United States of America. Information relating to the nature and effect of such differences ispresented in Note 41 to the consolidated financial statements.

 

 

**PricewaterhouseCoopers**

*Certified Public Accountants*

 

HongKong, March 25, 2004

 

F - 2

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE YEARSENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressedin thousands, except per share data)**

 
|                                                   |   | **Note**                    |   | **2001**        |   | **2002**         |   | **2003**    |   | **2003**   |   |
|--------------------------------------------------------|--------|-----------------------------|--------|-----------------|--------|------------------|--------|-------------|--------|------------|--------|
|                                                   |   |                        |   | **RMB**         |   | **RMB**          |   | **RMB**     |   | **US$**    |   |
|                                                   |   |                        |   | **As restated** |   | **As  restated** |   |        |   |       |   |
| Operating revenue (Turnover):                          |   |                        |   |            |   |             |   |        |   |       |   |
| GSM Business                                           |   | 6, 32, 35                   |   | 20,505,058      |   | 27,387,925       |   | 40,303,611  |   | 4,869,527  |   |
| CDMA Business                                          |   | 3(f), 6, 20(a), 23, 32,  35 |   | —          |   | 3,225,347        |   | 16,623,518  |   | 2,008,472  |   |
| Data and  Internet Business                            |   | 6, 32, 35                   |   | 1,820,211       |   | 2,793,039        |   | 3,437,083   |   | 415,272    |   |
| Long Distance  Business                                |   | 6, 32, 35                   |   | 1,488,733       |   | 2,765,723        |   | 2,273,148   |   | 274,644    |   |
| Paging Business                                        |   | 6, 32, 35                   |   | 4,341,824       |   | 2,161,188        |   | 1,403,053   |   | 169,518    |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Total service  revenue                                 |   |                        |   | 28,155,826      |   | 38,333,222       |   | 64,040,413  |   | 7,737,433  |   |
| Sales of  telecommunications products                  |   | 6, 32, 35                   |   | 1,237,060       |   | 2,243,303        |   | 3,595,912   |   | 434,462    |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Total operating  revenue                               |   | 6, 35                       |   | 29,392,886      |   | 40,576,525       |   | 67,636,325  |   | 8,171,895  |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Operating  expenses:                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Leased lines and  network capacities                   |   | 7, 8, 32                    |   | (853,306        | )      | (1,583,255       | )      | (4,320,382  | )      | (521,993   | )      |
| Interconnection  charges                               |   | 8, 32                       |   | (2,072,584      | )      | (3,229,640       | )      | (5,920,793  | )      | (715,357   | )      |
| Depreciation and  amortization                         |   | 7                           |   | (8,262,296      | )      | (11,255,724      | )      | (16,385,293 | )      | (1,979,689 | )      |
| Personnel                                              |   | 7, 8, 12, 13                |   | (2,487,218      | )      | (3,335,218       | )      | (4,574,546  | )      | (552,702   | )      |
| Selling and  marketing                                 |   | 7, 20(a), 23, 32            |   | (3,612,890      | )      | (5,980,948       | )      | (15,156,835 | )      | (1,831,265 | )      |
| General,  administrative and other expenses            |   | 7, 8, 32                    |   | (5,498,997      | )      | (5,631,850       | )      | (9,112,385  | )      | (1,100,968 | )      |
| Cost of  telecommunications products sold              |   | 32                          |   | (1,342,244      | )      | (2,236,206       | )      | (3,652,045  | )      | (441,244   | )      |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Total operating  expenses                              |   |                        |   | (24,129,535     | )      | (33,252,841      | )      | (59,122,279 | )      | (7,143,218 | )      |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Operating income                                       |   |                        |   | 5,263,351       |   | 7,323,684        |   | 8,514,046   |   | 1,028,677  |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Loss on sale of discontinued operation (Guoxin Paging) |   | 5                           |   | —          |   | —           |   | (663,279    | )      | (80,138    | )      |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
|                                                   |   |                        |   | 5,263,351       |   | 7,323,684        |   | 7,850,767   |   | 948,539    |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Interest income                                        |   | 7                           |   | 2,096,972       |   | 470,282          |   | 173,033     |   | 20,906     |   |
| Finance costs                                          |   | 9                           |   | (1,917,566      | )      | (1,474,441       | )      | (1,936,022  | )      | (233,912   | )      |
| Other income  (expense), net                           |   | 10                          |   | 19,831          |   | (16,359          | )      | 8,071       |   | 975        |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Income before  taxation                                |   | 7                           |   | 5,462,588       |   | 6,303,166        |   | 6,095,849   |   | 736,508    |   |
| Taxation                                               |   | 3(a), 14                    |   | (896,039        | )      | (1,720,205       | )      | (1,888,381  | )      | (228,156   | )      |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Income after  taxation                                 |   |                        |   | 4,566,549       |   | 4,582,961        |   | 4,207,468   |   | 508,352    |   |
| Minority  interests                                    |   |                        |   | 35,310          |   | 15,252           |   | 9,629       |   | 1,163      |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Net income                                             |   | 15                          |   | 4,601,859       |   | 4,598,213        |   | 4,217,097   |   | 509,515    |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Proposed final dividend                                |   | 15                          |   | —          |   | 1,255,300        |   | 1,255,317   |   | 151,669    |   |
|                                                   |   |                        |   |            |   |             |   |        |   |       |   |
| Dividend paid                                          |   | 15                          |   | —          |   | —           |   | 1,255,300   |   | 151,667    |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 3

----

 
|                                                              |   | **Note** |   | **2001**        |   | **2002**         |   | **2003**   |   | **2003**   |   |
|-------------------------------------------------------------------|--------|----------|--------|-----------------|--------|------------------|--------|------------|--------|------------|--------|
|                                                              |   |     |   | **As restated** |   | **As  restated** |   |       |   |       |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Basic earnings  per share                                         |   | 16       |   | RMB0.367        |   | RMB0.366         |   | RMB0.336   |   | USD0.041   |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Diluted earnings  per share                                       |   | 16       |   | RMB0.367        |   | RMB0.366         |   | RMB0.336   |   | USD0.041   |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Number of shares  outstanding for basic earnings (in thousands)   |   | 16       |   | 12,552,996      |   | 12,552,996       |   | 12,553,010 |   | 12,553,010 |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Number of shares  outstanding for diluted earnings (in thousands) |   | 16       |   | 12,552,996      |   | 12,552,996       |   | 12,568,683 |   | 12,568,683 |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Basic earnings  per ADS                                           |   | 16       |   | RMB3.666        |   | RMB3.663         |   | RMB3.359   |   | USD0.406   |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Diluted earnings  per ADS                                         |   | 16       |   | RMB3.666        |   | RMB3.663         |   | RMB3.355   |   | USD0.405   |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Number of ADS  outstanding for basic earnings (in thousands)      |   | 16       |   | 1,255,300       |   | 1,255,300        |   | 1,255,301  |   | 1,255,301  |   |
|                                                              |   |     |   |            |   |             |   |       |   |       |   |
| Number of ADS  outstanding for diluted earnings (in thousands)    |   | 16       |   | 1,255,300       |   | 1,255,300        |   | 1,256,869  |   | 1,256,869  |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 4

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**ASOF DECEMBER 31, 2002 and 2003**

**(Expressed in thousands)**

 
|                                                 |   | **Note**            |   | **2002**        |   | **2003**    |   | **2003**   |   |
|------------------------------------------------------|--------|---------------------|--------|-----------------|--------|-------------|--------|------------|--------|
|                                                 |   |                |   | **RMB**         |   | **RMB**     |   | **US$**    |   |
|                                                 |   |                |   | **As restated** |   |        |   |       |   |
| **Non-current  assets:**                             |   |                |   |            |   |        |   |       |   |
| Property, plant  and equipment, net                  |   | 21                  |   | 107,486,629     |   | 118,104,848 |   | 14,269,558 |   |
| Goodwill                                             |   | 3(a), 22            |   | 2,285,771       |   | 3,315,468   |   | 400,578    |   |
| Other assets                                         |   | 23                  |   | 7,018,223       |   | 5,849,430   |   | 706,735    |   |
| Deferred tax  assets                                 |   | 14                  |   | 826,568         |   | 324,900     |   | 39,255     |   |
| Investment  securities                               |   | 24                  |   | 105,648         |   | —      |   | —     |   |
| Investment in  associated companies                  |   |                |   | 3,814           |   | —      |   | —     |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| Total  non-current assets                            |   |                |   | 117,726,653     |   | 127,594,646 |   | 15,416,126 |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| **Current  assets:**                                 |   |                |   |            |   |        |   |       |   |
| Current portion  of deferred tax assets              |   | 3(a), 14            |   | 988,666         |   | 873,849     |   | 105,579    |   |
| Amounts due from  related parties                    |   | 32(b)               |   | 1,137,847       |   | 263,414     |   | 31,826     |   |
| Amounts due from  domestic carriers                  |   | 34(b)               |   | 211,462         |   | 184,613     |   | 22,305     |   |
| Prepayments and  other current assets                |   | 20                  |   | 2,573,764       |   | 3,147,777   |   | 380,318    |   |
| Inventories                                          |   | 19                  |   | 3,229,903       |   | 2,169,354   |   | 262,104    |   |
| Accounts  receivable, net                            |   | 18                  |   | 4,327,268       |   | 5,471,547   |   | 661,078    |   |
| Trading  securities                                  |   | 17                  |   | 173,939         |   | —      |   | —     |   |
| Short-term bank  deposits                            |   |                |   | 4,825,205       |   | 912,794     |   | 110,285    |   |
| Bank balances and cash                               |   | 4(b)(i), 28(a)(iii) |   | 14,433,498      |   | 9,219,936   |   | 1,113,963  |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| Total current  assets                                |   |                |   | 31,901,552      |   | 22,243,284  |   | 2,687,458  |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| **Current  liabilities:**                            |   |                |   |            |   |        |   |       |   |
| Dividend payable                                     |   |                |   | 8,448           |   | —      |   | —     |   |
| Payables and  accrued liabilities                    |   | 26                  |   | 19,811,961      |   | 17,098,420  |   | 2,065,850  |   |
| Amounts due to  Unicom Group                         |   | 32(c)               |   | 562,633         |   | 432,047     |   | 52,200     |   |
| Amounts due to  related parties                      |   | 32(b)               |   | 409,663         |   | 108,891     |   | 13,156     |   |
| Amounts due to  domestic carriers                    |   | 34(b)               |   | 1,123,580       |   | 778,841     |   | 94,100     |   |
| Current portion  of obligations under finance leases |   | 29, 34(b)           |   | 16,793          |   | 25,435      |   | 3,073      |   |
| Current portion  of long-term bank loans             |   | 28                  |   | 5,459,505       |   | 7,197,877   |   | 869,655    |   |
| Taxes payable                                        |   |                |   | 1,106,006       |   | 623,857     |   | 75,375     |   |
| Advances from  customers                             |   |                |   | 6,240,225       |   | 6,666,086   |   | 805,404    |   |
| Short-term loans  from Unicom Group                  |   | 32(d)               |   | 724,127         |   | —      |   | —     |   |
| Short-term bank  loans                               |   | 27                  |   | 9,146,500       |   | 10,975,199  |   | 1,326,036  |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| Total current  liabilities                           |   |                |   | 44,609,441      |   | 43,906,653  |   | 5,304,849  |   |
|                                                 |   |                |   |            |   |        |   |       |   |
| **Net  current liabilities**                         |   |                |   | (12,707,889     | )      | (21,663,369 | )      | (2,617,391 | )      |
|                                                 |   |                |   |            |   |        |   |       |   |
| **Total  assets less current liabilities**           |   |                |   | 105,018,764     |   | 105,931,277 |   | 12,798,735 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 5

----

 
|                              |   | **Note**  |   | **2002**        |   | **2003**    |   | **2003**   |   |
|-----------------------------------|--------|-----------|--------|-----------------|--------|-------------|--------|------------|--------|
|                              |   |      |   | **RMB**         |   | **RMB**     |   | **US$**    |   |
|                              |   |      |   | **As restated** |   |        |   |       |   |
| **Financed  by:**                 |   |      |   |            |   |        |   |       |   |
| **Shareholders’  equity:**   |   |      |   |            |   |        |   |       |   |
| Share capital                     |   | 30        |   | 1,331,371       |   | 1,331,390   |   | 160,860    |   |
| Share premium                     |   |      |   | 52,482,127      |   | 52,483,266  |   | 6,341,086  |   |
| Reserves                          |   | 15(a)     |   | 1,300,065       |   | 1,719,331   |   | 207,731    |   |
| Retained  earnings:               |   |      |   |            |   |        |   |       |   |
| Proposed final  dividend          |   | 15(b)     |   | 1,255,300       |   | 1,255,317   |   | 151,669    |   |
| Others                            |   | 3(a)      |   | 10,283,672      |   | 12,826,186  |   | 1,549,674  |   |
|                              |   |      |   |            |   |        |   |       |   |
| Shareholders’  equity        |   |      |   | 66,652,535      |   | 69,615,490  |   | 8,411,020  |   |
|                              |   |      |   |            |   |        |   |       |   |
| **Minority  interests**           |   |      |   | 566,257         |   | —      |   | —     |   |
|                              |   |      |   |            |   |        |   |       |   |
| **Non-current  liabilities:**     |   |      |   |            |   |        |   |       |   |
| Long-term bank  loans             |   | 28        |   | 37,686,162      |   | 36,212,791  |   | 4,375,269  |   |
| Obligations  under finance leases |   | 29, 34(b) |   | 101,302         |   | 99,719      |   | 12,048     |   |
| Other long-term  liabilities      |   |      |   | 12,508          |   | 3,277       |   | 396        |   |
|                              |   |      |   |            |   |        |   |       |   |
| Total  non-current liabilities    |   |      |   | 37,799,972      |   | 36,315,787  |   | 4,387,713  |   |
|                              |   |      |   |            |   |        |   |       |   |
|                              |   |      |   | 105,018,764     |   | 105,931,277 |   | 12,798,733 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 6

----

 

**C****HINA UNICOM LIMITED ANDSUBSIDIARIES**

**CONSOLIDATED****STATEMENTS OF CHANGES****IN SHAREHOLDERS’ EQUITY**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressed in thousands of RMB)**

** **
|                                                                                                   |   | **Share  capital** |   | **Share  premium** |   | **Revaluation  reserve** |   | **Statutory  reserve** |   | **Retained  profits** |   | **Total**  |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|--------------------------|--------|------------------------|--------|-----------------------|--------|------------|--------|
|                                                                                                   |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
| Balance at  January 1, 2001, as previously reported                                                    |   | 1,331,371          |   | 52,482,127         |   | 176,853                  |   | 424,805                |   | 2,809,246             |   | 57,224,402 |   |
| Change in  accounting policy:                                                                          |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
|  - Additional  provision for deferred tax assets (Note 3(a))                            |   | —             |   | —             |   | —                   |   | —                 |   | 228,061               |   | 228,061    |   |
|  - To adjust for  statutory reserve due to the change in accounting policy (Note 15(a)) |   | —             |   | —             |   | —                   |   | 22,806                 |   | (22,806               | )      | —     |   |
| Balance at  January 1, 2001, as restated                                                               |   | 1,331,371          |   | 52,482,127         |   | 176,853                  |   | 447,611                |   | 3,014,501             |   | 57,452,463 |   |
| Net income for  the year, as restated  (Note 3(a))                                                |   |               |   |               |   |                     |   |                   |   | 4,601,859             |   | 4,601,859  |   |
| Appropriation to  statutory reserve, as restated (Note 15(a))                                          |   |               |   |               |   |                     |   | 239,138                |   | (239,138              | )      | —     |   |
| Balance at  December 31, 2001, as restated                                                             |   | 1,331,371          |   | 52,482,127         |   | 176,853                  |   | 686,749                |   | 7,377,222             |   | 62,054,322 |   |
|                                                                                                   |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
| Net income for  the year, as restated  (Note 3(a))                                                |   | —             |   | —             |   | —                   |   | —                 |   | 4,598,213             |   | 4,598,213  |   |
| Appropriation to  statutory reserve, as restated (Note 15(a))                                          |   | —             |   | —             |   | —                   |   | 436,463                |   | (436,463              | )      | —     |   |
| Balance at  December 31, 2002, as restated                                                             |   | 1,331,371          |   | 52,482,127         |   | 176,853                  |   | 1,123,212              |   | 11,538,972            |   | 66,652,535 |   |
|                                                                                                   |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
| Dividends (Note  15(b))                                                                           |   | —             |   | —             |   | —                   |   | —                 |   | (1,255,300            | )      | (1,255,300 | )      |
| Exercise of  share options (Note 31(e))                                                                |   | 19                 |   | 1,139              |   | —                   |   | —                 |   | —                |   | 1,158      |   |
| Net income for  the year                                                                               |   | —             |   | —             |   | —                   |   | —                 |   | 4,217,097             |   | 4,217,097  |   |
| Appropriation to  statutory reserve  (Note 15(a))                                                      |   | —             |   | —             |   | —                   |   | 419,266                |   | (419,266              | )      | —     |   |
| Balance at  December 31, 2003                                                                          |   | 1,331,390          |   | 52,483,266         |   | 176,853                  |   | 1,542,478              |   | 14,081,503            |   | 69,615,490 |   |
|                                                                                                   |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
| Representing:                                                                                          |   |               |   |               |   |                     |   |                   |   |                  |   |       |   |
| Proposed final dividend (Note 15(b))                                                                   |   |               |   |               |   |                     |   |                   |   | 1,255,317             |   |       |   |
| Others                                                                                                 |   |               |   |               |   |                     |   |                   |   | 12,826,186            |   |       |   |
| Balance at  December 31, 2003                                                                          |   |               |   |               |   |                     |   |                   |   | 14,081,503            |   |       |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 7

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressed in thousands)**

 
|                                                        |   | **Note** |   | **2001**    |   | **2002**    |   | **2003**    |   | **2003**   |   |
|-------------------------------------------------------------|--------|----------|--------|-------------|--------|-------------|--------|-------------|--------|------------|--------|
|                                                        |   |     |   | **RMB**     |   | **RMB**     |   | **RMB**     |   | **US$**    |   |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| **Net cash inflow from operations**                         |   | (a)      |   | 13,249,360  |   | 15,675,105  |   | 26,449,770  |   | 3,195,692  |   |
| Interest received                                           |   |     |   | 2,605,507   |   | 599,506     |   | 204,025     |   | 24,650     |   |
| Interest paid                                               |   |     |   | (2,576,822  | )      | (1,868,208  | )      | (2,540,513  | )      | (306,948   | )      |
| Dividends received                                          |   |     |   | 22,864      |   | 24,978      |   | 2,573       |   | 311        |   |
| Dividends paid to minority owners of subsidiaries           |   |     |   | (29,377     | )      | (31,902     | )      | (4,689      | )      | (567       | )      |
| PRC income tax paid                                         |   |     |   | (2,193,657  | )      | (1,345,201  | )      | (1,545,907  | )      | (186,778   | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Net cash inflow from operating activities                   |   |     |   | 11,077,875  |   | 13,054,278  |   | 22,565,259  |   | 2,726,360  |   |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| **Investing activities**                                    |   |     |   |        |   |        |   |        |   |       |   |
| Purchase of property, plant and equipment                   |   |     |   | (28,547,009 | )      | (21,152,102 | )      | (21,184,245 | )      | (2,559,504 | )      |
| Sale of property, plant and equipment                       |   |     |   | 131,692     |   | 24,552      |   | 94,804      |   | 11,454     |   |
| Purchase of minority interests                              |   |     |   | (18,537     | )      | (257,337    | )      | —      |   | —     |   |
| (Increase) decrease in short-term bank deposits             |   |     |   | (17,083,008 | )      | 20,096,738  |   | 3,832,411   |   | 463,036    |   |
| Purchase of Unicom New Century, net of cash acquired        |   | 4(a)     |   | —      |   | (3,692,687  | )      | —      |   | —     |   |
| Payment of direct acquisition cost of Unicom New Century    |   |     |   | —      |   | —      |   | (59,767     | )      | (7,221     | )      |
| Purchase of Unicom New World, net of cash acquired          |   | 4(b)     |   | —      |   | —      |   | (2,326,449  | )      | (281,084   | )      |
| Purchase of trading securities                              |   |     |   | —      |   | (14,557     | )      | (87,956     | )      | (10,627    | )      |
| Sale of trading securities                                  |   |     |   | 144,976     |   | 18,865      |   | 118,575     |   | 14,326     |   |
| Purchase of investment in associated companies              |   |     |   | —      |   | (2,105      | )      | (10,062     | )      | (1,216     | )      |
| Sale of investment in associated companies                  |   |     |   | —      |   | 4,241       |   | 853         |   | 103        |   |
| Purchase of investment securities                           |   |     |   | (21,426     | )      | —      |   | —      |   | —     |   |
| Sale of investment securities                               |   |     |   | 5,139       |   | 35,300      |   | 19,753      |   | 2,387      |   |
| Sale of Guoxin Paging, net of cash disposed                 |   | 5        |   | —      |   | —      |   | 1,259,159   |   | 152,133    |   |
| Purchase of other assets                                    |   |     |   | (736,844    | )      | (226,947    | )      | (708,379    | )      | (85,587    | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Net cash outflow from investing activities                  |   |     |   | (46,125,017 | )      | (5,166,039  | )      | (19,051,303 | )      | (2,301,800 | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| **Financing activities**                                    |   |     |   |        |   |        |   |        |   |       |   |
| Proceeds from exercise of share options                     |   |     |   | —      |   | —      |   | 1,158       |   | 140        |   |
| Increase (decrease) of payables to Unicom Group             |   |     |   | 126,137     |   | (1,393,434  | )      | (724,127    | )      | (87,490    | )      |
| Proceeds from  short-term bank loans                        |   |     |   | 11,214,388  |   | 9,623,438   |   | 10,901,425  |   | 1,317,122  |   |
| Proceeds from  long-term bank loans                         |   |     |   | 10,029,022  |   | 7,757,005   |   | 11,075,836  |   | 1,338,195  |   |
| Repayment of  short-term bank loans                         |   |     |   | (11,859,205 | )      | (7,928,938  | )      | (10,278,727 | )      | (1,241,887 | )      |
| Repayment of  long-term bank loans                          |   |     |   | (766,875    | )      | (19,925,822 | )      | (18,497,783 | )      | (2,234,922 | )      |
| Dividends paid (Note 15(b))                                 |   |     |   | —      |   | —      |   | (1,255,300  | )      | (151,667   | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Net cash inflow (outflow) from financing activities         |   |     |   | 8,743,467   |   | (11,867,751 | )      | (8,777,518  | )      | (1,060,509 | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Net decrease in cash and cash equivalents                   |   |     |   | (26,303,675 | )      | (3,979,512  | )      | (5,263,562  | )      | (635,949   | )      |
| Cash and cash equivalents, beginning of year                |   |     |   | 44,716,685  |   | 18,413,010  |   | 14,433,498  |   | 1,743,871  |   |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Cash and cash equivalents, end of year                      |   |     |   | 18,413,010  |   | 14,433,498  |   | 9,169,936   |   | 1,107,922  |   |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| **Analysis  of the balances of cash and cash equivalents:** |   |     |   |        |   |        |   |        |   |       |   |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
| Cash balances                                               |   |     |   | 21,991      |   | 5,942       |   | 4,610       |   | 557        |   |
| Bank balances                                               |   |     |   | 18,391,019  |   | 14,427,556  |   | 9,215,326   |   | 1,113,406  |   |
| Less: Restricted bank deposits                              |   | (i)      |   | —      |   | —      |   | (50,000     | )      | (6,041     | )      |
|                                                        |   |     |   |        |   |        |   |        |   |       |   |
|                                                        |   |     |   | 18,413,010  |   | 14,433,498  |   | 9,169,936   |   | 1,107,922  |   |

 

----

Note(i): As of December 31, 2003, approximately RMB50 million bank balances (2001and 2002: Nil) was restricted by the bank to secure for long-term bank loans.

 

The accompanying notesare an integral part of the consolidated financial statements.

 

F - 8

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**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (continued)**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003**

**(Expressed in thousands)**

 

 

(a)          Thereconciliation of income before taxation to net cash inflow from operations wasas follows:

 
|                                                                                 |   | **2001**   |   | **2002**   |   | **2003**   |   | **2003**  |   |
|--------------------------------------------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|-----------|--------|
|                                                                                 |   | **RMB**    |   | **RMB**    |   | **RMB**    |   | **US$**   |   |
|                                                                                 |   |       |   |       |   |       |   |      |   |
| Income before taxation                                                               |   | 5,462,588  |   | 6,303,166  |   | 6,095,849  |   | 736,508   |   |
| Adjustments for:                                                                     |   |       |   |       |   |       |   |      |   |
| Depreciation and  amortization                                                       |   | 8,262,296  |   | 11,255,724 |   | 16,385,293 |   | 1,979,689 |   |
| Amortization of deferred customer acquisition costs of contractual  CDMA subscribers |   | —     |   | 1,385,424  |   | 5,836,587  |   | 705,183   |   |
| Interest income                                                                      |   | (2,096,972 | )      | (470,282   | )      | (173,033   | )      | (20,906   | )      |
| Interest expense                                                                     |   | 1,907,148  |   | 1,456,736  |   | 1,919,375  |   | 231,901   |   |
| Loss on sale of Guoxin Paging                                                        |   | —     |   | —     |   | 663,279    |   | 80,138    |   |
| Loss on disposal  of property, plant and equipment                                   |   | 54,475     |   | 82,467     |   | 49,940     |   | 6,034     |   |
| Provision for impairment  loss of property, plant and equipment and goodwill         |   | 632,511    |   | 38,797     |   | 528,048    |   | 63,799    |   |
| Provision for  doubtful debts                                                        |   | 540,954    |   | 971,989    |   | 1,749,887  |   | 211,423   |   |
| Share of losses/(incomes)  from associated companies                                 |   | 24,773     |   | (553       | )      | 2,275      |   | 275       |   |
| Dividends from  investment securities                                                |   | (22,864    | )      | (24,978    | )      | (2,573     | )      | (311      | )      |
| Realized gains  on trading securities                                                |   | (31,979    | )      | (1,876     | )      | (12,045    | )      | (1,455    | )      |
| Unrealized losses/(gains)  on trading securities                                     |   | 56,576     |   | 27,461     |   | (10,129    | )      | (1,224    | )      |
| Realized gains on  investment securities                                             |   | (944       | )      | (18,098    | )      | (13,268    | )      | (1,603    | )      |
| Reversal of  impairment loss of associated companies                                 |   | (3,219     | )      | —     |   | —     |   | —    |   |
| Realized gains  in associated companies                                              |   | —     |   | (1,251     | )      | —     |   | —    |   |
| (Reversal)/provision of impairment loss  of investment securities                    |   | (12,490    | )      | 650        |   | —     |   | —    |   |
| Operating income  before working capital changes                                     |   | 14,772,853 |   | 21,005,376 |   | 33,019,485 |   | 3,989,451 |   |
| Increase in  accounts receivable                                                     |   | (1,493,966 | )      | (2,085,863 | )      | (2,650,625 | )      | (320,251  | )      |
| (Increase)/  decrease in inventories                                                 |   | (72,302    | )      | (1,276,602 | )      | 1,263,299  |   | 152,633   |   |
| Increase in  other assets                                                            |   | —     |   | (5,478,259 | )      | (3,169,766 | )      | (382,975  | )      |
| Decrease/  (increase) in prepayments and other current assets                        |   | 187,565    |   | (1,142,810 | )      | (1,342,086 | )      | (162,152  | )      |
| Decrease/ (increase)  in amounts due from domestic carriers                          |   | 176,786    |   | 8,599      |   | (22,227    | )      | (2,685    | )      |
| (Increase)/ decrease  in amounts due from related parties                            |   | (891,497   | )      | 280,216    |   | 553,354    |   | 66,857    |   |
| Increase/ (decrease)  in payables and accrued liabilities                            |   | 872,084    |   | 1,488,449  |   | (35,732    | )      | (4,317    | )      |
| Increase/ (decrease)  in advances from customers                                     |   | 149,865    |   | 1,978,456  |   | (55,497    | )      | (6,705    | )      |
| (Decrease)/increase  in amounts due to domestic carriers                             |   | (534,599   | )      | 221,196    |   | (161,937   | )      | (19,565   | )      |
| Increase/ (decrease)  in amounts due to related parties                              |   | 82,571     |   | 676,347    |   | (948,498   | )      | (114,599  | )      |
|                                                                                 |   |       |   |       |   |       |   |      |   |
| Net cash inflow  from operations                                                     |   | 13,249,360 |   | 15,675,105 |   | 26,449,770 |   | 3,195,692 |   |

 

(b)         Supplementalinformation:

 

Payables to equipment suppliers forconstruction-in-progress during 2003 decreased by approximatelyRMB3,234 million (2001: increased byapproximately RMB2,706 million; 2002: decreased by approximately RMB2,201million).

 

F - 9

----

 

**CHINA UNICOM LIMITED**

**NOTES TO THE****CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts expressed in RMBunless otherwise stated)**

 

**1.****             ****ORGANISATION ANDPRINCIPAL ACTIVITIES**

 

ChinaUnicom Limited (the “Company”) was incorporated in the Hong Kong SpecialAdministrative Region (“Hong Kong”), the People’s Republic of China (the “PRC”) on February 8, 2000. Theprincipal activities of the Company are investment holding and the Company’s subsidiaries are engaged in the provision ofGSM and CDMA cellular,data,Internet, long distance and pagingservices in the PRC. The GSM andCDMA business hereinafter collectively refer to as the “Cellular Business”. The Companyand its subsidiaries are hereinafter referred to as the “Group”.

 

The Group completed the following acquisitions and sale activities in 2002 and 2003respectively:

 

***Acquisition of Unicom New Century TelecommunicationsCorporation Limited (“Unicom New Century”)***

 

In 2002, the Company acquired the entire equityinterests in Unicom New Century from its ultimate parent company, China UnitedTelecommunications Corporation (a state-owned enterprise established in thePRC, hereinafter referred to as “Unicom Group”). For detailsof this acquisition, please refer to Note 4(a).

 

***Acquisition ofUnicom New World Telecommunications Corporation Limited (“Unicom New World”)***

 

In 2003, the Company acquired the entire equityinterests in Unicom New World from Unicom Group. For detailsof this acquisition, please refer to Note 4(b).

 

***Sale of******Guoxin Paging Corporation Limited (“Guoxin Paging”)***

 

In 2003, the Company sold the entire equity interest inGuoxin Paging to Unicom Group. For details of the sale, please refer to Note 5.

 

After the above acquisitions and sale, the Companyexpanded its Cellular Business’s geographical coverage to 30 provinces,municipalities or autonomous regions in the PRC (which covers the wholemainland China apart from Guizhou Province) and discontinued its nationwidepaging operation in the PRC.

 

The immediate holding company of the Company is ChinaUnicom (BVI) Limited (“Unicom BVI”).  Themajority of the equity interests in Unicom BVI is owned by China UnitedTelecommunications Corporation Limited (a joint stock company incorporated inthe PRC on December 31, 2001, with its A shares listed on the Shanghai Stock Exchangeon October 9, 2002). The directors of the Company considerUnicom Group to be the ultimate parent company.

 

F - 10

----

 

**2.****             ****BASIS OF PRE****SENTATION**

 

Thefinancial statements have been prepared under the historical cost convention except that, as disclosed in theaccounting policies below, certain land and building and investments insecurities are stated at fair value. They have been prepared in accordance with accounting principles generally accepted in Hong Kong (“HK GAAP”) issued by the Hong Kong Society of Accountants (“HKSA”).  This basis ofaccounting differs from that used in the preparationof statutory financial statements for PRC statutory reporting purposes, which werebased on the accounting principles and financialregulations applicableto enterprises established in the PRC (“PRC GAAP”).

 

Theprincipal adjustments made to conform to HK GAAP include the following:

 

•                  Reversal ofrevaluation surplus and related depreciation and amortization charges arisingfrom the revaluation of assets performed by independent valuers registered inthe PRC;

 

•                  Additionalaccrual for certain retirement benefits;

 

•                  Additionalprovision for certain housing benefits;

 

•                  Additional capitalizationof borrowing costs;

 

•                  Provisionfor deferred taxation on HK GAAP adjustments; and

 

•                  Capitalization of the direct costs associated with the acquisition ofsubsidiaries.

 

TheCompany has adopted the purchase method to account for the acquisitions ofUnicom New Century and Unicom New World. The excess of the purchase consideration over the fair values of the netassets acquired has been recorded as goodwill, which is amortized using thestraight-line method over a period of 20 years. The effective dates of theacquisitions of Unicom New Century and Unicom New World were December 31, 2002and December 31, 2003 respectively. The operating results of these acquiredsubsidiaries have been included in the consolidated statements of income of theGroup after the acquisitions were effective.

 

Thesale of Guoxin Paging has been accounted for as a disposal of discontinued operation by the Group. The difference between thesale proceeds and the carrying amount of net assets of Guoxin Paging as of theeffective date of disposal (December 31, 2003) was recorded as the loss on saleof discontinued operation in the consolidated statements of income of theGroup.  The operating results of GuoxinPaging for 2003 was included in the consolidated statements of income of theGroup up to the effective date of the sale.

 

F - 11

----

 

**3.****             ****PRINCIPAL ACCOUNTINGPOLICIES**

 

Theprincipal accounting policies adopted in the preparation of the financialstatements are set out as follows:

 

***(******a)******        ******Basis of preparation***

 

In current year, the Group adoptedthefollowing Statements of Standard Accounting Practice (“SSAP”)issued by the HKSA which are effective for accountingperiods commencing on or after January 1, 2003:

 
| SSAP  12 (revised) |   | Income  Tax                                                |
|--------------------|--------|------------------------------------------------------------|
| SSAP  35           |   | Government  Grants and Disclosure of Government Assistance |

 

Upon the adoption of SSAP 12 “Income Taxes” (revised)(“SSAP 12”) in 2003, deferred taxation is provided in full, using the liabilitymethod, on temporary differences arising between the tax bases of assets andliabilities and their carrying amounts in the financial statements. Taxationrates enacted or substantively enacted at the balance sheet date are used todetermine deferred taxation. Deferred tax assets are recognized to the extentthat it is probable that future taxable income will be available against whichthe temporary differences can be utilized.

 

Prior to 2003, deferred taxation was accounted forat the current taxation rate in respect of timing differences between income ascomputed for taxation purpose and income as stated in the income statement. A deferred tax asset was not recognized unless the related benefitsare expected to crystallize in the foreseeable future. The adoption of SSAP 12 in2003 represents a change in accounting policy which hasbeen applied retrospectively so that the comparatives presented have beenrestated to conform to the changed policy.

 

As detailed in the consolidated statement ofchanges in equity, the change in the accounting policy has resulted in anincrease of opening retained earnings as of 1 January 2001, 2002 and 2003 byapproximately RMB205,255,000, RMB373,159,000 and RMB405,300,000, respectively,representing the deferred tax assets relating to the provision for doubtfuldebts previously not recognized. This change has resulted in an increase indeferred tax assets at 1 January 2003 by approximately RMB405,300,000.  The net income for the year ended December31, 2001 and 2002 has also been increased by approximately RMB145,098,000 and RMB32,141,000,respectively.

