**SECURITIESAND 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**                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| ** ** | **For  the fiscal year ended December 31, 2005**                                                                                                                                                                                                                              |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| ** ** | **OR**                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                            |
| ** ** | **For  the transition period from                      to /****                   ** |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| ** ** | **OR**                                                                                                                                                                                                                                                                             |
| ** ** | ** **                                                                                                                                                                                                                                                                         |
| **o**      | **SHELL COMPANY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                         |

 

**Date of event requiring this shell company report**

**Commission file number 1-15028**

**CHINA UNICOM LIMITED**(Exact Name of Registrant as Specified in ItsCharter)
| **N/A**                                                                                     |   | **Hong  Kong**                                   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (Translation of  Registrant’s Name Into English)                                       |   | (Jurisdiction of  Incorporation or Organization) |
|                                                                                        |   |                                             |
| **75****th 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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*                         Not for trading, but only in connectionwith the listing on the New York Stock Exchange, Inc. of Americandepositary shares, or ADSs, each representing 10 ordinary shares.

Securities registered or to be registered pursuant to Section 12(g) ofthe Act:**None**(Title of class)

Securities for which there is 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.

As of December 31,2005, 12,574,265,270 ordinary shares were issued and outstanding.

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  x  No o

If this report is anannual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.   Yes   o     No  x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes   x     No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large Accelerated Filer    x |   | Accelerated Filer   o |   |   |   | Non-Accelerated Filer   o |   |
|--------------------------------------------------|--------|--------------------------------------|--------|--------|--------|------------------------------------------|--------|

Indicateby check mark which financial statement item the registrant has elected tofollow.

Item 17    o        Item18    x

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).   Yes  o     No  x

 

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** **

**TABLE OF 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 4A.  Unresolved Staff Comments                                                    |       |       |       |
| 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                  |       |       |       |

 

i

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| Item 16E. Purchases of  Equity Securities by the Issuer and Affiliated Purchasers |   |   |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|
|                                                                              |   |   |   |
| PART III                                                                     |   |   |   |
|                                                                              |   |   |   |
| Item 17. Financial  Statements                                                    |   |   |   |
| Item 18. Financial  Statements                                                    |   |   |   |
| Item 19. Exhibits                                                                 |   |   |   |

 

ii

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**NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This annual report for the year endedDecember 31, 2005 contains forward-looking statements that are, by theirnature, subject to significant risks and uncertainties. Such forward-lookingstatements include, without limitation:

**·**                                         our strategy and future plan,

**·**                                         our capital expenditure plan,

**·**                                         our future business condition andfinancial results,

**·**                                         our abilities to upgrade and expand ournetworks and increase network efficiency,

**·**                                         our ability to improve our existingservices and offer and market new services,

**·**                                         our ability to leverage our position asan integrated telecommunications operator and expand into new businesses andnew markets,

**·**                                         future growth of market demand for ourservices,

**·**                                         our ability to upgrade and developtechnology applications, and

**·**                                         future regulatory and other developmentsin the Chinese telecommunications industry.

These forward-lookingstatements reflect our current views with respect to future events. Actualresults may differ materially from information contained in the forward-lookingstatements as a result of a number of factors that may be beyond our control,including, without limitation:

**·**                                         any changes in the regulatory policies ofthe Ministry of Information Industry, or MII, the State-owned AssetsSupervision and Administration Commission, or SASAC, and other relevantgovernment authorities in the People’s Republic of China, or the PRC,

**·**                                         the PRC government’s decision in relationto the technology standards and licenses of third generation mobiletelecommunication, or 3G,

**·**                                         the effects of competition on the demandand price of our telecommunications services,

**·**                                         any changes in telecommunications andrelated technology and applications based on such technology, and

**·**                                         changes in political, economic, legal andsocial conditions in China including: the PRC government’s policies withrespect to economic growth, consolidations of and other structural changes inthe PRC telecommunications industry, foreign exchange, foreign investment andentry by foreign companies into China’s telecommunications market.

In addition, our future capital expenditure anddevelopment plans are dependent on various factors, including, among others:

**·**                                         the availability of adequate financing onacceptable terms,

iii

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**·**                                         the adequate and timely supply ofequipment when required, and

**·**                                         the adequacy of currently availablespectrum or availability of additional spectrum.

Please also see the “D. Risk Factors” section under Item3.

**CERTAIN DEFINITIONS**

As used in this annual report, references to “we”,“us”, “our,” the “Company” and “Unicom” are to China Unicom Limited. Unless thecontext otherwise requires, these references include all of our subsidiaries.In respect of any time prior to our incorporation, references to “we”, “us”,“our” and “Unicom” are to the telecommunications businesses in which ourpredecessors were engaged and which were subsequently assumed by us. Allreferences to “Unicom Group” are to China United TelecommunicationsCorporation, our indirect controlling shareholder. Unless the context otherwiserequires, these references include all of Unicom Group’s subsidiaries,including us and our subsidiaries. Please also see “A. History and Developmentof the Company” under Item 4 for our current shareholding structure.

 

iv

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**PART I**

## **Item 1. Identity of Directors, Senior Management and Advisers**

Not Applicable.

## **Item 2. Offer Statistics and Expected Timetable**

Not Applicable.

## **Item 3. Key Information**

### ***A.            Selected Financial Data***

The following table presents our selected consolidatedincome statement data for the years ended December 31, 2001, 2002, 2003,2004 and 2005 and our selected consolidated balance sheet data as of December 31,2001, 2002, 2003, 2004 and 2005. The selected consolidated balance sheet dataas of December 31, 2004 and 2005 and income statement and cash flow datafor the years ended December 31, 2003, 2004 and 2005 have been derivedfrom our audited consolidated financial statements included in this annualreport. The selected consolidated balance sheet data as of December 31,2001, 2002 and 2003 and income statement and cash flow data for the years endedDecember 31, 2001 and 2002 have been derived from our audited consolidatedfinancial statements that are not included in this annual report.

Our financial statements are prepared in accordancewith Hong Kong Financial Reporting Standards and Hong Kong AccountingStandards, or HKFRS, which became effective on January 1, 2005. Prior to January 1,2005, our financial statements were prepared in accordance with generally acceptedaccounting principles in Hong Kong, or HK GAAP. The adoption of HKFRS resultedin changes in certain accounting policies which have been reflected in thefinancial statements either in accordance with the transitional provisions inthe applicable accounting standards or, to the extent there are no transitionalprovisions, applied retrospectively. Accordingly, the comparative financial data presented in this annualreport for the years ended December 31, 2001, 2002, 2003 and 2004 havebeen restated, as applicable, to conform to the changed accounting policies. Adetailed description is set forth in Note 2.2 to our consolidated financialstatements.

1

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Financial statements prepared in accordance with HKFRSvary in certain material respects from generally accepted accounting principlesin the United States, or US GAAP. In accordance with HKFRS, we adopted thepurchase method to account for our acquisitions from Unicom Group of certaincellular businesses and assets held by Unicom New Century TelecommunicationsCorporation Limited, or Unicom New Century, Unicom New World TelecommunicationsCorporation Limited, or Unicom New World, and China Unicom InternationalLimited, or Unicom International. The acquisitions of Unicom New Century, UnicomNew World and Unicom International became effective on December 31, 2002,December 31, 2003 and in September 2004, respectively, as describedin “A. History and Development of the Company” under Item 4. Accordingly, ourconsolidated income statement and, except as otherwise noted, all other HKFRSfinancial information for the year 2004 presented in this annualreport include the operating results of Unicom New Century and Unicom New Worldfor the year ended December 31, 2004 and the operating results ofUnicom International from the effective date of the acquisition to December 31,2004, but our consolidated income statement and all otherHKFRS financial information for the year 2003 presented in this annual report do not include the operatingresults of Unicom New World for the year ended December 31, 2003. Underthe purchase method, our consolidated balance sheet as of December 31,2003 includes the financial position of Unicom New Century and Unicom New Worldand our consolidated balance sheet as of December 31, 2004 alsoincludesthe financial position of Unicom International. In contrast, under US GAAP,these acquisitions would have been accounted for as transfers of entities undercommon control. The financial statements prepared under US GAAP would have beenretroactively restated for all periods presented on a combined basis as if theacquisitions had been in effect since inception, whereby related assets andliabilities of the acquired businesses would have been accounted for athistorical cost and the results of operations of the acquired businesses wouldhave been included in the consolidated financial statements for the earliestperiod presented.

Under HKFRS, the sale of Guoxin Paging CorporationLtd., or Guoxin Paging, on December 31, 2003 by us to Unicom Group hasbeen accounted for as a sale of discontinued operation. The difference betweenthe sale proceeds and the carrying amount of net assets of Guoxin Paging as of December 31,2003 was recorded as the loss on sale of discontinued operation in ourconsolidated income statement for the year ended December 31, 2003. Theoperating results of Guoxin Paging from January 1, 2003 to the effectivedate of the sale of Guoxin Paging were included in our consolidated incomestatement for the year ended December 31, 2003. Under US GAAP, the sale ofGuoxin Paging to Unicom Group is considered a transfer of business betweenentities under common control and accounted for at historical cost of the netassets transferred, after reduction, if appropriate, for an indicated impairmentof value. In addition, under US GAAP, the results of operations of a componentor segment of an entity that has been disposed of should be reported indiscontinued 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.

2

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See Note 37 to the consolidated financialstatements included in this annual report for a summary of the principaldifferences between HKFRS and US GAAP that have a significant effect on ourfinancial statements.
| ** **                                                                                                                        | ** ** | **As of or for the year ended December 31**                        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2001   (Restated)**(1)                                                                                   | ** ** | **2002   (Restated)**(1) | ** ** | **2003   (Restated)**(1) | ** ** | **2004   (Restated)**(1) | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                                                                        | ** ** | **RMB**                                                                                                    | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$**(2) | ** ** |
| ** **                                                                                                                        | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| **Income  Statement Data:**                                                                                                       |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| HKFRS                                                                                                                             |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue (Turnover):                                                                                                               |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Cellular Business                                                                                                                 |       | 20,640                                                                                                     |       | 31,112 |   | 57,819 |   | 71,887 |   | 79,712 |   | 9,877 |   |
| -GSM Business                                                                                                                     |       | 20,640                                                                                                     |       | 27,890 |   | 41,153 |   | 47,509 |   | 52,136 |   | 6,460 |   |
| -CDMA Business                                                                                                                    |       | —                                                                                                     |       | 3,222 |   | 16,667 |   | 24,378 |   | 27,577 |   | 3,417 |   |
| Paging Business                                                                                                                   |       | 4,342                                                                                                      |       | 2,161 |   | 1,403 |   | — |   | — |   | — |   |
| Long Distance Business                                                                                                            |       | 1,489                                                                                                      |       | 2,766 |   | 2,273 |   | 1,848 |   | 1,525 |   | 189 |   |
| Data and Internet Business                                                                                                        |       | 1,820                                                                                                      |       | 2,793 |   | 3,437 |   | 3,663 |   | 3,050 |   | 378 |   |
| Total service revenue                                                                                                             |       | 28,291                                                                                                     |       | 38,832 |   | 64,933 |   | 77,397 |   | 84,287 |   | 10,444 |   |
| Sales of telecommunications Products                                                                                              |       | 556                                                                                                        |       | 1,411 |   | 2,221 |   | 1,690 |   | 2,762 |   | 342 |   |
| Total revenue                                                                                                                     |       | 28,847                                                                                                     |       | 40,243 |   | 67,154 |   | 79,087 |   | 87,049 |   | 10,786 |   |
| Costs and expenses                                                                                                                |       | (23,554                                                                                                    | )          | (32,912 | ) | (58,538 | ) | (71,127 | ) | (78,979 | ) | (9,786 | ) |
| Income before  income tax                                                                                                         |       | 5,493                                                                                                      |       | 6,311 |   | 6,198 |   | 6,471 |   | 7,102 |   | 880 |   |
| Net income                                                                                                                        |       | 4,660                                                                                                      |       | 4,649 |   | 4,269 |   | 4,493 |   | 4,931 |   | 611 |   |
| -Basic net income per share(3)                                                                                                    |       | 0.37                                                                                                       |       | 0.37 |   | 0.34 |   | 0.36 |   | 0.39 |   | 0.05 |   |
| -Number of shares outstanding for basic  net income per share (in thousands)(3)                                                   |       | 12,552,996                                                                                                 |       | 12,552,996 |   | 12,553,010 |   | 12,561,242 |   | 12,570,398 |   | 12,570,398 |   |
| -Diluted net income per share(3)                                                                                                  |       | 0.37                                                                                                       |       | 0.37 |   | 0.34 |   | 0.36 |   | 0.39 |   | 0.05 |   |
| -Number of shares outstanding for diluted  net income per share (in thousands)(3)                                                 |       | 12,552,996                                                                                                 |       | 12,552,996 |   | 12,556,728 |   | 12,593,054 |   | 12,607,476 |   | 12,607,476 |   |
| -Basic net income per ADS(4)                                                                                                      |       | 3.68                                                                                                       |       | 3.69 |   | 3.41 |   | 3.58 |   | 3.92 |   | 0.49 |   |
| -Number of ADS outstanding for basic net  income per ADS (in thousands)(3)                                                        |       | 1,255,300                                                                                                  |       | 1,255,300 |   | 1,255,301 |   | 1,256,124 |   | 1,257,040 |   | 1,257,040 |   |
| -Diluted net income per ADS(4)                                                                                                    |       | 3.68                                                                                                       |       | 3.69 |   | 3.41 |   | 3.57 |   | 3.91 |   | 0.48 |   |
| -Number of ADS outstanding for diluted net  income per ADS (in thousands)(3)                                                      |       | 1,255,300                                                                                                  |       | 1,255,300 |   | 1,255,673 |   | 1,259,305 |   | 1,260,748 |   | 1,260,748 |   |
|                                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| US  GAAP(5)                                                                                                                       |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                                                                           |       | 32,501                                                                                                     |       | 50,421 |   | 71,980 |   | 79,388 |   | 87,255 |   | 10,812 |   |
| Operating income from continuing  operations                                                                                      |       | 7,921                                                                                                      |       | 9,759 |   | 10,710 |   | 8,185 |   | 8,142 |   | 1,009 |   |
| Net income before discontinued operation,  and cumulative effect of change in accounting policy                                   |       | 5,866                                                                                                      |       | 5,500 |   | 6,078 |   | 4,713 |   | 5,013 |   | 621 |   |
| Loss from discontinued operation, net of  tax                                                                                     |       | 710                                                                                                        |       | 422 |   | 1,342 |   | — |   | — |   | — |   |
| Cumulative effect of change in accounting  policy (transitional adjustment of goodwill impairment upon the adoption of  SFAS 142) |       | —                                                                                                     |       | 42 |   | — |   | — |   | — |   | — |   |
| Net income                                                                                                                        |       | 5,155                                                                                                      |       | 5,036 |   | 4,736 |   | 4,713 |   | 5,013 |   | 621 |   |
| -Basic net income per share before  discontinued operation and cumulative effect of change in accounting policy(3)                |       | 0.47                                                                                                       |       | 0.44 |   | 0.48 |   | 0.38 |   | 0.40 |   | 0.05 |   |