 

The adoption of SSAP 12 was also resulted in anincrease of the deferred tax assets of Unicom New Century as of 31 December2002 by approximately RMB80,448,000. This adjustment increased the net assetsvalue of Unicom New Century on 31 December 2002 and accordingly reduced the goodwillrecorded by the Group arising from the acquisition of Unicom New Century on 31December 2002.

 

Since the impact of the adoption of the SSAP 35 “Government Grants and Disclosure of Government Assistance” on theGroup’s financial statements is not significant, no prior period adjustment hasbeen required.

 

Pursuant to the HKSA's standards improvementprocess, the Hong Kong Financial Reporting Standards Committee("FASC") of the HKSA has undertaken a special project to achieveconvergence with the International Financial Reporting Standards("IFRS").  Under theconvergence principle, the HKSA will adopt the revised International AccountingStandards ("IAS") as Hong Kong Accounting Standards("HKAS"). The convergence project is designed to achieve fullconvergence of the existing HK SSAP with IAS by (i) adoption of the revisionsmade to the IAS as a result of the improvement project of the InternationalAccounting Standards Board ("IASB"), (ii) elimination of existingdifferences between HK SSAP and their IAS equivalents, and (iii) issue newaccounting standards to adopt the remaining IAS as new HKAS.  The revised or new HKAS will become effectivefor accounting periods beginning on or after January 1, 2005.  As part of this convergence project, certainnew HKAS pronouncements have already been issued in 2004.  The Group is currently assessing the effectof these new pronouncements on its financial statements.

 

 

F - 12

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***(******b)******        ******Group accounting***

 

**(i)****           ****Consolidation**

 

The consolidated financial statements include the financialstatements of the Company and its subsidiaries made up to December 31.

 

Subsidiaries are those entities in which the Company,directly or indirectly, controls the composition of the board of directors;controls more than half of the voting power; or holds more than half of theissued share capital.

 

The results of subsidiaries acquired or disposed ofduring the year are included in the consolidated income statement from theeffective dates of acquisition or up to the effective date of disposal, asappropriate.

 

All significant inter company transactions andbalances within the Group are eliminated on consolidation.

 

Minority interests represent the interests ofoutside shareholders in the operating results and net assets of subsidiaries.

 

**(ii)****       ****Associated companies**

 

Anassociated company is a company, not being a subsidiary, in which an equityinterest is held for the long-term and significant influence is exercised inits management.

 

Theconsolidated statements of income includes the Group’s share of the results ofassociated companies for the year, and the consolidated balance sheet includesthe Group’s share of the net assets of the associated companies andgoodwill/negative goodwill (net of accumulated amortization) on acquisition.

 

Equityaccounting is discontinued where the carrying amount of the investment in anassociated company reaches zero, unless the Group has incurred obligations orguaranteed obligations in respect of the associated companies.

 

Where,in the opinion of the directors, there is an impairment loss of an associatedcompany, permanently reduced below its carrying value, or the market value hasfallen below the carrying value over a sustained period, a provision is madefor such impairment loss.

 

***(c******)******         ******Use of estimates***

 

Thepreparation of financial statements in conformity with HK GAAP requires management to make estimatesand assumptions that affect the reported amounts and disclosures.  Accordingly, actualresults may differ from those estimates and assumptions.

 

F - 13

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***(d******)******        ******Property, plant and equipment***

 

**(i)****           ****Land use rights and building**

 

Landuse rights and buildings are stated at valuation.  Independent valuations are performed periodically with the last valuation performed on 31 March 2000.  In the intervening years, the directorsreview the carrying value of land use rights and buildings and adjustment ismade where in the directors’ opinionthere has been a material change in value. Any increase in land use rights andbuildings valuation is credited to the revaluation reserve; any decrease isfirst offset against an increase on earlier valuation in respect of the sameproperty and is thereafter charged to the statements of income. Upon the disposal of revalued land use rights and buildings, the realized portion of the revaluationreserve is transferred from the valuation reserve to retained earnings.

 

**(ii)****       ****Other fixed assets**

 

Otherfixed assets, comprising leasehold improvement, telecommunications equipment,office furniture and fixtures are stated at cost less accumulated depreciationand accumulated impairment losses. The cost of an asset comprises its purchaseprice and any directly attributable costs of bringing the asset to its workingcondition and location for its intended use. Expenditures incurred after the telecommunications equipment have beenput into operation, such as repairs and maintenance and overhaul costs, arenormally charged to expense in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditurehas resulted in an increase in the future economic benefits expected tobe obtained from the use of the asset beyond itsoriginally assessed standard of performance, theexpenditure is capitalized as an additional cost of the assets.

 

**(iii)****   ****Depreciation**

 

Landuse rights are amortized over the period of the lease while other fixed assetsare depreciated at rates sufficient to write off their costs less accumulatedlosses over their estimated useful lives on a straight-line basis. Theestimated useful lives of property, plant and equipment are as follows:

 
|                                 |   | **Depreciable  life**     |   | **Residual  value** |   |
|--------------------------------------|--------|---------------------------|--------|---------------------|--------|
|                                 |   |                      |   |                |   |
| Land use rights                      |   | Over the period of  lease |   | —              |   |
| Buildings                            |   | 8 – 40  years        |   | 3                   | %      |
| Leasehold improvements               |   | Over the lease term       |   | —              |   |
| Telecommunications  equipment        |   | 4 – 15 years         |   | 3                   | %      |
| Office furniture, fixtures and other |   | 4 – 14 years         |   | 3                   | %      |

 

**(iv)****      ****Construction-in-progress**

 

Construction-in-progressrepresents buildings and plant under construction and equipment pendinginstallation, and is stated at cost lessaccumulated impairment losses. Costs include construction and acquisition costs, and interest chargesarising from borrowings used to finance the assets during the constructionperiod.

 

Noprovision for depreciation is made on construction-in-progress until such timeas the assets are completed and ready for use.

 

F - 14

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**(v)****          ****Impairment and gains orloss on disposal**

 

Ateach balance sheet date, both internal and external sources of information areconsidered to assess whether there is any indication that assets includingproperty, plant and equipment are impaired. If any such indication exists, therecoverable amount of the asset is estimated and where relevant, an impairmentloss is recognized to reduce the assets to its recoverable amount. Suchimpairments losses are recognized in the income statement except where theasset is carried at valuation and the impairment loss does not exceed therevaluation surplus for that same asset, in which cases it is treated as arevaluation decrease. In determining the recoverable amount, expected futurecash flows generated by the property, plant and equipment are discounted totheir present values.

 

Provisionfor impairment loss is charged to the statements of income and classified under“general, administrative and other expenses” as a component of operatingexpenses.  Reversal of impairment lossesrecognized in prior years is recorded when impairment losses recognized for theasset no longer exist or have decreased. The reversal is recorded in the statements of income.

 

Thegain or loss on disposal of a property, plant and equipment is the differencesbetween the net sales proceeds and the carrying amount of the relevant assets,and is recognized in the statements of income. Any revaluation reserve balance remaining attributable to the relevantasset is transferred to retained earnings and is shown as a movement inreserves.

 

***(******e******)******         ******Goodwill***

 

Goodwillrepresents the excess of purchase consideration over the fair values of the Group’s shareof thenet identifiable assets and liabilities of the acquired subsidiary/associated company at the date of acquisition. Goodwill is carried at cost lessaccumulated amortization and accumulated impairment losses.  Goodwill is amortized using the straight-line method over the estimatedeconomic lives of the acquired businesses. Goodwill arising on major strategicacquisitions of the Group to expand its geographical market coverage isamortized over 20 years. For all other acquisitions, goodwill is generallyamortized over 5-7 years.

 

Whenlater events and circumstances occur which indicate the carrying balance ofgoodwill may not be recoverable, the unamortized balance is written down to itsestimated recoverable amount. Estimated recoverable amount is determined basedon estimated discounted future net cash flows of the related business over its remaining life.

 

F - 15

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***(******f******)******           ******Other assets***

 

Otherassets mainly represent (i)expenditures on facilities for interconnection with otheroperators, for which the Group has a permanent use right, (ii) long-term prepaidleased lines and rentals and (iii) deferredcustomer acquisition costs of CDMA contractual subscribers.

 

Expenditureson interconnection facilitiesare amortized using the straight-line method over the beneficial period of 5 years.Long-termprepaid leased lines and rentals are amortized using astraight-line method over the lease period.

 

Deferredcustomer acquisition costs of CDMA contractual subscriber represent the cost ofCDMA handsets given to contractual subscribers under special promotional packages. Deferred customeracquisition costs, to the extent recoverable, are amortised over the contractual period (notexceeding 2 years) to match with the minimum contract revenue.  Deferred customer acquisition costs ofcontractual CDMA subscriber are included in “prepayment and other currentassets” when the customer contract is within 1 year, whereas they are recordedas “other assets” when the contract period is over 1 year.

 

***(******g******)******        ******Investments******in securities***

 

**(i****)****           ****Investment securities**

 

Equity securitiesintended to be held on a continuing basis are classified as investmentsecurities and recorded at cost less any provision for impairment loss.

 

Thecarrying amounts of investment securities are reviewed at the end of each yearto assess whether the fair values have declined below the carryingamounts.  When a decline other thantemporary decline has occurred, the carrying amount of such securities will bereduced to its fair value. The impairment loss is recognized as an expense inthe statements of income. This impairment loss is written back to statements ofincome when the circumstances and events that led to the write-downs orwrite-offs cease to exist and there is persuasive evidence that the newcircumstances and events will persist for the foreseeable future.Upon disposal of investment securities,income or loss thereon is accounted for in the statements of income.

 

**(ii)****       ****Trading securities**

 

Trading securities are carried at fair value.  At each balance sheet date, the net unrealized gains or losses arising from the changes in fair value of tradingsecurities are recognized in thestatements of income.  Gains or losseson disposal of trading securities, representing the differences between the netsales proceeds and the carrying amounts, are recognized in the statements ofincome as they arise.

 

***(h)******        ******Cash and cash equivalents***

 

Cash and cash equivalents are carried at cost inthe balance sheet. For the purposes of the cash flow statement, cash and cashequivalents comprise cash on hand, deposits held at call with banks, cashinvestments with maturity of 3 months or less from the date of investment.

 

***(******i******)******           ******Short-term bank deposits***

 

Short-termbank deposits are cash invested in fixed-term deposits with original maturitiesranging from more than 3 months to 1 year.

 

F - 16

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**(*****j******)******           ******Accounts receivables and other receivables***

 

Provision is made against accounts receivables and otherreceivables to the extent they are considered to be doubtful. They are statedin the balance sheet net of such provision.

 

***(k)******        ******Inventories***

 

Inventories,which principally comprise handsets, SIM cards, UIM cards, pagers andaccessories, are stated at thelower of cost and netrealizable value.  Cost is based on theweighted average method and comprises all costs of purchase and other costsincurred in bringing the inventories to their present location and condition.Net realizable value is determined on the basis of anticipated sales proceedsless estimated selling expenses. The amount ofany reversal of any write-down of inventories, arising from an increase in net realizablevalue, is recognized as a reduction in the amount of inventories recognized asexpense in the period in which the reversal occurs.

 

***(******l******)******           ******Advances from customers***

 

Advancesfrom customers are monthly fees paid by Paging subscribers in advance oramounts paid by customers for GSMand CDMA prepaid cards, GSM and CDMA prepaid service fees,Internet protocol (“IP”) telephonecards and other callingcards whichcover future telecommunications services (over a period of 3 to 12 months).Customer advances are stated atthe amountof proceeds received less the amount already recognized as revenues upon therendering of services.

 

***(m******)******     ******Assetsunder lease***

 

**(i)****           ****Finance leases**

 

Leases that substantially transfer to the Group allthe risks and rewards of ownership of assets are accounted for as financeleases.  Finance leases are capitalizedat the inception of the lease at the lower of the fair value of the leasedassets or the present value of the minimum lease payments. Each lease paymentis allocated between the capital and finance charges so as to achieve aconstant rate on the capital balances outstanding.  The corresponding rental obligations, net of finance charges, areincluded in long-term liabilities.  Thefinance charges are charged to the statements of income over the lease periods.

 

Assets held under finance leases are depreciatedover the shorter of their estimated useful lives and the lease periods.

 

**(ii)****       ****Operatingleases**

 

Leases where substantially all the risks andrewards of ownership remain with the lessor are accounted for as operating leases.Minimum lease payments under operating leases net of any incentives receivedfrom the lessor are recognized as leasing expenses in to the statements ofincome on a straight-line basis over the lease periods. Leased rental receivedunder operating leases are recognized as lease rental income on a straight-linebasis over the lease periods.

 

F - 17

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***(******n******)******        ******Borrowing costs***

 

Borrowing costs are expensed asincurred, except for interest directly attributable to the acquisition,construction or production of an asset, that necessarily takes a substantial period of time to get ready for itsintended use, in which case they are capitalized as part of the cost of thatasset. Capitalization of borrowing costscommences when expenditures for the asset and borrowing costs are beingincurred and the activities to prepare the asset for its intended use are inprogress.Borrowingcostsare capitalized up to the date when the project is completed and ready for itsintended use.

 

Tothe extent that funds are borrowed specifically for the purpose of obtaining aqualifying asset, the amount of borrowing costs eligible for capitalization isdetermined as the actual borrowing costs incurred on that borrowing during theperiod less any investment income on the temporary investment of thoseborrowings.

 

To the extent that fundsare borrowed generally and used for the purpose of obtaining a qualifyingasset, the amount of borrowing costs eligible for capitalization is determinedby applying a capitalization rate to the expenditures on that asset. The capitalizationrate is the weighted average of the borrowing costs applicable to theborrowings of the Group that are outstanding during the period, other thanborrowings made specifically for the purpose of obtaining a qualifying asset.The amount of borrowing costs capitalized during a period should not exceed theamount of borrowing cost incurred during that period. Other borrowing costs arerecognized as expenses when incurred.

 

Thecapitalized borrowing rate represents the cost of capital for raising therelated borrowings externally and varies from 4.44% to 5.76% for the year endedDecember 31, 2003 (2001: 5.46% to 7.65%; 2002: 4.54%to 6.24%).

 

***(******o******)******        ******Provision******s***

 

Provisions are recognizedwhen the Group has present obligations (legal or constructive) as a result of apast event, it is probable (i.e. more likely than not) that an outflow ofresources embodying economic benefit will be required to settle the obligation,and a reliable estimate of the amount can be made. Provisions are reviewed ateach balance sheet date and adjusted to reflect the current best estimate.Where the effect of the time value of money is material, the amount of a provisionis the present value of the expenditures expected to be required to settle theobligation.

 

F - 18

----

 

***(******p******)******        ******Revenue recogn******ition***

 

**(i)**            Revenue isrecognized when it is probable that the economic benefits associated with a transaction will flow to the Group and when the revenue and cost can be measured reliably, on thefollowing basis:

 

•                  Usage feesare recognized when the service is rendered;

 

•                  Monthly feesare recognized as revenue in the month during which the services are rendered;

 

•                  Connectionfees are recognized as revenue upon activation of service for subscribers;

 

•                  Revenue fromtelephone cards, which represent prepaid service fees received from customersfor telephoneservices, isrecognized when the related service is rendered upon actual usage of thetelephone cards by customers;

 

•                  Leased linerental income is recognized on a straight-line basis over the leaseterm; and

 

•                  Sales oftelecommunications products, such as handsets, SIM cards, UIM cards, pagers and accessories etc, are recognized when title has been passed to the buyers.

 

**(ii)**        **Interest income**

 

Interestincome from deposits in banks or other financial institutions is recognized ona time proportion basis, taking into account the principal amounts and theinterest rates applicable.

 

**(iii)**    **Dividend income**

 

Dividendincome is recognized when the rights to receive payment is established.

 

***(q)******        ******Foreign currency translation***

 

TheGroup maintains its books and records in Renminbi (“RMB”), which is not freelyconvertible into foreign currencies. Transactions in foreign currencies are translated at the exchange ratesat the dates of the transactions. Monetary assets and liabilities denominatedin other currencies are translated at exchange rates ruling at the balancesheet date.  Exchange differencesarising from changes in exchange rates subsequent to the transaction dates aredealt with in the statements of income.

 

For the convenience of the reader, translation ofamounts for RMB into United States dollars (“US”) has been made at the noonbuying rate in New York city for cable transfer payables in foreign currenciesas certified for customers purposes by the Federal Reserve Bank of New York onDecember 31, 2003 of US$1.00=RMB8.2767. No representation is made that RMBamounts could have been, or could be, converted into US$ at that rate onDecember 31, 2003, or at other rate.

 

F - 19

----

 

***(******r******)******          ******Employee******benefits***

 

**(i)****           ****Retirement benefi****ts**

 

TheGroup’s contributions to the defined contribution retirement scheme areexpensed as incurred and are reduced by contributions forfeited by thoseemployees who leave the scheme prior to vesting fully in the contributions.

 

**(ii)****       ****Housing ben****efits**

 

TheGroup’s contributions to the housing fund, special monetary housing benefitsand other housing benefits are expensed as incurred.

 

**(iii)****   ****Equity compensationbenefits**

 

Shareoptions are granted to directors and employees under the relevant share optionschemes of the Companyapproved bythe Board of Directors (Note 31). The financial impact of the share optiongranted is not recorded in thefinancialstatements until such time when the options are exercised. When the options areexercised, the proceedsreceived netof any transaction costs are credited to share capital (nominal value) andshare premium.

 

***(******s******)******          ******Taxation***

 

**(i)****           ****Income tax**

 

Incometax is provided on the basis of income for statutory financial reportingpurposes, adjusted for income and expense items, which are not assessable ordeductible for tax purposes.

 

**(ii)****       ****Deferred taxation**

 

Deferred taxation is provided in full, using theliability method, on temporary differences arising between the tax bases ofassets and liabilities and their carrying amounts in the financial statements.Taxation rates enacted or substantively enacted at the balance sheet date areused to determine deferred taxation. Deferred tax assets are recognized to theextent that it is probable that future taxable profit will be available againstwhich the temporary differences can be utilized.

 

***(******t******)******           ******Related parties***

 

Entitiesare considered to be related if one has the ability to control the other,directly or indirectly, or has the ability to exercise significant influenceover the financial and operatingdecisions ofthe other.  Entities are also consideredto be related if they are subject to common control or common significant influence.

 

F - 20

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***(u)******        ******Contingent liabilities and contingentassets***

 

Acontingent liability is a possible obligation that arises from past events andwhose existence will only be confirmed by the occurrence or non-occurrence ofone or more uncertain future events not wholly within the control of theGroup.  It can also be a presentobligation arising from past events that is not recognized because it is notprobable that outflow of economic resources will be required or the amount ofobligation cannot be measured reliably.

 

Acontingent liability is not recognized but is disclosed in the notes to thefinancial statements.  When a change inthe probability of an outflow occurs so that outflow is probable, the liabilitywill then be recognized as a provision.

 

Acontingent asset is a possible asset that arises from past events and whoseexistence will be confirmed only by the occurrence or non-occurrence of one ormore uncertain events not wholly within the control of the Group.

 

Contingentassets are not recognized but are disclosed in the notes to the financialstatements when an inflow of economic benefits is probable.  When an inflow is virtually certain, anasset is recognized.

 

***(v)******         ******Events after the balance sheet date***

 

Eventsafter the balance sheet date that provide additional information about theposition at the balance sheet date or those that indicate the going concernassumption is not appropriate (adjusting events) are reflected in the financialstatements.  Events after the balancesheet date that are not adjusting events are disclosed in the notes whenmaterial.

 

***(w)******      ******Segment reporting***

 

Inaccordance with the Group’s internal financial reporting, the Group hasdetermined that business segments be presented as the primary reporting format.

 

Unallocatedcosts primarily represent corporate expenses. Segments assets consist primarilyof property, plant andequipment,other assets, prepayments, inventories, receivables and operating cash. Segmentliabilities comprise operatingliabilities.Capital expenditure mainly comprises additions to property, plant andequipment.

 

***(******x******)******        ******E******arnings per share and per American Depository Share(“ADS”)***

 

Basicearnings per share has been computed by dividing the net income by the numberof weighted average number of ordinary shares outstanding during the year.

 

Dilutedearnings per share has been computed by dividing the net income by the weightedaverage number of ordinary shares, after adjusting for the effects of thedilutive potential ordinary shares.

 

Basicand diluted net earnings per ADS have been computed by multiplying the netincome per share by 10, which is the number of shares represented by each ADS.

 

F - 21

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**4.****             ****ACQUISITIONS**

 

**(a)****         ****Acquisition of Unicom New Century**

 

Unicom New Century was a limited liability companyestablished in the PRC on July 16, 2002 to engage in the provision of GSM and CDMA cellulartelecommunications services in 6 provinces, 2 autonomous regions and 1municipality in the PRC, namely, Sichuan, Heilongjiang, Jilin,Henan, Jiangxi, Shannxi, Guangxi,Xinjiang and Chongqing. The Cellular Business of Unicom New Century and therelevant net assets were previously owned and operated by various branches ofUnicom Group.

 

Pursuant to the resolution passed by the Company’s Board of Directors on November20, 2002 and the extraordinary general meeting of the Company’s shareholders onDecember 23, 2002, the Company acquired the entire equity interests in UnicomNew Century (via the intermediary holding company, Unicom New Century (BVI)Limited) at a cash consideration of approximately RMB4,909 million (includingother direct costs of acquisition of approximately RMB109 million).  Thereafter, Unicom New Century has become awholly-owned subsidiary of the Company.

 

The aforementioned acquisition of Unicom NewCentury became effective on December 31, 2002 when all the conditions to theacquisition were satisfied and cash consideration was settled by theGroup.  The Company has adopted thepurchase method of accounting to account for this acquisition.  The total fair value of the identifiableassets and liabilities of Unicom New Century as of December 31, 2002 amountedto approximately RMB2,624 million, the excess of purchase consideration overthe fair value of identifiable assets and liabilities has been recorded asgoodwill amounting to approximately RMB2,285 million, which is amortized usingthe straight-line method over the beneficial period of 20 years.

 

As the effectivedate of this acquisition was December 31, 2002, both the operating results and the financial position of Unicom NewCentury have been included in the consolidated financial statements of theGroup for the year ended December 31, 2003. However, the 2002 comparatives only reflected the financial position ofUnicom New Century in the consolidated balance sheet and excluded the operatingresults of Unicom New Century in the consolidated statements of income of theGroup.

 

On June 30, 2003, the Company entered into a sharetransfer agreement with Unicom New Century (BVI) Limited and acquired theentire share capital of Unicom New Century from Unicom New Century (BVI)Limited. Thereafter, Unicom New Century became a direct wholly-owned subsidiaryof the Company.

 

Operatingrevenue and net income for the year ended December 31, 2003 of Unicom NewCentury amounted to approximately RMB15,946million and RMB364 millionrespectively.

 

F - 22

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The fair value of the net assets acquired and netcash outflow in respect of the acquisition of Unicom New Century were asfollowing:

** **
|                                                                              |   | **As of  December 31,  2002** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                              |   | **RMB’000**              |   |
|                                                                              |   |                          |   |
| Net assets  acquired:                                                             |   |                          |   |
| Property, plant  and equipment, net                                               |   | 23,330,775                    |   |
| Other assets                                                                      |   | 1,799,357                     |   |
| Deferred tax  assets                                                              |   | 56,368                        |   |
| Current portion  of deferred tax assets                                           |   | 251,255                       |   |
| Amounts due from  related parties                                                 |   | 809,526                       |   |
| Amounts due from  domestic carriers                                               |   | 20,601                        |   |
| Prepayments and  other current assets                                             |   | 714,396                       |   |
| Inventories                                                                       |   | 1,201,310                     |   |
| Accounts  receivable, net                                                         |   | 715,331                       |   |
| Bank balances  and cash                                                           |   | 1,107,313                     |   |
| Payables and  accrued liabilities                                                 |   | (4,940,983                    | )      |
| Amounts due to  Unicom Group                                                      |   | (778,109                      | )      |
| Amounts due to  related parties                                                   |   | (649,896                      | )      |
| Amounts due to  domestic carriers                                                 |   | (160,018                      | )      |
| Current portion  of long-term bank loans                                          |   | (2,668,782                    | )      |
| Long-term bank  loans                                                             |   | (15,465,331                   | )      |
| Taxes payable                                                                     |   | (215,734                      | )      |
| Advances from  customers                                                          |   | (1,496,228                    | )      |
| Short-term loans from Unicom Group                                                |   | (724,127                      | )      |
| Short-term bank  loans                                                            |   | (363,000                      | )      |
|                                                                              |   |                          |   |
|                                                                              |   | 2,544,024                     |   |
| Goodwill                                                                          |   | 2,365,197                     |   |
| Less: Direct  costs of acquisition                                                |   | (109,221                      | )      |
|                                                                              |   |                          |   |
| Consideration  paid                                                               |   | 4,800,000                     |   |
|                                                                              |   |                          |   |
| Analysis of the  net outflow in respect of the acquisition of Unicom New Century: |   |                          |   |
| Cash  consideration                                                               |   | 4,800,000                     |   |
| Bank balances and cash in hand acquired                                           |   | (1,107,313                    | )      |
|                                                                              |   |                          |   |
| Net cash outflow  in respect of the acquisition of Unicom New Century             |   | 3,692,687                     |   |

 

**(b)****         ****Acquisition of Unicom New World**

 

Unicom New World was a limited liability companyestablished in the PRC on November 4, 2003 to engage in the provision of GSM and CDMA cellulartelecommunications services in 6 provinces and 3 autonomous regions in the PRC, namely,Shanxi, Hunan, Hainan, Yunnan, Gansu, Qinghai, Inner Mongolia, Ningxia andXizang. The Cellular business ofUnicom New World and the relevant net assets were previously owned and operatedby various branches of Unicom Group.

 

Pursuant to the resolution passed by the Company’s Board of Directors on November 20, 2003 and the extraordinarygeneral meeting of the Company’s shareholders on December 23, 2003, the Company acquired theentire equity interests in Unicom New World (via the intermediary holdingcompany, Unicom New World (BVI) Limited) at a cash consideration of approximately RMB3,249million (including other direct costs of acquisition of approximately RMB49million).  Thereafter, Unicom New World has become awholly-owned subsidiary of the Company.

 

F - 23

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After all theconditions to the acquisition were satisfied and the cash consideration was settled by the Group, the acquisition of Unicom New World became effective on December 31, 2003. The Company has adopted thepurchase method of accounting to account for this acquisition. The total fairvalue of the identifiable assets and liabilities of Unicom New World as of December 31, 2003 amountedto approximately RMB2,104 million, the excess of purchase consideration overthe fair value of the identifiable assets and liabilities has been recorded as goodwillamounting to approximately RMB1,145 million, which is amortized using the straight-line method over the expected beneficial period of20 years.

 

As the effectivedate of this acquisition was December 31, 2003, the consolidated financial statements did not include the operatingresults of Unicom New World, but included the financial position of Unicom NewWorld as of December 31, 2003.

 

Operating revenue and net income for the year endedDecember 31, 2003 of Unicom New World amounted to approximately RMB8,135million and RMB349 million respectively.

 

The fair value of the net assets acquired and netcash outflow in respect of the acquisition of Unicom New World were as follows:

 
|                                                                                    |   | **Note** |   | **As of  December 31,  2003** |   |
|-----------------------------------------------------------------------------------------|--------|----------|--------|-------------------------------|--------|
|                                                                                    |   |     |   | **RMB’000**              |   |
| The fair value  of the net assets acquired:                                             |   |     |   |                          |   |
| Property, plant  and equipment, net                                                     |   |     |   | 12,106,458                    |   |
| Other assets                                                                            |   |     |   | 583,827                       |   |
| Deferred tax  assets                                                                    |   |     |   | 14,010                        |   |
| Current portion  of deferred tax assets                                                 |   |     |   | 192,918                       |   |
| Amounts due from  related parties                                                       |   |     |   | 207,237                       |   |
| Amounts due from  domestic carriers                                                     |   |     |   | 5,745                         |   |
| Prepayments and  other current assets                                                   |   |     |   | 283,287                       |   |
| Inventories                                                                             |   |     |   | 307,503                       |   |
| Accounts  receivable, net                                                               |   |     |   | 357,880                       |   |
| Bank balances  and cash                                                                 |   | (i)      |   | 923,551                       |   |
| Payables and  accrued liabilities                                                       |   |     |   | (1,951,215                    | )      |
| Amounts due to  Unicom Group                                                            |   |     |   | (1,005,135                    | )      |
| Amounts due to  related parties                                                         |   |     |   | (324,597                      | )      |
| Amounts due to  domestic carriers                                                       |   |     |   | (52,473                       | )      |
| Current portion  of long-term bank loans                                                |   |     |   | (2,213,216                    | )      |
| Long-term bank  loans                                                                   |   |     |   | (5,473,734                    | )      |
| Taxes payable                                                                           |   |     |   | (46,764                       | )      |
| Advances from  customers                                                                |   |     |   | (604,862                      | )      |
| Short-term bank  loans                                                                  |   |     |   | (1,206,000                    | )      |
|                                                                                    |   |     |   | 2,104,420                     |   |
| Goodwill                                                                                |   |     |   | 1,144,957                     |   |
| Less: direct  costs of acquisition                                                      |   |     |   | (49,377                       | )      |
|                                                                                    |   |     |   |                          |   |
| Consideration  paid                                                                     |   |     |   | 3,200,000                     |   |
|                                                                                    |   |     |   |                          |   |
| The net cash  outflow in respect of the acquisition of Unicom New World was as follows: |   |     |   |                          |   |
| Cash  consideration                                                                     |   |     |   | 3,200,000                     |   |
| Bank balances  and cash acquired (less restricted bank deposits)                        |   | (i)      |   | (873,551                      | )      |
| Net cash outflow  in respect of the acquisition of Unicom New World                     |   |     |   | 2,326,449                     |   |

 

----

Note (i):    As of December 31, 2003, approximately RMB50 million bank balances was restrictedby the bank to secure the long-term bank loans.

 

F- 24

----

 

**5.****             ****SALE****OF DISCONTINUED OPERATION (GUOXINPAGING)**

 

Guoxin Paging wasestablished as a limited liability company in the PRC in September 1998. Guoxin Paging originally operated a nationwide Paging Business through its 31 subsidiaries and branches in 27 provinces andautonomous regions and 4 municipalities in the PRC and was wholly-owned byChina Unicom Corporation Limited (hereinafter referred to as “CUCL”, a directwholly-owned subsidiary of the Company).

 

TheGroup originally had 5 operating segments namely GSM Business, CDMA Business,Data and Internet Business, Long Distance Business and Paging Business (seeNote 35). Pursuant to the ordinary resolution passed by the Company’s Board of Directors on November 20, 2003, the Board ofDirectors announced the plan to dispose of the Paging Business to the ultimateparent company, Unicom Group. The disposal is consistent with the Group’slong-term strategy to focus its activities in the core telecommunicationbusiness. After obtaining theindependent shareholders’ approval in an extraordinary general meeting of the Company’s shareholders onDecember 23, 2003, the Company completed the sale of the entire equity interests of Guoxin Paging to Unicom Group at a cash consideration of RMB2,750 million.

 

Thesale of Guoxin Paging became effective on December 31, 2003 after all the conditions to the sale were satisfied, the majority of cash proceeds was settled by Unicom Group, and ownership as well as control waspassed to Unicom Group. Thetotal net assets of Guoxin Paging as ofDecember 31, 2003 amounted to approximately RMB3,413 million, and the difference between the sale proceeds andthe net assets disposed amounting to approximately RMB663 million,has been recorded as the loss on saleof discontinued operation.

 

Sincethe effective date ofthis sale was December 31, 2003, the operating results of Guoxin Paging havebeen included in the consolidated statements of income of the Group up to this date. Details of the sale were set forth in the related shareholders’ circular “Connected Transactions” of the Company dated November 26, 2003.