 

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| ** **                                                                                                        | ** ** | **As of or for the year ended December 31**                        | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2001   (Restated)**(1)                                                                                   | ** ** | **2002   (Restated)**(1) | ** ** | **2003   (Restated)**(1) | ** ** | **2004   (Restated)**(1) | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                                                                                        | ** ** | **RMB**                                                                                                    | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$**(2) | ** ** |
| ** **                                                                                                        | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| -Basic net income per ADS before  discontinued operation and cumulative effect of change in accounting policy(4)  |       | 4.67                                                                                                       |       | 4.38 |   | 4.84 |   | 3.75 |   | 3.99 |   | 0.49 |   |
| -Basic net income per share after  discontinued operation and cumulative effect of change in accounting policy(3) |       | 0.41                                                                                                       |       | 0.40 |   | 0.38 |   | 0.38 |   | 0.40 |   | 0.05 |   |
| -Basic net income per ADS after  discontinued operation and cumulative effect of change in accounting policy(4)   |       | 4.11                                                                                                       |       | 4.01 |   | 3.77 |   | 3.75 |   | 3.97 |   | 0.49 |   |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Balance  sheet Data:**                                                                                          |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| HKFRS                                                                                                             |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Bank balances and cash                                                                                            |       | 18,413                                                                                                     |       | 14,433 |   | 9,220 |   | 4,655 |   | 5,472 |   | 678 |   |
| Property, plant and equipment                                                                                     |       | 75,493                                                                                                     |       | 107,216 |   | 117,863 |   | 118,492 |   | 116,056 |   | 14,381 |   |
| Total assets                                                                                                      |       | 130,118                                                                                                    |       | 152,095 |   | 152,870 |   | 149,038 |   | 142,630 |   | 17,674 |   |
| Short-term debt and current portion of  other long-term debt                                                      |       | 7,933                                                                                                      |       | 15,330 |   | 18,173 |   | 20,015 |   | 22,035 |   | 2,730 |   |
| Obligations under finance lease-current  portion                                                                  |       | 8                                                                                                          |       | 17 |   | 25 |   | 938 |   | 421 |   | 52 |   |
| Obligations under finance lease-non-current  portion                                                              |       | 101                                                                                                        |       | 101 |   | 100 |   | 489 |   | 145 |   | 18 |   |
| Other long-term debt                                                                                              |       | 36,337                                                                                                     |       | 37,686 |   | 36,213 |   | 26,137 |   | 11,982 |   | 1,485 |   |
| Shareholders’ equity                                                                                         |       | 61,943                                                                                                     |       | 66,572 |   | 69,052 |   | 72,442 |   | 76,287 |   | 9,453 |   |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| US  GAAP (Restated)(5)                                                                                            |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment                                                                                     |       | —                                                                                                     |       | 118,787 |   | 118,171 |   | 118,701 |   | 116,232 |   | 14,403 |   |
| Total assets                                                                                                      |       | —                                                                                                     |       | 164,636 |   | 150,477 |   | 146,615 |   | 139,958 |   | 17,343 |   |
| Obligations under finance lease-current  portion                                                                  |       | —                                                                                                     |       | 17 |   | 25 |   | 938 |   | 421 |   | 52 |   |
| Obligations under finance lease-non-current  portion                                                              |       | —                                                                                                     |       | 101 |   | 100 |   | 489 |   | 145 |   | 18 |   |
| Other long-term debt                                                                                              |       | —                                                                                                     |       | 45,520 |   | 36,213 |   | 26,137 |   | 11,982 |   | 1,485 |   |
| Shareholders’ equity                                                                                         |       | —                                                                                                     |       | 64,215 |   | 65,946 |   | 69,442 |   | 73,265 |   | 9,078 |   |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                                                                                        |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| HKFRS:                                                                                                            |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                                                         |       | 11,078                                                                                                     |       | 13,054 |   | 22,565 |   | 23,819 |   | 30,804 |   | 3,817 |   |
| Net cash used in investing activities                                                                             |       | (46,125                                                                                                    | )          | (5,166 | ) | (19,051 | ) | (18,958 | ) | (16,748 | ) | (2,075 | ) |
| Net cash provided by (used in) financing  activities                                                              |       | 8,743                                                                                                      |       | (11,868 | ) | (8,778 | ) | (9,401 | ) | (13,213 | ) | (1,637 | ) |
|                                                                                                              |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| US GAAP (Restated)(5):                                                                                            |       |                                                                                                       |       |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                                                         |       | 15,320                                                                                                     |       | 18,235 |   | 25,993 |   | 24,510 |   | 31,486 |   | 3,902 |   |
| Net cash used in investing activities                                                                             |       | (62,971                                                                                                    | )          | (10,261 | ) | (20,295 | ) | (19,668 | ) | (17,431 | ) | (2,160 | ) |

 

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| ** **                                           | ** ** | **As of or for the year ended December 31**                        | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2001   (Restated)**(1)                                                                                   | ** ** | **2002   (Restated)**(1) | ** ** | **2003   (Restated)**(1) | ** ** | **2004   (Restated)**(1) | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **RMB**                                                                                                    | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$**(2) | ** ** |
| ** **                                           | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| Net cash provided by (used in) financing  activities |       | 21,015                                                                                                     |       | (12,773 | ) | (11,397 | ) | (9,440 | ) | (13,213 | ) | (1,637 | ) |

 

(1)             Theadoption of HKFRS on January 1, 2005 resulted in changes in certainaccounting policies which have been reflected in the financial statements eitherin accordance with the transitional provisions in the applicable accountingstandards or, to the extent there are no transitional provisions, appliedretrospectively. Accordingly, thecomparative financial data prior to January 1, 2005 presented herein havebeen restated, as applicable, to conform to the changed accounting policies. SeeNote 2.2 to our consolidated financial statements included in this Form 20-Ffor detailed discussion.

(2)             Thetranslation of RMB into US dollars has been made at the rate of RMB8.0702 to US$1.00, the noon buying rate in New York City for cabletransfer in RMB as certified for customs purposes by the Federal Reserve Bankof New York on December 30, 2005. The translations are solely for theconvenience of the reader.

(3)             SeeNotes 29 and 37****to the financial statementsincluded in this Form 20-F on how basic and diluted net income pershare are calculated under HKFRS and US GAAP, respectively.

(4)             Netincome per ADS is calculated by multiplying net income per share by 10, whichis the number of shares represented by each ADS.

(5)             TheUS GAAP amounts as of and for each of the relevant years ended on December 31,2005, 2004, 2003 and 2002 are presented as if the acquisitions of Unicom NewCentury, Unicom New World and Unicom International had been in existence sincethe beginning of the earliest period presented.

**Historical Exchange Rates Information**

We publish our financial statements in Renminbi, orRMB, the legal tender currency in the PRC. In this annual report, references to“US dollars” or “US$” are to United States dollars and references to “Hong Kongdollars”, “HK dollars” or “HK$” are to Hong Kong dollars. Solely for theconvenience of the reader, this annual report contains translations of certainRMB and Hong Kong dollar amounts into US dollar amounts and vice versa atspecified rates. These translations should not be construed as representationsthat the RMB or Hong Kong dollar amounts actually represent such US dollaramounts or could be converted into US dollar amounts at the rates indicated orat all. Unless otherwise stated, the translations of RMB and Hong Kong dollarsinto US dollars and vice versa have been made at the rate of RMB8.0702 toUS$1.00 and HK$7.7533 to US$1.00, the noon buyingrates in New York City for cable transfers payable in RMB or Hong Kong dollarsas certified for customs purposes by the Federal Reserve Bank of New York on December 30,2005.

The noon buying rates on June 28, 2006 were RMB7.9970to US$1.00 and HK$7.7678 toUS$1.00, respectively. The average noon buying rates for 2001, 2002, 2003, 2004and 2005 were RMB8.2772, RMB8.2771,RMB8.2772, RMB8.2768 and RMB8.1826,respectively, to US$1.00, and HK$7.7996, HK$7.7996, HK$7.7864, HK$7.7899 and HK$7.7755, respectively, to US$1.00, calculated as the averageof the noon buying rates on the last day of each month during each applicableyear. The following table sets forth the high and low noon buying rates betweenRMB and the US dollar (in RMB per US dollar) and Hong Kong dollar and the USdollar (in Hong Kong dollar per US dollar) for each month during the previoussix months:

| Period             | ** ** | **High**                        | ** ** | **Low**                         | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------|------------|---------------------------------|------------|---------------------------------|------------|----------|------------|---------|------------|
| ** **         | ** ** | **(RMB per US$1.00)** | ** ** | **(HK$ per US$1.00)** | ** ** |
| December 2005 |       | 8.0808                          |       | 8.0702                          |       | 7.7548   |       | 7.7516  |       |
| January 2006  |       | 8.0702                          |       | 8.0596                          |       | 7.7571   |       | 7.7506  |       |
| February 2006 |       | 8.0616                          |       | 8.0415                          |       | 7.7618   |       | 7.7564  |       |
| March 2006    |       | 8.0415                          |       | 8.0167                          |       | 7.7618   |       | 7.7564  |       |
| April 2006    |       | 8.0248                          |       | 8.0040                          |       | 7.7598   |       | 7.7529  |       |
| May 2006      |       | 8.0300                          |       | 8.0005                          |       | 7.7575   |       | 7.7510  |       |

 

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### ***B.            Capitalization andIndebtedness***

Not applicable.

### ***C.            Reasons for the Offer and Useof Proceeds***

Not applicable.

### ***D.            Risk Factors***

**Risks Relating to Our Business**

***Our cellular businesses face intense competition fromChina Mobile Communications Corporation, or China Mobile, China TelecomCorporation Limited, or China Telecom, and China Network Communications GroupCorporation, or China Netcom. Such competition may intensify and result inslower subscriber growth, lower tariffs and higher customer acquisition costsfor us, which would materially adversely affect our financial condition,results of operations and growth prospects.***

Our cellular businesses face intense competition fromChina Mobile. China Mobile is the largest cellular operator in China and hascompetitive advantages over us in areas such as customer base, financialresources and brand recognition. We are experiencing intense competition fromChina Mobile in our cellular service areas, and such competition may continueand intensify. In particular, continued price competition between China Mobileand us in many service areas has accelerated the decline of the average revenueper user per month, or ARPU, of our cellular services, and adversely affectedour profitability. Moreover, China Mobile has announced its intention to launch3G cellular services in the future, which could further intensify thecompetition with our cellular businesses, particularly our CDMA services.

Our cellular services also compete with the localwireless telecommunications services of China Telecom and China Netcom in theirrespective service areas, known as “Little Smart” services, which are based ontheir fixed line networks and primarily utilize the personal handy-phonesystem, or PHS, technology. They are offered as extensions of fixed lineservices and, with such features as calling-party-pays arrangements, carrysignificantly lower tariffs than cellular services. The “Little Smart” serviceswere previously offered primarily in small- to medium-sized cities, but havebeen introduced in most major cities nationwide since 2003. Currently theseservices have attracted over 90 million users in China and theirsubscriber base is continuing to grow. In addition, both China Telecom andChina Netcom have announced their intention to develop 3G cellular services inthe future, which would impose direct competition with our cellular business.

Increased competition from China Mobile, China Telecomand China Netcom could lead to slower subscriber growth, lower traffic volumeof our services, continued price pressure and higher costs of customeracquisition, which may materially adversely affect our financial condition,results of operations and growth prospects.

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***Our CDMA services may not succeed in gaining a broadermarket acceptance in China.***

We are the only cellular operator offering CDMA servicesin China. Prior to the introduction of our CDMA services in 2002, digitalcellular services in China were mostly based on the global system for mobilecommunications, or GSM, technology. The majority of cellular subscribers inChina today continue to be GSM subscribers. CDMA cellular services compete withGSM services for cellular subscribers, who may be reluctant to switch to CDMAcellular services because of the need to obtain a new CDMA handset and a newphone number. CDMA services are also perceived to have limitations ininternational roaming due to the lack of CDMA networks in many countries. Inaddition, CDMA handsets are generally more expensive than GSM handsets. As of December 31,2005, the total number of our CDMA subscribers has reached 32.72 millionin our service areas. Nevertheless, in comparison with 393 million cellularsubscribers in China as of December 31, 2005, CDMA services have yet togain a broader market acceptance in China.