 

(a)          The total assets and total liabilities ofGuoxin Paging comprised the following:

 
|               |   | **Guoxin Paging**      |   |
|--------------------|--------|------------------------|--------|
|               |   | **As of  December 31** |   |
|               |   | **2002**               |   | **2003** |   |
|               |   | **RMB’000**       |   | **RMB’000** |   |
|               |   |                   |   |   |   |
| Non-current assets |   | 4,964,886              |   | 3,914,492 |   |
| Current assets     |   | 2,264,714              |   | 2,048,250 |   |
|               |   |                   |   |   |   |
| Total assets       |   | 7,229,600              |   | 5,962,742 |   |
| Total liabilities  |   | (2,098,986             | )      | (1,997,772 | ) |
|               |   |                   |   |   |   |
| Minority  interest |   | (566,257               | )      | (551,691 | ) |
|               |   |                   |   |   |   |
| Net assets         |   | 4,564,357              |   | 3,413,279 |   |

 

F - 25

----

 

(b)         The net assets sold and net cash inflow inrespect of the sale of Guoxin Paging were as follows:

 
|                                                                                  |   | **As of  December 31,  2003** |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                  |   | **RMB’000**              |   |
| Net assets sold:                                                                      |   |                          |   |
| Property, plant  and equipment, net                                                   |   | 3,647,083                     |   |
| Other assets                                                                          |   | 151,067                       |   |
| Investment  securities                                                                |   | 99,157                        |   |
| Investment in  associated companies                                                   |   | 17,185                        |   |
| Amount due from Unicom Group                                                          |   | 9,440                         |   |
| Amount due from  related parties                                                      |   | 277,457                       |   |
| Amount due from  domestic carriers                                                    |   | 54,821                        |   |
| Prepayments and  other current assets                                                 |   | 207,813                       |   |
| Inventories                                                                           |   | 104,753                       |   |
| Accounts  receivable, net                                                             |   | 107,632                       |   |
| Trading  securities                                                                   |   | 165,493                       |   |
| Short-term bank  deposits                                                             |   | 80,000                        |   |
| Bank balances  and cash                                                               |   | 1,040,841                     |   |
| Dividend payable                                                                      |   | (8,260                        | )      |
| Payables and accrued  liabilities                                                     |   | (1,491,890                    | )      |
| Amount due to  related parties                                                        |   | (121,173                      | )      |
| Amount due to  domestic carriers                                                      |   | (235,275                      | )      |
| Taxes payable                                                                         |   | (17,669                       | )      |
| Advances from  customers                                                              |   | (123,505                      | )      |
| Minority  interests                                                                   |   | (551,691                      | )      |
|                                                                                  |   | 3,413,279                     |   |
|                                                                                  |   |                          |   |
| Less: sale proceeds                                                                   |   | (2,750,000                    | )      |
|                                                                                  |   |                          |   |
| Loss on sale of discontinued operation                                                |   | 663,279                       |   |
|                                                                                  |   |                          |   |
| The net cash  inflow in respect of the sale of discontinued operation was as follows: |   |                          |   |
| Sale proceeds received                                                                |   | 2,300,000                     |   |
| Bank balances  and cash disposed                                                      |   | (1,040,841                    | )      |
|                                                                                  |   |                          |   |
| Net cash inflow  in respect of the sale of discontinued operation                     |   | 1,259,159                     |   |

 

F - 26

----

 

(c)          The operating results of the Groupattributable to the continuing operations and discontinued operation (Guoxin Paging) were as follows:

 
|                                   |   | **Continuing  operations** |   | **Discontinued  operation  (Guoxin Paging)** |   | **Group as a  whole** |   |
|----------------------------------------|--------|----------------------------|--------|----------------------------------------------|--------|-----------------------|--------|
|                                   |   | **2001**                   |   | **2002**                                     |   | **2003**              |   | **2001** |   | **2002** |   | **2003** |   | **2001** |   | **2002** |   | **2003** |   |
|                                   |   | **RMB’000**           |   | **RMB’000**                             |   | **RMB’000**      |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                   |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating revenue (Turnover)           |   | 24,567,853                 |   | 36,604,071                                   |   | 65,249,242            |   | 4,825,033 |   | 3,972,454 |   | 2,387,083 |   | 29,392,886 |   | 40,576,525 |   | 67,636,325 |   |
| Operating expenses                     |   | (18,336,824                | )      | (28,656,496                                  | )      | (55,531,586           | )      | (5,792,711 | ) | (4,596,345 | ) | (3,590,693 | ) | (24,129,535 | ) | (33,252,841 | ) | (59,122,279 | ) |
|                                   |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                |   | 6,231,029                  |   | 7,947,575                                    |   | 9,717,656             |   | (967,678 | ) | (623,891 | ) | (1,203,610 | ) | 5,263,351 |   | 7,323,684 |   | 8,514,046 |   |
| Loss on sale of discontinued operation |   | —                     |   | —                                       |   | —                |   | — |   | — |   | (663,279 | ) | — |   | — |   | (663,279 | ) |
| Interest income                        |   | 2,073,479                  |   | 452,908                                      |   | 163,934               |   | 23,493 |   | 17,374 |   | 9,099 |   | 2,096,972 |   | 470,282 |   | 173,033 |   |
| Finance costs                          |   | (1,876,997                 | )      | (1,466,093                                   | )      | (1,930,784            | )      | (40,569 | ) | (8,348 | ) | (5,238 | ) | (1,917,566 | ) | (1,474,441 | ) | (1,936,022 | ) |
| Other (loss) income, net               |   | 25,990                     |   | (41,352                                      | )      | (31,797               | )      | (6,159 | ) | 24,993 |   | 39,868 |   | 19,831 |   | (16,359 | ) | 8,071 |   |
|                                   |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before taxation          |   | 6,453,501                  |   | 6,893,038                                    |   | 7,919,009             |   | (990,913 | ) | (589,872 | ) | (1,823,160 | ) | 5,462,588 |   | 6,303,166 |   | 6,095,849 |   |
| Taxation                               |   | (1,196,286                 | )      | (1,895,987                                   | )      | (2,307,596            | )      | 300,247 |   | 175,782 |   | 419,215 |   | (896,039 | ) | (1,720,205 | ) | (1,888,381 | ) |
|                                   |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) after taxation           |   | 5,257,215                  |   | 4,997,051                                    |   | 5,611,413             |   | (690,666 | ) | (414,090 | ) | (1,403,945 | ) | 4,566,549 |   | 4,582,961 |   | 4,207,468 |   |

 

(d)         The cash flows of the Group attributable tothe continuing operations and discontinued operation (Guoxin Paging) were asfollows:

 
|                                                 |   | **Continuing  operations** |   | **Discontinued  operation  (Guoxin Paging)** |   | **Group as a  whole** |   |
|------------------------------------------------------|--------|----------------------------|--------|----------------------------------------------|--------|-----------------------|--------|
|                                                 |   | **2001**                   |   | **2002**                                     |   | **2003**              |   | **2001** |   | **2002** |   | **2003** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                 |   | **RMB’000**           |   | **RMB’000**                             |   | **RMB’000**      |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                 |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash inflow from operating activities            |   | 10,845,972                 |   | 12,692,415                                   |   | 22,141,521            |   | 231,903 |   | 361,863 |   | 423,738 |   | 11,077,875 |   | 13,054,278 |   | 22,565,259 |   |
| Net cash outflow from investing activities           |   | (45,133,699                | )      | (4,579,122                                   | )      | (18,660,174           | )      | (991,318 | ) | (586,917 | ) | (391,129 | ) | (46,125,017 | ) | (5,166,039 | ) | (19,051,303 | ) |
| Net cash inflow (outflow) from financing activities  |   | 8,220,878                  |   | (11,703,468                                  | )      | (8,752,829            | )      | 522,589 |   | (164,283 | ) | (24,689 | ) | 8,743,467 |   | (11,867,751 | ) | (8,777,518 | ) |
|                                                 |   |                       |   |                                         |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (decrease) increase in cash and cash equivalents |   | (26,066,849                | )      | (3,590,175                                   | )      | (5,271,482            | )      | (236,826 | ) | (389,337 | ) | 7,920 |   | (26,303,675 | ) | (3,979,512 | ) | (5,263,562 | ) |

 

F - 27

----

 

**6.****              OPERATINGREVENUE**

 

Operating revenueprimarily comprisesusage fees, monthly fees, connection fees, interconnection revenue, leased linerental income and sales of telecommunications products earned by the Group from GSM, CDMA, data, Internet, long distance and pagingservices.  Tariffs for these servicesare subject to regulations by various government authorities, including theState Development and Reform Commission, the Ministry of Information Industry(“MII”)****and the provincial priceregulatory authorities.

 

Operating revenue is netof business tax and government surcharges.

 

The majorcomponents of operating revenue are as follows:

 
|                                     |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                     |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **GSM  Business**                        |   |     |   |             |   |             |   |             |   |
| Usage fee                                |   | (i) (a)  |   | 14,937,448       |   | 20,274,987       |   | 29,072,249       |   |
| Monthly fee                              |   | (ii)     |   | 3,660,473        |   | 4,169,129        |   | 7,042,299        |   |
| Connection fee                           |   | (iii)    |   | 204,986          |   | —           |   | —           |   |
| Interconnection  revenue                 |   | (iv)     |   | 1,262,267        |   | 1,709,771        |   | 1,926,907        |   |
| Other revenue                            |   | (vi)     |   | 439,884          |   | 1,234,038        |   | 2,262,156        |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Total GSM  service revenue               |   |     |   | 20,505,058       |   | 27,387,925       |   | 40,303,611       |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **CDMA  Business**                       |   |     |   |             |   |             |   |             |   |
| Usage fee                                |   | (i) (a)  |   | —           |   | 2,231,050        |   | 11,671,523       |   |
| Monthly fee                              |   | (ii)     |   | —           |   | 713,483          |   | 3,488,411        |   |
| Interconnection  revenue                 |   | (iv)     |   | —           |   | 184,296          |   | 607,830          |   |
| Other revenue                            |   | (vi)     |   | —           |   | 96,518           |   | 855,754          |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Total CDMA  service revenue              |   |     |   | —           |   | 3,225,347        |   | 16,623,518       |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **Data  and Internet Business**          |   |     |   |             |   |             |   |             |   |
| Usage fee                                |   | (i) (b)  |   | 1,581,189        |   | 2,069,415        |   | 2,443,610        |   |
| Monthly fee                              |   | (ii)     |   | —           |   | 9,478            |   | 9,085            |   |
| Interconnection  revenue                 |   | (iv)     |   | 146,844          |   | 348,248          |   | 361,514          |   |
| Leased lines  rental                     |   | (v)      |   | 64,117           |   | 274,274          |   | 420,433          |   |
| Other revenue                            |   | (vi)     |   | 28,061           |   | 91,624           |   | 202,441          |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Total Data and  Internet service revenue |   |     |   | 1,820,211        |   | 2,793,039        |   | 3,437,083        |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **Long  Distance Business**              |   |     |   |             |   |             |   |             |   |
| Usage fee                                |   | (i) (b)  |   | 539,808          |   | 1,223,051        |   | 1,148,040        |   |
| Interconnection  revenue                 |   | (iii)    |   | 577,780          |   | 664,302          |   | 365,724          |   |
| Leased lines  rental                     |   | (v)      |   | 363,078          |   | 873,054          |   | 701,549          |   |
| Other revenue                            |   | (vi)     |   | 8,067            |   | 5,316            |   | 57,835           |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Total Long Distance  service revenue     |   |     |   | 1,488,733        |   | 2,765,723        |   | 2,273,148        |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **Paging  Business**                     |   |     |   |             |   |             |   |             |   |
| Monthly fee                              |   | (ii)     |   | 4,141,232        |   | 1,912,786        |   | 612,999          |   |
| Connection fee                           |   | (iii)    |   | 1,595            |   | —           |   | —           |   |
| Interconnection  revenue                 |   | (iv)     |   | —           |   | 113,123          |   | 1,654            |   |
| Other revenue                            |   | (vi)     |   | 198,997          |   | 135,279          |   | 788,400          |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Total Paging  service revenue            |   |     |   | 4,341,824        |   | 2,161,188        |   | 1,403,053        |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **Total  service revenue**               |   |     |   | 28,155,826       |   | 38,333,222       |   | 64,040,413       |   |
|                                     |   |     |   |             |   |             |   |             |   |
| Sales of  telecommunications products    |   |     |   | 1,237,060        |   | 2,243,303        |   | 3,595,912        |   |
|                                     |   |     |   |             |   |             |   |             |   |
| **Total  operating revenue**             |   |     |   | 29,392,886       |   | 40,576,525       |   | 67,636,325       |   |

 

F - 28

----

 

----

Notes:

 

(i)    Usage fees comprise:

 

(a)   charges for incoming andoutgoing calls made by cellular subscribers including charges for local calls,domestic direct dial (“DDD”) and international direct dial (“IDD”) as well asroaming fees for calls made by cellular subscribers outside their local serviceareas; and

 

(b)   charges for IP telephone calls,data and Internet services and fixedline long distance calls.

 

(ii)   Monthly fees represent fixedamounts charged to cellular, data, Internet, and paging subscribers on amonthly basis for maintaining their access to the related services.

 

(iii)  Connection fees are charged tocellular and paging subscribers for the one-time activation service rendered toconnect the cellular subscribersto the Group’s cellular network or to reconfigurethe receiving frequency of the subscribers’pagers to the Group’s pagingnetwork. Connection fees have beencancelled since July 1, 2001.

 

(iv)  Interconnection revenuerepresents amounts received from other operators, including Unicom Group, forcalls from their networks to the Group’snetworks. It also includes roaming-in fees received from other operators,including Unicom Group, for calls made by their subscribers using the Group’s cellular networks. Interconnection revenue is recognizedwhen relevant calls are made by subscribers (see Notes 32(a) and 34(a)).

 

(v)   Leased line rental incomerepresents rentals received for leasing of transmission lines to Unicom Group,business customers and other domestic carriers in the PRC.

 

(vi)  Other revenue mainly representsrevenue from the provision of value-added services such as short message andsecretarial services to subscribers.

 

F - 29

----

 

**7.****              INCOMEBEFORE TAXATION**

 

Income before taxation isstated after charging and crediting the following:

 
|                                                                                 |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|--------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                 |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **After****charging/(****crediting):**                                               |   |     |   |             |   |             |   |             |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Share of losses (income) from associated companies                                   |   | 10       |   | 24,773           |   | (553             | )      | 2,275            |   |
| Dividends from investment securities                                                 |   | 10       |   | (22,864          | )      | (24,978          | )      | (2,573           | )      |
| Realized gains on trading securities                                                 |   | 10       |   | (31,979          | )      | (1,876           | )      | (12,045          | )      |
| Unrealized losses (gains) on trading securities                                      |   | 10       |   | 56,576           |   | 27,461           |   | (10,129          | )      |
| Realized gains on investment securities                                              |   | 10       |   | (944             | )      | (18,098          | )      | (13,268          | )      |
| Gains on disposal of interests in associated company                                 |   | 10       |   | —           |   | (1,251           | )      | —           |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Interest income                                                                      |   |     |   | (2,096,972       | )      | (470,282         | )      | (173,033         | )      |
| Interest expense:                                                                    |   | 9        |   | 2,593,402        |   | 1,879,663        |   | 2,523,512        |   |
| Less: amounts capitalized in construction-in-progress                                |   | 9        |   | (686,254         | )      | (422,927         | )      | (604,137         | )      |
| Total interest expenses                                                              |   |     |   | 1,907,148        |   | 1,456,736        |   | 1,919,375        |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Depreciation:                                                                        |   |     |   |             |   |             |   |             |   |
| -  Assets held under finance  leases                                            |   | 21       |   | 9,327            |   | 20,046           |   | 12,154           |   |
| -  Other assets                                                                 |   |     |   | 7,715,229        |   | 10,830,635       |   | 15,963,117       |   |
| Total depreciation                                                                   |   | 21       |   | 7,724,556        |   | 10,850,681       |   | 15,975,271       |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Amortization of goodwill                                                             |   | 22       |   | 74,261           |   | 23,414           |   | 115,260          |   |
| Other amortization                                                                   |   | 23       |   | 463,479          |   | 381,629          |   | 294,762          |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Amortization of deferred customer acquisition costs of contractual  CDMA subscribers |   | 20(a)    |   | —           |   | 1,385,424        |   | 5,836,587        |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Loss on disposal of property, plant and equipment                                    |   | 8(iv)    |   | 54,475           |   | 82,467           |   | 49,940           |   |
|                                                                                 |   |     |   |             |   |             |   |             |   |
| Auditors’ remuneration                                                          |   |     |   | 52,972           |   | 38,916           |   | 54,003           |   |

 

F - 30

----

 
|                                                                         |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                         |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **After****charging/(****crediting):**                                       |   |     |   |             |   |             |   |             |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Operating lease expense:                                                     |   |     |   |             |   |             |   |             |   |
| -  Leased lines                                                         |   |     |   | 853,306          |   | 691,358          |   | 805,018          |   |
| -  CDMA network capacities                                              |   | 32(a)    |   | —           |   | 891,897          |   | 3,515,364        |   |
| -  Other leasing expense                                                |   | 8(iv)    |   | 569,954          |   | 610,931          |   | 882,671          |   |
| Total operating lease expense                                                |   |     |   | 1,423,260        |   | 2,194,186        |   | 5,203,053        |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Provision (write-back) for doubtful debts:                                   |   |     |   |             |   |             |   |             |   |
| -  GSM Business                                                         |   |     |   | 517,663          |   | 802,914          |   | 1,116,523        |   |
| -  CDMA Business                                                        |   |     |   | —           |   | 42,050           |   | 397,810          |   |
| -  Data and Internet Business                                           |   |     |   | 24,743           |   | 70,922           |   | 125,676          |   |
| -  Long Distance Business                                               |   |     |   | 13,058           |   | 46,124           |   | 75,870           |   |
| -  Paging Business                                                      |   |     |   | (14,510          | )      | 9,979            |   | 34,008           |   |
| Total provision for doubtful debts                                           |   | 8(iv)    |   | 540,954          |   | 971,989          |   | 1,749,887        |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Cost of inventories                                                          |   |     |   | 1,268,645        |   | 2,161,512        |   | 3,570,234        |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Write-down of inventories to net realizable value                            |   |     |   | 16,605           |   | 7,156            |   | 47,101           |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| (Write-back) additional provision for impairment losses of investments  in:  |   |     |   |             |   |             |   |             |   |
| -  Associated companies                                                 |   |     |   | (3,219           | )      | —           |   | —           |   |
| -  Investment securities                                                |   |     |   | (12,490          | )      | 650              |   | —           |   |
| Total provision for impairment in investments                                |   |     |   | (15,709          | )      | 650              |   | —           |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Personnel:                                                                   |   |     |   |             |   |             |   |             |   |
| -  Salaries and wages                                                   |   |     |   | 2,156,911        |   | 2,654,845        |   | 3,676,168        |   |
| -  Contributions to defined  contribution pension schemes               |   | 12       |   | 163,500          |   | 203,164          |   | 273,182          |   |
| -  Contributions to  supplementary defined contribution pension schemes |   | 12       |   | —           |   | 11,066           |   | 39,854           |   |
| -  Special monetary housing  benefits                                   |   | 13       |   | 88,911           |   | 277,944          |   | 109,210          |   |
| -  Contributions to other housing  fund                                 |   | 13       |   | 69,963           |   | 92,549           |   | 170,614          |   |
| -  Other housing benefits                                               |   | 13       |   | 7,933            |   | 95,650           |   | 305,518          |   |
| Total personnel                                                              |   |     |   | 2,487,218        |   | 3,335,218        |   | 4,574,546        |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Additional provision for impairment of:                                      |   |     |   |             |   |             |   |             |   |
| -  Property, plant and  equipment                                       |   | 21       |   | 468,611          |   | —           |   | 528,048          |   |
| - Goodwill                                                              |   | 22       |   | 163,900          |   | 38,797           |   | —           |   |
| Total provision for impairment                                               |   | 8(iv)    |   | 632,511          |   | 38,797           |   | 528,048          |   |
|                                                                         |   |     |   |             |   |             |   |             |   |
| Net exchange (income) losses                                                 |   | 10       |   | (14,476          | )      | 21,533           |   | 9,960            |   |

 

F - 31

----

 

**8.****              OPERATINGEXPENSES**

 

Major components ofoperating expenses is asfollows:

 

(i)    Leased line charges incurredin association with leasing of transmission capacity from other operators and leasing expenses related toCDMA network capacities from Unicom New Horizon (see Notes 32(a), 33 and 34(a)).

 

(ii)   Interconnection chargesrepresent amounts paid to other operators, including Unicom Group, for callsfrom the Group’s networks tothe networks of other operators.

 

(iii)  Personnel costs comprise staffsalaries and wages, contributions to defined contribution pension schemes andhousing benefits.

 

(iv)  General, administrative andother expenses are analyzed asfollows:

 
|                                                                                    |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-----------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                    |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                    |   |             |   |             |   |             |   |
| Operating lease rental expenses                                                         |   | 569,954          |   | 610,931          |   | 882,671          |   |
| Repair and maintenance expenses                                                         |   | 424,614          |   | 832,259          |   | 1,387,466        |   |
| Provision for doubtful debts                                                            |   | 540,954          |   | 971,989          |   | 1,749,887        |   |
| Loss on disposal of property, plant and equipment                                       |   | 54,475           |   | 82,467           |   | 49,940           |   |
| Provisions for impairment loss of property, plant and equipment and  goodwill (Note 21) |   | 632,511          |   | 38,797           |   | 528,048          |   |
| Traveling, entertainment and meeting expenses                                           |   | 612,592          |   | 850,876          |   | 1,242,166        |   |
| Power and water charges                                                                 |   | 473,774          |   | 729,650          |   | 1,313,099        |   |
| Office expenses                                                                         |   | 587,727          |   | 582,187          |   | 749,080          |   |
| Other                                                                                   |   | 1,602,396        |   | 932,694          |   | 1,210,028        |   |
|                                                                                    |   |             |   |             |   |             |   |
|                                                                                    |   | 5,498,997        |   | 5,631,850        |   | 9,112,385        |   |

 

**9.****             ****FINANCE****COSTS**

 
|                                                  |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                  |   |             |   |             |   |             |   |
| Interest on bank loans repayable over 5 years         |   | —           |   | 41,115           |   | 124,105          |   |
| Interest on bank loans repayable within 5 years       |   | 2,593,402        |   | 1,838,548        |   | 2,399,407        |   |
| Less: Amounts capitalized in construction-in-progress |   | (686,254         | )      | (422,927         | )      | (604,137         | )      |
|                                                  |   |             |   |             |   |             |   |
| Total interest expenses                               |   | 1,907,148        |   | 1,456,736        |   | 1,919,375        |   |
| Bank charges                                          |   | 10,418           |   | 17,705           |   | 16,647           |   |
|                                                  |   |             |   |             |   |             |   |
|                                                  |   | 1,917,566        |   | 1,474,441        |   | 1,936,022        |   |

 

F - 32

----

 

**10.****       OTHER (INCOME) EXPENSES,NET**

 
|                                                 |   | **2001**         |   | **2002**         |   | **2003**         |   |
|------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                 |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                 |   |             |   |             |   |             |   |
| Share of losses (income) from associated companies   |   | 24,773           |   | (553             | )      | 2,275            |   |
| Dividends from investment securities                 |   | (22,864          | )      | (24,978          | )      | (2,573           | )      |
| Realized gains on trading securities                 |   | (31,979          | )      | (1,876           | )      | (12,045          | )      |
| Unrealized losses (gains) on trading securities      |   | 56,576           |   | 27,461           |   | (10,129          | )      |
| Realized gains on investment securities              |   | (944             | )      | (18,098          | )      | (13,268          | )      |
| (Gains) losses from exchange difference              |   | (14,476          | )      | 21,533           |   | 9,960            |   |
| Gains on disposal of interests in associated company |   | —           |   | (1,251           | )      | —           |   |
| Other                                                |   | (30,917          | )      | 14,121           |   | 17,709           |   |
|                                                 |   |             |   |             |   |             |   |
|                                                 |   | (19,831          | )      | 16,359           |   | (8,071           | )      |

 

**11.****       DIRECTORS’,SENIOR EXECUTIVES’ AND SUPERVISORS’ EMOLUMENTS**

 

**(a)   Directors’ emoluments**

 

The aggregate amounts offees and emoluments payable to directors of the Company during the year are setout below:

 
|                                                  |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                  |   |             |   |             |   |             |   |
| Non-executive directors:                              |   |             |   |             |   |             |   |
| Fees                                                  |   | 1,273            |   | 849              |   | 1,594            |   |
|                                                  |   |             |   |             |   |             |   |
| Executive directors:                                  |   |             |   |             |   |             |   |
| Fees                                                  |   | —           |   | —           |   | —           |   |
| Other emoluments                                      |   |             |   |             |   |             |   |
| -  Salaries, allowance and other allowances      |   | 9,083            |   | 9,722            |   | 9,352            |   |
| -  Pension benefits/pension scheme contributions |   | 124              |   | 38               |   | 106              |   |
| -  Bonuses paid and payable                      |   | 11,162           |   | 5,887            |   | 9,688            |   |
|                                                  |   |             |   |             |   |             |   |
|                                                  |   | 20,369           |   | 15,647           |   | 19,146           |   |
|                                                  |   |             |   |             |   |             |   |
|                                                  |   | 21,642           |   | 16,496           |   | 20,740           |   |

 

Non-executivedirectors’ emoluments disclosed above include approximately RMB1,275,000 (2001:RMB637,000; 2002: RMB636,000) paid to independent non-executive directors.

 

During2003, 2,772,000 (2001: Nil; 2002: 2,802,000) share options were granted to thedirectors under the amended Share Option Scheme approved by the independentnon-executive directors on 21 May and 30 May 2003 respectively.See Note 31(d) for the details of share options granted during theyear.

 

F - 33

----

 

The emoluments of the directors analyzed by the number of directors andemolument ranges were as follows:

 
|                                              |   | **Number of  directors** |   |
|---------------------------------------------------|--------|--------------------------|--------|
| **(All  amounts expressed in Hong Kong dollars)** |   | **2001**                 |   | **2002** |   | **2003** |   |
|                                              |   |                     |   |   |   |   |   |
| $nil - $1,000,000                                 |   | 4                        |   | 4 |   | 5 |   |
| $1,000,001 - $1,500,000                           |   | —                   |   | 2 |   | — |   |
| $2,000,001 - $2,500,000                           |   | —                   |   | 1 |   | 2 |   |
| $2,500,001 - $3,000,000                           |   | 2                        |   | 1 |   | 1 |   |
| $3,000,001 - $3,500,000                           |   | —                   |   | 1 |   | — |   |
| $3,500,001 - $4,000,000                           |   | 1                        |   | 1 |   | 1 |   |
| $4,000,001 - $4,500,000                           |   | 1                        |   | — |   | — |   |
| $5,000,001 - $5,500,000                           |   | 1                        |   | — |   | — |   |
| $6,500,001 - $7,000,000                           |   | —                   |   | — |   | 1 |   |
|                                              |   |                     |   |   |   |   |   |
|                                              |   | 9                        |   | 10 |   | 10 |   |

 

No directors waived the right to receive emoluments during the years.

 

**(b)****          F****ive highest paidindividuals**

 

The five individualswhose emoluments were the highest in the Group for 2003 include 4 directors (2001: All;2002: 4) whose emoluments arereflected in the analysis presented above. The emoluments payable to theremaining individual during the years 2002 and 2003 are as follows:

 
|                                          |   | **2002**         |   | **200****3**     |   |
|-----------------------------------------------|--------|------------------|--------|------------------|--------|
|                                          |   | **RMB’000** |   | **RMB’000** |   |
|                                          |   |             |   |             |   |
| Salaries, allowance and other allowances      |   | 1,432            |   | 1,435            |   |
| Pension benefits/pension scheme contributions |   | —           |   | 38               |   |
| Bonuses paid and payable                      |   | 849              |   | 850              |   |
|                                          |   |             |   |             |   |
|                                          |   | 2,281            |   | 2,323            |   |

 

The emoluments of theremaining individual during 2003 fell within the band of HK$2,000,001- HK$2,500,000 (2002: HK$2,000,001- HK$2,500,000).

 

No emolument was paid tothe five highest paid individuals as an inducement to join or upon joining theCompany or as compensation for loss of office.

 

F - 34

----

 

**12.****       RETIREMENTBENEFITS**

 

All the full timeemployees of the Group are covered by a state-sponsored pension scheme underwhich the employees are entitled to an annual pension equal to their basicsalaries at their retirement dates.  ThePRC government isresponsible for the pension liability to these retired employees.  The Group was required to make defined contributions to the pension schemeat the rate of 19% for the yearended December 31, 2003 (2001and 2002: 19%) of the employees’ basic salaries. Under this scheme, the Grouphas no obligation for post-retirement benefitsbeyond the annual contributions.

 

In addition, effectivefrom August 11, 1998, a supplementary defined contribution pension plan managedby an independent insurance company was established.  Under this plan, the Group makes a monthly defined contributionof 2% to 6% (2001 and 2002: 2% to 6%) of the monthly salary of eachemployee.  There were no vested benefitsattributable to past services upon adoption of the plan.

 

Retirement benefitscharged to the statements of income were as follows:

 
|                                                                |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                |   |             |   |             |   |             |   |
| Contributions to defined contribution pension  schemes              |   | 163,500          |   | 203,164          |   | 273,182          |   |
| Contributions to supplementary defined contribution pension schemes |   | —           |   | 11,066           |   | 39,854           |   |

 

**1****3.****       HOUSING BENEFITS**

 

Under the housing reformschemes in accordance with government regulations at the provincial level inthe PRC, the Group provided benefits to certain qualified employees to enablethem to purchase living quarters at a discount. In the case of Guoxin Paging,the living quarters were provided by China Telecom prior to the establishmentof Guoxin Paging and the related benefits were not charged to the Group.  In the case of the GSM Business, certain ofthese living quarters were provided by Unicom Group and the related benefitswere not charged to the Group. Housing benefits which were not charged to theGroup amounted to approximately RMB18.5 million for 2003 (2001 and 2002:RMB18.5 million).

 

Subsequent to theestablishment of Guoxin Paging, for living quarters purchased or built by theGroup, the liability to provide the housing benefits was recognized by theGroup upon finalization of the allocation of the housing units to specificemployees.  The amount of the benefitswas the difference between the cost of the quarters purchased by the employeesand the amount actually charged to the employees. The benefits are recorded asexpenses over the estimated remaining average service life of the participatingemployees.

 

In addition, all of thefull time employees of the Group are entitled to participate in astate-sponsored housing fund. The fund can be used for the construction ofliving quarters or may be withdrawn upon the retirement of the employees. TheGroup is required to make annual contributions to the housing fund at a rate on10% (2001: from5% to 10%; 2002: 10%) of theemployees’ basic salaries.

 

According to the centralgovernment policy on housing reform based on a State Council circular issued in1998, monetary housing subsidies in the form of special cash payments are to bemade by certain PRC enterprises to their employees in order to enable them topurchase living quarters. Under this general policy, enterprises are allowed toestablish their own housing reform schemes taking into consideration the actualfinancial capability of the enterprises.

 

F - 35

----

 

The Group finalized its monetary housing benefit scheme as a special employee incentivescheme for all qualified employees in 2001. According to the scheme, the total amount of monetary housing benefitfor each employee is determined based on the working age of the employee andthe property market price prevailing in the relevant location.  The total monetary housing benefit isdivided into three annual payments in the proportion of 40%, 30% and 30% respectively. In order to beincluded in the incentive scheme, employees are required to sign a servicecontract with a minimum service period of three years.  The employees will be entitled to the first40% payment only when the following criteria are met:

 

(i)    the provincial branch in whichthe employees are working has achieved the annual performance budget set byhead office management; and

 

(ii)   the employees continue to be under the employment of the Group atthe time of the payment.

 

Similarly, the employees will only be entitled to thesecond and then the third annual payments when and only when the above twoconditions are also fulfilled in subsequent years.

 

The Group accrues for each annual payment upon thefulfillment of the above criteria by the employees, at which time the liability isconsidered to have arisen.

 

For the years ended December 31, 2001, 2002 and 2003, certain provinces achievedthe annual performance budget and were thus approvedby management to distribute and pay out such monetary housing benefits. Theprovision for special monetaryhousing benefits for qualified employees of these provinces for the years ended December 31, 2001, 2002and 2003 amounted to approximately RMB88,911,000, RMB277,944,000and RMB109,210,000 respectively, based on the aforementioned distributionplan. The remainingprovinces were not entitled to the special monetary housing benefits since they did not achieve their annual performance budget in 2001, 2002 and 2003 andaccordingly, no provision for suchbenefits was made.

 

The expenses incurred bythe Group in relation to the housing benefits described above were as follows(excluding those paid by Unicom Group and China Telecom and not charged to theGroup):

 
|                              |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-----------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                              |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                              |   |             |   |             |   |             |   |
| Special monetary housing benefits |   | 88,911           |   | 277,944          |   | 109,210          |   |
| Contributions to housing fund     |   | 69,963           |   | 92,549           |   | 170,614          |   |
| Other housing benefits            |   | 7,933            |   | 95,650           |   | 305,518          |   |
|                              |   |             |   |             |   |             |   |
|                              |   | 166,807          |   | 466,143          |   | 585,342          |   |

 

F - 36

----

 

**14.****       TAXATION**

 

Provision for taxationrepresents:

 
|                                                                                  |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                  |   | **As restated**  |   | **As restated**  |   |             |   |
| Provision for  PRC enterprise income tax on the estimated taxable income for the year |   | 1,608,825        |   | 1,192,801        |   | 1,064,968        |   |
| Deferred  taxation                                                                    |   | (712,786         | )      | 527,404          |   | 823,413          |   |
|                                                                                  |   |             |   |             |   |             |   |
|                                                                                  |   | 896,039          |   | 1,720,205        |   | 1,888,381        |   |

 

There is no Hong Kongincome tax liability as the Group does not have any assessable income sourced from Hong Kongfor 2001, 2002 and 2003.

 

The income taxliabilities of the Groupwere assessed as follows:

 

(a)          The tax liabilities of CUCL and itswholly-owned subsidiaries for 2001, 2002 and 2003 were assessed in accordancewith Foreign Investment Enterprises (“FIE”) taxation requirements on aconsolidated basis as a single entity and settled income tax liabilitiescentrally in Beijing as approved by the tax authority;

 

(b)         Prior to the acquisition of Unicom New Centuryin years 2001 and 2002, Unicom Group was assessed for PRC enterprise taxliability under the relevant tax rules and regulations applicable tostate-owned enterprises, and at the statutory rate of 33% on a consolidationbasis as a single entity.  The taxprovision for Unicom New Century was determined on a separate return basisusing the same tax policy applicable to Unicom Group. Under this basis, the taxliabilities attributable to Unicom New Century were determined as if it wereassessed for income tax separately from Unicom Group. In 2002, tax liabilitiesof Unicom New Century was assessed in accordance with FIE taxation requirementson a consolidated basis as a single entity; and

 

(c)          Various provincial branches/municipal citiesof CUCL and Unicom New Century were granted a preferential treatment by taxauthorities to assess their enterprise income tax at the rates of 30%, 15% or10% in years 2001, 2002 and 2003. The remaining provincial branches wereassessed at the standard tax rate of 33%.

 

F - 37

----

 

The reconciliation of PRCenterprise income tax between the statutory tax rate of 33% and the effectivetax rate actually recorded in the statements of income is as follows:

 
|                                                                            |   | **2001**        |   | **2002**        |   | **2003** |   |
|---------------------------------------------------------------------------------|--------|-----------------|--------|-----------------|--------|----------|--------|
|                                                                            |   | **As restated** |   | **As restated** |   |     |   |
|                                                                            |   |            |   |            |   |     |   |
| **PRC**                                                                         |   |            |   |            |   |     |   |
|                                                                            |   |            |   |            |   |     |   |
| Statutory tax  rate of 33%                                                      |   | 33.0            | %      | 33.0            | %      | 33.0     | %      |
| Non-deductible  expenses:                                                       |   |            |   |            |   |     |   |
| - Housing benefits                                                              |   | 2.2             |   | —          |   | —   |   |
| - Personnel  expenses                                                           |   | 0.7             |   | 0.1             |   | —   |   |
| - Other                                                                         |   | 1.2             |   | 1.4             |   | 0.3      |   |
| Effect of preferential  tax rates                                               |   | (2.7            | )      | (3.2            | )      | (1.6     | )      |
| Increase in  opening deferred tax assets resulting from an increase in tax rate |   | —          |   | —          |   | (2.3     | )      |
| Investment tax  credits for domestic equipment (Note (a))                       |   | —          |   | (2.8            | )      | —   |   |
| Additional  depreciation deductible  for tax purpose from 2001  (Note (b))      |   | (9.8            | )      | —          |   | —   |   |
| Additional expense deductible for tax purpose (Note (c))                        |   | —          |   | —          |   | (0.9     | )      |
| Write-off of  deferred tax assets previously recognized for Guoxin Paging       |   | —          |   | —          |   | 1.9      |   |
|                                                                            |   |            |   |            |   |     |   |
| Effective PRC income tax rate                                                   |   | 24.6            | %      | 28.5            | %      | 30.4     | %      |
|                                                                            |   |            |   |            |   |     |   |
| **Hong Kong**                                                                   |   |            |   |            |   |     |   |
|                                                                            |   |            |   |            |   |     |   |
| Statutory tax  rate                                                             |   | 16.0            | %      | 16.0            | %      | 17.5     | %      |
| Non-taxable  income:                                                            |   |            |   |            |   |     |   |
| - Interest  income                                                              |   | (16.0           | )      | (16.0           | )      | (17.5    | )      |
|                                                                            |   |            |   |            |   |     |   |
| Effective HK income tax rate                                                    |   | —          |   | —          |   | —   |   |
|                                                                            |   |            |   |            |   |     |   |
| Total overall effective income  tax rate                                        |   | 16.4            | %      | 27.3            | %      | 31.0     | %      |

 

Tax effect ofpreferential tax rate is as follows:

 
|                                |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |     |   |
| Aggregate amount  (RMB in millions) |   | 83.6     |   | 191.3    |   | 97       |   |
| Per share effect  (RMB)             |   | 0.007    |   | 0.015    |   | 0.008    |   |

 

Notes:

 

----

(a)          For 2002, investment taxcredits represented the tax credits relating to the additions of certaindomestic equipment that were deductible against current tax.