Whether our CDMA services can gain broader marketacceptance will continue to be subject to a number of uncertainties, including,among others:

·                                          whether we can effectively retain ourexisting subscribers and attract sufficient new CDMA cellular subscribers;

·                                          whether we can effectively reduce thecost of CDMA handsets and marketing expenses and strengthen the management ofthe purchase and distribution processes of the CDMA handsets; and

·                                          whether we can generate more revenuesfrom value-added services by capitalizing the technological advantages of CDMA1X wireless data services.

Any of these uncertainties may adversely affect thegrowth and profitability of our CDMA cellular services and consequently ourfinancial condition and results of operation.

***Our CDMA and GSM businesses may compete with eachother, which may adversely affect the growth and profitability of thesebusinesses.***

Although we are committed to coordinating thedevelopment of our CDMA and GSM businesses, these two businesses may compete witheach other for our financial, management, human and other resources as well ascellular subscribers. For example, since we have expanded our CDMA servicesinto the mass market, our CDMA business may compete with our GSM business formid- and low-end cellular subscribers. A portion of our CDMA subscribers were former subscribers of our GSM services. If thedevelopment of our CDMA and GSM services is not coordinated effectively or wecannot obtain adequate resources for both our GSM and CDMA cellular services,the growth and profitability of these businesses and our financial condition,results of operations and growth prospects may be adversely affected.

***Failure to continually expand and upgrade our networksand infrastructure or changes in telecommunications technology andtechnological standards could adversely affect our competitive position andhinder our growth.***

The growth of our businesses depends on whether we areable to continue to expand the coverage and capacity of our networks, toupgrade the technology and to improve the quality of our networks in a timelyand effective manner. We also need to continue to improve the quality of ourexisting networks in order to enhance our telecommunications services.

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In addition, thetelecommunications industry in China and elsewhere in the world is subject torapid and significant changes in technology and technological standards,including, among others, the technology migration to 3G and the development ofvoice-over-internet protocol technology, or VOIP. Such changes may render our networks and systems obsolete or inadequate.As a result of suchchanges, we may need to make significant changes and upgrades to our existingnetworks and infrastructure or construct new networks and infrastructure, whichmay require substantial capital expenditures and other resources.

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

·                                          obtain adequate financing;

·                                          obtain relevant government licenses,permits and approvals;

·                                          manage the technology migration in aneffective manner;

·                                          obtain adequate network equipment andsoftware;

·                                          retain experienced management andtechnical personnel;

·                                          obtain sufficient spectrum frequencies,network numbers and other telecommunication resources controlled by the PRCgovernment;

·                                          gain access to the sites for networkconstruction or upgrade; and

·                                          enter into interconnection and otherarrangements with other operators.

If we are not able to timely and effectively overcomethese uncertainties and other difficulties we may encounter in expanding andupgrading our networks and infrastructure, our competitive position, financial condition, results of operations and growth prospects may be adversely affected.

***We may be unable to fund our capital expenditure anddebt service requirements, which may adversely affect our financial conditionand growth prospects.***

We continue to have a significant level of capital expenditure and debtservice requirements. Weplan to spend approximately RMB22.00 billion for capital expenditure in 2006,an increase of RMB4.39 billion or 24.9% from 2005. As of December 31,2005, the sum of our long-term and short-term interest bearing debt exceededthe amount of our cash, cash equivalents and short-term bank deposits byRMB28.3 billion. See “Liquidity and Capital Resources” under Item 5. Inthe future we may be unable to obtain the necessary financing on a timely basisand on acceptable terms, and our failure to do so may adversely affect ourfinancial condition, competitive position and growth prospects. Our ability toobtain acceptable financing at any time may depend on a number of factors,including, among others:

·                                          our financial condition and results of operations,

·                                          our creditworthiness and relationship with lenders,

·                                          the condition of the economy and thetelecommunications industry in China,

·                                          conditions in relevant financial markets in China andelsewhere in the world, and

·                                          our ability to obtain any requiredgovernment approvals for our financings.

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***The CDMA handset promotional packages have increasedour costs and expenses and may adversely affect our profitability.***

In order toaccelerate the development of the CDMA business and subscriber growth duringthe product introduction period, we began to offer certain CDMA handsetpromotional packages in the second half of 2002. Under those arrangements, CDMAhandsets were provided to the subscribers for their use at no additional costto them during the specified contract periods as long as such subscribersagreed to incur a minimum amount of service fees during the contract period. Themaximum contract period is two years. The cost of the handsets provided tosubscribers under these contractual arrangements, treated as deferred customeracquisition costs, were deferred, to the extent recoverable, and amortized overthe contractual period during which we expect to receive the minimum contractrevenue. Therefore, these promotional packages tend to increase our costs andexpenses.

While wesubstantially reduced the use of such CDMA handset promotional packages since2003, the carrying amount of the deferred customer acquisition costs remainsignificant. For the year ended December 31, 2005, amortization of suchdeferred customer acquisition costs amounted to approximatelyRMB5,948 million and the carrying amount of such costs amounted toRMB2,944 million as of December 31, 2005. As a result, while the use of theseCDMA promotional packages has accelerated the growth of our CDMA business, theymay adversely affect the profitability of our CDMA business and our financialcondition and results of operations.

In order tocontrol the costs of our CDMA promotional packages, we have adopted the policyto centralize the purchases of CDMA handsets since 2005. In July 2005, weestablished a subsidiary, Unicom Huasheng Telecommunications Technology CompanyLimited, or Unicom Huasheng, which primarily manages the purchaseand distribution of CDMA handsets for us. Such centralized purchase policy hasresulted in us maintaining a certain level of inventory of CDMA handsets thatis subject to the risk of inventory obsolescence. As of December 31, 2005,we maintained an inventory of CDMA handsets of RMB930 million.

***Our long distance, data and Internet businesses remainrelatively small*** comparing to ChinaTelecom and China Netcom,and competition from China Telecom, China Netcom and other telecommunicationservice providers may adversely affect our profitability and growth in thesebusinesses.

The fixed lineoperators of China Telecom and China Netcom currently hold a dominant marketposition in the public switched long distance telephony, or PSTN, and dataservices markets in China in their respective service areas. They are also thedominant providers of Internet protocol telephony, or IP telephony, andInternet access services in China. China Telecom and China Netcom havecompetitive advantages over us in customer base, financial resources, fixednetwork coverage and “last-mile” access. Our IP telephony servicescompete with other service providers including China Satellite Communication,or China SatCom and China Railway Communications Co. Ltd., or China Railcom. In2005, intense competition has continued to contribute to the decreases inaverage realized tariff rates for long distance services and in our revenuefrom long distance business. The growth of our long distance, data and Internetbusinesses has been further hindered by our lack of licenses to operate localtelephony networks. Competition from China Telecom, China Netcom and otherservice providers may continue to adversely affect the profitability and growthof our long distance, data and Internet businesses and consequently our overallfinancial condition and results of operations.

***Our churn rates and doubtful debt rat***io mayincrease.

The monthly average churn rate of our GSM cellularservices slightly increased from 2.30% in 2004 to 2.41% in 2005. Such increasewas primarily due to the following factors:

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·                                          intense competition fromthe GSM services of China Mobile and the “Little Smart” services of ChinaTelecom and China Netcom;

·                                          the increase in the proportion ofcost-sensitive subscribers among new subscribers as a result of continuingexpansion of our GSM cellular services in the mass market; and

·                                          an increase in the proportion ofsubscribers to our pre-paid GSM services which are characterized by a higherchurn rate than post-paid services.

Although the monthly average churn rate of our CDMA cellularservices stood at 1.49% in 2005, the same level in 2004, there is no assurancethat it will not increase in the future. Increased churn rates of our GSM andCDMA services may adversely affect our market share and increase our costs ofadditional customer acquisitions and bad debt, which would adversely affect ourfinancial condition, results of operations and growth prospects.

China has yet to develop an effective credit control system, and withintense competition in the cellular telecommunication market, our doubtful debt ratio for cellularservices, calculated as the amount of provision for doubtful debt divided byrevenue from our cellular services, may increase in the future. While ourdoubtful debt ratio decreased from 2.8% as of December 31, 2004 to 1.8% asof December 31, 2005 due to our improved management of paymentdelinquency in 2005, there is no assurance that it will not increase in thefuture. If such ratio increases in the future, our financial condition andresults of operations could be adversely affected.

***Obstacles in interconnection with networks of othertelecommunication operators could jeopardize our operations.***

The effective provision of our cellular, long distancetelephony and other services requires the interconnection between our networksand the networks of China Telecom, China Netcom, China Mobile and othertelecommunication operators. Any obstacles in existing interconnectionarrangements or any significant change of their terms, as a result of naturalevents, accidents, or for regulatory, technological, competitive or otherreasons, could lead to temporary service disruptions and increased costs thatcan seriously jeopardize our operations and adversely affect our profitabilityand growth. Difficulties in the execution of new interconnection arrangementson a timely basis and on acceptable terms, including the inability to promptlyestablish additional interconnection links or increase interconnectionbandwidths as required, could also adversely affect our financial condition,results of operation and growth prospects.

***Our controlling shareholder, Unicom Group, can exertinfluence on us and cause us to make decisions that may not always be in thebest interests of our other shareholders.***

Unicom Group indirectly controls an aggregate of52.36% of our issued share capital as of May 31, 2006. As ourcontrolling shareholder, it is able to influence our major business decisionsthrough its control of our board of directors. All of our executive directorsand executive officers also serve as directors or executive officers of UnicomGroup. In addition, our operations depend on a number of services provided byUnicom Group. For example, Unicom Group leases to us, on an exclusive basis,capacity on the CDMA network located in our cellular service areas, provides uswith access to international gateways, supplies us with SIM cards and callingcards and provides equipment procurement services and customer services to us. UnicomGroup and we also provide a number of services to each other, includinginterconnection and roaming services, sales agency and collection servicesand provisionof premises. See “A. History and Development of the Company - OurRelationship with Unicom Group” under Item 4 of this annual report. Theinterests of Unicom Group and our interests in these transactions may differand Unicom Group may cause us to make decisions that conflict with theinterests of our other shareholders.

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***The internal reorganization of Unicom Group for the AShare offering has created a two-step voting mechanism that will require theapproval of the minority shareholders of both our Company and the A ShareCompany for significant connected transactions between us and Unicom Group.***

In October 2002, Unicom Group completed aninternal reorganization of its shareholding in our company and the initialpublic offering in China, of its newly established subsidiary, China UnitedTelecommunications Corporation Limited, or A Share Company. As part of thisrestructuring, a portion of Unicom Group’s indirect shareholding in our companywas transferred to the A Share Company, whose business is limited to indirectlyholding the equity interest of our company without any other direct businessoperations. A voting mechanism was established to allow public shareholders ofthe A Share Company to indirectly participate in our shareholders’ meetings anda two-step voting mechanism was established for the approval of connectedtransactions. See “A. History and Development of the Company -Further Restructuring of Unicom Group and Initial Public Offering of the AShare Company in 2002” under Item 4 below. As a result, significant connectedtransactions between us or our subsidiaries and Unicom Group or itssubsidiaries will require the separate approval of the independent minorityshareholders both of ourcompany and of the A Share Company. Connected transactions approved by ourindependent minority shareholders nevertheless cannot proceed if they are notapproved by the independent minority shareholders of the A Share Company. Thisadds another necessary step of approval process for those transactions.

***Investor confidence andthe market prices of our shares and ADSs may be materially and adverselyimpacted if we are or our independent registered public accounting firm isunable to conclude that our internal control over financial reporting iseffective as of December 31, 2006 as required by Section 404 of theSarbanes-Oxley Act of 2002.***

We are a public company inthe United States that is subject to, among other things, the Sarbanes-OxleyAct of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires thatwe include a report of management on our internal control over financialreporting in our Annual Report on Form 20-F that contains anassessment by management of the effectiveness of our internal control overfinancial reporting. In addition, our independent registered public accountingfirm must audit and report on management’s assessment of the effectiveness ofour internal control over financial reporting. These requirements will firstapply to our Annual Report on Form 20-F for the fiscal year ending December 31,2006. Our management may conclude that our internal control over financialreporting is not effective. Even if our management concludes that our internalcontrol over financial reporting is effective, our independent registeredpublic accounting firm may disagree. If our independent registered publicaccounting firm is not satisfied with our internal control over financialreporting or the level at which our controls are documented, designed,operated, reviewed or evaluated, or if the independent registered publicaccounting firm interprets the relevant requirements, rules or regulationsdifferently from us, then it may decline to attest to our management’sassessment or may issue an adverse opinion. Any of these possible outcomescould result in an adverse reaction in the financial marketplace due to a lossof investor confidence in the reliability of our consolidated financialstatements, which could materially and adversely affect the market prices ofour shares and ADSs.

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***We may incur increased costs as a result of being apublic company.***

As a public company listedon the New York Stock Exchange and The Stock Exchange of Hong Kong Limited, weincur a higher level of accounting, legal and other expenses than many privatecompanies. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequentlyimplemented by the Securities and Exchange Commission, or the SEC, and the NewYork Stock Exchange, have required changes in corporate governance and internalcontrol practices of public companies. We expect these new rules andregulations to increase our legal and financial compliance costs and to makecertain corporate activities more time-consuming and costly. We are currentlyevaluating and monitoring developments with respect to these new rules, and wecannot predict the amount of additional costs we may incur or the timing ofsuch costs.

**Risks Relating to the Telecommunications Industry inChina**

***Regulatory or policy changes relating to the PRCtelecommunications industry or future industry restructuring may materiallyadversely affect our financial condition, results of operations and growthprospects.***

The PRC government continues to regulate many aspectsof the telecommunications industry in China. Potential changes in regulationsand policies and their implementation could lead to changes in the overallindustry environment. These changes may include, among others, new regulatorydecisions or measures relating to issuance of 3G licenses or selection of 3Gtechnology standards, calling-party-pays arrangements or othertariff adjustments, fulfillment oftelecommunications service providers’ universal service obligations and the associated expenses, usage of numbers orfrequency resources and the associatedfees, or standardsand mechanisms of interconnection settlement, and could substantially affectour financial condition, results of operations and growth prospects. Forexample, if the PRC government decides to grant 3G licenses to one or more ofour competitors but not to us, or deregulates or reduces state tariff ratesapplicable to some of our services, our results of operations and financialcondition may be materially and adversely affected.