 

(b)         During 2001, CUCLobtained the approval from the relevant tax authorities in the PRC that certaindepreciation expenses prior to 2000, which had previously been disallowed fordeduction against current tax, could be used to deduct against enterpriseincome tax over 5 years. Accordingly, the deferred tax asset relating to this“additional depreciation deductible for tax purpose” was recognized in 2001upon the receipt of the tax approval. Such deferred tax will be reversed on astraight-line basis for the period from 2000 to 2004.

 

(c)          During 2003, CUCL andUnicom New Century obtained approvals from the relevant tax authorities in thePRC that certain monetary housing benefits, which were previously treated asnon-deductible expenses for income taxassessment purposes in prior years, could be used to deduct againstenterprise income tax over 3 years. Accordingly, all the related deferredtax assets have been recognized in 2003 upon the receipt of the above taxapprovals. Such deferred tax assets willbe utilized on a straight-linebasis over 3 years.

 

F - 38

----

 

The movement of thedeferred tax assets is as follows:

 
|                                                                                         |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                         |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                         |   |     |   | **As restated**  |   | **As  restated** |   |             |   |
|                                                                                         |   |     |   |             |   |             |   |             |   |
| Balance,  beginning of year                                                                  |   |     |   | 1,013,720        |   | 1,954,567        |   | 1,815,234        |   |
| Change in  accounting policy:                                                                |   |     |   |             |   |             |   |             |   |
| - Recognition of additional deferred tax assets in relation to provision  for doubtful debts |   | 3(a)     |   | 228,061          |   | —           |   | —           |   |
| Acquisition of Unicom New Century                                                            |   |     |   | —           |   | 388,071          |   | —           |   |
| Acquisition of Unicom New World                                                              |   |     |   | —           |   | —           |   | 206,928          |   |
| Deferred  taxation charged to statements of income                                           |   |     |   | 712,786          |   | (527,404         | )      | (823,413         | )      |
|                                                                                         |   |     |   |             |   |             |   |             |   |
| Balance, end of  year                                                                        |   |     |   | 1,954,567        |   | 1,815,234        |   | 1,198,749        |   |

 

Deferred taxation as of year-end represents the taxation effect of thefollowing temporary differences:

 
|                                                                              |   | **Note** |   | **2002**         |   | **2003**         |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                              |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                              |   |     |   | **As  restated** |   |             |   |
|                                                                              |   |     |   |             |   |             |   |
| Deferred tax  assets:                                                             |   |     |   |             |   |             |   |
| Interest on  loans from CCF joint ventures                                        |   | (a)      |   | 287,998          |   | 256,673          |   |
| Loss arising  from terminations of CCF Arrangements                               |   | (a)      |   | 309,813          |   | 236,249          |   |
| Income tax on  advances from customers for telephone cards                        |   |     |   | 471,657          |   | 261,467          |   |
| Provision for  impairment loss for property, plant and equipment                  |   |     |   | 112,994          |   | 4,875            |   |
| Provision for  impairment loss for goodwill and difference in amortization period |   |     |   | 40,498           |   | —           |   |
| Provision for  doubtful debts of Paging Business                                  |   |     |   | 38,673           |   | —           |   |
| Provision for  doubtful debts of Cellular Business                                |   | 3(a)     |   | 485,748          |   | 534,839          |   |
| Write-off of  other assets                                                        |   |     |   | 17,662           |   | 7,563            |   |
| Write-down of  inventories to net realizable value                                |   |     |   | 31,260           |   | 15,905           |   |
| Amortization of  retirement benefits                                              |   |     |   | 37,379           |   | 18,549           |   |
| Additional  depreciation deductible for tax purpose                               |   |     |   | 171,091          |   | 101,267          |   |
| Differences on  tax basis for the residual value of property, plant and equipment |   |     |   | 19,634           |   | 7,608            |   |
| Monetary housing  benefits                                                        |   |     |   | —           |   | 56,826           |   |
| Other                                                                             |   |     |   | 68,152           |   | 29,309           |   |
|                                                                              |   |     |   |             |   |             |   |
|                                                                              |   |     |   | 2,092,559        |   | 1,531,130        |   |
|                                                                              |   |     |   |             |   |             |   |
| Deferred tax  liabilities:                                                        |   |     |   |             |   |             |   |
| Change of  depreciation period                                                    |   |     |   | (76,468          | )      | (28,268          | )      |
| Capitalized  interest already deducted for tax purpose                            |   |     |   | (200,857         | )      | (304,113         | )      |
|                                                                              |   |     |   |             |   |             |   |
|                                                                              |   |     |   | (277,325         | )      | (332,381         | )      |
|                                                                              |   |     |   |             |   |             |   |
| Net deferred tax  assets                                                          |   |     |   | 1,815,234        |   | 1,198,749        |   |
|                                                                              |   |     |   |             |   |             |   |
| Less: Current  portion of deferred tax assets                                     |   |     |   | (988,666         | )      | (873,849         | )      |
|                                                                              |   |     |   |             |   |             |   |
|                                                                              |   |     |   | 826,568          |   | 324,900          |   |

 

F - 39

----

 

Note:

 

----

(a)          Prior to 2000, in theprocess of developing its cellular networks, the GSM Business has entered intocooperation agreements with certain contractual joint ventures (the “CJVs”)established in the PRC. Each CJV was established by one or more Chineseenterprises and one or more foreign parties, and the aforementioned cooperationarrangements are referred to as the China-China-Foreign Arrangement (the “CCFArrangements”). Pursuant to the CCF Arrangements, the CJVs have extendedfunding to the GSM Business for the construction of telecommunications systemsand network equipment in the PRC. Based on the terms of the cooperationagreements, the CCF Arrangements had been accounted for as secured financingarrangements to the GSM Business, and interest had been accrued by the GSMBusiness based on the funds provided by the CJVs and the then prevailing marketborrowing rates. Afterwards, all CCF Arrangements had been terminated in 1999and 2000, and the related loss on the termination of CCF Arrangements wascharged to the statements of income as incurred. Pursuant to the approval ofrelevant tax authorities, since all the interest costs and the loss ontermination of these CCF Arrangements can be deducted against current tax over7 years. The resulting deferred tax assets were recognized accordingly.

 

**1****5.****       NET INCOME**

 

(a)          CUCL and Unicom NewCentury were registered as foreign investment enterprises in the PRC. Inaccordance with the Articles ofAssociation of CUCL and Unicom New Century, they are required to provide for certain statutory reserves, namely,general reserve fund and staff bonus and welfare fund, which are appropriatedfrom income after tax and minority interests but before dividend distribution.

 

CUCL and Unicom NewCentury are requiredto allocate at least 10% of their income after tax and minority interestsdetermined under PRC GAAP to the general reserve fund until the cumulativeamounts reach 50% of the registered capital. The statutory reserve can only beused, upon approval obtained from the relevant authority, to offset accumulatedlosses or increase capital.

 

Appropriation to thestaff bonus and welfare fund is at the discretion of the directors. The staff bonusand welfare fund can only be used for special bonuses or the collective welfareof the employees and are not distributable as cash dividends. Under HK GAAP,the appropriations to the staff bonus and welfare fund will be charged tostatements of income as expenses incurred since any assets acquired throughthis fund belong to the employees. For the years ended December 31, 2003, noappropriation to staff bonus and welfare fund has been made (2001 and 2002:Nil).

 

Accordingly, CUCL andUnicom New Century appropriated approximately RMB382,030,000 (2001:RMB239,138,000; 2002: RMB436,463,000) and RMB37,236,000 (2002:Nil) respectivelyto the general reserve fund for the year ended December 31, 2003.

 

As stated in Note 3(a),the change in accounting policy on income taxes has resulted in an increase ofdistributable reserves to shareholders of CUCL for the years ended December 31,2001 and 2002 respectively. As a result, CUCL has made additional appropriationto the statutory reserves amounting to approximately RMB40,530,000 in 2003(2001: RMB22,806,000; 2002: RMB37,316,000).

 

F - 40

----

 

(b)         At the annual general meeting held on 12 May 2003, the shareholdersof the Company approved thepayment of final dividend of RMB0.10per ordinary share for the year ended December 31, 2002 totaling RMB1,255,299,607 which hasbeen reflected as an appropriation of retained earnings for 2003.  As of December 31, 2003, such dividends havebeen fully paid by the Company.

 

At a meeting held on March25, 2004, the Board of Directors of the Company proposed the payment of finaldividend of RMB0.10 per ordinary share to the shareholders for the year endedDecember 31, 2003 totaling RMB1,255,317,207. This proposed dividend has notbeen reflected as a dividend payable in the financial statements as of December31, 2003, but will be reflected as an appropriation of retained earnings in thefinancial statements for the year ending December 31, 2004.

 

(c)          For the year endedDecember 31, 2003, net income included a loss of approximately RMB21,654,000 (2001: net income of approximatelyRMB1,981,843,000; 2002: net income of approximately RMB287,492,000) which hasbeen dealt with in the financial statements of the Company. As of December 31,2003, the amount of distributable reserves to shareholders of the Companyamounted to approximately RMB2,577,229,000 (2001: RMB3,566,691,000; 2002: RMB3,854,183,000).

 

**1****6.****       EARNINGS PER SHARE**

 

**Earnings per share and per American Depository Share (“ADS”)**

 

Basic earnings per sharefor the years ended December 31, 2001, 2002 and 2003 were computed by dividing the netincome by the weighted average number of ordinary shares in issue during the years.

 

Diluted earnings pershare for the years ended December 31, 2001, 2002 and 2003 were computed by dividing the netincome by the weighted average number of ordinary shares in issue during the years,after adjusting for the effects of the potential dilutive ordinary shares. All potential dilutive ordinary shares arose from share options grantedunder (i) the amended Pre-Global Offering Share Option Scheme; and (ii) theamended Share Option Scheme as described in Note 31. For 2003, all potentialdilutive shares arose from additional share options granted in 2003 under theamended Share Option Scheme (see details in Note 31), which if converted toordinary shares would decrease net income per share. For 2001 and 2002, therewas no dilution of earnings per share after taking into account the dilutiveeffect of the share options. The anti-dilutive shares arising from the shareoptions in 2003 of approximately 66,573,000 shares (2001: 30,451,000 shares;2002: 48,745,000 shares) were not included in the calculation of dilutedearnings per share.

 

Basic and dilutedearnings per ADS have been computed by multiplying the earnings per share by10, which is the number of shares represented by each ADS.

 

Reconciliation of thenumerators and denominators of the basic and diluted earnings per sharecomputations:

 
|                                    |   | **2001**         |   | **2002**      |   | **2003**                           |   |
|-----------------------------------------|--------|------------------|--------|---------------|--------|------------------------------------|--------|
|                                    |   | **Net  income**  |   | **Shares**    |   | **Per****s****hare****a****mount** |   | **Net  income** |   | **Shares** |   | **Per****s****hare****a****mount** |   | **Net  income** |   | **S****hares** |   | **Per****s****hare****a****mount** |   |
|                                    |   | **RMB’000** |   | **‘000** |   | **RMB**                            |   | **RMB’000** |   | **‘000** |   | **RMB** |   | **RMB’000** |   | **‘000** |   | **RMB** |   |
|                                    |   | **As  restated** |   |          |   | **As  restated**                   |   | **As  restated** |   |   |   | **As  restated** |   |   |   |   |   |   |   |
|                                    |   |             |   |          |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings                          |   | 4,601,859        |   | 12,552,996    |   | 0.367                              |   | 4,598,213 |   | 12,552,996 |   | 0.366 |   | 4,217,097 |   | 12,553,010 |   | 0.336 |   |
| Effect of  conversion of share  options |   | —           |   | —        |   | —                             |   | — |   | — |   | — |   | — |   | 15,673 |   | — |   |
|                                    |   |             |   |          |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings                        |   | 4,601,859        |   | 12,552,996    |   | 0.367                              |   | 4,598,213 |   | 12,552,996 |   | 0.366 |   | 4,217,097 |   | 12,568,683 |   | 0.336 |   |

 

F - 41

----

 

**1****7.****       TRADING SECURITIES**

 

Trading securities represented listedequity securities in the PRC, which werecarried at fair value. The realized gains on trading securities for the year ended December 31, 2003 amounted to approximately RMB12,045,000****(2001: RMB31,979,000; 2002: RMB1,876,000) and the unrealizedgains amounted to RMB10,129,000(2001: unrealized loss of RMB56,576,000;2002: unrealized loss ofRMB27,461,000). As of December31, 2003, no trading securities are maintained by the Group after the sale of Guoxin Paging on December 31,2003.

 

**1****8.****       ACCOUNTS RECEIVABLE, NET**

 
|                                                         |   | **2002**         |   | **2003**         |   |
|--------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                         |   | **RMB’000** |   | **RMB’000** |   |
|                                                         |   |             |   |             |   |
| Accounts  receivable for GSM services                        |   | 3,920,821        |   | 5,268,041        |   |
| Accounts  receivable for CDMA services                       |   | 1,004,754        |   | 2,408,093        |   |
| Accounts  receivable for Data and Internet services          |   | 410,479          |   | 696,802          |   |
| Accounts  receivable for Long Distance services              |   | 543,838          |   | 587,570          |   |
| Accounts  receivable for Paging services                     |   | 181,348          |   | —           |   |
| Sub-total                                                    |   | 6,061,240        |   | 8,960,506        |   |
|                                                         |   |             |   |             |   |
| Less:  Provision for doubtful debts for GSM  services   |   | (1,466,803       | )      | (2,716,396       | )      |
| Provision for  doubtful debts for CDMA services              |   | (62,821          | )      | (508,970         | )      |
| Provision for  doubtful debts for Data and Internet services |   | (99,214          | )      | (158,313         | )      |
| Provision for  doubtful debts for Long Distance services     |   | (60,176          | )      | (105,280         | )      |
| Provision for  doubtful debts for Paging service             |   | (44,958          | )      | —           |   |
|                                                         |   |             |   |             |   |
|                                                         |   | 4,327,268        |   | 5,471,547        |   |

 

The aging analysis ofaccounts receivable was as follows:

 
|                                |   | **2002**         |   | **2003**         |   |
|-------------------------------------|--------|------------------|--------|------------------|--------|
|                                |   | **RMB’000** |   | **RMB’000** |   |
|                                |   |             |   |             |   |
| Not yet due  (within credit period) |   | 2,818,296        |   | 3,433,584        |   |
| Due within three  months            |   | 1,311,930        |   | 1,744,568        |   |
| Three months to  six months         |   | 464,750          |   | 750,719          |   |
| Six months to  one year             |   | 769,718          |   | 1,299,386        |   |
| More than one  year                 |   | 696,546          |   | 1,732,249        |   |
|                                |   |             |   |             |   |
|                                |   | 6,061,240        |   | 8,960,506        |   |

 

Thenormal credit period granted by the Group is on average 30 days from the dateof invoice.

 

Provisionfor doubtful debts was analyzed as follows:

 
|                               |   | **2002**         |   | **2003**         |   |
|------------------------------------|--------|------------------|--------|------------------|--------|
|                               |   | **RMB’000** |   | **RMB’000** |   |
|                               |   |             |   |             |   |
| Balance,  beginning of year        |   | 1,005,937        |   | 1,733,972        |   |
| Provision for  the year            |   | 971,989          |   | 1,749,887        |   |
| Acquisition of  Unicom New Century |   | 327,936          |   | —           |   |
| Acquisition of  Unicom New World   |   | —           |   | 199,904          |   |
| Sale of  Guoxin Paging             |   | —           |   | (64,664          | )      |
| Written-off for  the year          |   | (571,890         | )      | (130,140         | )      |
|                               |   |             |   |             |   |
| Balance, end of  year              |   | 1,733,972        |   | 3,488,959        |   |

 

F - 42

----

 

**1****9.****       INVENTORIES**

 
|            |   | **2002**         |   | **2003**         |   |
|-----------------|--------|------------------|--------|------------------|--------|
|            |   | **RMB’000** |   | **RMB’000** |   |
|            |   |             |   |             |   |
| Handsets        |   | 2,357,577        |   | 1,133,027        |   |
| Telephone cards |   | 672,728          |   | 855,183          |   |
| Pagers          |   | 77,134           |   | —           |   |
| Other           |   | 122,464          |   | 181,144          |   |
|            |   |             |   |             |   |
|            |   | 3,229,903        |   | 2,169,354        |   |

 

**20.****       PREPAYMENTS AND OTHERCURRENT ASSETS**

 
|                                                                 |   | **Note** |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                 |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |     |   |             |   |             |   |
| Prepaid rental                                                       |   |     |   | 85,185           |   | 233,461          |   |
| Deposits and  prepayments                                            |   |     |   | 1,069,939        |   | 1,624,874        |   |
| Interest  receivable                                                 |   |     |   | 37,780           |   | 4,872            |   |
| Advances to  employees                                               |   |     |   | 106,749          |   | 164,487          |   |
| Deferred  customer acquisition costs of contractual CDMA subscribers |   | (a)      |   | 508,596          |   | 535,521          |   |
| Other                                                                |   |     |   | 765,515          |   | 584,562          |   |
|                                                                 |   |     |   |             |   |             |   |
|                                                                 |   |     |   | 2,573,764        |   | 3,147,777        |   |

 

The aging analysis of prepayments and other current assets was as follows:

 
|            |   | **2002**         |   | **2003**         |   |
|-----------------|--------|------------------|--------|------------------|--------|
|            |   | **RMB’000** |   | **RMB’000** |   |
|            |   |             |   |             |   |
| Within one year |   | 2,227,594        |   | 3,109,944        |   |
| Over one year   |   | 346,170          |   | 37,833           |   |
|            |   |             |   |             |   |
|            |   | 2,573,764        |   | 3,147,777        |   |

 

F - 43

----

 

Note:

 

----

(a)          As part of the arrangement with certain CDMAcontractual subscribers under special promotion packages, CDMA handsets wereprovided to certain subscribers for their use at no additional charge duringspecified contract periods ranging from 6 months to 2 years.

 

Underthe terms of these contracts, subscribers are required to spend a minimumamount of service fees during the contract period. In addition, to securefuture performance, these subscribers are also required to (i) prepay servicefees or deposits, (ii) maintain a restricted bank deposits in a designatedcommercial banks to secure the minimum contract amount, or (iii) provide theGroup with a guarantor who will compensate the Group for any loss upon theirnon-performance. The costs of CDMA handsets under the abovecontractual arrangements aretreated as deferred customer acquisition costs, to the extent recoverable basedon management periodic assessment, and are amortized over the contractual period (not exceeding 2years) to match with the Group’s minimum contract revenue.

 

For the year ended December 31, 2003, amortization of these deferred customer acquisition costs ofcontractual CDMA subscribers amounted to approximatelyRMB5,837 million (2002: RMB1,385 million), which was recorded in “sellingand marketing” expenses.  As of December 31, 2003, the carrying amount of unamortized deferred customer acquisition costs ofcontractual CDMA subscribers totaled approximately RMB4,447 million (2002: RMB5,983 million), withapproximately RMB536 million (2002: RMB509 million) recorded in “prepayment and other current assets” (for contract periodwithin 1 year) and with approximately RMB3,911 million (2002: RMB5,474 million) recorded in “other assets” (for contractperiod over 1 year) (see Note 23).

 

As of December 31, 2003, thecarrying amount of prepaid service fees and deposits obtained by the Groupunder the above contracts amounted to RMB2,366 million and RMB153 million (2002:RMB2,625 million and RMB150 million) respectively.

 

F - 44

----

 

**21.****       PROPERTY, PLANT ANDEQUIPMEN****T, NET**

 
|                                      |   | **2003**                            |   | **2002**                           |   |
|-------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|
|                                      |   | **Land use  rights and  buildings** |   | **Telecommuni-cations  equipment** |   | **Office  furniture,  fixtures and  others** |   | **Leasehold  improvements** |   | **Construction  in  progress** |   | **Total** |   | **Total** |   |
|                                      |   | **RMB’000**                    |   | **RMB’000**                   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Cost or  valuation:                       |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of  year                        |   | 10,355,012                          |   | 102,924,638                        |   | 4,671,149 |   | 947,561 |   | 19,419,349 |   | 138,317,709 |   | 96,074,270 |   |
| Additions                                 |   | 177,588                             |   | 295,748                            |   | 304,702 |   | — |   | 18,028,869 |   | 18,806,907 |   | 19,365,121 |   |
| Acquisition of  Unicom New Century        |   | —                              |   | —                             |   | — |   | — |   | — |   | — |   | 23,330,775 |   |
| Acquisition of  Unicom New World          |   | 1,256,443                           |   | 8,531,911                          |   | 169,789 |   | 43,497 |   | 2,104,818 |   | 12,106,458 |   | — |   |
| Transfer from  CIP                        |   | 1,788,019                           |   | 15,137,290                         |   | 467,503 |   | 121,982 |   | (17,514,794 | ) | — |   | — |   |
| Sale of  Guoxin Paging                    |   | (449,606                            | )      | (10,939,104                        | )      | (721,200 | ) | (14,647 | ) | (296,496 | ) | (12,421,053 | ) | — |   |
| Disposals                                 |   | (23,501                             | )      | (729,047                           | )      | (397,167 | ) | (43,614 | ) | — |   | (1,193,329 | ) | (452,457 | ) |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| End of year                               |   | 13,103,955                          |   | 115,221,436                        |   | 4,494,776 |   | 1,054,779 |   | 21,741,746 |   | 155,616,692 |   | 138,317,709 |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Representing:                             |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| At cost                                   |   | 10,733,182                          |   | 115,221,436                        |   | 4,494,776 |   | 1,054,779 |   | 21,741,746 |   | 153,245,919 |   | 135,614,629 |   |
| At valuation                              |   | 2,370,773                           |   | —                             |   | — |   | — |   | — |   | 2,370,773 |   | 2,703,080 |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
|                                      |   | 13,103,955                          |   | 115,221,436                        |   | 4,494,776 |   | 1,054,779 |   | 21,741,746 |   | 155,616,692 |   | 138,317,709 |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated  depreciation and impairment: |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of  year                        |   | 1,067,005                           |   | 27,665,564                         |   | 1,667,089 |   | 416,875 |   | 14,547 |   | 30,831,080 |   | 20,325,835 |   |
| Charge for the  year                      |   | 579,600                             |   | 14,461,239                         |   | 787,652 |   | 146,780 |   | — |   | 15,975,271 |   | 10,850,681 |   |
| Impairment  losses                        |   | —                              |   | 526,030                            |   | — |   | — |   | 2,018 |   | 528,048 |   | — |   |
| Sale of  Guoxin Paging                    |   | (119,255                            | )      | (8,190,816                         | )      | (451,275 | ) | (10,366 | ) | (2,258 | ) | (8,773,970 | ) | — |   |
| Disposals                                 |   | (2,703                              | )      | (640,671                           | )      | (362,354 | ) | (42,857 | ) | — |   | (1,048,585 | ) | (345,436 | ) |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| End of year                               |   | 1,524,647                           |   | 33,821,346                         |   | 1,641,112 |   | 510,432 |   | 14,307 |   | 37,511,844 |   | 30,831,080 |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Net book value:                           |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| End of year                               |   | 11,579,308                          |   | 81,400,090                         |   | 2,853,664 |   | 544,347 |   | 21,727,439 |   | 118,104,848 |   | 107,486,629 |   |
|                                      |   |                                |   |                               |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of  year                        |   | 9,288,007                           |   | 75,259,074                         |   | 3,004,060 |   | 530,686 |   | 19,404,802 |   | 107,486,629 |   | 75,748,435 |   |

 

As of December 31, 2003,prepayments for property, plant and equipment to be used in constructionamounting to approximatelyRMB1,431 million (2001:RMB2,272 million; 2002: RMB4,164 million) have been included in construction-in-progress.

 

For2003, interest of approximately RMB604 million (2001: RMB686 million; 2002: RMB423million) was capitalized to construction-in-progress.

 

Asof December 31, 2003, the cost or valuation of land use rights (located in thePRC) and the accumulated depreciation amounted to approximately RMB303 millionand RMB61 million respectively (2001: RMB315 million and RMB60 million; 2002:RMB348 million and RMB77 million).

 

Land use rights andbuildings of the Group as of March 31, 2000 were valued by Sallmanns (Far East)Ltd., registered property valuers in Hong Kong, using the replacement cost oropen market value approach, as appropriate. The resulting revaluation surplusand deficit amounted to RMB177 million and RMB28 million, respectively. Theadditional depreciation attributable to the revaluation surplus amounted to approximately RMB8.80 million for 2003 (2001 and 2002: RMB8.80 million).The revaluation deficit was charged to the statements of income during the year ended December 31,2000. As of December 31, 2003, for theseland use right and buildings stated at revalued amounts, their carrying amount wouldhave been approximately RMB1,783 million (2001: RMB2,139 million; 2002: RMB2,032million) had they been carried at cost less accumulated depreciation.

 

F - 45

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Asof December 31, 2003, net book value of telecommunications equipment held underfinance leases amounted to approximately RMB147 million (2001: RMB179 million; 2002:RMB159 million).

 

Impairmentof assets for the Paging Business:

 

Managementconducts an impairment assessment at each balance sheet date to identifywhether the carrying values of the property, plant and equipment may beimpaired.

 

In2001, the economic performance of Paging Business was worse than originallyexpected. Updated analyses and forecasts were prepared by the Group todetermine if there had been an impairment of assets. The test for impairmentwas conducted for the paging telecommunication business of each province,representing a cash-generating unit, after considering the significant declinein revenue and profitability in 2001. The impairment assets includingtelecommunications equipment and the related goodwill of certain provinces werewritten down to their recoverable values determined based on their value inuse. Value in use is determined based on the present value of estimated futurenet cash inflows expected to arise from the continuing use of the pagingassets. In estimating the future net cash flows, management has made keyassumptions and estimations on the appropriate discount rate adopted (8% perannum), the period covered by the cash flow forecast, the impact of thecontinuous decline of traditional Paging Business, the future loss of subscribers,the expected trend in average revenue per subscriber, as well as incrementalcash flows arising from new Paging Businesses and the effects of the adoptionof cost reduction plans.  All these assumptions and estimationsare made based on historicaltrends adjusted for the current market situation (including physical conditionsof these assets) and the forecast of the future development of new value-addedPaging Businesses.

 

Theseassumptions and estimates are made after considering the historical trends, theprevailing market trends and the physical conditions of the related assets.Based on the above, the Group recorded impairment loss for property, plant andequipment amounting to approximately RMB469 million and for goodwill amountingto approximately RMB164 million for the year ended December 31, 2001.

 

In2002, the Group conducted re-assessment of the recoverable amount of the pagingassets based on the best estimates of the discounted net future cash flowsexpected to be generated from the Paging Business in the future years.Management expected further reduction of cash inflows to be generated from thetraditional Paging Business. Other assumptions are consistent with thoseadopted in the previous assessment performed in 2001. Based on the estimate ofthe discounted net cash flows expected to arise from the continuing use of thepaging assets, the Group concluded that the carrying amount of the pagingassets as of December 31, 2002 did not exceed its recoverable amount andaccordingly no additional impairment loss was recognized in 2002.

 

In2003, based on the updated analysis and the worsening trend of thedecline of the traditional Paging Business in the first half of 2003, despite the continuous growth of newvalue-added Paging Businesses, theGroup expected that the related incremental future cash inflows to begenerated from these new paging services could unlikely offset the effects ofthe rapid decline of the traditional Paging Business in future. Consequently, based on the latest estimateof the discounted future net cash flows expected to arise from the continuingoperations of the Paging Business, after considering the unexpected rapiddecline of the traditional Paging Business in the first half of 2003,the Group concluded that thecarrying amount of paging assets as at 30 June 2003 had exceeded their expectedrecoverable amounts.  Accordingly, theGroup has recorded an additional impairment loss for property, plant and equipment of the Paging Business amounting toapproximately RMB528 million for the year ended December 31, 2003.

 

Inaddition, the Group has also recognized losses on disposal of property, plantand equipment of approximately RMB50 million for the year ended December 31, 2003(2001: RMB54 million; 2002: RMB82 million).

 

F - 46

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**22.****       GOODWILL**

 
|                                                    |                                 | **2002**                              |     | **2003**         |     |
|---------------------------------------------------------|--------------------------------------|---------------------------------------|----------|------------------|----------|
|                                                    |                                 | **RMB’000**                      |     | **RMB’000** |     |
|                                                    |                                 | **As  restated  (Note 3****(a)****)** |     |             |     |
| Cost:                                                   |                                 |                                  |     |             |     |
| Goodwill arising from acquisition of Unicom New Century |                                 | 2,284,749                             |     | 2,284,749        |     |
| Goodwill arising from acquisition of Unicom New World   |                                 | —                                |     | 1,144,957        |     |
| Other goodwill                                          |                                 | 525,431                               |     | —           |     |
|                                                    |                                 | 2,810,180                             |     | 3,429,706        |     |
|                                                    |                                 |                                  |     |             |     |
| Less:                                              | Accumulated amortization             |                                  | (321,712 | )                | (114,238 | ) |
|                                                    | Impairment losses for other goodwill |                                  | (202,697 | )                | —   |   |
|                                                    |                                 |                                  |     |             |     |
|                                                    |                                 | 2,285,771                             |     | 3,315,468        |     |

 

Goodwillarising from the acquisition of Unicom New Century and Unicom New Worldrepresented the excess of purchase consideration over the fair value over theseparately identifiable net assets acquired (see Note 4). The amortizationcharge of goodwill arising from acquisition of Unicom New Century amounted toapproximately RMB114,238,000 for the year ended December 31, 2003.

 

Priorto 2002, other goodwill represented the excess of purchaseconsideration over the fair values of the separately identifiable assetsacquired by Guoxin Paging in respect of (i) certain local Paging Businessesduring its restructuring in1998; and (ii) minority interests in the provincial subsidiaries of GuoxinPaging.  The amortization charge of goodwill for the year endedDecember 31, 2003 amounted toapproximately RMB1,022,000 (2001:RMB74,261,000; 2002: RMB23,414,000). As of December 31, 2003, all the goodwillrelated to Paging Business has been fully amortized.

 

Theimpairment provision in 2002 amounted to approximately RMB38,797,000 (2001:RMB163,900,000) representing the write-down of goodwill relating to the PagingBusinesses in certain provinces to their recoverable amounts.

 

**23.****       OTHER ASSETS**

 
|                                                                 |   | **Note** |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                 |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |     |   |             |   |             |   |
| Interconnection facilities                                           |   |     |   | 568,099          |   | 613,622          |   |
| Other                                                                |   |     |   | 869,558          |   | 1,588,839        |   |
|                                                                 |   |     |   | 1,437,657        |   | 2,202,461        |   |
|                                                                 |   |     |   |             |   |             |   |
| Less:  Accumulated amortization                                      |   |     |   | (680,101         | )      | (1,162,464       | )      |
|                                                                 |   |     |   | 757,556          |   | 1,039,997        |   |
|                                                                 |   |     |   |             |   |             |   |
| Prepaid rental and leased line                                       |   |     |   | 786,503          |   | 897,783          |   |
| Deferred  customer acquisition costs of contractual CDMA subscribers |   | 20(a)    |   | 5,474,164        |   | 3,911,650        |   |
|                                                                 |   |     |   |             |   |             |   |
|                                                                 |   |     |   | 7,018,223        |   | 5,849,430        |   |

 

For the year endedDecember 31, 2003, amortization of other assets, excluding deferred customeracquisition costs of contractual CDMA subscribers and prepaid rental and leasedline, amounted toapproximately RMB294,762,000 (2001:RMB463,479,000; 2002: RMB381,629,000).

 

F - 47

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**2****4.****       INVESTMENT SECURITIES**

 
|                                           |   | **2002**         |   | **2003**         |   |
|------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                           |   | **RMB’000** |   | **RMB’000** |   |
|                                           |   |             |   |             |   |
| Unlisted equity securities in the PRC, at cost |   | 111,863          |   | —           |   |
| Less: Provision for impairment losses          |   | (6,215           | )      | —           |   |
|                                           |   |             |   |             |   |
|                                           |   | 105,648          |   | —           |   |

 

As of December 31, 2003, the Group did not hold anyinvestment securities.

 

**2****5.****       INVESTMENT IN SUBSIDIARIES**

 

During 2003, the Company acquired the entire issuedshare capital of Unicom New World (BVI) Limited, which holds the entire equity interests in Unicom New World.The acquisition became effective onDecember 31, 2003.

 

Inaddition, the Company has contributed cash of approximately RMB6,427,513,000(2001: RMB14,647,535,000; 2002: RMB17,464,520,000) to CUCL as additionalinvestment in 2003.

 

As of December 31, 2003,the details of the Company’s subsidiaries were as follows:

 
| **Name**                                         |   | **Place  and date of  incorporation  and legal entity**                   |   | **Percentage  of equity  interests held** |   | **Issued and  fully paid  capital** |   | **Principal  activities** |   |
|--------------------------------------------------|--------|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------|--------|---------------------------|--------|
|                                             |   |                                                                      |   | **Direct**                                |   | **Indirect**                        |   | **RMB’000**          |   |   |   |
|                                             |   |                                                                      |   |                                      |   |                                |   |                      |   |   |   |
| China Unicom  Corporation Limited                |   | The PRC, April 21, 2000, limited liability company                        |   | 100.00                                    | %      | —                              |   | 45,042,057                |   | Telecommunications operation |   |
|                                             |   |                                                                      |   |                                      |   |                                |   |                      |   |   |   |
| Unicom New  Century (BVI) Limited                |   | British Virgin Islands,  October 23, 2002, limited liability company |   | 100.00                                    | %      | —                              |   | 12                        |   | Investment holding |   |
|                                             |   |                                                                      |   |                                      |   |                                |   |                      |   |   |   |
| Unicom New  Century Telecommunications Co., Ltd. |   | The PRC,   July 16, 2002, limited liability company                  |   | 100.00                                    | %      | —                              |   | 328,936                   |   | Telecommunications  operation |   |
|                                             |   |                                                                      |   |                                      |   |                                |   |                      |   |   |   |
| Unicom New World  (BVI) Limited                  |   | British Virgin Islands,  November 5, 2003, limited liability company |   | 100.00                                    | %      | —                              |   | 1                         |   | Investment holding |   |
|                                             |   |                                                                      |   |                                      |   |                                |   |                      |   |   |   |
| Unicom New World  Telecommunications Co., Ltd.   |   | The PRC, November 4, 2003, limited liability company                      |   | —                                    |   | 100.00                              | %      | 2,054,770                 |   | Telecommunications operation |   |

 

F - 48

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**2****6.****       PAYABLES AND ACCRUEDLIABILITIES**

 
|                                               |   | **Note** |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                               |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                               |   |     |   |             |   |             |   |
| Payables to  contractors and equipment suppliers   |   |     |   | 13,703,912       |   | 11,789,366       |   |
| Accrued expenses                                   |   |     |   | 1,139,645        |   | 1,417,750        |   |
| Payables to  telecommunications products suppliers |   |     |   | 2,395,928        |   | 1,346,784        |   |
| Customer  deposits                                 |   |     |   | 784,156          |   | 1,198,812        |   |
| Salary and  welfare payables                       |   |     |   | 775,668          |   | 494,794          |   |
| Other                                              |   | (a)      |   | 1,012,652        |   | 850,914          |   |
|                                               |   |     |   |             |   |             |   |
|                                               |   |     |   | 19,811,961       |   | 17,098,420       |   |

 

Note:

 

----

(a)          Other includesmiscellaneous accruals for housing fund and other government surcharges.

 

The aging analysis of payables and accrued liabilities isas follows:

 
|                    |   | **2002**         |   | **2003**         |   |
|-------------------------|--------|------------------|--------|------------------|--------|
|                    |   | **RMB’000** |   | **RMB’000** |   |
|                    |   |             |   |             |   |
| Less than six  months   |   | 14,887,342       |   | 12,253,057       |   |
| Six months to  one year |   | 2,521,886        |   | 3,051,167        |   |
| More than one  year     |   | 2,402,733        |   | 1,794,196        |   |
|                    |   |             |   |             |   |
|                    |   | 19,811,961       |   | 17,098,420       |   |

 

F - 49

----

**2****7****.****      ****SHORT-TERM BANK LOANS**

 

Interestrates on short-term bank loans ranged from 4.54% to 5.31% per annum for 2003 (2001: 4.19% to7.72% per annum; 2002: 4.54% to5.56% per annum).

 

Supplementalinformation with respect to short-term bank loans was:

 
|               |   | **Balance at  year end** |   | **Weighted  average  interest rate  at year end** |   | **Maximum  amount  outstanding  during the year** |   | **Average  amount  outstanding  during the  year*** |   | **Weighted  average  interest rate  during the  year**** |   |
|--------------------|--------|--------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------------|--------|
|               |   | **RMB’000**         |   | **per annum**                                     |   | **RMB’000**                                  |   | **RMB’000**                                    |   | **per annum**                                            |   |
|               |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| December 31,  2002 |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - secured          |   | 209,000                  |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - unsecured        |   | 8,937,500                |   |                                              |   |                                              |   |                                                |   |                                                     |   |
|               |   | 9,146,500                |   | 5.06                                              | %      | 9,146,500                                         |   | 8,117,750                                           |   | 5.39                                                     | %      |
|               |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| December 31,  2003 |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - secured          |   | 520,000                  |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - unsecured        |   | 10,455,199               |   |                                              |   |                                              |   |                                                |   |                                                     |   |
|               |   | 10,975,199               |   | 5.22                                              | %      | 10,975,199                                        |   | 10,060,850                                          |   | 5.15                                                     | %      |

 

----

*                 The averageamount outstanding is computed by dividing the total of outstanding principalbalance as of January 1 and December 31, as applicable, by 2.

 

**          The weightedaverage interest rate is computed by dividing the total of weighted averageinterest rates as of January 1 and December 31, as applicable, by 2.

 

Asof December 31, 2003, short-termbank loans of approximately RMB70 million (2002: RMB463 million) were guaranteed by Unicom Group.

 

Asof December 31, 2003, short-term bank loans of approximately RMB520 million (2002: RMB209 million) were secured by the futureservice fee revenue to be generated by the cellular operations.

 

F - 50

----

 

**2****8.****      ****LONG-TERM BANK LOANS**

** **
|                        |   | **Interest  rates and final maturity**                                                                                                                |   | **2002**         |   | **2003**         |   |
|-----------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                        |   |                                                                                                                                                  |   | **RMB’000** |   | **RMB’000** |   |
| RMB denominated  bank loans |   | Fixed interest rate ranging from 4.44% to 5.76%  (2002: 4.54% to 6.24%) per annum with maturity through 2009 (2002: maturity  through 2008) (Note(a)) |   |             |   |             |   |
|                        |   |                                                                                                                                                  |   |             |   |             |   |
| - secured                   |   |                                                                                                                                                  |   | 24,627,646       |   | 10,622,366       |   |
| - unsecured                 |   |                                                                                                                                                  |   | 18,518,021       |   | 26,994,612       |   |
|                        |   |                                                                                                                                                  |   |             |   |             |   |
|                        |   |                                                                                                                                                  |   | 43,145,667       |   | 37,616,978       |   |
|                        |   |                                                                                                                                                  |   |             |   |             |   |
| USD denominated  bank loans |   | Float interest rate of USD LIBOR plus interest  margin of  0.28% to 0.44% per annum  with maturity through 2010 (Note (b))                       |   | —           |   | 5,793,690        |   |
|                        |   |                                                                                                                                                  |   |             |   |             |   |
| Less: Current  portion      |   |                                                                                                                                                  |   | (5,459,505       | )      | (7,197,877       | )      |
|                        |   |                                                                                                                                                  |   |             |   |             |   |
|                        |   |                                                                                                                                                  |   | 37,686,162       |   | 36,212,791       |   |

 

Therepayment schedule of the long-term bank loans is as follows:

 
|                                                 |   | **2002**         |   | **2003**         |   |
|------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                 |   | **RMB’000** |   | **RMB’000** |   |
| Balances due:                                        |   |             |   |             |   |
| - not later than one year                            |   | 5,459,505        |   | 7,197,877        |   |
| - later than one year and not later than two years   |   | 4,825,581        |   | 15,549,832       |   |
| - later than two years and not later than five years |   | 32,581,222       |   | 18,837,560       |   |
| Thereafter                                           |   | 279,359          |   | 1,825,399        |   |
|                                                 |   |             |   |             |   |
|                                                 |   | 43,145,667       |   | 43,410,668       |   |
| Less: Portion  classified as current liabilities     |   | (5,459,505       | )      | (7,197,877       | )      |
|                                                 |   |             |   |             |   |
|                                                 |   | 37,686,162       |   | 36,212,791       |   |

 

(a)          As ofDecember 31, 2003, long-termbank loans denominated in RMB were secured by the following:

 

(i)                   ApproximatelyRMB10,622 million (2002: RMB24,628 million) oflong-term bank loans were secured by the future service fee revenue to begenerated by the cellular operations of the relevant branches. Included in these long-term bank loans, approximately RMB3,600 million(2002:RMB3,471 million) was also guaranteed by Unicom Group;

 

(ii)                In addition to the above, approximately RMB8,004 million (2002: RMB9,164million) of long-term bank loans were guaranteed by Unicom Group; and

 

(iii)             Approximately RMB50 million (2002: Nil) of long-term bank loans weresecured by restricted bank deposits.

 

(b)         The Companysigned an agreement with 13 financial institutions for a long-term syndicatedloan of USD0.7 billion (the “Facility”) in September 2003. The Facility wassplit into 3 tranches (i) USD0.2 billion 3-year loan; (ii) USD0.3 billion5-year loan; and (iii) USD0.2 billion 7-year loan and carried an interest rateof 0.28%, 0.35% and 0.44% over US dollar LIBOR per annum for each trancherespectively.

 

InOctober 2003, the Company and CUCL entered into an agreement to lend the abovebank loans to CUCL with similar terms to finance the network constructions ofCUCL.

 

F- 51

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**29****.****OBLIGATIONS UNDER FINANCE LEASES**

 

Obligations under finance leases were analyzed asfollows:

 
|                                                         |   | **2002**         |   | **2003**         |   |
|--------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                         |   | **RMB’000** |   | **RMB’000** |   |
| Total minimum lease payments under finance leases repayable: |   |             |   |             |   |
| - not later than one year                                    |   | 17,284           |   | 25,926           |   |
| - later than one year and not later than five years          |   | 34,659           |   | 34,659           |   |
| - later than five years                                      |   | 154,395          |   | 145,753          |   |
|                                                         |   |             |   |             |   |
|                                                         |   | 206,338          |   | 206,338          |   |
| Less:Future finance charges                                  |   | (88,243          | )      | (81,184          | )      |
|                                                         |   |             |   |             |   |
| Present value of minimum obligations                         |   | 118,095          |   | 125,154          |   |
|                                                         |   |             |   |             |   |
| Representing obligations under finance leases:               |   |             |   |             |   |
| - current liabilities                                        |   | 16,793           |   | 25,435           |   |
| - non-current liabilities                                    |   | 101,302          |   | 99,719           |   |

 
|                                                   |   | **2002**         |   | **2003**         |   |
|--------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                   |   | **RMB’000** |   | **RMB’000** |   |
|                                                   |   |             |   |             |   |
| The present value of obligations under finance leases: |   |             |   |             |   |
| - not later than one year                              |   | 16,793           |   | 25,435           |   |
| - later than one year and not later than five years    |   | 28,224           |   | 28,224           |   |
| - later than five years                                |   | 73,078           |   | 71,495           |   |
|                                                   |   | 118,095          |   | 125,154          |   |
|                                                   |   |             |   |             |   |
| Less: Portion classified as current liabilities        |   | (16,793          | )      | (25,435          | )      |
|                                                   |   |             |   |             |   |
|                                                   |   | 101,302          |   | 99,719           |   |

 

Interest rate of obligations under finance leases is at 6% per annum.

 

**30****.****      ****SHARE CAPITAL**

 
|                                            |   | **2002**         |   | **2003**         |   |
|-------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                            |   | **HK$’000** |   | **HK$’000** |   |
| Authorized:                                     |   |             |   |             |   |
| 30,000,000,000  ordinary shares of HK$ 0.1 each |   | 3,000,000        |   | 3,000,000        |   |

 
|                    |   |     |   | **2002**                                 |   | **2003**         |   |
|-------------------------|--------|----------|--------|------------------------------------------|--------|------------------|--------|
|                    |   | **Note** |   | **Number of****s****hares  (‘000)** |   | **HK$’000** |   | **RMB****e****quivalent  ‘000** |   | **Number of****s****hares  (‘000)** |   | **HK$’ 000** |   | **RMB****e****quivalent  ‘000** |   |
| Issued and fully  paid: |   |     |   |                                     |   |             |   |   |   |   |   |   |   |   |   |
| - Unicom BVI            |   |     |   | 9,725,000                                |   | 972,500          |   | 1,030,850 |   | 9,725,000 |   | 972,500 |   | 1,030,850 |   |
| -Public investors       |   | (a)      |   | 2,827,996                                |   | 282,799          |   | 300,521 |   | 2,828,172 |   | 282,817 |   | 300,540 |   |
|                    |   |     |   |                                     |   |             |   |   |   |   |   |   |   |   |   |
|                    |   |     |   | 12,552,996                               |   | 1,255,299        |   | 1,331,371 |   | 12,553,172 |   | 1,255,317 |   | 1,331,390 |   |

 

----

Note: (a) Increase of 176,000 ordinary shares in year 2003 representsthe ordinary shares in issued under the share option scheme (Note 31(e)).

 

F- 52

----

 

**31****.****      ****SHARE OPTION SCHEME**

 

TheCompany adopted a share option scheme (the “Share Option Scheme”) and a fixedaward pre-global offering share scheme (“Pre-Global Offering Share OptionScheme”) on June 1, 2000 for the granting of share options to qualifiedemployees, with terms amended on May 13, 2002 to comply with the requirementsset out in the New Chapter 17 of the Listing Rules.

 

Movementsin the number of share options outstanding during the years 2001, 2002and 2003 are as follows:

 
|                        |   | **Number of  share options involved** |   |
|-----------------------------|--------|---------------------------------------|--------|
|                        |   | **2001**                              |   | **2002** |   | **2003** |   |
|                        |   |                                  |   |   |   |   |   |
| Balance,  beginning of year |   | 27,116,600                            |   | 33,840,600 |   | 69,868,600 |   |
| Granted                     |   | 6,724,000                             |   | 36,028,000 |   | 105,956,000 |   |
| Exercised                   |   | —                                |   | — |   | (176,000 | ) |
| Cancelled                   |   | —                                |   | — |   | (3,281,200 | ) |
|                        |   |                                  |   |   |   |   |   |
| Balance, end of  year       |   | 33,840,600                            |   | 69,868,600 |   | 172,367,400 |   |

 

Asof December 31, 2003, information of outstanding options are summarized asfollows:

 
| **Date of options granted**                                        |   | **The period  during  which an option  may be exercised** |   | **The price  per  share to be paid on  exercise of options** |   | **Number of****s****hares  outstanding as of  December 31, 2002** |       | **Number of****s****hares  outstanding as of  December 31, 2003** |        |
|--------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|--------------------------------------------------------------|--------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| Shares granted  under the Pre-Global Offering Share Option Scheme: |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| - June 22, 2000 (Note (a))                                         |   | June 22, 2002 to June 21,  2010                           |   | HK$                                                          | 15.42  |                                                              | 27,116,600 |                                                              | 25,436,600  |   |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| Shares granted  under the Share Option Scheme:                     |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| - June 30,  2001 (Note (b))                                        |   | June 30, 2001 to June 21,  2010                           |   | HK$                                                          | 15.42  |                                                              | 6,724,000  |                                                              | 6,508,000   |   |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| - August2, 2002 (Note (c))                                         |   | July 10, 2003 to July  9, 2008                            |   | HK$                                                          | 6.18   |                                                              | 36,028,000 |                                                              | 34,466,800  |   |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| - May 21, 2003 (Note (d))                                          |   | May 21, 2004 to May 20,  2009                             |   | HK$                                                          | 4.30   |                                                              | —     |                                                              | 105,590,000 |   |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
| - May 30, 2003 (Note (d))                                          |   | May 21, 2004 to May 20,  2009                             |   | HK$                                                          | 4.66   |                                                              | —     |                                                              | 366,000     |   |
|                                                               |   |                                                      |   |                                                         |   |                                                              |       |                                                              |        |
|                                                               |   |                                                      |   |                                                         |   | 69,868,600                                                        |       | 172,367,400                                                       |        |

 

F- 53

----

 

(a)          According tothe resolution passed by the Board of Directors in June 2000, a total of the27,116,600 options were granted on June 22, 2000 to the senior management,including directors, and certain other employees (which represent, on theirfull exercise, 27,116,600 shares of the Company) under the fixed awardPre-Global Offering Share Option Scheme adopted by the Company on June 1, 2000in the following terms:

 

(i)             the exerciseprice is equivalent to the share issue price of the Global Offering of HK$15.42per share (excluding the brokerage fee and HKSE transaction levy); and

 

(ii)          the optionsare vested and exercisable after 2 years from the grant date and expire 10years from the date of grant.

 

No further option can be granted under thePre-Global Offering Option Scheme.

 

The Pre-Global Offering Option Scheme had beenamended in conjunction with the amended terms of the Share Option Scheme on May13, 2002. Apart from the above two terms, the principal terms are the same asthe amended Share Option Scheme in all material aspects.

 

(b)         On June 1,2000, the Company adopted the Share Option Scheme pursuant to which the directorsof the Company may, at their discretion, invite employees, including executivedirectors, of the Company or any of its subsidiaries, to take up options tosubscribe for shares up to a maximum aggregate number of shares (includingthose that could be subscribed for under the pre-global offering share optionscheme as described above) equal to 10% of the total issued share capital ofthe Company.  According to the ShareOption Scheme, the nominal considerationpayable by a participant for the grant of options will be HK$1.00. The exercise price payable by a participant upon the exercise of anoption will be determined by the directors at their discretion at the date of grant, exceptthat such price may not be set below a minimum price which is the higher of:

 

(i)             the nominalvalue of a share; and

 

(ii)          80% of theaverage of the closing prices of shares on the HKSE on the five trading daysimmediately preceding the date of grant of the option on which there weredealings in the shares on the HKSE.

 

Theperiod during which an option may be exercised will be determined by thedirectors at their discretion, except that no option may be exercised laterthan 10 years from June 22, 2000. According to a resolution of the Board of Directorsin June 2001, the Company has granted 6,724,000 share optionsunder the Share Option Scheme which represent, on their fullexercise, 6,724,000 shares to certain employees of the Group in the followingterms:

 

(i)             the price ofa share payable by a participant upon the exercise of an option shall beHK$15.42 (excluding the brokerage fee and HKSE transaction levy); and

 

(ii)        the period during which anoption is vested and exercisable commences from the date of grant of theoptions and will end by June 22, 2010.

 

F - 54

----

 

Theterms of the Share Option Scheme were amended on May 13, 2002 to comply withthe requirements set out in the New Chapter 17 of the Listing Rules which cameinto effect on September 1, 2001 with the following major amendments:

 

(i)             share optionmay be granted to employees including executive directors of the Group or anyof the non-executive directors;

 

(ii)          the optionperiod commences on a day after the date on which an option is offered but notlater than 10 years from the offer date; and

 

(iii)       minimumsubscription price shall not be less than the higher of:

 

**•**      the nominalvalue of the shares;

 

**•**      the closingprice of the shares of the Stock Exchange as stated in the Stock Exchange’squotation sheets on the offer date in respect of the options; and

 

•      the averageclosing price of the shares on the Stock Exchange’s quotation sheets for thefive trading days immediately preceding the offer date.

 

(c)          According toresolution passed by the Board of Directors and the Independent Non-ExecutiveDirectors of the Company dated July 10,2002, a total of 36,028,000 share options were granted to eligible individualsincluding directors, independent non-executive directors, and the non-executivedirectors of the Company under the amended Share Option Scheme in the followingterms:

 

(i)             aggregate of2,802,000 options were granted to the executive directors, non-executivedirectors and independent non-executive directors of the Company;

 

(ii)          the exerciseprice is HK$6.18; and

 

(iii)       the vestingdates and exercisable periods of the options are as follows:

 
| **Vesting dates** |   | **Exercisable  periods**      |   | **Portions** |   |
|-------------------|--------|-------------------------------|--------|--------------|--------|
|              |   |                          |   |         |   |
| July 10, 2003     |   | July 10, 2003 to July 9, 2008 |   | 40           | %      |
| July 10, 2004     |   | July 10, 2004 to July 9, 2008 |   | 30           | %      |
| July 10, 2005     |   | July 10, 2005 to July 9, 2008 |   | 30           | %      |

 

(d)         According toresolutions passed bythe Board of Directors and the Independent Non-Executive Directors of theCompany dated May 21,2003 and May 30, 2003, a total of105,590,000 share options and 366,000share options were granted to eligible individuals(including directors, independent non-executive directors, non-executivedirectors, middle to seniormanagement of the Group)respectively, under the amended Share Option Scheme inthe following terms:

 

(i)             an aggregateof 2,772,000 options were granted to the executive directors, non-executivedirectors and independent non-executive directors of the Company;

 

(ii)          the exerciseprice per share option is HK$4.30 and HK$4.66respectively; and

 

(iii)       the vestingdates and exercisable periods of the options are as follows:

 
| **Vesting dates** |   | **Exercisable  periods**      |   | **Portions** |   |
|-------------------|--------|-------------------------------|--------|--------------|--------|
|              |   |                          |   |         |   |
| May 21, 2004      |   | May 21, 2004 to May  20, 2009 |   | 40           | %      |
| May 21, 2005      |   | May 21, 2005 to May 20, 2009  |   | 30           | %      |
| May 21, 2006      |   | May 21, 2006 to May 20, 2009  |   | 30           | %      |

 

F- 55

----

 

All of the options granted are governed by theamended terms of the Share Option Scheme and Pre-Global Offering Share OptionScheme as mentioned above.

 

(e)          Details of share options exercised during the year were as following:

 
| **Date of option  exercised** |   | **Exercise  price** |   | **Market  value per Share  at exercise date** |   | **Proceeds  received** |      | **Number of  shares involved** |       |
|-------------------------------|--------|---------------------|--------|-----------------------------------------------|--------|------------------------|-----------|--------------------------------|------------|
|                          |   |                |   |                                          |   |                   |      |                           | ** ** |
| December 2, 2003              |   | HK$                 | 6.18   |                                          | HK$    | 7.50                   |      | HK$                            | 271,920    |   | 44,000 | ** ** |
| December 9, 2003              |   | HK$                 | 6.18   |                                          | HK$    | 7.45                   |      | HK$                            | 815,760    |   | 132,000 | ** ** |
|                          |   |                |   |                                          |   |                   |      |                           |       |
|                          |   |                |   |                                          |   | HK$                    | 1,087,680 |                           | 176,000    |   |

 

**32****.****      ****RELATED PARTYTRANSACTIONS**

 

Thetable set forth below summarizes the name of significant related parties andnature of relationship with the Companyas of December 31, 2003:

 
| **Name of related parties**                                                                    |   | **Nature of  relationship with the Company** |
|------------------------------------------------------------------------------------------------|--------|----------------------------------------------|
|                                                                                           |   |                                         |
| China  United Telecommunications Corporation (“Unicom Group”)                        |   | Ultimate parent company                      |
| Unicom NewSpace Co., Ltd  (“Unicom NewSpace”)                                        |   | A subsidiary of Unicom Group                 |
| Unicom Xingye Science and Technology Trade Co. (“Unicom Xingye”)                     |   | A subsidiary of Unicom Group                 |
| Beijing Unicom Xingye Science and Technology Company Limited (“Beijing  Xingye”)     |   | A subsidiary of Unicom Group                 |
| Unicom Import and Export  Company Limited (“Unicom I/E Co”)                          |   | A subsidiary of Unicom Group                 |
| China Unicom  International Limited (“Unicom International”)                         |   | A subsidiary of Unicom Group                 |
| Unicom International (HK)  Limited (“Unicom International (HK)”)                     |   | A subsidiary of Unicom Group                 |
| Unicom New Horizon Mobile Telecommunications Company Limited (“Unicom  New Horizon”) |   | A subsidiary of Unicom Group                 |
| China Unicom Corporation  Limited (“CUCL”)                                           |   | A subsidiary of the Company                  |
| Unicom New Century Telecommunications Corporation Limited (“Unicom New  Century”)    |   | A subsidiary of the Company                  |
| Unicom New World Telecommunications Corporation Limited(“Unicom New World”)          |   | A subsidiary of the Company                  |
| Guoxin Paging Corporation  Ltd. (“Guoxin Paging”)                                    |   | A subsidiary of Unicom Group                 |
| Unicom Guomai Communications Corporation Limited (“Unicom Guomai”)                   |   | A subsidiary of Guoxin Paging                |

 

F - 56

----

 

**(a)****         ****Transactions with UnicomGroup and its subsidiaries**

 

Thefollowing is a summary of significant recurring transactions carried out withUnicom Group and its subsidiaries. These transactions also constitute connectedtransactions under the Listing Rules. In the director’s opinion, thesetransactions were carried out on normal commercial terms in the ordinary courseof business.

 
|                                                                      |   | **Note**    |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------|--------|-------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                      |   |        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **Transactions with Unicom Group and  its subsidiaries:**                 |   |        |   |             |   |             |   |             |   |
| Interconnection  and roaming revenues                                     |   | (i), (iii)  |   | 875,305          |   | 1,678,637        |   | 1,002,702        |   |
| Interconnection  and roaming charges                                      |   | (ii), (iii) |   | 298,828          |   | 331,179          |   | 316,271          |   |
| Rental  charges for premises, equipment and facilities                    |   | (iv)        |   | 21,257           |   | 17,817           |   | 17,936           |   |
| Revenue  for leasing of transmission line capacity                        |   | (v)         |   | 216,113          |   | 566,519          |   | 185,086          |   |
| Commission  revenue for sales agency services                             |   | (vi)        |   | 14,560           |   | —           |   | —           |   |
| Sales  of CDMA handsets                                                   |   | (vii)       |   | —           |   | 487,850          |   | 64,929           |   |
| Charges  for the international gateway services                           |   | (viii)      |   | —           |   | 15,626           |   | 8,631            |   |
| Leasing  of satellite transmission capacity                               |   | (ix)        |   | 61,778           |   | 35,153           |   | 26,400           |   |
| Purchase  of telecom cards                                                |   | (x)         |   | 1,255,533        |   | 877,221          |   | 1,186,500        |   |
| CDMA  network capacity lease rental                                       |   | (xi)        |   | —           |   | 891,897          |   | 3,515,364        |   |
| Commission  expenses for sales agency services incurred for telecom cards |   | (xii)       |   | 2,616            |   | 18,497           |   | 16,175           |   |
| Rental  charges for leasing of transmission line                          |   | (xiii)      |   | 16,882           |   | —           |   | —           |   |
| Agency  fee incurred for procurement of telecommunications equipment      |   | (xiv)       |   | 124,451          |   | 13,992           |   | 17,904           |   |
| Rental  for the PRC corporate office                                      |   | (xv)        |   | 10,131           |   | 7,598            |   | —           |   |
| Sales  of telecommunications equipment                                    |   | (xvi)       |   | —           |   | 16,088           |   | —           |   |

 

----

(i)                               Interconnectionrevenues represent the amounts received or receivable from Unicom Group forcalls from its networks to the Group’s networks.  Roaming revenues represent revenue for calls made using theGroup’s networks by Unicom Group’s subscribers.

 

(ii)                            Interconnectioncharges are for calls made from the Group’s networks to Unicom Group’snetworks.  Roaming expenses representexpenses for calls made by the Group’s subscribers using Unicom Group’snetworks.

 

(iii)                         Interconnectionsettlement between Unicom Group’s network and the Group’s network is based onstandards established from time to time by the MII.  In the case of calls between cellular subscribers in differentprovinces, settlement is based on either the standards established by the MIIor an internal settlement arrangement applied by Unicom Group based on theirrespective internal costs of providing this service. Also, charges for roamingservices between the Group and Unicom Group are based on their respectiveinternal costs of providing these services.

 

(iv)                        CUCL andUnicom New Century respectively signed service agreements with Unicom Group to mutuallylease premises, equipment and facilities from each other. Rentals are based onthe lower of depreciation costs and market rates.

 

(v)                           Unicom Groupleases transmission line capacity from the Group in accordance with therelevant provision of the services agreement. Revenue for leases of transmission line capacity is based on tariffsstipulated by MII from time to time less a discount of up to 10%.

 

(vi)                        GuoxinPaging acts as the sales agent of Unicom Group to sell telecommunicationsproducts (such as SIM cards and prepaid cards) in 2001.  In return, Guoxin receives agency commissionfrom Unicom Group at fixed rates based on commission rates stipulated by UnicomGroup applicable to third party sales agents. This agency services wasterminated in April 2001.

 

F - 57

----

 

(vii)                     According tothe sales of CDMA handsets agreements entered into between Unicom Group andUnicom Guomai on May 10, 2002 and January 1, 2003 respectively, Unicom Groupagreed to purchase CDMA mobile phone handsets from Unicom Guomai.  The selling price is negotiated on an arm’slength basis, which is not lower than the price sold by Unicom Guomai toindependent third parties.

 

(viii)                  Charges forinternational gateway services represent the amounts paid or payable to UnicomGroup for international gateway services provided for the Group’s internationallong distance networks. The charge for this service is based on the cost ofoperation and maintenance of the international gateway facilities incurred byUnicom Group, including depreciation, together with a margin of 10% over cost.

 

(ix)                          Satellitetransmission capacity leasing fees represent the amounts paid or payable toUnicom NewSpace for the use of satellite transmission capacity.  The charges are based on the MII regulationsthen in effect less the applicable discount up to 10% as agreed with UnicomNewSpace.

 

(x)                             The Groupsigned a service agreement with Unicom Group to purchase SIM cards, UIM cards, Internetprotocol phone cards and prepaid rechargeable calling cards from Unicom Group(to be imported by Unicom Xingye) at cost plus a margin to be agreed from timeto time, but not to exceed 20%, and subject to appropriate volume discounts.

 

(xi)                          According tothe CDMA Lease Agreements entered among CUCL, Unicom Group and Unicom NewHorizon, Unicom New Horizon agreed to lease the capacity of CDMA network toCUCL covering 9 provinces and 3 municipalities. The lease fee per unit ofcapacity is calculated on a basis that if full capacity is leased, it wouldpermit Unicom New Horizon to recover its investment in constructing the CDMAnetwork in 7 years, together with an internal return of 8%. In addition, UnicomNew Century and Unicom New World have also entered into CDMA capacity leaseagreements with Unicom Group and Unicom New Horizon under the acquisitionarrangements. The terms of the leasing arrangements are in all materialrespects the same as those contained in the CDMA Lease Agreement entered intoby CUCL (see Note 33 for details).

 

(xii)                       UnicomInternational and Unicom International (HK) provided sales agency services suchas selling of telecommunications cards, leased lines and transfer calls to theGroup. The commission expenses are charged based on contractual prices whichapproximated market rates.

 

(xiii)                    In 2001, theGroup leased transmission line capacity from Unicom International (HK) andUnicom International in accordance with the relevant provision of the servicesagreement.  Leased line expenses arecharged based on market rates. There were no leased line rental charges in 2002since this service was terminated in October 2001.

 

(xiv)                   The Groupsigned a service agreement with Unicom I/E Co., in which Unicom I/E Co. agreedto provide equipment procurement services to the Group.  Unicom I/E Co. charges the Group 0.7% of thevalue of imported equipment and 0.5% of the value of domestic equipment forsuch services.

 

(xv)                      CUCL signeda rental agreement with Beijing Xingye, under which Beijing Xingye leasesoffice premises to CUCL at its PRC corporate office. Monthly rental iscalculated on the basis of US$ 20 per square meter. This rental agreement wasterminated in September 2002.

 

(xvi)                   Based on aresolution passed by the shareholders of Unicom Guomai on April 23, 2002,Unicom Guomai agreed to sell telecommunications equipment to certain branchesof Unicom Group, these contracts were obtained by Unicom Guomai through atendering process and the contract prices were negotiated on an arm’s lengthbasis.

 

F - 58

----

 

(xvii)                Unicom Groupis the registered proprietor of the “Unicom’’ trademark in English and thetrademark bearing the “Unicom” logo, which are registered at the PRC StateTrademark Bureau.  Pursuant to anexclusive PRC trademark license agreement entered into between Unicom Group andCUCL, CUCL and its affiliates are granted the right to use these trademarks ona royalty free basis for an initial period of 5 years, renewable at CUCL’soption.

 

Aspart of the acquisition arrangements of Unicom New Century and Unicom NewWorld, Unicom New Century and Unicom New World enteredinto PRC trademark license agreement with Unicom Group respectively. Unicom NewCentury and Unicom New World are granted the right to use these trademark on aroyalty free bases for an initial period of 10 years, renewable for another 10years at Unicom New Century and Unicom New World’s options.

 

(xviii)             According tothe Multiple Service Agreement (the “Agreement”) signed between the Group andUnicom Paging Limited (“Unicom Paging”, a subsidiary of Unicom Group) datedAugust 1, 2001, the Group and Unicom Paging agree to share the right to use theother party’s logo and trademark in the Paging Business at no cost.  In addition, the Agreement also specifiesthe basis of allocating common expenses incurred by each party for any sharedresources and facilities.  For the yearsended December 31, 2001, 2002 and 2003, the amount of common expenses involvedwas insignificant.

 

**(b)****               ****Amounts due from and torelated parties/Unicom Group**

 

Amountsdue from and to related parties or Unicom Group are unsecured, non-interestbearing, repayable on demand and arise in the ordinary course of business inrespect of transactions with Unicom Group or the subsidiaries of Unicom Groupas described in (a) above.

 

**(c)****               ****Amount due to Unicom Group**

** **
|                                                                             |   | **2001**         |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                             |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                             |   |             |   |             |   |             |   |
| Due to Unicom  Group, beginning of year                                          |   | 821,797          |   | 947,934          |   | 562,633          |   |
| Interconnection  and roaming revenues                                            |   | (875,305         | )      | (1,678,637       | )      | (1,002,702       | )      |
| Interconnection  and roaming charges                                             |   | 298,828          |   | 331,179          |   | 316,271          |   |
| Revenue for  leasing of transmission line capacity and premises and facilities   |   | (216,113         | )      | (566,519         | )      | (185,086         | )      |
| Rental charges  for premises, equipment and facilities                           |   | 21,257           |   | 17,817           |   | 17,936           |   |
| Commission revenue for sales agency services                                     |   | 14,560           |   | —           |   | —           |   |
| Sales of CDMA  mobile handsets                                                   |   | —           |   | (487,850         | )      | (64,929          | )      |
| Charges for the  international gateway services                                  |   | —           |   | 15,626           |   | 8,631            |   |
| Network  construction costs paid by Unicom Group for CUCL of fixed-line networks |   | 702,614          |   | 112,474          |   | —           |   |
| Settlement made  during the year                                                 |   | 180,296          |   | 1,032,163        |   | 224,158          |   |
| Proceeds  receivable from sale of Guoxin Paging                                  |   | —           |   | —           |   | (450,000         | )      |
| Amounts due to Unicom  Group by Unicom New Century                               |   | —           |   | 838,446          |   | —           |   |
| Amounts due to  Unicom Group by Unicom New World                                 |   | —           |   | —           |   | 1,005,135        |   |
| Due to Unicom  Group, end of year                                                |   | 947,934          |   | 562,633          |   | 432,047          |   |

 

F - 59

----

 

**(d)****         ****Short-term****loans from Unicom Group**

 

Asof December 31, 2002, short-term loans from Unicom Group represented loansprovided by Unicom Group to relevant branches of Unicom New Century to financethe operations of the Cellular Business. These loans were borrowed by UnicomGroup from banks at the interest rate of 4.54%.  These bank loans wereidentified as attributable to the relevant branches of Unicom New Century based on theamount of funds actually utilized by the relevant branches of Unicom NewCentury.  The corresponding interestexpenses were also charged to these relevant branches based on funds actuallyutilized. All these loans were guaranteed by Unicom Group. As of December 31, 2003, such loans have already been fully repaid by theGroup.

 

**(e)****         ****Bank loans guaranteed by Unicom Group**

 

As of December 31, 2003, the Group had approximatelyRMB11,604 million (2002: RMB12,635 million) of long-term bank loans and approximately RMB70 million (2002: RMB463 million) of short-termbank loans guaranteed by Unicom Group.

 

**33.****       LEASINGOF CDMA NETWORK CAPACITY**

 

In November 2001, CUCL entered into a CDMA capacitylease agreement  (the “CDMA LeaseAgreement”) with Unicom Group and Unicom New Horizon. Pursuant to the CDMA LeaseAgreement, Unicom New Horizon agreed to lease the capacity of CDMA network to CUCLcovering the 9 provinces of and 3 municipalities.

 

Major terms of the CDMA Lease Agreement include thefollowing:

 

•                        CUCLhas the exclusive right to lease and operate the CDMA network capacity in theabove regions;

 

•                        Theterm of the CDMA Lease Agreement is for an initial period of 1 year (the“Initial Lease Term”), renewable for further one year terms at the option ofthe CUCL;

 

•                        Thelease fee per unit of capacity is calculated on a basis that if full capacityis leased, it would permit Unicom New Horizon to recover its investment inconstructing the CDMA network in 7 years, together with an internal return of8%;

 

•                        CUCLhas the option to add or reduce the capacity leased by giving specified periodof advance notice.  There is no minimumrequirement on the network capacity to be leased beyond the Initial Lease Term;and

 

•                        CUCLhas the option to purchase the network assets. The acquisition price will be negotiated between the CUCL and Unicom NewHorizon, based on the appraised value of the network determined by anindependent appraiser, provided that it will not exceed such price as would,add together with any lease payments made previously, enable Unicom New Horizonto recover its investment with an internal rate of return of 8%.

 

Commencement of the CDMA Lease Agreement wasconditional upon, among others, the testing and initial acceptance and deliveryof phase I of the CDMA network and the receipt of all necessary governmentapprovals. Upon the fulfillment of all the conditions precedent to thecommencement of the CDMA Lease Agreement, the Initial Lease Term commenced on January8, 2002.  This lease arrangement hasbeen accounted for as an operating lease of the network capacities.  On January 8, 2003, CUCL renewed the CDMALease Agreement with Unicom New Horizon for a further one year.