In addition, the PRC government has in the pastrestructured the telecommunications industry through a number of initiativesthat were rolled out in stages and may initiate further industry restructuringin the future. Potential restructuring of the PRC telecommunications industry,if any, may affect the overall business environment and the operations oftelecommunications operators in China, including us. We cannot predict thetiming for, and any implications and effect of, any future restructuring of thePRC telecommunications industry, or give any assurance that we will not bematerially adversely affected by any such industry restructuring.

***Issuanceof additional telecommunication service licenses, including 3G licenses, mayfurther intensify competition in the PRC telecommunications industry andmaterially adversely affect our financial condition, results of operations andgrowth prospects.***

Since mid 1990s, the PRCgovernment has taken various measures, including licensing more providers oftelecommunications services, to encourage competition in the telecommunicationsindustry. Currently, the Chinese telecommunications market has six basictelecommunications service providers — China Telecom, China Mobile, China Netcom,China Satcom, China Railcom, and our Company — and thousands of value-addedservice providers. In addition, the government may grant additionaltelecommunications service licenses in the future, including additionallicenses to provide 3G cellular services.

 

 

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The PRC government has not publicly announced itsdecisions on the timing of the grant of the 3G licenses, the number of 3Glicenses to be granted, or the selection of preferred 3G technology standards. Theissuance of 3G licenses to cellular service providers may significantly changethe overall competition environment of the wireless telecommunications industryand further intensify the competition among cellular service providers. While we haveparticipated in the 3G trial tests sponsored by the MII and have been preparingfor developing 3G business by upgrading our CDMA and/or GSM network andservices, we cannot assure youthat the PRC government will grant us the requisite approvals and license(s) ina timely or favorable manner, or at all. We cannot predict the 3G technologystandards that may be selected by the PRC government for the 3G license(s) thatmay be granted to us. Even if we are granted one or more 3G licenses, we cannotassure you that wewill successfully manage the technology migration to 3G and 3G operations andeffectively compete with other cellular services providers.

After its accession to the World Trade Organization,or WTO, in December 2001, China promulgated the Administrative Regulationson Telecommunications Companies with Foreign Investment, implementing itscommitments to the WTO. Those commitments include the gradual reduction offoreign ownership restrictions in the telecommunications industry and thestep-by-step opening of the telecommunications market in China to foreignoperators.  By the end of 2006, therewill be no geographic restriction for foreign telecommunication serviceprovider to provide mobile voice and data telecommunication services in China. See“Regulatory and Related Matters — Entry into the Industry” under Item 4. When the PRC government grants licensesto additional telecommunications service providers in the future, licensees mayinclude foreign-invested operators. Such foreign-invested operatorsentering into China’s telecommunications market may have competitive advantagesover us in areas such as financial resources, network management and technicalexpertise.

Increased competition in China’s telecommunicationsservices industry could impede the growth of our businesses, further increasecompetition for skilled and experienced employees, result in or exacerbateprice competition and increase our customer acquisition costs and other costsand expenses, and thereby adversely affect our results of operations, financialcondition and growth prospects.

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

The telecommunications industry in China hasexperienced rapid growth in the last several years, especially in the cellularcommunications sector. The total number of cellular subscribers in Chinaincreased from 43.3 million at the end of 1999 to 393 million by December 31,2005. Cellular penetration increased from 3.5% to 30.3% nationwide during thesame period. The growth in cellular subscribers has been slowing down ascellular penetration continues to increase in our cellular service areas. Inaddition, ARPU for the cellular communications market in China continues todecline. For example, ARPU of our GSM subscribers declined from RMB49.4 in 2004to RMB48.5 in 2005. Any slow-down in the growth in China’s telecommunicationsindustry may adversely affect the growth and profitability of our business.

***The PRC government may require us, along with othertelecommunication service providers in China, to provide universal serviceswith specified obligations, and we may not be compensated adequately forproviding such services.***

Under the Telecommunications Regulations promulgatedby the State Council, telecommunications service providers in China arerequired to fulfill universal service obligations in accordance with relevantregulations to be promulgated by the PRC government authorities, and the MIIhas the authority to delineate the scope of universal service obligations. TheMII, together with government finance and pricing authorities, is alsoresponsible for formulating administrative rules relating to theestablishment of a universal service fund and compensation schemes foruniversal services.

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While specific universal services obligations are notyet clear, we believe that such services may include mandatory provision ofbasic telecommunications services in less economically developed areas in Chinaand mandatory contribution to a universal service fund. In addition, as part ofthe transitional measures prior to the formalization of a universal serviceobligation framework, the MII has required major telecommunication serviceproviders in China, including Unicom Group, to participate in a project toprovide telephone services in thousands of remote villages in China. Inparticipating in such project, Unicom Group, with our assistance, undertook theuniversal service obligation to extend telecommunication service coverage to atotal of more than 4,600 administrative-level villages in 2004 and 2005primarily through its CDMA and satellite transmission networks. In 2006, UnicomGroup is required to extend telecommunication service coverage to more than1,500 additional villages in remote areas. See “B. Business Overview —Regulatory and Related Matters — Universal Services” under Item 4.

We cannot predict whether the PRC government willspecifically require us to undertake universal service obligations in thefuture. To the extent we are required to do so, it is currently uncertainwhether we will be adequately compensated by the government or by the universalservice fund. We cannot assure you that we will be able to realize an adequatereturn on investments for expanding networks to, and providingtelecommunications services in, those less economically developed areas due topotentially higher capital expenditure requirements, lower usage by customersand lack of flexibility in setting our tariffs. We also cannot predict whetherwe will be required to make contribution to the universal service fund. Any ofthese events may adversely affect our financial condition and results ofoperations.

***Actual or perceived health risks associated with theuse of mobile devices could impair our ability to retain and attract customers,reduce cellular service usage or result in litigation.***

Concerns have been expressed in some countries thatthe electromagnetic signals emitted by wireless telephone handsets and basestations may pose health risks at exposure levels below existing guideline levels,and interfere with the operation of electronic equipment. In addition, cellularoperators have been subject to lawsuits alleging various health consequences asa result of cellular handset usage or proximity to base stations or seekingprotective or remedial measures. While we are not aware that such health riskshave been substantiated, there can be no assurance that the actual, orperceived, risks associated with the transmission of electromagnetic signalswill not impair our ability to retain customers and attract new customers,reduce cellular service usage or result in litigation.