 

F - 60

----

 

In addition, as part of the acquisition arrangementsof Unicom New Century and Unicom New World, Unicom New Century and Unicom NewWorld has also entered into CDMA capacity lease agreements with Unicom Groupand Unicom New Horizon in November 2002 and November 2003 respectively. Theterms of these leasing arrangements are in all material respects the same asthose contained in the CDMA Lease Agreement entered into by CUCL as describedabove except the leased capacity. Under these lease agreements, Unicom NewHorizon agreed to lease the capacity of CDMA network to Unicom New Centurycovering 6 provinces, 2 autonomous regions and 1 municipality and to Unicom NewWorld covering 6 provinces and 3 autonomous regions.

 

**34****.****      ****TRANSACTIONS WITHDOMESTIC CARRIERS**

 

TheGroup’s telecommunications networks depend, in large part, on interconnectionwith domestic carriers’ public switched telephone network and on transmissionlines leased from major domestic carriers. Major domestic carriers include China Telecommunications Corporation andits subsidiaries (“China Telecom”), China Mobile Communications Corporation andits subsidiaries (“China Mobile”) and China Network Communication GroupCorporation and its subsidiaries (“China Netcom”).

 

**(a)****         ****Transactions withdomestic carriers**

 

Thefollowing is a summary of significant transactions with domestic carriers inthe ordinary course of business:

 

 
|                    |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |
|-------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|
|                    |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |
|                    |   |     |   |             |   |             |   |             |
| Interconnection revenue |   | (i)      |   | 461,133          |   | 771,751          |   | 1,647,221        |
| Interconnection charges |   | (i)      |   | 1,375,852        |   | 2,666,186        |   | 5,301,792        |
| Leased line revenue     |   | (ii)     |   | —           |   | —           |   | 218,974          |
| Leased line charges     |   | (ii)     |   | 668,386          |   | 680,508          |   | 722,684          |

 

Note:

 

----

(i)             Theinterconnection revenue and charges mainly represent the amounts due from or todomestic carriers for telephone calls made between the Group’s networks and thepublic switched telephone network of domestic carriers. The interconnectionsettlements are calculated in accordance with interconnection agreementsreached between the branches of theGroupand domestic carriers on a provincial basis. The terms of these agreements are set in accordance with the standardsettlement arrangement stipulated by the MII.

 

(ii)          Leased linecharges are paid or payable to domestic carriers by the Group for the leasingof transmission line.  At the same time, the Group leases transmission line to domesticcarriers and leased line rental income represents the amount received orreceivable from them. The charges are calculated at a fixedcharge per line, depending on the number of lines being used by the Group and domestic carriers.

 

F - 61

----

 

**(b)****         ****Amounts due from and todomestic carriers**

 
|                                                                |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                |   | **RMB’000** |   | **RMB’000** |   |
| Amounts due from  domestic carriers                                 |   |             |   |             |   |
| - Receivable  for interconnection revenue and  leased lines revenue |   | 260,578          |   | 184,729          |   |
| - Less: provision for doubtful debts                                |   | (49,116          | )      | (116             | )      |
|                                                                |   |             |   |             |   |
|                                                                |   | 211,462          |   | 184,613          |   |
| Amounts due to  domestic carriers                                   |   |             |   |             |   |
| - Payables for interconnection charges and leased lines  charges    |   | 1,123,580        |   | 778,841          |   |
|                                                                |   |             |   |             |   |
| Long-term  payable due to domestic carriers                         |   |             |   |             |   |
| - Payables for obligations under finance leases:                    |   |             |   |             |   |
| - Current portion of obligations under finance leases               |   | 16,793           |   | 25,435           |   |
| - Obligations under finance leases                                  |   | 101,302          |   | 99,719           |   |
|                                                                |   |             |   |             |   |
|                                                                |   | 118,095          |   | 125,154          |   |

 

Allamounts due from and to domestic carriers were unsecured, non-interestbearing and repayable within one year.

 

Long-term payable for obligations under financelease was related to the leasing of certain subsea transmission cables from adomestic carrier for a period of 25 years (see Note 29).

 

**35****.****      ****SEGMENT INFORMATION**

 

Operatingsegments represent components of an enterprise regarding which separatefinancial information is available for regular evaluation by the chiefoperating decision maker, or decision-making group, when considering how toallocate resources and in assessing performance.

 

TheGroup organizes its business segments based on the various types oftelecommunications services provided to customers in the PRC.  The major business segments operated by theGroup are classified as below:

 

•                  GSM Business--- the provision of GSM telephone and related services;

•                  CDMABusiness --- the provision of CDMA telephone and related services, through a leasingarrangement of CDMA network capacities from Unicom New Horizon (see Note 33);

•                  Data andInternet Business --- the provision of domestic and international data,Internet and other related services;

•                  Long Distance Business --- the provision of domestic andinternational long distance and other related services; and

•                  PagingBusiness --- the provision of paging and related services.

 

ThePaging Business was sold to Unicom Group on December 31, 2003 (See Note 5).

 

Theoperating segments are managed separately because each operating segmentrepresents a strategic business unit that provides various kinds of telecommunicationservices. All the operating segments of the Group have been aggregated into theabove reportable segments since they are expected to exhibit similar futureeconomic characteristics under central management at separate locations.

 

TheGroup’s primary measure of segment results is based on segment income or lossbefore taxation.

 

F - 62

----

 

**(a)****          Business segments**

 
|                                                        |   | **2003**           |   |
|-------------------------------------------------------------|--------|--------------------|--------|
|                                                        |   | **GSM   Business** |   | **CDMA  Business** |   | **Internet   and Data   Business** |   | **Long  Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                                                        |   | **RMB’000**   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Operating revenue (Turnover):                               |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                   |   | 29,072,249         |   | 11,671,523 |   | 2,443,610 |   | 1,148,040 |   | — |   | — |   |   |   | 44,335,422 |   |
| Monthly fee                                                 |   | 7,042,299          |   | 3,488,411 |   | 9,085 |   | — |   | 612,999 |   | — |   |   |   | 11,152,794 |   |
| Interconnection revenue                                     |   | 1,926,907          |   | 607,830 |   | 361,514 |   | 365,724 |   | 1,654 |   | — |   |   |   | 3,263,629 |   |
| Leased lines rental                                         |   | —             |   | — |   | 420,433 |   | 701,549 |   | — |   | — |   |   |   | 1,121,982 |   |
| Other revenue                                               |   | 2,262,156          |   | 855,754 |   | 202,441 |   | 57,835 |   | 788,400 |   | — |   |   |   | 4,166,586 |   |
| Total services revenue                                      |   | 40,303,611         |   | 16,623,518 |   | 3,437,083 |   | 2,273,148 |   | 1,403,053 |   | — |   |   |   | 64,040,413 |   |
| Sales of telecommunications products                        |   | 862,777            |   | 1,956,452 |   | 7,814 |   | 14,914 |   | 753,955 |   | — |   |   |   | 3,595,912 |   |
| Total operating revenue from external customers             |   | 41,166,388         |   | 18,579,970 |   | 3,444,897 |   | 2,288,062 |   | 2,157,008 |   | — |   |   |   | 67,636,325 |   |
| Inter segment revenue                                       |   | 41,057             |   | 41,725 |   | 1,826,222 |   | 866,728 |   | 230,075 |   | — |   | (3,005,807 | ) | — |   |
| Total operating revenue                                     |   | 41,207,445         |   | 18,621,695 |   | 5,271,119 |   | 3,154,790 |   | 2,387,083 |   | — |   |   |   | 67,636,325 |   |
| Operating expenses:                                         |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and network capacities                         |   | (339,410           | )      | (3,576,498 | ) | (294,888 | ) | (78,027 | ) | (80,084 | ) | — |   | 48,525 |   | (4,320,382 | ) |
| Interconnection charges                                     |   | (5,478,520         | )      | (1,684,749 | ) | (732,210 | ) | (752,521 | ) | — |   | — |   | 2,727,207 |   | (5,920,793 | ) |
| Depreciation and amortization                               |   | (13,117,906        | )      | (306,754 | ) | (1,305,239 | ) | (419,346 | ) | (1,144,922 | ) | (5,650 | ) | (85,476 | ) | (16,385,293 | ) |
| Personnel                                                   |   | (2,605,475         | )      | (660,894 | ) | (525,726 | ) | (333,051 | ) | (415,554 | ) | (33,846 | ) |   |   | (4,574,546 | ) |
| Selling and marketing                                       |   | (4,605,600         | )      | (9,141,877 | ) | (883,495 | ) | (405,904 | ) | (126,018 | ) | — |   | 6,059 |   | (15,156,835 | ) |
| General, administrative and other expenses                  |   | (5,571,493         | )      | (1,363,927 | ) | (761,405 | ) | (462,081 | ) | (916,418 | ) | (37,550 | ) | 489 |   | (9,112,385 | ) |
| Cost of telecommunications products sold                    |   | (765,926           | )      | (2,177,168 | ) | (22,250 | ) | (4,231 | ) | (907,697 | ) | — |   | 225,227 |   | (3,652,045 | ) |
| Total operating expenses                                    |   | (32,484,330        | )      | (18,911,867 | ) | (4,525,213 | ) | (2,455,161 | ) | (3,590,693 | ) | (77,046 | ) |   |   | (59,122,279 | ) |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                     |   | 8,723,115          |   | (290,172 | ) | 745,906 |   | 699,629 |   | (1,203,610 | ) | (77,046 | ) |   |   | 8,514,046 |   |
| Loss on sale of discontinued  operation (Guoxin Paging)     |   |               |   |   |   |   |   |   |   |   |   |   |   | (663,279 | ) | (663,279 | ) |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,850,767 |   |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   | 58,006             |   | 7,013 |   | 4,589 |   | 3,400 |   | 9,099 |   | 106,734 |   | (15,808 | ) | 173,033 |   |
| Finance costs                                               |   | (1,754,050         | )      | (32,078 | ) | (62,791 | ) | (56,946 | ) | (5,238 | ) | (40,727 | ) | 15,808 |   | (1,936,022 | ) |
| Other (expense) income, net                                 |   | (21,609            | )      | 3,680 |   | (4,741 | ) | 1,488 |   | 39,868 |   | (10,615 | ) |   |   | 8,071 |   |
| Segment income (loss) before taxation and minority interest |   | 7,005,462          |   | (311,557 | ) | 682,963 |   | 647,571 |   | (1,159,881 | ) | (21,654 | ) |   |   |   |   |
| Income before taxation                                      |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | 6,095,849 |   |
| Taxation                                                    |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,888,381 | ) |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income after taxation                                       |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,207,468 |   |
| Minority interests                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | 9,629 |   |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                  |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,217,097 |   |
|                                                        |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for doubtful debts                                |   | 1,116,523          |   | 397,810 |   | 125,676 |   | 75,870 |   | 34,008 |   | — |   |   |   | 1,749,887 |   |
| Impairment loss recognized in the statements of income      |   | —             |   | — |   | — |   | — |   | 528,038 |   | — |   |   |   | 528,038 |   |
| Capital expenditures for segment assets (1)                 |   | 8,906,166          |   | — |   | 4,128,985 |   | 2,555,252 |   | 35,126 |   | 4,129,690 |   |   |   | 19,755,219 |   |

 
|                                                        |   | **2002**          |   |
|-------------------------------------------------------------|--------|-------------------|--------|
|                                                        |   | **GSM  Business** |   | **CDMA  Business** |   | **Internet  and Data  Business** |   | **Long  Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                                                        |   | **RMB’000**  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Operating revenue (Turnover):                               |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                   |   | 20,274,987        |   | 2,231,050 |   | 2,069,415 |   | 1,223,051 |   | — |   | — |   |   |   | 25,798,503 |   |
| Monthly fee                                                 |   | 4,169,129         |   | 713,483 |   | 9,478 |   | — |   | 1,912,786 |   | — |   |   |   | 6,804,876 |   |
| Interconnection revenue                                     |   | 1,709,771         |   | 184,296 |   | 348,248 |   | 664,302 |   | 113,123 |   | — |   |   |   | 3,019,740 |   |
| Leased lines rental                                         |   | —            |   | — |   | 274,274 |   | 873,054 |   | — |   | — |   |   |   | 1,147,328 |   |
| Other revenue                                               |   | 1,234,038         |   | 96,518 |   | 91,624 |   | 5,316 |   | 135,279 |   | — |   |   |   | 1,562,775 |   |
| Total services revenue                                      |   | 27,387,925        |   | 3,225,347 |   | 2,793,039 |   | 2,765,723 |   | 2,161,188 |   | — |   |   |   | 38,333,222 |   |
| Sales of telecommunications products                        |   | 721,100           |   | 423,057 |   | 5,631 |   | 13,258 |   | 1,080,257 |   | — |   |   |   | 2,243,303 |   |
| Total operating revenue from external customers             |   | 28,109,025        |   | 3,648,404 |   | 2,798,670 |   | 2,778,981 |   | 3,241,445 |   | — |   |   |   | 40,576,525 |   |
| Inter segment revenue                                       |   | —            |   | — |   | 559,888 |   | 682,423 |   | 731,009 |   | — |   | (1,973,320 | ) | — |   |
| Total operating revenue                                     |   | 28,109,025        |   | 3,648,404 |   | 3,358,558 |   | 3,461,404 |   | 3,972,454 |   | — |   |   |   | 40,576,525 |   |
| Operating expenses:                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and network capacities                         |   | (205,374          | )      | (932,994 | ) | (221,028 | ) | (93,079 | ) | (136,024 | ) | — |   | 5,244 |   | (1,583,255 | ) |
| Interconnection charges                                     |   | (3,386,592        | )      | (279,440 | ) | (408,843 | ) | (555,470 | ) | — |   | — |   | 1,400,705 |   | (3,229,640 | ) |
| Depreciation and amortization                               |   | (8,322,549        | )      | (100,902 | ) | (697,188 | ) | (687,420 | ) | (1,442,836 | ) | (4,829 | ) |   |   | (11,255,724 | ) |
| Personnel                                                   |   | (1,780,173        | )      | (281,243 | ) | (396,150 | ) | (290,977 | ) | (555,261 | ) | (31,414 | ) |   |   | (3,335,218 | ) |
| Selling and marketing                                       |   | (2,663,531        | )      | (2,126,475 | ) | (651,594 | ) | (305,505 | ) | (238,640 | ) | — |   | 4,797 |   | (5,980,948 | ) |
| General, administrative and other expenses                  |   | (3,370,938        | )      | (506,715 | ) | (590,531 | ) | (501,657 | ) | (597,427 | ) | (65,726 | ) | 1,144 |   | (5,631,850 | ) |
| Cost of telecommunications products sold                    |   | (744,640          | )      | (408,791 | ) | (11,299 | ) | (5,049 | ) | (1,626,157 | ) | — |   | 559,730 |   | (2,236,206 | ) |
| Total operating expenses                                    |   | (20,473,797       | )      | (4,636,560 | ) | (2,976,633 | ) | (2,439,157 | ) | (4,596,345 | ) | (101,969 | ) |   |   | (33,252,841 | ) |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                     |   | 7,635,228         |   | (988,156 | ) | 381,925 |   | 1,022,247 |   | (623,891 | ) | (101,969 | ) |   |   | 7,323,684 |   |
| Loss on sale of discontinued  operation (Guoxin Paging)     |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,323,684 |   |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   | 48,503            |   | 4,146 |   | 4,525 |   | 5,516 |   | 17,374 |   | 390,218 |   |   |   | 470,282 |   |
| Finance costs                                               |   | (1,287,443        | )      | (47,979 | ) | (72,864 | ) | (48,789 | ) | (8,348 | ) | (9,018 | ) |   |   | (1,474,441 | ) |
| Other (expense) income, net                                 |   | (46,889           | )      | (10 | ) | (2,562 | ) | (152 | ) | 24,993 |   | 8,261 |   |   |   | (16,359 | ) |
| Segment income (loss) before taxation and minority interest |   | 6,349,399         |   | (1,031,999 | ) | 311,024 |   | 978,822 |   | (589,872 | ) | 287,492 |   |   |   |   |   |
| Income before taxation                                      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 6,303,166 |   |
| Taxation                                                    |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,720,205 | ) |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income after taxation                                       |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,582,961 |   |
| Minority interests                                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 15,252 |   |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,598,213 |   |
|                                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for doubtful debts                                |   | 802,914           |   | 42,050 |   | 70,922 |   | 46,124 |   | 9,979 |   | — |   |   |   | 971,989 |   |
| Impairment loss recognized in the statements of income      |   | —            |   | — |   | — |   | 38,797 |   | — |   | — |   |   |   | 38,797 |   |
| Capital expenditures for segment assets (1)                 |   | 7,899,442         |   | — |   | 3,247,507 |   | 3,343,330 |   | 208,460 |   | 4,236,036 |   |   |   | 18,934,775 |   |

 
|                      |   | **As of  December 31, 2003** |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **GSM  Business**            |   | **CDMA  Business** |   | **Internet  and  Data Business** |   | **Long  Distance  Business** |   |   |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                      |   | **RMB’000**             |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets      |   | 104,430,531                  |   | 4,717,167 |   | 8,611,873 |   | 19,061,967 |   |   |   | 63,234,534 |   | (50,218,142 | ) | 149,837,930 |   |
| Total segment liabilities |   | 56,837,496                   |   | 6,561,772 |   | 3,975,293 |   | 6,918,025 |   |   |   | 5,929,854 |   |   |   | 80,222,440 |   |

 
|                      |   | **As of  December 31, 2002** |   |
|---------------------------|--------|------------------------------|--------|
|                      |   | **GSM  Business**            |   | **CDMA  Business** |   | **Internet and  Data** |   | **Long  Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                      |   | **RMB’000**             |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets      |   | 97,888,808                   |   | 5,724,427 |   | 7,081,704 |   | 13,876,837 |   | 8,410,871 |   | 58,016,167 |   | (41,370,609 | ) | 149,628,205 |   |
| Total segment liabilities |   | 67,666,655                   |   | 5,788,290 |   | 2,785,794 |   | 3,826,692 |   | 2,205,343 |   | 136,639 |   |   |   | 82,409,413 |   |

 

F - 63

----

 
|                                                        |   | **2001**         |   |
|-------------------------------------------------------------|--------|------------------|--------|
|                                                        |   | **GSM Business** |   | **CDMA  Business** |   | **Internet  and Data  Business** |   | **Long  Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                                                        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **Operating revenue (Turnover):**                           |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                   |   | 14,937,448       |   | — |   | 1,566,149 |   | 554,848 |   | — |   | — |   |   |   | 17,058,445 |   |
| Monthly fee                                                 |   | 3,660,473        |   | — |   | — |   | — |   | 4,141,232 |   | — |   |   |   | 7,801,705 |   |
| Connection fee                                              |   | 204,986          |   | — |   | — |   | — |   | 1,595 |   | — |   |   |   | 206,581 |   |
| Interconnection revenue                                     |   | 1,262,267        |   | — |   | 132,741 |   | 591,883 |   | — |   | — |   |   |   | 1,986,891 |   |
| Leased lines rental                                         |   | —           |   | — |   | 102,804 |   | 324,391 |   | — |   | — |   |   |   | 427,195 |   |
| Other revenue                                               |   | 439,884          |   | — |   | 18,517 |   | 17,611 |   | 198,997 |   | — |   |   |   | 675,009 |   |
| Total services revenue                                      |   | 20,505,058       |   | — |   | 1,820,211 |   | 1,488,733 |   | 4,341,824 |   | — |   |   |   | 28,155,826 |   |
| Sales of telecommunications products                        |   | 820,585          |   | — |   | — |   | — |   | 416,475 |   | — |   |   |   | 1,237,060 |   |
| Total operating revenue from external customers             |   | 21,325,643       |   | — |   | 1,820,211 |   | 1,488,733 |   | 4,758,299 |   | — |   |   |   | 29,392,886 |   |
| Inter segment revenue                                       |   | 651              |   | — |   | 303,357 |   | 866,572 |   | 66,734 |   | — |   | (1,237,314 | ) | — |   |
| Total operating revenue                                     |   | 21,326,294       |   | — |   | 2,123,568 |   | 2,355,305 |   | 4,825,033 |   | — |   |   |   | 29,392,886 |   |
| Operating expenses:                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and network capacities                         |   | (533,455         | )      | — |   | (415,280 | ) | (15,252 | ) | (307,348 | ) | — |   | 418,029 |   | (853,306 | ) |
| Interconnection charges                                     |   | (2,195,396       | )      | — |   | (475,703 | ) | (158,642 | ) | — |   | — |   | 757,157 |   | (2,072,584 | ) |
| Depreciation and amortization                               |   | (5,556,317       | )      | — |   | (342,411 | ) | (604,961 | ) | (1,754,973 | ) | (3,634 | ) |   |   | (8,262,296 | ) |
| Personnel                                                   |   | (1,106,962       | )      | — |   | (250,493 | ) | (159,619 | ) | (937,198 | ) | (32,946 | ) |   |   | (2,487,218 | ) |
| Selling and marketing                                       |   | (2,486,867       | )      | — |   | (551,839 | ) | (157,015 | ) | (478,478 | ) | — |   | 61,309 |   | (3,612,890 | ) |
| General, administrative and other expenses                  |   | (3,046,235       | )      | — |   | (358,486 | ) | (285,596 | ) | (1,760,688 | ) | (48,811 | ) | 819 |   | (5,498,997 | ) |
| Cost of telecommunications products sold                    |   | (788,218         | )      | — |   | — |   | — |   | (554,026 | ) | — |   |   |   | (1,342,244 | ) |
| Total operating expenses                                    |   | (15,713,450      | )      | — |   | (2,394,212 | ) | (1,381,085 | ) | (5,792,711 | ) | (85,391 | ) |   |   | (24,129,535 | ) |
|                                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                     |   | 5,612,844        |   | — |   | (270,644 | ) | 974,220 |   | (967,678 | ) | (85,391 | ) |   |   | 5,263,351 |   |
|                                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   | 31,544           |   | — |   | 2,099 |   | 979 |   | 23,493 |   | 2,038,857 |   |   |   | 2,096,972 |   |
| Finance costs                                               |   | (1,560,826       | )      | — |   | (72,883 | ) | (243,288 | ) | (40,569 | ) | — |   |   |   | (1,917,566 | ) |
| Other (expense) income, net                                 |   | (842             | )      | — |   | (952 | ) | (592 | ) | (6,159 | ) | 28,376 |   |   |   | 19,831 |   |
| Segment income (loss) before taxation and minority interest |   | 4,082,720        |   | — |   | (342,380 | ) | 731,319 |   | (990,913 | ) | 1,981,842 |   |   |   |   |   |
| Income before taxation                                      |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 5,462,588 |   |
| Taxation                                                    |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | (896,039 | ) |
|                                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income after taxation                                       |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,566,549 |   |
| Minority interests                                          |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 35,310 |   |
|                                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                  |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,601,859 |   |
|                                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                          |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for doubtful debts                                |   | 517,663          |   | — |   | 24,743 |   | 13,058 |   | (14,510 | ) | — |   |   |   | 540,954 |   |
| Impairment loss recognized in the statements of income      |   | —           |   | — |   | — |   | — |   | 632,511 |   | — |   |   |   | 632,511 |   |
| Capital expenditures for segment assets (1)                 |   | 20,777,990       |   | — |   | 3,447,123 |   | 3,884,937 |   | 549,338 |   | 2,594,071 |   |   |   | 31,253,459 |   |
|                                                             |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Capital expenditures classified under “unallocated amounts” representcapital expenditures on common facilities, which benefit all business segments.

 

F- 64

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**(b)****         ****Geographical segments**

 

TheGroup’s services users are mainly in the PRC. There is no other geographicalsegment with segment revenue from external customers equal to or greater than10% of total consolidated revenue from sales to all external customers.

 

Althoughthe Group has its corporate headquarters in Hong Kong, a substantial portion ofthe Group’s non-current assets (including property, plant and equipment andother assets) are situated in mainland China, as theGroup’s principal activities are conducted in the PRC. For the year ended December 31, 2003, substantially all capital expenditures were incurred toacquire assets located in the mainlandChina.There is no other geographical segment with segment assets equal to or greaterthan 10% of the total assets of all geographical segments.

 

**(c)****         ****Discontinued operation**

 

The subsidiary that carried out the Paging Business,Guoxin Paging, was disposed of on December 31, 2003, which has been reported asa discontinued operation (see Note 5).

 

**3****6****. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

Financialassets of the Group include bank balances and cash, short-term bank deposits,trading securities, accounts receivable, prepayment and other current assets,amounts due from related parties and domestic carriers. Financial liabilitiesof the Group include accounts payable and accrued liabilities, bank loans,lease payables and amounts due to related parties and domestic carriers.

 

Bankbalances and cash and short-termbank deposits denominated in foreign currencies as summarized below, have been translated to RMB at the applicable rates quoted bythe People’s Bank of China as of December 31, 2002 and 2003.

 
|                        |   | **2002**               |   | **2003**           |   |
|-----------------------------|--------|------------------------|--------|--------------------|--------|
|                        |   | **Original  currency** |   | **Exchange  rate** |   | **RMB  equivalent** |   | **Original  currency** |   | **Exchange  rate** |   | **RMB  equivalent** |   |
|                        |   | **’000**          |   |               |   | **RMB****’000** |   | **’000** |   |   |   | **RMB****’000** |   |
| **Bank balances and cash:** |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| - denominated in HK$        |   | 1,103,579              |   | 1.06               |   | 1,170,787 |   | 19,126 |   | 1.06 |   | 20,382 |   |
| - denominated in US dollars |   | 785,328                |   | 8.27               |   | 6,497,476 |   | 81,888 |   | 8.27 |   | 677,764 |   |
|                        |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Sub-total                   |   |                   |   |               |   | 7,668,263 |   |   |   |   |   | 698,146 |   |
|                        |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| **Short-term deposits:**    |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| - denominated in HK$        |   | 1,697,414              |   | 1.06               |   | 1,800,786 |   | — |   | 1.06 |   | — |   |
| - denominated in US dollars |   | 365,047                |   | 8.27               |   | 3,020,321 |   | 110,285 |   | 8.27 |   | 912,794 |   |
|                        |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Sub-total                   |   |                   |   |               |   | 4,821,107 |   |   |   |   |   | 912,794 |   |
|                        |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Total                       |   |                   |   |               |   | 12,489,370 |   |   |   |   |   | 1,610,940 |   |

 

TheGroup did not have and does not believe it will have any difficulty inexchanging its foreign currency cash into RMB at the exchange rates quoted bythe People’s Bank of China.  Thecarrying amounts of the Group’s bank balances and cash, short-term bankdeposits, other current financial assets and liabilities approximated theirfair value as of December 31, 2002 and 2003 due to the nature or short maturityof those instruments.

 

F - 65

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Thecarrying amounts of receivables and payables which are all subject to normaltrade credit terms approximate their fair values.

 

Thefair value of trading securities is estimated by reference to their quotedmarket price at the balance sheet date.

 

Investmentsecurities are measured at cost as there is no quoted marked price in an activemarket and whose fair value cannot be reliably measured.

 

Thecarrying amounts of long-term bank loans approximate their fair values based onprevailing market borrowing rates available for comparable bank loans withsimilar terms and maturities.

 

**3****7****.****      ****CONTINGENCIES AND COMMITMENTS**

 

**(a)****         ****Capital commitments**

 

As of December 31, 2002 and 2003, the Group hadcapital commitments, mainly in relation to the construction of telecommunicationsnetworks, as follows:

 
|                               |   | **2003**                |   | **2002**         |   |
|------------------------------------|--------|-------------------------|--------|------------------|--------|
|                               |   | **Land and  buildings** |   | **Equipment**    |   | **Total** |   | **Total** |   |
|                               |   | **RMB’000**        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                               |   |                    |   |             |   |   |   |   |   |
| Authorized and  contracted for     |   | 523,031                 |   | 6,188,907        |   | 6,711,938 |   | 6,262,219 |   |
| Authorized but  not contracted for |   | 210,040                 |   | 985,122          |   | 1,195,162 |   | 2,636,155 |   |
|                               |   |                    |   |             |   |   |   |   |   |
| Total                              |   | 733,071                 |   | 7,174,029        |   | 7,907,100 |   | 8,898,374 |   |

 

Asof December 31, 2003,approximately RMB83 million (2002: RMB385 million) ofcapital commitment outstanding was denominated in US dollars (equivalent to US$10 million (2002: US$47 million)).

 

F - 66

----

 

**(b)****         ****Operating leasecommitments**

 

As of December 31, 2002 and 2003, the Group hadtotal future aggregate minimum operating lease payments under operating leasesas follows:

 
|                                                |   | **2003**                |   | **2002**         |   |
|-----------------------------------------------------|--------|-------------------------|--------|------------------|--------|
|                                                |   | **Land and  buildings** |   | **Equipment**    |   | **CDMA  network  capacities** |   | **Total** |   | **Total** |   |
|                                                |   | **RMB’000**        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                |   |                    |   |             |   |   |   |   |   |   |   |
| Leases expiring:                                    |   |                    |   |             |   |   |   |   |   |   |   |
| - not later than one year                           |   | 476,663                 |   | 144,830          |   | 6,528,530 |   | 7,150,023 |   | 3,631,575 |   |
| - later than one year and not later than five years |   | 1,130,260               |   | 260,860          |   | — |   | 1,391,120 |   | 1,413,864 |   |
| - later than five years                             |   | 837,825                 |   | 116,092          |   | — |   | 953,917 |   | 1,131,167 |   |
|                                                |   |                    |   |             |   |   |   |   |   |   |   |
| Total                                               |   | 2,444,748               |   | 521,782          |   | 6,528,530 |   | 9,495,060 |   | 6,176,606 |   |

 

**(c)****         ****Commitment to purchase CDMA handsets**

 

Asof December 31, 2003, the Groupcommitted to purchase CDMA handsets amounted to approximately RMB920 million (2002: RMB870million).

 

**3****8****.****      ****EVENTS AFTER BALANCE SHEET**

 

CUCL signed an agreement with 11 financial institutions for a long-term syndicated loan ofUSD0.5 billion (the “Facility”) onFebruary25, 2004 to financethe working capital and network construction expenditure. TheFacility was repayable in 3 years and carried aninterest rate of 0.40% over USdollar LIBOR per annum. CUCL has utilizedUSD0.2 billion of the Facility on March 25, 2004.

 

**39****.****      ****COMPARATIVE FIGURES**

 

Certain comparative figures have been adjusted toreflect the retrospective adjustment of deferred tax assets in accordance withSSAP 12 adopted in current year.

 

**40.****      ****APPROVAL OF FINANCIAL STATEMENTS**

# ** **

# **Thefinancial statements were approved by the board of directors on March 25, 2004.**

 

F - 67

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**41.****      ****SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP**

 

Theconsolidated financial statements of the Group prepared under HK GAAP differ incertain material respects from those prepared under generally acceptedaccounting principles in the United States of America (“US GAAP”). Significantdifferences between HK GAAP and US GAAP are summarized below:

 

**(A)****      ****Effect of theacquisitions of entities under common control**

 

UnderHK GAAP, the Group has adopted the purchase method of accounting to account forthe acquisitions of Unicom New Century and Unicom New World (the“Acquisitions”) on December 31, 2002 and 2003 respectively. Under the purchasemethod, the operating results of these acquired subsidiaries have been includedin the consolidated statements of incomes of the Group after the Acquisitionswere effective. The excess of the purchase consideration over the fairvalues of the separately identifiable net assets acquired hasbeen recorded as goodwill, which is amortized using the straight-line methodover a period of 20 years.

 

Asthe Group, Unicom New Century and Unicom New World were under the commoncontrol of Unicom Group prior to the Acquisitions, these Acquisitions are considered as a transfer ofbusinesses under common control and the acquired assets and liabilities areaccounted for at historical cost under US GAAP.  Furthermore, the consolidated financial statements prepared underUS GAAP for all periods presented have been retroactively restated as if UnicomNew Century and Unicom New World were always part of the Group. The cashconsiderations paid by theCompany are treated as capital distribution in the respective years of the acquisitions. Goodwillarising from the acquisitions and the related amortization of goodwill recognized underHK GAAP have been reversed under US GAAP. Transaction costs, which arecapitalized as part of the cost of investment under HK GAAP, have been expensedin full under US GAAP.

 

**(B)****      ****Effect of the disposal ofentity under common control**

 

Under HK GAAP, the sale of Guoxin Paging has beenaccounted for as a sale of discontinued operation by the Group. The differencebetween the sale proceeds and the carrying amount of net assets of GuoxinPaging as of December 31, 2003 (the effective date of disposal) was recorded asthe loss on saleof discontinued operation in the consolidated statements of income of theGroup. The operating results of Guoxin Paging for 2003 were included in thestatements of income of the Group up to the effective date of the sale.

 

Under US GAAP, the sale of Guoxin Paging to UnicomGroup is considered a transfer of business between entities under commoncontrol and accounted for at historical cost of the net assets transferred,after reduction, if appropriate, for an indicated impairment of value (see Note(G)). In addition, under US GAAP, theresults of operations of a component or segment of an entity that has beendisposed of should be reported in discontinued operations as a separatecomponent of income, separately from continuing operations, in the period inwhich the disposal occurred and in prior periods. Accordingly, all theoperating results of Guoxin Paging have been grouped into and reported in thestatements of income as “Discontinued operation-Loss from discontinuedoperation” under US GAAP.

 

F - 68

----

 

**(C)****      ****Revenue and costsrecognition**

 

UnderHK GAAP, upfront non-refundable revenue, such as connection fee, is recognizedwhen received upon completion of activation services. Under US GAAP, in accordancewith Staff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements”, upfront non-refundable revenue and the related direct incrementalcosts incurred are deferred and recognized over the estimated customer serviceperiods.  The expected customer serviceperiod for the Cellular Business is estimated based on the expected stabilizedchurn rates. On this basis, the weighted average customer service period basedon current estimation considering the prevailing market environment is approximately4 years (2000: 10 years; 2001 and 2002: 6 years). The effects of the change of accounting estimate were to increase the net incomeand earningsper share by approximately RMB70 million and RMB0.006respectively for the yearended December 31, 2003 and by approximately RMB26 million and RMB0.002 respectively for the year ended December 31, 2001.

 

**(D)****      ****Employee housing schemes**

 

Priorto the establishment of Guoxin Paging and CUCL, bothChina Telecom (the previous owner of Guoxin Paging prior to its restructuringinto the Group) and Unicom Group provided housing benefits to qualifiedemployees of the Group to enable them to purchase living quarters at a discount. Under HK GAAP, housing benefitsincurred and borne by China Telecom and Unicom Group for these employees werenot recognized by the Group. Under US GAAP, the amount of such housing benefitsis being recognized as part of the Group’s operating expenses over theestimated average service life of the participating employees.  The corresponding credits are beingaccounted for as capital contributions.

 

**(E)****        ****Deferred taxation**

 

Uponthe adoption of SSAP 12 in 2003 under HK GAAP, which has been retroactivelyapplied to all periods presented, there is no longer a difference in accountingfor deferred taxation between HK GAAP and US GAAP. The remaining adjustmentrelated to deferred taxation represent the deferred tax effects of other USGAAP adjustments.

 

**(F)****        ****Revaluation of property,plant and equipment**

 

UnderHK GAAP, revaluation surplus in relation to buildings is recorded by the Groupas part of the property, plant and equipment. Thereafter, depreciation isprovided based on the revalued amounts. Under US GAAP, all property, plant andequipment are stated at historical cost less accumulated depreciation, andprepaid land use rights are stated at the unamortized prepaid amount as part of other assets.

 

F - 69

----

 

**(G)****      ****Impairment of goodwilland long-lived assets**

 

Thecarrying amounts of property, plant and equipment and goodwill under HK GAAPare reviewed periodically in order to assess whether the recoverable amount hasdeclined below the carrying amount. When such a decline occurs, the carrying amount is reduced to the recoverableamount based on the expected future cash flows generated by the assetsdiscounted to their present value.  Asubsequent increase in the recoverable amount is written back to the statementsof income when circumstances and events that led to the write-down or write-offcease to exist.

 

**(i)****     ****Goodwill**

 

UnderHK GAAP, goodwill is amortized using the straight-line method over the expectedbeneficial lives of the acquired businesses. Prior to January 1, 2002, the US GAAP treatment was consistent withthis. In addition, for the year ended December 31, 2001, although the projectedamount of future undiscounted cash flows of certain Paging assets wassufficient to recover the net carrying amount of goodwill as of December 31,2001 under US GAAP, the amount of discounted cash flows was not sufficient under HK GAAP. Consequently, for the yearended December 31, 2001, the impairmentprovision for goodwill recognized under US GAAP was lower than that recognizedunder HK GAAP by approximatelyRMB62,948,000.

 

Starting from January 1,2002, under US GAAP, upon the adoption of Statements of Financial AccountingStandards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), theGroup no longer amortizes goodwill but, rather, assesses the goodwill of eachidentified reporting unit for impairment annually. The adoption of SFAS 142 hasresulted in a cumulative effect of accounting change of approximately RMB42,175,000 (net of tax approximatelyRMB20,773,000) on January 1, 2002 and has been reflected in the condensedstatements of income for the year ended December 31, 2002 under US GAAP. Thesubsequent annual impairment assessment of goodwill as at December 31, 2002 and 2003 did not result in any material differencein the fair values.  Prior to January 1,2002, impairment accounting of goodwill under US GAAP was prescribed by Statementsof Financial Accounting Standards No. 121 “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed of”(“SFAS 121”).

 

F - 70

----

 

The pro-forma impact to the reported net income andearnings per share before and after discontinued operation and effect of changein accounting policy for the year of initial application of SFAS 121 in 2002and the prior year are provided as follows:

 
|                                                                                                           |   | **2001**  |   | **2002**  |   |
|----------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|
|                                                                                                           |   |      |   |      |   |
| Net income after  discontinued operation and effect of change in accounting policy:                            |   |      |   |      |   |
| As reported (RMB’000)                                                                                     |   | 5,155,495 |   | 5,028,416 |   |
| Add back:  Goodwill amortization, net of tax impact (RMB’000)                                             |   | 49,755    |   | —    |   |
| Pro forma (RMB’000)                                                                                       |   | 5,205,250 |   | 5,028,416 |   |
|                                                                                                           |   |      |   |      |   |
| Net income  before discontinued operation and effect of change in accounting policy:                           |   |      |   |      |   |
| As reported (RMB’000)                                                                                     |   | 5,865,671 |   | 5,492,804 |   |
| Add back:  Goodwill amortization, net of tax impact                                                            |   | 49,755    |   | —    |   |
| Pro forma (RMB’000)                                                                                       |   | 5,915,426 |   | 5,492,804 |   |
|                                                                                                           |   |      |   |      |   |
| Basic and  diluted earnings per share after discontinued operation and effect of change in accounting policy:  |   |      |   |      |   |
| As reported  (RMB)                                                                                             |   | 0.411     |   | 0.401     |   |
| Pro forma (RMB)                                                                                                |   | 0.411     |   | 0.401     |   |
|                                                                                                           |   |      |   |      |   |
| Basic and  diluted earnings per share before discontinued operation and effect of change in accounting policy: |   |      |   |      |   |
| As reported  (RMB)                                                                                             |   | 0.467     |   | 0.438     |   |
| Pro forma (RMB)                                                                                                |   | 0.467     |   | 0.438     |   |
|                                                                                                           |   |      |   |      |   |
| Basic and  diluted earnings per ADS after discontinued operation and effect of change in accounting policy:    |   |      |   |      |   |
| As reported  (RMB)                                                                                             |   | 4.107     |   | 4.006     |   |
| Pro forma (RMB)                                                                                                |   | 4.107     |   | 4.006     |   |
|                                                                                                           |   |      |   |      |   |
| Basic and  diluted earnings per ADS before discontinued operation and effect of change in accounting policy:   |   |      |   |      |   |
| As reported  (RMB)                                                                                             |   | 4.673     |   | 4.376     |   |
| Pro forma (RMB)                                                                                                |   | 4.673     |   | 4.376     |   |

 

F- 71

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**(ii)****        Long-livedassets**

 

On January 1, 2002, theCompany has adopted Statements of Financial Accounting Standard No. 144 (“SFAS144”), which supercedes SFAS 121 and Accounting Principles Board Opinion No.30, “Reporting the Results of Operations, Reporting the Effects of Disposal ofSegment of a Business and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions”.  SFAS 144retains the previous accounting for the impairment of long-lived assets to beheld and used in operation as prescribed under SFAS 121, but also establishesmore restrictive criteria that must be met to classify long-lived assets asheld-for sale, and differentiates between long-lived assets that are disposedof by sale from those disposed of other than by sale.  SFAS 144 also increases the range of dispositions that qualifyfor reporting as discontinued operations, and changes the manner in whichexpected future operating losses from such operations are to be reported.

 

Under SFAS 144,long-lived assets excluding goodwill are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparisonof the carrying amount of an asset to future undiscounted net cash flowsexpected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amounts of theassets exceed the fair value of the assets, which is determined based on theestimated future discounted net cash flows expected to be generated by theasset held for continuous use.  Assetsimpaired or to be disposed of are reported at the lower of the carrying amountsor fair values less costs to sell, which result in a new cost basis for theimpaired assets.  This new cost basis isnot to be adjusted for subsequent recoveries in value.

 

Based on the aboveassessment performed and taking into account of the adoption of SFAS 144, no materialdifferences arose in respect of the timing and the amount of impairment forequipment for the years ended December 31, 2002 and 2003.  For the yearended December 31, 2001, although the projected amount of future undiscountednet cash flows was sufficient to recover the net carrying amount of long-livedassets as of December 31, 2001 under US GAAP, the amount of future discountednet cash flows was not sufficient underHK GAAP. Consequently, for the year ended December 31, 2001, the impairmentprovision for equipment recognized under US GAAP were lower than that recognizedunder HK GAAP by approximately RMB12,382,000.

 

For the year ended December 31, 2003, as described inNote (B) above, the disposal of Guoxin Paging has been treated as a transfer ofbusiness between entities under common controls.  For this kind of distribution of a business to the owner in aspin-off, a re-assessment of the impairment of the long-lived assets of thebusiness is required while they are classified as “held and used” and prior tothe spin-off.  An impairment loss wouldbe recognized when the carrying amounts of the long-lived assets of thebusiness as of the effective date of disposal exceeded their fair values.  After considering the above impairmentassessment, any difference between the disposal consideration and the newcarrying values of assets and liabilities of the business is treated contribution by (ordistribution to) the owner, as appropriate. Accordingly, an additionalprovision of impairment loss of the Paging assets amounting to approximatelyRMB608 million wasrecorded under US GAAP as at the effective date of the sale of Guoxin Paging. There was no adjustment to theshareholders’ equity since the disposal consideration approximated the newcarrying values of the net assets of Guoxin Paging, after taking intoconsideration the additional impairment provision described above.

 

F - 72

----

 

**(H)****       Share option scheme**

 

Under HK GAAP, theproceeds received from the exercise of the share options granted under thefixed award amended Share Option Scheme and Pre-Global Offering Share OptionScheme are to be recognized as an increase to capital upon the exercise of theshare options as stated in Note 31 of the financial statements.

 

Under US GAAP, theCompany applies Accounting Principles Board Opinion No. 25 (“APB 25”) toaccount for its fixed award stock options issued to employees. Under APB 25,compensation expense is recorded in the amount of the excess, if any, of thequoted market price of the shares on the date of grant over the exercise priceof the options, which is amortized over the vesting period of the option. Sincethe exercise price of the options granted did not exceed the market price ofthe underlying stock on the date of grant, no compensation cost for options hasbeen recognized in the reconciliation of net income to US GAAP. In accordancewith SFAS 123, as further amended by Statement of Financial AccountingStandards, No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure”(“SFAS 148”) which is effective for the year ended December 31,2002, the required pro formainformation to be disclosed is set forth below*:*

 
|                                                                                                            |   | **2001**  |   | **2002**  |   | **2003**  |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
|                                                                                                            |   |      |   |      |   |      |   |
| Net income:                                                                                                     |   |      |   |      |   |      |   |
| As reported (RMB’000)                                                                                      |   | 5,155,495 |   | 5,028,416 |   | 4,728,423 |   |
| Less: Total stock-based  employee compensation expense determined under fair value based method (RMB’ 000) |   | (153,479  | )      | (90,288   | )      | (86,855   | )      |
| Pro forma (RMB’000)                                                                                        |   | 5,002,016 |   | 4,938,128 |   | 4,641,568 |   |
|                                                                                                            |   |      |   |      |   |      |   |
| Basic earnings per  share:                                                                                      |   |      |   |      |   |      |   |
| As reported  (RMB)                                                                                              |   | 0.411     |   | 0.401     |   | 0.377     |   |
| Pro forma (RMB)                                                                                                 |   | 0.398     |   | 0.393     |   | 0.370     |   |
|                                                                                                            |   |      |   |      |   |      |   |
| Diluted earnings  per share:                                                                                    |   |      |   |      |   |      |   |
| As reported  (RMB)                                                                                              |   | 0.411     |   | 0.401     |   | 0.376     |   |
| Pro forma (RMB)                                                                                                 |   | 0.398     |   | 0.393     |   | 0.369     |   |
|                                                                                                            |   |      |   |      |   |      |   |
| Basic earnings per  ADS:                                                                                        |   |      |   |      |   |      |   |
| As reported  (RMB)                                                                                              |   | 4.107     |   | 4.006     |   | 3.767     |   |
| Pro forma (RMB)                                                                                                 |   | 3.985     |   | 3.934     |   | 3.698     |   |
|                                                                                                            |   |      |   |      |   |      |   |
| Diluted earnings  per ADS:                                                                                      |   |      |   |      |   |      |   |
| As reported  (RMB)                                                                                              |   | 4.107     |   | 4.006     |   | 3.762     |   |
| Pro forma (RMB)                                                                                                 |   | 3.985     |   | 3.934     |   | 3.693     |   |

 

F - 73

----

 

**(I)****            Investment in equitysecurities**

 

Under HK GAAP, negotiableequity securities including ownership interest in an enterprise, which areintended to be held on a continuing basis, are classified as investmentsecurities and are stated at cost.  Thecarrying amounts of investment securities are written down to reflect anydiminution in value expected to be other than temporary.  Provisions against the carrying value arereversed when the circumstances and events that led to the write-downs orwrite-offs cease to exist and if there is persuasive evidence that the newcircumstances and events will persist for the foreseeable future.

 

Under US GAAP, equitysecurities which are not marketable and do not have readily determinable fairvalues are classified as other investments, which are stated at cost lessimpairment in value other than temporary. If an impairment in value is judged to be other than temporary, the costof the investment is written down to its recoverable amount as a new cost basisand the amount of the write-down is included in the statements of income.  The new cost basis is not changed forsubsequent recoveries in value.

 

During the years endedDecember 31, 2002 and 2003, there was no recovery in the value of investmentsin equity securities under HK GAAP (2001: approximately RMB12,305,000).

 

**(J)****         New AccountingPronouncements**

 

The Financial Accounting Standard Board (“FASB”)issued Statement of Financial Accounting Standards No. 149 “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”),Emerging Issues Task Force (“EITF”) reacheda final consensus on EITFIssue 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables” that addressescertain aspects of a vendor’s accounting for multiple revenue-generatingarrangements (“EITF Issue 00-21”) and FASB Interpretation No. 46 (revisedDecember 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”),which issued to revisethe original FASB Interpretation No. 46.

 

(a)          SFAS 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133 “Accounting for Derivative Instruments and HedgingActivities”. SFAS 149is effective for contracts entered into or modified after June 30, 2003. Theadoption of SFAS 149 did not have a material effect on the consolidated financialstatements of the Group.

 

F - 74

----

 

(b)**        **InNovember 2002, the Emerging Issues Task Force reached a final consensus on EITFIssue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”,which addresses certain aspects of a vendor’s accounting for multiplerevenue-generating arrangements.  ThisIssue addresses when and, how an arrangement involving multiple deliverablesshould be divided into separate units of accounting.  Factors to consider in this assessment include whether any of thedeliverables are independently functional or sufficiently separable, and if so,whether there is any sufficient evidence of related fair values to account forthem separately. Related provisions under EITF Issue 00-21 do not change otherwise applicablerevenue recognition criteria.  EITFIssue 00-21 also providesadditional guidance with respect to (i) the effect of certain customer rightsdue to vendor nonperformance on the recognition of revenue allocated todelivered units of accounting; (ii) the impact on the measurement and/orallocation of arrangement consideration of customer cancellation provisions andconsideration that varies as a result of future actions of the customer or thevendor; and (iii) the recognition of the cost of certain deliverables that areexcluded from the revenue accounting for an arrangement. The provisions of thisIssue become effective for fiscal periods beginning after June 15, 2003, withearly application permitted. The Group is currently reviewing the provisions ofEITF Issue 00-21 and does not expectthe adoption of this Issue to have a material effect on its results ofoperations and financial position.

 

(c)          FIN 46R provides guidance on the identification ofand financial reporting for entities over which control is achieved throughmeans other than voting rights.  UnderFIN 46R, an entity is defined as a variable interest entity (“VIE”) if theentity (1) lacks sufficient equity investment at risk to permit the entity tofinance its activities without additional subordinated financial support fromother parties, (2) has equity owners who cannot make significant decisionsabout the entity’s operations, and/or (3) has equity owners that do not absorbthe entity’s expected losses or returns. FIN 46R requires a variable interest holder to consolidate the VIE ifthat party will absorb a majority of the expected losses of the VIE, receive amajority of the returns of the VIE, or both. This party is considered the primary beneficiary of the VIE.  Furthermore, an enterprise with a variableinterest in a VIE shall treat the variable interests in that same VIE held byits related parties as its own interests. In the case where two or more related parties hold variable interests inthe same VIE, then the party, within the related party group, that is mostclosely associated with the variable interest entity is the primarybeneficiary.  For VIEs created afterJanuary 31, 2003, FIN 46R is effective immediately.  For VIEs that qualify as special purpose entities, as defined inFIN 46R, the Group must adopt provisions of FIN 46R on January 1, 2004, and forall other VIEs created before January 31, 2003, the Group must adopt FIN 46R onDecember 31, 2004.

 

The Company has adopted FIN 46R as of December 31, 2003.  As of December 31, 2003, the Company hasidentified only one VIE in which it holds a variable interest.  The name of the VIE is Unicom New Horizonand the form of variable interest held by the Company is a series of leaserenewal options.  Unicom New Horizon isa 100% owned subsidiary of the Company’s controlling shareholder, from whichthe Group leases its CDMA assets on a capacity-used basis under operatingleases, subject to indefinite renewal options. The Company has concluded that its controlling shareholder is theprimary beneficiary of Unicom New Horizon, since it absorbs all of Unicom NewHorizon’s expected losses (through its ownership of 100% of Unicom NewHorizon’s equity and an unconditional guarantee of 100% of Unicom New Horizondebt) and is indirectly associated with the operations of the leased CDMAassets through its majority ownership of the Company. As such, the adoption ofFIN 46R did not have any impact to the Group’s consolidated financialstatements.

 

F - 75

----

 

Differences between HK GAAP and US GAAP which affectnet income and earnings per share of the Group are summarized below:

 
|                                                                                                                                                          |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                                                          |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                                                                                          |   |     |   | **As restated**  |   | **As restated**  |   |             |   |
|                                                                                                                                                          |   |     |   |             |   |             |   |             |   |
| Net income under  HK GAAP                                                                                                                                     |   | (1)      |   | 4,601,859        |   | 4,598,213        |   | 4,217,097        |   |
|                                                                                                                                                          |   |     |   |             |   |             |   |             |   |
| Impact of US  GAAP adjustments:                                                                                                                               |   | (2)      |   |             |   |             |   |             |   |
| - Effect of acquisition of Unicom New Century                                                                                                                 |   | (A)      |   | 351,889          |   | 648,006          |   | —           |   |
| - Transaction costs for the acquisition of Unicom New  Century                                                                                                |   | (A)      |   | —           |   | (109,221         | )      | —           |   |
| - Reversal of goodwill amortization and recognition of depreciation expenses based  on historical cost of property, plant and equipment of Unicom New Century |   | (A)      |   | —           |   | —           |   | 88,794           |   |
| - Effect of acquisition of Unicom New World                                                                                                                   |   | (A)      |   | 81,174           |   | (118,879         | )      | 350,947          |   |
| - Transaction costs for the acquisition of Unicom New  World                                                                                                  |   | (A)      |   | —           |   | —           |   | (49,378          | )      |
| - Deferral of upfront non-refundable revenue                                                                                                                  |   | (C)      |   | (1,001,637       | )      | (860,490         | )      | (1,417,474       | )      |
| - Amortization of upfront non-refundable revenue                                                                                                              |   | (C)      |   | 455,839          |   | 526,982          |   | 1,223,938        |   |
| - Deferral of direct incremental cost                                                                                                                         |   | (C)      |   | 934,713          |   | 776,387          |   | 1,417,474        |   |
| - Amortization of direct incremental cost                                                                                                                     |   | (C)      |   | (358,867         | )      | (435,385         | )      | (1,071,450       | )      |
| - Employee housing benefits                                                                                                                                   |   | (D)      |   | (18,532          | )      | (18,532          | )      | (18,532          | )      |
| - Reversal of depreciation for revalued property, plant  and equipment                                                                                        |   | (F)      |   | 7,485            |   | 7,485            |   | 7,485            |   |
| - Difference in provision for impairment and disposal  loss of Paging Business                                                                                |   | (B)      |   | 12,382           |   | —           |   | 55,078           |   |
| - Reversal of differences in provision for impairment  loss of equipment upon depreciation  and disposal and disposal                                         |   | (G)      |   | —           |   | (3,538           | )      | (3,538           | )      |
| - Difference in provision for impairment loss of  goodwill                                                                                                    |   | (G)      |   | 62,948           |   | —           |   | —           |   |
| - Non-recognition of recovery of impairment provision  of investment securities and associated companies                                                      |   | (I)      |   | (17,948          | )      | —           |   | —           |   |
| - Deferred tax effects of US GAAP adjustments                                                                                                                 |   | (E)      |   | 44,190           |   | 59,563           |   | (72,018          | )      |
| - Effect of change in accounting policy:                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Transitional  adjustment of goodwill impairment upon the adoption of SFAS 142 (net of tax  RMB20,773,000)                                                     |   | (G)      |   | —           |   | (42,175          | )      | —           |   |
|                                                                                                                                                          |   |     |   |             |   |             |   |             |   |
| Net income as restated  under US GAAP                                                                                                                         |   | (2)      |   | 5,155,495        |   | 5,028,416        |   | 4,728,423        |   |

 

F - 76

----

 

Differences between HK GAAP and US GAAP which affectshareholders’ equity of the Group are summarized below:

 

 
|                                                                                                                                                           |   | **Note** |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                                                                                                           |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                                                                                           |   |     |   | **As restated**  |   |             |   |
|                                                                                                                                                           |   |     |   |             |   |             |   |
| Shareholders’  equity under HK GAAP                                                                                                                       |   | (1)      |   | 66,652,535       |   | 69,615,490       |   |
|                                                                                                                                                           |   |     |   |             |   |             |   |
| Impact of US  GAAP adjustments:                                                                                                                                |   | (2)      |   |             |   |             |   |
| - Effect of acquisition of Unicom New Century                                                                                                                  |   | (A)      |   | (2,052,554       | )      | (2,052,554       | )      |
| - Transaction costs for the acquisition of Unicom New  Century                                                                                                 |   | (A)      |   | (109,221         | )      | (109,221         | )      |
| - Reversal of goodwill amortization and recognition of  depreciation expenses based on historical cost of property, plant and  equipment of Unicom New Century |   | (A)      |   | —           |   | 88,794           |   |
| - Effect of acquisition of Unicom New World                                                                                                                    |   | (A)      |   | 497,989          |   | (946,370         | )      |
| - Transaction costs for the acquisition of Unicom New  World                                                                                                   |   | (A)      |   | —           |   | (49,378          | )      |
| - Deferred upfront non-refundable revenue                                                                                                                      |   | (C)      |   | (4,536,046       | )      | (5,953,520       | )      |
| - Accumulated amortization of upfront non-refundable  revenue                                                                                                  |   | (C)      |   | 1,422,526        |   | 2,646,464        |   |
| - Deferred direct incremental cost                                                                                                                             |   | (C)      |   | 3,619,901        |   | 5,037,375        |   |
| - Accumulated amortization of direct incremental cost                                                                                                          |   | (C)      |   | (1,016,882       | )      | (2,088,332       | )      |
| - Reversal of revaluation surplus of property, plant  and equipment:                                                                                           |   |     |   | —           |   | —           |   |
| - Cost                                                                                                                                                         |   | (F)      |   | (176,853         | )      | (82,531          | )      |
| - Accumulated depreciation                                                                                                                                     |   | (F)      |   | 30,296           |   | 15,351           |   |
| - Reversal of revaluation deficit of property, plant  and equipment:                                                                                           |   |     |   |             |   |             |   |
| - Cost                                                                                                                                                         |   | (F)      |   | 28,000           |   | —           |   |
| - Accumulated depreciation                                                                                                                                     |   | (F)      |   | (2,716           | )      | —           |   |
| - Differences  in cost and depreciation relating to provision for impairment loss of  equipment                                                                |   | (G)      |   | 8,844            |   | —           |   |
| - Differences in provision for impairment loss of  goodwill                                                                                                    |   | (G)      |   | 62,948           |   | —           |   |
| - Cumulative effect of change in accounting policy:                                                                                                            |   |     |   |             |   |             |   |
| Transitional  adjustment of goodwill impairment upon the adoption of SFAS 142                                                                                  |   | (G)      |   | (62,948          | )      | —           |   |
| - Non-recognition of recovery of impairment provision  of investment securities and associated companies                                                       |   | (I)      |   | (17,948          | )      | —           |   |
| - Deferred tax effects of US GAAP adjustments                                                                                                                  |   | (E)      |   | (132,875         | )      | (209,065         | )      |
| - Recognition of deferred tax assets in relation to the  loss carry forward from a subsidiary                                                                  |   | (1), (3) |   | 107,299          |   | —           |   |
| - Valuation allowance                                                                                                                                          |   | (1), (3) |   | (107,299         | )      | —           |   |
|                                                                                                                                                           |   |     |   |             |   |             |   |
| Shareholders’  equity as restated under US GAAP                                                                                                           |   | (2)      |   | 64,214,996       |   | 65,912,503       |   |

 

F - 77

----

 

Note:

 

----

(1)          Under HK GAAP, prior to2003, deferred taxation was accounted for at the current taxation rate inrespect of timing differences between net income as computed for taxationpurpose and net income as stated in the statements of income. A deferred taxasset was not recognized unless the related benefits are expected tocrystallize in the foreseeable future. Upon the adoption of SSAP 12 in 2003, deferredtaxation is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the financialstatements. Taxation rates enacted or substantively enacted at thebalance sheet date are used to determine deferred taxation. Deferred tax assetsare recognized to the extent that it is probable that future taxable incomewill be available against which the temporary differences can be utilized.Detail description was set forth in Note 3(a) to the financial statements.

 

The change in theaccounting policy has resulted in an increase of opening retained earnings asof January 1, 2002 and 2003 by approximately RMB373,159,000 and RMB405,300,000,respectively, representing the deferred tax assets relating to the provisionfor doubtful debts previously not recognized. This change has resulted in anincrease in deferred tax assets at January 1, 2003 by approximatelyRMB405,300,000.  The net income for the yearended December 31, 2002 has also been increased by approximately RMB32,141,000.

 

The adoption of SSAP 12 hasalso resulted in an increase of the deferred tax assets of Unicom New Century asof December 31, 2002 by approximately RMB80,448,000.

 

Under HK GAAP, theadoption of SSAP 12 in 2003 represents a change in accounting policy which hasbeen applied retrospectively so that the comparatives presented have beenrestated to conform to the changed policy.

 

(2)          In accordance with the US GAAP accounting as described in Note(A) above, the financial statements under US GAAP for prior periods presentedhave been retroactively restated to include Unicom New Century and Unicom NewWorld since the beginning of the earliest period presented.

 

(3)          A valuation allowancewas recorded against the deferred tax assets in relation to the loss carriedforward from a subsidiary prior to 2001 because it is highly uncertain as towhether sufficient future net income can be generated by the subsidiary toutilize the tax loss within the five-year carried forward period allowed undertax laws of the PRC at that time. The operating loss carry forward expires invarious years through 2003, if not utilized. Starting from 2001, with theapproval of the state tax bureau, loss incurred by this subsidiary can be setoff against taxable net income of the Group. As of December 31, 2003, deferredtax assets in relation to the loss carried forward from a subsidiary related tothe Paging Business was disposed together with the sale of Guoxin Paging.

 

F - 78

----

 

The following summarized the combining results ofoperations and the financial positions for the separate entities on a combinedbasis as of and for the years ended December 31, 2001, 2002 and 2003, restatedto reflect the impact of the effects of the sale of Guoxin Paging and Acquisitionof entities under common control, which is accounted for at historical costunder US GAAP with prior periods restated as if the entities were alwayscombined, and other differences between HK GAAP and US GAAP.

 
|                                            |   | **The Group  (before the  acquisition of  Unicom New  World)** |   | **Unicom  New World** |   | **Elimination**  |   | **The Group  (after the  acquisition of  Unicom New  World)** |   |
|-------------------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------|--------|------------------|--------|---------------------------------------------------------------|--------|
|                                            |   | **RMB’000**                                               |   | **RMB’000**      |   | **RMB’000** |   | **RMB’000**                                              |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| **For the year ended December 31,  2001**       |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                         |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating revenue  (Turnover)                   |   | 30,024,754                                                     |   | 2,905,547             |   | (428,980         | )      | 32,501,321                                                    |   |
| Net income from  continuing operations          |   | 5,784,497                                                      |   | 81,174                |   | —           |   | 5,865,671                                                     |   |
| Net loss from  discontinued operation           |   | (710,176                                                       | )      | —                |   | —           |   | (710,176                                                      | )      |
| Net income                                      |   | 5,074,321                                                      |   | 81,174                |   | —           |   | 5,155,495                                                     |   |
| Basic earnings  per share (RMB)                 |   | 0.404                                                          |   | —                |   | —           |   | 0.411                                                         |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| **As of/for the year ended December  31, 2002** |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                         |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating  revenue (Turnover)                   |   | 45,800,199                                                     |   | 5,238,615             |   | (623,566         | )      | 50,415,248                                                    |   |
| Net income from  continuing operations          |   | 5,611,683                                                      |   | (116,694              | )      | (2,185           | )      | 5,492,804                                                     |   |
| Net loss from  discontinued operation           |   | (422,213                                                       | )      | —                |   | —           |   | (422,213                                                      | )      |
| Effect of change  in accounting policy          |   | (42,175                                                        | )      | —                |   | —           |   | (42,175                                                       | )      |
| Net income                                      |   | 5,147,295                                                      |   | (116,694              | )      | (2,185           | )      | 5,028,416                                                     |   |
| Basic earnings  per share (RMB)                 |   | 0.410                                                          |   | —                |   | —           |   | 0.401                                                         |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Financial  position:                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Non-current  assets                             |   | 118,644,755                                                    |   | 12,571,854            |   | —           |   | 131,216,609                                                   |   |
| Current assets                                  |   | 31,921,101                                                     |   | 2,153,980             |   | (655,797         | )      | 33,419,284                                                    |   |
| Total assets                                    |   | 150,565,856                                                    |   | 14,725,834            |   | (655,797         | )      | 164,635,893                                                   |   |
| Non-current  liabilities                        |   | 41,673,150                                                     |   | 8,025,450             |   | —           |   | 49,698,600                                                    |   |
| Current  liabilities                            |   | 44,609,442                                                     |   | 6,200,210             |   | (653,612         | )      | 50,156,040                                                    |   |
| Total  liabilities                              |   | 86,282,592                                                     |   | 14,225,660            |   | (653,612         | )      | 99,854,640                                                    |   |
| Minority  interests                             |   | 566,257                                                        |   | —                |   | —           |   | 566,257                                                       |   |
| Net assets                                      |   | 63,717,007                                                     |   | 500,174               |   | (2,185           | )      | 64,214,996                                                    |   |

 

F- 79

----

 
|                                            |   | **The Group  (before the  acquisition of  Unicom New  World)** |   | **Unicom  New World** |   | **Elimination**  |   | **The Group  (after the  acquisition of  Unicom New  World)** |   |
|-------------------------------------------------|--------|----------------------------------------------------------------|--------|-----------------------|--------|------------------|--------|---------------------------------------------------------------|--------|
|                                            |   | **RMB’000**                                               |   | **RMB’000**      |   | **RMB’000** |   | **RMB’000**                                              |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| **As of/for the year ended December  31, 2003** |   |                                                           |   |                  |   |             |   |                                                          |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Results of  operations:                         |   |                                                           |   |                  |   |             |   |                                                          |   |
| Operating  revenue (Turnover)                   |   | 65,055,706                                                     |   | 8,116,512             |   | (1,213,965       | )      | 71,958,253                                                    |   |
| Net income from  continuing operations          |   | 5,719,316                                                      |   | 348,762               |   | 2,185            |   | 6,070,263                                                     |   |
| Net loss from  discontinued operation           |   | (1,341,840                                                     | )      | —                |   | —           |   | (1,341,840                                                    | )      |
| Net income                                      |   | 4,377,476                                                      |   | 348,762               |   | 2,185            |   | 4,728,423                                                     |   |
| Basic earnings  per share (RMB)                 |   | 0.349                                                          |   | —                |   | —           |   | 0.377                                                         |   |
|                                            |   |                                                           |   |                  |   |             |   |                                                          |   |
| Financial  position (Note (a)):                 |   |                                                           |   |                  |   |             |   |                                                          |   |
| Non-current  assets                             |   | 115,104,870                                                    |   | 13,064,550            |   | —           |   | 128,169,420                                                   |   |
| Current assets                                  |   | 20,941,127                                                     |   | 2,278,122             |   | (975,965         | )      | 22,243,284                                                    |   |
| Total assets                                    |   | 136,045,997                                                    |   | 15,342,672            |   | (975,965         | )      | 150,412,704                                                   |   |
| Non-current  liabilities                        |   | 34,908,769                                                     |   | 5,684,779             |   | —           |   | 40,593,548                                                    |   |
| Current  liabilities                            |   | 37,478,355                                                     |   | 7,404,263             |   | (975,965         | )      | 43,906,653                                                    |   |
| Total  liabilities                              |   | 72,387,124                                                     |   | 13,089,042            |   | (975,965         | )      | 84,500,201                                                    |   |
| Net assets                                      |   | 63,658,873                                                     |   | 2,253,630             |   | —           |   | 65,912,503                                                    |   |

 

----

Note (a):**             **As described in Note (B) above, Guoxin Pagingwas sold to Unicom Group effective on December 31, 2003. As a result, thebalance sheet of the Group did not include the financial positions of GuoxinPaging as of December 31, 2003.

 

F - 80

----

 

The following are condensed statements of income,changes in shareholders’ equity and cash flow information for the years ended December31, 2001, 2002and 2003, condensed balance sheets information for the Group as of December 31,2002 and 2003, and additional financial information as of and for the yearsended December 31, 2001, 2002 and 2003, restated to reflect the impact of theeffects of the disposal of Guoxin Paging and Acquisition of entities undercommon control which is accounted for at historical cost with retroactiverestatement under US GAAP.

 

***CondensedStatements of income***

 
|                                                                                                                      |   | **Note** |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                      |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Operating  revenue (Turnover):                                                                                            |   | (g)      |   | 32,501,321       |   | 50,415,248       |   | 71,958,253       |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Operating  expenses:                                                                                                      |   |     |   |             |   |             |   |             |   |
| Leased lines and  network capacities                                                                                      |   | (g)      |   | (746,495         | )      | (2,102,165       | )      | (4,725,932       | )      |
| Interconnection  charges                                                                                                  |   | (g)      |   | (2,548,638       | )      | (3,953,324       | )      | (6,119,138       | )      |
| Depreciation and  amortization                                                                                            |   |     |   | (9,274,845       | )      | (14,147,811      | )      | (16,746,044      | )      |
| Personnel                                                                                                                 |   |     |   | (2,175,648       | )      | (3,854,314       | )      | (4,644,904       | )      |
| Selling and  marketing                                                                                                    |   | (g)      |   | (3,749,047       | )      | (8,118,722       | )      | (16,701,625      | )      |
| General,  administrative and other expenses                                                                               |   | (g)      |   | (5,131,604       | )      | (7,282,553       | )      | (9,195,354       | )      |
| Cost of  telecommunications products sold                                                                                 |   | (g)      |   | (953,962         | )      | (1,203,367       | )      | (3,124,558       | )      |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Total operating expenses                                                                                                  |   |     |   | (24,580,239      | )      | (40,662,256      | )      | (61,257,555      | )      |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Operating income  from continuing operations                                                                              |   |     |   | 7,921,082        |   | 9,752,992        |   | 10,700,698       |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Interest income                                                                                                           |   |     |   | 2,096,856        |   | 476,353          |   | 169,521          |   |
| Finance costs                                                                                                             |   |     |   | (2,781,419       | )      | (2,765,835       | )      | (2,319,034       | )      |
| Other income  (expenses), net                                                                                             |   |     |   | 4,878            |   | (45,557          | )      | (29,927          | )      |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Net income from  continuing operations before taxation, discontinued operation and effect of  change in accounting policy |   |     |   | 7,241,397        |   | 7,417,953        |   | 8,521,258        |   |
| Taxation                                                                                                                  |   | (c)      |   | (1,375,726       | )      | (1,925,149       | )      | (2,450,995       | )      |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Net income  before discontinued operation, and effect of change in accounting policy                                      |   |     |   | 5,865,671        |   | 5,492,804        |   | 6,070,263        |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Discontinued  operation                                                                                                   |   |     |   |             |   |             |   |             |   |
| - Loss from discontinued operation                                                                                        |   |     |   | (880,504         | )      | (578,389         | )      | (1,762,222       | )      |
| - Add: related tax impact                                                                                                 |   | (c)      |   | 170,328          |   | 156,176          |   | 420,382          |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Loss from discontinued operation, net of tax                                                                              |   |     |   | (710,176         | )      | (422,213         | )      | (1,341,840       | )      |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Net income  before effect of change in accounting policy                                                                  |   |     |   | 5,155,495        |   | 5,070,591        |   | 4,728,423        |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Effect of change  in accounting policy:                                                                                   |   |     |   |             |   |             |   |             |   |
| - Transitional adjustment of goodwill impairment upon  the adoption of SFAS 142                                           |   |     |   | —           |   | (62,948          | )      | —           |   |
| - Less: related tax impact                                                                                                |   | (c)      |   | —           |   | 20,773           |   | —           |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
|                                                                                                                      |   |     |   | —           |   | (42,175          | )      | —           |   |
|                                                                                                                      |   |     |   |             |   |             |   |             |   |
| Net income                                                                                                                |   |     |   | 5,155,495        |   | 5,028,416        |   | 4,728,423        |   |

 

F - 81

----

 
|                                                                                        |   | **Note** |   | **2001** |   | **2002** |   | **2003** |   |
|---------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                        |   |     |   |     |   |     |   |     |   |
| **Basic earnings per share (RMB):**                                                         |   |     |   |     |   |     |   |     |   |
| Earnings per share before discontinued operation and  effect of change in accounting policy |   | (1)      |   | 0.467    |   | 0.438    |   | 0.484    |   |
| Loss from discontinued operation, net of tax                                                |   |     |   | (0.056   | )      | (0.034   | )      | (0.107   | )      |
| Effect of change in accounting policy, net of tax                                           |   |     |   | —   |   | (0.003   | )      | —   |   |
| Net income                                                                                  |   | (1)      |   | 0.411    |   | 0.401    |   | 0.377    |   |
|                                                                                        |   |     |   |     |   |     |   |     |   |
| **Diluted earnings per share (RMB):**                                                       |   |     |   |     |   |     |   |     |   |
| Earnings per share before discontinued operation and  effect of change in accounting policy |   | (2)      |   | 0.467    |   | 0.438    |   | 0.483    |   |
| Loss from discontinued operation, net of tax                                                |   |     |   | (0.056   | )      | (0.034   | )      | (0.107   | )      |
| Effect of change in accounting policy, net of tax                                           |   |     |   | —   |   | (0.003   | )      | —   |   |
| Net income                                                                                  |   | (2)      |   | 0.411    |   | 0.401    |   | 0.376    |   |
|                                                                                        |   |     |   |     |   |     |   |     |   |
| **Basic earnings per ADS (RMB):**                                                           |   |     |   |     |   |     |   |     |   |
| Earnings per share before discontinued operation and  effect of change in accounting policy |   | (1), (3) |   | 4.673    |   | 4.376    |   | 4.836    |   |
| Loss from discontinued operation, net of tax                                                |   |     |   | (0.566   | )      | (0.336   | )      | (1.069   | )      |
| Effect of change in accounting policy, net of tax                                           |   |     |   | —   |   | (0.034   | )      | —   |   |
| Net income                                                                                  |   | (1), (3) |   | 4.107    |   | 4.006    |   | 3.767    |   |
|                                                                                        |   |     |   |     |   |     |   |     |   |
| **Diluted earnings per ADS (RMB):**                                                         |   |     |   |     |   |     |   |     |   |
| Earnings per share before discontinued operation and  effect of change in accounting policy |   | (2), (3) |   | 4.673    |   | 4.376    |   | 4.830    |   |
| Loss from discontinued operation, net of tax                                                |   |     |   | (0.566   | )      | (0.336   | )      | (1.068   | )      |
| Effect of change in accounting policy, net of tax                                           |   |     |   | —   |   | (0.034   | )      | —   |   |
| Net income                                                                                  |   | (2), (3) |   | 4.107    |   | 4.006    |   | 3.762    |   |

 

Note:

 

----

(1)                Basic earnings pershare before or afterdiscontinued operation and effect of change in accounting policy for theyearsended December 31, 2001, 2002 and 2003 were computed by dividing the net incomebefore or after discontinuedoperation and effect of change in accounting policy for the financial yearsunder US GAAP by the weighted average number of ordinary shares in issue during the years.

 

(2)                Diluted earningsper share before or after discontinued operation and effect of change inaccounting policy for the years ended December 31, 2001, 2002 and 2003 were computed by dividing the netincome before or after discontinued operation and effect of change inaccounting policy for the financial years under US GAAP by the weighted averagenumber of ordinary shares in issue during the years, after adjusting for theeffects of the dilutive potential ordinary shares. All potential dilutiveshares arose from share options granted (i) under the amended Pre-GlobalOffering Share Option Scheme; and (ii) under the amended Share Option Scheme asdescribed in Note 31. For 2003,all potential dilutive ordinary shares arose from additional share optionsgranted in 2003 under the amended Share Option Scheme (see Note 31), which ifconverted to ordinary shares would decrease earnings per share. For 2001 and 2002, there were no dilution ofearnings per share after taking into account of the dilutive effect of theshare options. The anti-dilutive shares arising from the share options of approximately 66,573,000 shares (2001: 30,451,000 shares; 2002: 48,745,000 shares) were notincluded in the calculation of diluted earnings per share in 2003.

 

(3)                Basic and dilutedearnings per ADS before or after discontinued operation and effect of change inaccounting policy were computed by multiplying the earnings per share by 10,which is the number of shares represented by each ADS.

 

F - 82

----

 

***Condensed Balance Sheet***

 
|                                                 |   | **Note** |   | **2002**         |   | **2003**         |   |
|------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                 |   |     |   | **RMB’000** |   | **RMB’000** |   |
| **Assets**                                           |   |     |   |             |   |             |   |
| **Current  assets:**                                 |   |     |   |             |   |             |   |
| Amounts due from  Unicom Group                       |   |     |   | 111,206          |   | —           |   |
| Current portion  of deferred tax assets              |   | (c)      |   | 1,291,650        |   | 873,849          |   |
| Amounts due from  related parties                    |   |     |   | 872,048          |   | 263,414          |   |
| Amounts due from  domestic carriers                  |   |     |   | 215,545          |   | 184,613          |   |
| Prepayments and  other current assets                |   | (d)      |   | 2,800,140        |   | 3,147,777        |   |
| Inventories                                          |   |     |   | 3,532,674        |   | 2,169,354        |   |
| Account  receivable                                  |   |     |   | 6,663,071        |   | 8,960,506        |   |
| Less: Provision  for doubtful debts                  |   |     |   | (1,895,770       | )      | (3,488,959       | )      |
| Accounts  receivable, net                            |   |     |   | 4,767,301        |   | 5,471,547        |   |
| Trading  securities                                  |   |     |   | 173,939          |   | —           |   |
| Short-term bank  deposits                            |   |     |   | 4,825,205        |   | 912,794          |   |
| Bank balances  and cash                              |   |     |   | 14,829,576       |   | 9,219,936        |   |
|                                                 |   |     |   |             |   |             |   |
| Total current  assets                                |   |     |   | 33,419,284       |   | 22,243,284       |   |
|                                                 |   |     |   |             |   |             |   |
| **Non-current  assets:**                             |   |     |   |             |   |             |   |
| Property, plant  and equipment, net                  |   | (a)      |   | 118,787,064      |   | 118,124,070      |   |
| Goodwill                                             |   |     |   | 1,022            |   | —           |   |
| Other assets                                         |   | (b)      |   | 11,673,174       |   | 9,920,469        |   |
| Deferred tax  assets                                 |   | (c)      |   | 663,835          |   | 124,881          |   |
| Investment  securities                               |   |     |   | 90,919           |   | —           |   |
| Investment in  associated companies                  |   |     |   | 595              |   | —           |   |
|                                                 |   |     |   |             |   |             |   |
| **Total  assets:**                                   |   |     |   | 164,635,893      |   | 150,412,704      |   |
|                                                 |   |     |   |             |   |             |   |
| **LIABILITIES  AND EQUITY**                          |   |     |   |             |   |             |   |
| **Current  liabilities:**                            |   |     |   |             |   |             |   |
| Dividend payable                                     |   |     |   | 8,448            |   | —           |   |
| Payables and  accrued liabilities                    |   | (e)      |   | 22,310,930       |   | 17,098,420       |   |
| Amounts due to  Unicom Group                         |   |     |   | 562,633          |   | 432,047          |   |
| Amounts due to  related parties                      |   |     |   | 294,642          |   | 108,891          |   |
| Amounts due to  domestic carriers                    |   |     |   | 1,201,277        |   | 778,841          |   |
| Current portion  of obligations under finance leases |   |     |   | 16,793           |   | 25,435           |   |
| Current portion  of long-term bank loans             |   | (f)      |   | 6,737,684        |   | 7,197,877        |   |
| Taxes payable                                        |   |     |   | 1,307,471        |   | 623,857          |   |
| Advances from  customers                             |   |     |   | 7,043,442        |   | 6,666,086        |   |
| Short-term loans  from Unicom Group                  |   |     |   | 1,276,220        |   | —           |   |
| Short-term bank  loans                               |   |     |   | 9,396,500        |   | 10,975,199       |   |
|                                                 |   |     |   |             |   |             |   |
| Total current  liabilities                           |   |     |   | 50,156,040       |   | 43,906,653       |   |
|                                                 |   |     |   |             |   |             |   |
| **Non-current  liabilities:**                        |   |     |   |             |   |             |   |
| Long-term bank  loans                                |   | (f)      |   | 45,519,525       |   | 36,212,791       |   |
| Obligations  under finance leases                    |   |     |   | 101,302          |   | 99,719           |   |
| Deferred revenue                                     |   |     |   | 4,065,265        |   | 4,277,761        |   |
| Other long-term  liabilities                         |   |     |   | 12,508           |   | 3,277            |   |
|                                                 |   |     |   |             |   |             |   |
| Total  non-current liabilities                       |   |     |   | 49,698,600       |   | 40,593,548       |   |
|                                                 |   |     |   |             |   |             |   |
| **Minority  interests**                              |   |     |   | 566,257          |   | —           |   |
|                                                 |   |     |   |             |   |             |   |
| **Shareholders’  Equity**                       |   |     |   | 64,214,996       |   | 65,912,503       |   |
|                                                 |   |     |   |             |   |             |   |
| **Total  liability and shareholders’ equity**   |   |     |   | 164,635,893      |   | 150,412,704      |   |

 

F- 83

----

 

***Condensed Statementof Changes In Shareholders’ Equity***

 
|                                                                                                             |   | **RMB’000** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                             |   |             |   |
| Balance as of  January 1, 2001, as previously reported before adjusting for the acquisition  of Unicom New World |   | 56,759,192       |   |
| Adjustment for  the acquisition of Unicom New World                                                              |   | (216,381         | )      |
|                                                                                                             |   |             |   |
| Balance as of  January 1, 2001, as adjusted for the acquisition of Unicom New World                              |   | 56,542,811       |   |
| Net income for  the year ended December 31, 2001                                                                 |   | 5,155,495        |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Contribution from  owner                                                                                         |   | 235,992          |   |
| Distribution to  owner                                                                                           |   | (68,749          | )      |
|                                                                                                             |   |             |   |
| Balance as of  December 31, 2001, as  adjusted for the acquisition of Unicom New World                           |   | 61,884,081       |   |
| Net income for  the year ended December 31, 2002                                                                 |   | 5,028,416        |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Contribution  from owner                                                                                         |   | 2,083,967        |   |
| Deemed capital  distribution relating to the payment to Unicom Group for the transfer of Unicom New Century      |   | (4,800,000       | )      |
|                                                                                                             |   |             |   |
| Balance as of  December 31, 2002, as  adjusted for the acquisition of Unicom New World                           |   | 64,214,996       |   |
| Net income for  the year ended December 31, 2003                                                                 |   | 4,728,423        |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Contribution  from owner                                                                                         |   | 1,673,693        |   |
| Deemed capital  distribution relating to the payment to Unicom Group for the transfer of Unicom New World        |   | (3,200,000       | )      |
| Distribution to  owner                                                                                           |   | (268,999         | )      |
| Dividend paid                                                                                                    |   | (1,255,300       | )      |
| Exercise of  share options                                                                                       |   | 1,158            |   |
|                                                                                                             |   |             |   |
| Balance as of  December 31, 2003                                                                                 |   | 65,912,503       |   |

 

F - 84

----

 

***Condensed Cash FlowStatement***

 
|                                          |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-----------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                          |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Net cash inflows  (outflows) from:            |   |             |   |             |   |             |   |
| Operating  activities                         |   | 15,320,459       |   | 18,214,554       |   | 25,991,589       |   |
| Investing activities                          |   | (62,970,725      | )      | (10,256,078      | )      | (20,272,030      | )      |
| Financing  activities                         |   | 21,015,381       |   | (12,772,555      | )      | (11,379,199      | )      |
|                                          |   |             |   |             |   |             |   |
| Net decrease in  cash and cash equivalents    |   | (26,634,885      | )      | (4,814,079       | )      | (5,659,640       | )      |
| Cash and cash  equivalents, beginning of year |   | 46,278,540       |   | 19,643,655       |   | 14,829,576       |   |
|                                          |   |             |   |             |   |             |   |
| Cash and cash  equivalents, end of year       |   | 19,643,655       |   | 14,829,576       |   | 9,169,936        |   |
|                                          |   |             |   |             |   |             |   |
| Interest paid  (net of amount capitalized)    |   | (2,784,378       | )      | (2,697,644       | )      | (2,322,892       | )      |

 

**Supplementalinformation**

 

Payables to equipment suppliers forconstruction-in-progress during 2003 decreased by approximately RMB3,799million (2001: increasedby approximately RMB1,924 million; 2002: decreased by approximately RMB1,502 million).

 

***(a)******         Property,Plant and Equipment, net***

 
|                                   |   | **2002**         |   | **2003**         |   |
|----------------------------------------|--------|------------------|--------|------------------|--------|
|                                   |   | **RMB’000** |   | **RMB’000** |   |
|                                   |   |             |   |             |   |
| Buildings                              |   | 11,276,660       |   | 12,800,363       |   |
| Telecommunication  equipment           |   | 119,200,606      |   | 116,315,865      |   |
| Office  furniture, fixtures and others |   | 5,098,221        |   | 4,494,776        |   |
| Leasehold  improvements                |   | 1,163,482        |   | 1,054,779        |   |
| Construction-in-progress               |   | 21,559,101       |   | 21,741,746       |   |
|                                   |   |             |   |             |   |
|                                   |   | 158,298,070      |   | 156,407,529      |   |
| Less:  Accumulated depreciation        |   | (39,511,006      | )      | (38,283,459      | )      |
|                                   |   |             |   |             |   |
|                                   |   | 118,787,064      |   | 118,124,070      |   |

 

F - 85

----

 

***(b)******         OtherAssets***

 
|                                                                 |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                 |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |             |   |             |   |
| Inter-connection  facilitates                                        |   | 641,894          |   | 613,622          |   |
| Deferred direct  incremental costs                                   |   | 4,911,833        |   | 6,465,485        |   |
| Other                                                                |   | 956,739          |   | 1,588,839        |   |
|                                                                 |   |             |   |             |   |
|                                                                 |   | 6,510,466        |   | 8,667,946        |   |
| Less:  Accumulated amortization                                      |   | (2,332,426       | )      | (3,860,502       | )      |
|                                                                 |   |             |   |             |   |
|                                                                 |   | 4,178,040        |   | 4,807,444        |   |
|                                                                 |   |             |   |             |   |
| Prepaid rental and leased line                                       |   | 1,296,741        |   | 1,201,375        |   |
| Deferred  customer acquisition costs of contractual CDMA subscribers |   | 6,198,393        |   | 3,911,650        |   |
|                                                                 |   |             |   |             |   |
|                                                                 |   | 11,673,174       |   | 9,920,469        |   |

 

***(c)******          Taxation***

 

Detailed description of the assessment basis of income taxliability of the Group including CUCL and Unicom New Century were set forth inNote 14 of the financial statements.

 

The income tax liabilityof Unicom New World was assessed as follows:

 

(i)             For 2001, 2002 and2003, Unicom Group was assessed for PRC enterprise income tax liability underthe relevant tax rules and regulations applicable to stat-owned enterprises atthe statutory rate of 33% on a consolidation basis as a single entity. The taxprovision for Unicom New World was determined on a separate return basis usingthe same tax policy applicable to Unicom Group. Under this basis, the taxliabilities attributable to Unicom New World were determined as if it were assessedfor income tax separately from Unicom Group; and

 

(ii)          Various provincialbranches and autonomous regions of Unicom New World were granted a preferential treatment by local taxauthorities to assess their enterprise income tax at a tax rate of 15% for 2003(2001 and 2002: 15%). The remaining provincial branches, or autonomous regions,were assessed at the standard tax rate of 33%.

 

The components of incometax are as follows:

 
|                                                                                  |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                  |   |             |   |             |   |             |   |
| Provision for  PRC enterprise income tax of the estimated taxable income for the year |   | 2,120,966        |   | 1,578,591        |   | 1,078,030        |   |
| Deferred  taxation                                                                    |   | (915,568         | )      | 169,609          |   | 952,583          |   |
|                                                                                  |   |             |   |             |   |             |   |
|                                                                                  |   | 1,205,398        |   | 1,748,200        |   | 2,030,613        |   |

 

F - 86

----

 

The reconciliation of PRCenterprise income tax at the statutory tax rate of 33% and the effective tax rate actuallyrecorded in the statements of income is as follows:

 
|                                                                           |   | **2001** |   | **2002** |   | **2003** |   |
|--------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **PRC**                                                                        |   |     |   |     |   |     |   |
|                                                                           |   |     |   |     |   |     |   |
| Statutory tax  rate of 33%                                                     |   | 33       | %      | 33       | %      | 33       | %      |
| Non-deductible  expenses:                                                      |   |     |   |     |   |     |   |
| - Housing benefits                                                             |   | 1.6      |   | 0.1      |   | —   |   |
| - Personnel expenses                                                           |   | 2.5      |   | 1.7      |   | —   |   |
| - Selling and marketing expenses                                               |   | 0.2      |   | 0.2      |   | —   |   |
| - Other                                                                        |   | 0.8      |   | 1.0      |   | 0.6      |   |
| Non-taxable  revenue-connection fee                                            |   | (0.6     | )      | —   |   | —   |   |
| Additional  expenses for tax deductible purposes:                              |   |     |   |     |   |     |   |
| - Interest on loans from CCF joint ventures                                    |   | —   |   | (0.9     | )      | (0.3     | )      |
| - Depreciation expenses                                                        |   | (7.1     | )      | (0.2     | )      | (0.1     | )      |
| - Monetary housing benefits                                                    |   | —   |   | —   |   | (0.8     | )      |
| Effect of  preferential tax rates                                              |   | (0.7     | )      | (3.2     | )      | (2.1     | )      |
| Investment tax  credits for domestic equipment                                 |   | (1.9     | )      | (4.6     | )      | —   |   |
| Increase in  opening deferred tax asset resulting from an increase in tax rate |   | —   |   | —   |   | (2.1     | )      |
| Write-off  deferred tax assets previously recognized for Guoxin Paging         |   | —   |   | —   |   | 1.8      |   |
|                                                                           |   |     |   |     |   |     |   |
| **Effective  PRC income tax rate**                                             |   | 27.8     | %      | 27.1     | %      | 30.0     | %      |
|                                                                           |   |     |   |     |   |     |   |
| **Effective  HK income tax rate**                                              |   | —   |   | —   |   | —   |   |
|                                                                           |   |     |   |     |   |     |   |
| **Total overall  effective income tax rate**                                   |   | 19.1     | %      | 25.9     | %      | 30.1     | %      |

 

Effect of preferential tax rates is as follows:

 
|                                |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |     |   |
| Aggregate amount  (RMB in millions) |   | 84       |   | 209      |   | 143      |   |
| Per share effect  (RMB)             |   | 0.007    |   | 0.017    |   | 0.011    |   |

 

F - 87

----

 

The movement of deferredtax assets is as follows:

 
|                                                                 |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                 |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |             |   |             |   |
| Balance,  beginning of year                                          |   | 2,125,094        |   | 1,955,485        |   |
| Deferred  taxation charged to statements of income                   |   | (190,382         | )      | (952,583         | )      |
| Deferred  taxation relating to sale of Guoxin Paging                 |   | —           |   | (4,172           | )      |
| Deferred  taxation relating to effect of change in accounting policy |   | 20,773           |   | —           |   |
|                                                                 |   |             |   |             |   |
| Balance, end of  year                                                |   | 1,955,485        |   | 998,730          |   |

 

Deferred taxationrepresents the taxation effect of the following temporary differences:

 
|                                                                                              |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                              |   | **RMB’000** |   | **RMB’000** |   |
| Non-current  deferred tax assets:                                                                 |   |             |   |             |   |
| Net amount of  deferral and amortization of upfront non-refundable revenue and incremental  costs |   | 1,013,328        |   | 887,269          |   |
| Interest on  loans from CCF joint ventures                                                        |   | 287,998          |   | 256,673          |   |
| Loss arising  from terminations of CCF Arrangements                                               |   | 312,117          |   | 236,249          |   |
| Operating loss  of a subsidiary prior to 2001 (Note 1)                                            |   | 107,299          |   | —           |   |
| Provision for  impairment loss of property, plant and equipment                                   |   | 110,075          |   | 4,875            |   |
| Provision for  impairment loss of goodwill                                                        |   | 27,620           |   | —           |   |
| Provision for  doubtful debts of Paging Business                                                  |   | 38,673           |   | —           |   |
| Write-off of  other assets                                                                        |   | 17,662           |   | 7,563            |   |
| Amortization of  retirement benefits                                                              |   | 37,379           |   | 18,549           |   |
| Additional  depreciation deductible for tax purpose                                               |   | 171,091          |   | 101,267          |   |
| Differences in  tax basis for the residual value of the property, plant and equipment             |   | 19,634           |   | 7,608            |   |
| Other                                                                                             |   | 110,453          |   | 24,497           |   |
|                                                                                              |   |             |   |             |   |
|                                                                                              |   | 2,253,329        |   | 1,544,550        |   |
| Less: Valuation  allowance                                                                        |   | (107,299         | )      | —           |   |
|                                                                                              |   |             |   |             |   |
|                                                                                              |   | 2,146,030        |   | 1,544,550        |   |
| Non-current  deferred tax liabilities:                                                            |   |             |   |             |   |
| Net amount of  deferral and amortization of upfront non-refundable revenue and incremental  costs |   | (1,185,131       | )      | (1,087,288       | )      |
| Change of  depreciation period                                                                    |   | (82,978          | )      | (28,268          | )      |
| Capitalized  interest already deducted for tax purposes                                           |   | (214,086         | )      | (304,113         | )      |
|                                                                                              |   |             |   |             |   |
|                                                                                              |   | (1,482,195       | )      | (1,419,669       | )      |
|                                                                                              |   |             |   |             |   |
| Net non-current deferred tax assets                                                               |   | 663,835          |   | 124,881          |   |
|                                                                                              |   |             |   |             |   |
| Current portion  of deferred tax assets                                                           |   |             |   |             |   |
| Income tax on  advances from customers for telephone cards                                        |   | 693,830          |   | 261,467          |   |
| Write-down of  inventory to net realizable value                                                  |   | 31,261           |   | 15,905           |   |
| Provision for  doubtful debts of Cellular Business                                                |   | 543,691          |   | 534,839          |   |
| Monetary housing  benefits                                                                        |   | —           |   | 56,826           |   |
| Other                                                                                             |   | 22,868           |   | 4,812            |   |
|                                                                                              |   | 1,291,650        |   | 873,849          |   |
|                                                                                              |   |             |   |             |   |
| Total                                                                                             |   | 1,955,485        |   | 998,730          |   |

 

----

Note (1): Refer to Note 3 of shareholders’ equityreconciliation table.

 

F - 88

----

 

***(d)******         Prepaymentand Other Current Assets***

 
|                                                                 |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                 |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |             |   |             |   |
| Prepaid rental                                                       |   | 85,185           |   | 233,461          |   |
| Deposits and  prepayments                                            |   | 1,190,597        |   | 1,624,874        |   |
| Interest  receivables                                                |   | 37,780           |   | 4,872            |   |
| Advances to  employees                                               |   | 120,408          |   | 164,487          |   |
| Deferred  customer acquisition costs of contractual CDMA subscribers |   | 531,551          |   | 535,521          |   |
| Others                                                               |   | 834,619          |   | 584,562          |   |
|                                                                 |   |             |   |             |   |
|                                                                 |   | 2,800,140        |   | 3,147,777        |   |

 

***(e)******          Payablesand Accrued Liabilities***

 
|                                               |   | **2002**         |   | **2003**         |   |
|----------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                               |   | **RMB’000** |   | **RMB’000** |   |
|                                               |   |             |   |             |   |
| Payables to  contractors and equipment suppliers   |   | 15,588,133       |   | 11,789,366       |   |
| Accrued expenses                                   |   | 1,271,852        |   | 1,417,750        |   |
| Payables to  telecommunications products suppliers |   | 2,636,330        |   | 1,346,784        |   |
| Customer  deposits                                 |   | 916,585          |   | 1,198,812        |   |
| Salary and  welfare payables                       |   | 842,394          |   | 494,794          |   |
| Other                                              |   | 1,055,636        |   | 850,914          |   |
|                                               |   |             |   |             |   |
|                                               |   | 22,310,930       |   | 17,098,420       |   |

 

F - 89

----

 

***(f)******            Long-termBank Loans***

 
|                        |   | **Interest  rate and final maturity**                                                                                                       |   | **2002**         |   | **2003**         |   |
|-----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                        |   |                                                                                                                                        |   | **RMB’000** |   | **RMB’000** |   |
|                        |   |                                                                                                                                        |   |             |   |             |   |
| RMB denominated  bank loans |   | Fixed interest rate ranging from 4.44% to 5.76%  (2002: 4.54% to 6.24%) per annum with maturity through 2009 (2002: maturity  through 2008) |   |             |   |             |   |
| - secured                   |   |                                                                                                                                        |   | 31,516,112       |   | 10,622,366       |   |
| - unsecured                 |   |                                                                                                                                        |   | 20,741,097       |   | 26,994,612       |   |
|                        |   |                                                                                                                                        |   |             |   |             |   |
|                        |   |                                                                                                                                        |   | 52,257,209       |   | 37,616,978       |   |
|                        |   |                                                                                                                                        |   |             |   |             |   |
| USD denominated  bank loans |   | Floating interest rate of USD LIBOR plus interest  margin of 0.28% to 0.44% per annum with maturity through 2010                            |   | —           |   | 5,793,690        |   |
|                        |   |                                                                                                                                        |   |             |   |             |   |
|                        |   |                                                                                                                                        |   | 52,257,209       |   | 43,410,668       |   |
| Less: Current  portion      |   |                                                                                                                                        |   | (6,737,684       | )      | (7,197,877       | )      |
|                        |   |                                                                                                                                        |   |             |   |             |   |
|                        |   |                                                                                                                                        |   | 45,519,525       |   | 36,212,791       |   |

 

The repayment schedule ofthe long-term bank loans was as follows:

 
|                                             |   | **2002**         |   | **2003**         |   |
|--------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                             |   | **RMB’000** |   | **RMB’000** |   |
| Balances due:                                    |   |             |   |             |   |
| - 2003                                           |   | 6,737,684        |   | —           |   |
| - 2004                                           |   | 6,656,391        |   | 7,197,877        |   |
| - 2005                                           |   | 25,647,532       |   | 15,549,832       |   |
| - 2006                                           |   | 10,085,831       |   | 11,700,060       |   |
| - 2007                                           |   | 2,838,410        |   | 3,020,930        |   |
| - 2008                                           |   | 291,361          |   | 4,116,570        |   |
| - Thereafter                                     |   | —           |   | 1,825,399        |   |
|                                             |   |             |   |             |   |
|                                             |   | 52,257,209       |   | 43,410,668       |   |
| Less: Portion  classified as current liabilities |   | (6,737,684       | )      | (7,197,877       | )      |
|                                             |   |             |   |             |   |
|                                             |   | 45,519,525       |   | 36,212,791       |   |

 

As of December 31, 2003,long-term bank loansdenominated in RMB were secured by the following:

 

(i)             Approximately RMB10,622 million (2002: RMB31,516  million) of long-term bank loans were securedby the future service fee revenue to be generated by the cellular operations ofthe relevant branches. Included in these long-term bank loans, approximatelyRMB3,600 million (2002: RMB4,931 million) was also guaranteed by Unicom Group;

 

(ii)          Approximately RMB8,004 million (2002:RMB10,497 million) of long-term bank loans were guaranteed by Unicom Group; and

 

(iii)       ApproximatelyRMB50 million (2002: Nil) of long-term bank loans were secured by restrictedbank deposit.

 

F - 90

----

 

***(g)******         RelatedParty Transactions***

 
|                                                                      |   | **2001**         |   | **2002**         |   | **2003**         |   |
|---------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                      |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **Transactions  with Unicom Group and its subsidiaries:**                 |   |             |   |             |   |             |   |
| Interconnection  and roaming revenues                                     |   | 24,859           |   | 34,167           |   | 158,486          |   |
| Interconnection  and roaming charges                                      |   | 36,847           |   | 50,132           |   | 52,294           |   |
| Rental charges  for premises, equipment and facilities                    |   | 24,963           |   | 21,601           |   | 17,936           |   |
| Revenue for  leasing of transmission line capacity                        |   | 150              |   | 12,557           |   | 10,717           |   |
| Sales of CDMA  mobile handsets                                            |   | —           |   | 6,129            |   | 23,484           |   |
| Charges for the  international gateway services                           |   | —           |   | 15,626           |   | 8,631            |   |
| Leasing of  satellite transmission capacity                               |   | 61,778           |   | 35,153           |   | 26,400           |   |
| Purchase of  telecom cards                                                |   | 1,795,585        |   | 1,391,811        |   | 1,326,641        |   |
| CDMA network  capacity lease rental                                       |   | 128,021          |   | 1,299,286        |   | 3,909,148        |   |
| Commission  expenses for sales agency services incurred for telecom cards |   | 2,616            |   | 18,497           |   | 16,175           |   |
| Agency fee  incurred for procurement of telecommunications equipment      |   | 308,117          |   | 19,634           |   | 20,705           |   |
| Rental for the  PRC corporate office                                      |   | 10,131           |   | 7,598            |   | —           |   |
| Sales of  telecommunications equipment                                    |   | —           |   | 16,088           |   | —           |   |

 

Detail description of thenature and terms of the related party transactions are set forth in Note 32 ofthis financial statements.

 

**Movementof significant provisions**

 

(a)          Provision for deferredtaxation valuation allowance was analyzed as follows:

 

 
|                        |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                        |   |             |   |             |   |             |   |
| Balance, beginning  of year |   | 107,299          |   | 107,299          |   | 107,299          |   |
| Provision for  the year     |   | —           |   | —           |   | —           |   |
| Disposal of  Guoxin Paging  |   | —           |   | —           |   | (107,299         | )      |
|                        |   |             |   |             |   |             |   |
| Balance, end of  year       |   | 107,299          |   | 107,299          |   | —           |   |

 

(b)         Provision for doubtfuldebts was analyzed as follows:

 
|                        |   | **2001**         |   | **2002**         |   | **2003**         |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                        |   |             |   |             |   |             |   |
| Balance, beginning  of year |   | 921,067          |   | 1,370,027        |   | 1,895,770        |   |
| Provision for  the year     |   | 728,779          |   | 1,395,699        |   | 2,016,106        |   |
| Written-off for  the year   |   | (279,819         | )      | (869,956         | )      | (358,253         | )      |
| Disposal of  Guoxin Paging  |   | —           |   | —           |   | (64,664          | )      |
|                        |   |             |   |             |   |             |   |
| Balance, end of  year       |   | 1,370,027        |   | 1,895,770        |   | 3,488,959        |   |

 

(c)          Other than thosedescribed in the above notes, there was no other significant movement ofprovisions for the years ended December 31, 2001, 2002 and 2003.

 

F - 91

----

 

**ComprehensiveStatements of income**

 

According to SFAS No.130 “Reporting of ComprehensiveIncome”, certain items shown as components of common equity must be moreprominently reported in a separate statement as components of comprehensiveincome. For the years ended December 31, 2001, 2002 and 2003, apart from thenet income, therewas no other comprehensive income which should be included in the statement ofcomprehensive income.

 

**Shareoption scheme**

 

As disclosed in Note 31, information relating to the shareoptions outstanding under the amended Pre-Global Offering Share Option Scheme andShare Option Scheme as of December 31, 2001, 2002 and 2003 is as follows:

 

 
|                           |   | **2001**                 |   | **2002**                                 |   | **2003**                 |   |
|--------------------------------|--------|--------------------------|--------|------------------------------------------|--------|--------------------------|--------|
|                           |   | **Options  outstanding** |   | **Weighted  average****exercise  price** |   | **Options  outstanding** |   | **Weighted  average****exercise  price** |   | **Options outstanding** |   | **Weighted  average****exercise  price** |   |
|                           |   |                     |   | **HK$**                                  |   |                     |   | **HK$** |   |   |   | **HK$** |   |
|                           |   |                     |   |                                     |   |                     |   |   |   |   |   |   |   |
| Outstanding, beginning of year |   | 27,116,600               |   | 15.42                                    |   | 33,840,600               |   | 15.42 |   | 69,868,600 |   | 10.66 |   |
| Granted during the year        |   | 6,724,000                |   | 15.42                                    |   | 36,028,000               |   | 6.18 |   | 105,956,000 |   | 4.30 |   |
| Exercised during the year      |   | —                   |   | —                                   |   | —                   |   | — |   | (176,000 | ) | 6.18 |   |
| Cancelled during the year      |   | —                   |   | —                                   |   | —                   |   | — |   | (3,281,200 | ) | 12.26 |   |
|                           |   |                     |   |                                     |   |                     |   |   |   |   |   |   |   |
| Outstanding, end of year       |   | 33,840,600               |   | 15.42                                    |   | 69,868,600               |   | 10.66 |   | 172,367,400 |   | 6.72 |   |

 

As of December 31, 2003, 45,947,320 share options (2001:6,724,000 share options; 2002: 33,840,600 share options) were exercisable and the weighted average exerciseprice was HK$6.72 (2001: HK$15.42; 2002: HK$15.42). Also, as of December 31, 2003, weighted average remainingcontractual life of the options outstanding was approximately 5.5 years (2001: approximately 8.5 years; 2002: approximately 6.5 years).

 

The SFAS 123 method of accounting is based on severalassumptions and should not be viewed as indicative of the operation of the Companyin future periods.  The estimatedfair value of each option granted to the employees ofthe Group on the date of grant is estimated to be HK$4.90, HK$2.48and HK$1.26 for 2001, 2002 and 2003 respectively usingthe Black-Scholes option pricing method with the assumptions as follows:

 
|                          |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Estimated fair value (in HK$) |   | HK$      | 4.90   |     | HK$    | 2.48     |   | HK$ | 1.26 |   |
| Risk free interest rate       |   | 6        | %      | 3        | %      | 3        | %      |
| Expected life (in years)      |   | 8        |   | 5        |   | 3        |   |
| Expected dividend yield       |   | 0        | %      | 0        | %      | 2        | %      |
| Volatility                    |   | 52       | %      | 41       | %      | 35       | %      |
|                               |        |          |        |          |        |          |        |  |  |  |

 

Had the compensation costs for the plans been determined based on theestimated fair value at the grant dates for awards under the plans consistentwith the method of SFAS 123, the Group’s net income and earnings per shareunder US GAAP on a pro forma basis for the years ended December 31, 2001, 2002 and2003 are disclosed in the aforementioned Note H.

 

F - 92

----