**Risks Relating to Doing Business in China**

***Our operations may be adversely affected by changesin China’s economic, political and social conditions.***

Substantially all of ourbusiness operations are conducted in China and substantially all of ourrevenues are derived from our operations in China. Accordingly, our business,financial condition, results of operations and prospects are affected to asignificant degree by economic, political and social conditions in China. ThePRC economy differs from the economies of most developed countries in manyrespects, including with respect to the amount of government involvement, levelof development, growth rate, control of foreign exchange and allocation ofresources. While the PRC economy has experienced significant growth in the pastthree decades, growth has been uneven across different regions and amongvarious economic sectors. The PRC government has implemented various measuresto encourage economic development and guide the allocation of resources. Someof these measures benefit the overall PRC economy, but may also have a negativeeffect on us. For example, our financial condition and results of operationsmay be adversely affected by government control over capital investments orchanges in tax regulations that are applicable to us. Since early 2004, the PRCgovernment has implemented certain measures to control the pace of economicgrowth. These measures may cause a decrease in the level of economic activityin China, including a decline in individual spending activities, which in turncould adversely affect our financial condition and results of operations.

 

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***If the PRCgovernment revises the current regulations that allow a foreign investmententerprise to pay foreign exchange in current account transactions, ouroperating subsidiary’s ability to satisfy their foreign exchange obligationsand to pay dividends to us in foreign currencies may be restricted.***

The ability of our wholly-owned operating subsidiary, ChinaUnicom Corporation Limited, or CUCL, to satisfy their foreign exchangeobligations and to pay dividends to us depends on existing and future foreign exchangeregulations in China. The Renminbi is currently convertible by foreign-investedenterprises in China to settle transactions under the current account, whichinclude trade and service related foreign exchange transactions and payments ofdividends 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, which holds substantially all of our assets and throughwhich we conduct substantially all of our business, is a foreign-investedenterprise in China. This status allows them to purchase foreign exchange atdesignated foreign exchange banks for settlement of current accounttransactions without the approval of the State Administration for ForeignExchange. However, there is no assurance that the  relevant PRC government authorities will notin the future impose any limitation on the ability of foreign-investedenterprises to purchase foreign exchange to satisfy their foreign exchangeobligations or to pay dividends. In that event, CUCL’s ability to satisfy itsforeign exchange obligations and to pay dividends to us in foreign currenciesmay be restricted.

***Fluctuationsin the value of the Renminbi could adversely affect the prices of our sharesand ADSs as well as our profitability.***

Substantially all of our revenues and costs andexpenses are denominated in Renminbi, while a portion of our borrowings, equipmentpurchases and other capital expenditures are denominated in foreign currencies.On July 21, 2005, the PRC government changed its decade-old policy ofpegging the value of Renminbi to that of U.S. dollar. Under the new policy, theRenminbi is permitted to fluctuate within a narrow and managed band against abasket of certain foreign currencies determined by the People’s Bank of China. TheRenminbi may appreciate or depreciate significantly in value against the U.S.dollar or other foreign currencies in the long term, depending on thefluctuation of the basket of currencies against which it is currently valued,or it may be permitted to enter into a full float, which may also result in asignificant appreciation or depreciation of the Renminbi against the U.S.dollar or other foreign currencies. Fluctuations of the Renminbi couldadversely affect the value in foreign currency terms of cash flow generatedfrom our operations or any dividends payable on our shares and ADSs, andtherefore the price of our shares and ADSs. Any future Renminbi devaluationscould also increase our equipment acquisition costs and costs and expenses orlead to significant fluctuations in the exposure of ourforeign-currency-denominated liabilities, thereby adversely affecting ourprofitability.

***Uncertainties in the PRC legal system couldlimit the legal protections available to us and to foreign investors.***

Our wholly-owned operatingsubsidiary, CUCL, is organized under the laws of PRC and is generally subjectto laws and regulations applicable to foreign-invested enterprises in China. TheChinese legal system is a civil law system based on written statutes. Unlikecommon law systems, it is a system in which decided legal cases may be citedfor reference but have limited precedential value. Since 1979, the PRCgovernment has promulgated laws and regulations dealing with economic matterssuch as foreign investment, corporate organization and governance, commerce,taxation and trade. However, because these laws and regulations are relativelynew, and because of the limited volume of published cases and their non-bindingnature, interpretation and/or enforcement of these laws and regulationsinvolves uncertainties. Therefore, the PRC legal system may not afford the samelegal protection available to investors in the United States or elsewhere.

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***Any futureoutbreak of health epidemics or other adverse public health developments mayseverely disrupt our business and operations.***

Adverse public health epidemics or pandemics could disrupt businessesand the national economy of China and other countries and regions where we dobusiness. From December 2002 to June 2003, China and other countriesexperienced an outbreak of a new and highly contagious form of atypicalpneumonia now known as severe acute respiratory syndrome, or SARS. Recently,some Asian countries, including China, have encountered incidents of the H5N1strain of bird flu, or avian flu. We are unable to predict the effect, if any,that avian flu may have on our business. In particular, any future outbreak ofSARS, avian flu or similar adverse public health developments may, among otherthings, significantly disrupt our ability to adequately staff our business, andmay adversely affect our operations. Furthermore, an outbreak may severelyrestrict the level of economic activity in affected areas, which may in turnmaterially and adversely affect our business and prospects. As a result, wecannot assure you that any future outbreak of SARS, avian flu or similaradverse public health developments would not have a material adverse effect onour financial condition and results of operations.

**Item 4.Information on the Company**

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

**Industry Restructuring**

Since 1993, the PRC government has implemented anumber of measures to restructure and introduce competition in thetelecommunications industry. Prior to June 1994, China Telecom was thesole provider of telecommunications services in China. In June 1994,Unicom Group was established in accordance with the State Council’s approval tointroduce competition in the telecommunications industry. Since then, the PRCgovernment 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 also approved China Railcom to provide mosttelecommunications services other than cellular services.

In 1999, the State Council approved a plan torestructure the former China Telecom along four business lines: fixed line,cellular, paging and satellite communications. As a result of therestructuring, China Telecom retained the fixed line, data and Internetbusinesses, while China Mobile assumed the cellular business previouslyoperated by China Telecom. In 2002, the PRC government further separated ChinaTelecom into two companies, with the southern company retaining the name ofChina Telecom and assets and businesses in 21 provinces in southern and westernChina and the northern company retaining assets and businesses in 10 provincesin northern China and merging with CNCL and Jitong to form China Netcom. As aresult of the PRC government’s efforts to introduce competition in thetelecommunications industry, there is currently more than one service providerin most of the sectors within the telecommunications industry. See “B. Business Overview - Competition” below.

**History of Unicom Group**

As part of its efforts to introduce orderly competition to thetelecommunications sector in China, the State Council approved the proposal toestablish Unicom Group in December 1993 and authorized it to build andoperate cellular networks and local and long distance networks. Since itsestablishment in June 1994, Unicom Group first developed a nationwidecellular network using GSM technology and a nationwide long distance telephonynetwork. In May 1997, the State Council granted approval to Unicom Groupto provide data services. The MII licensed Unicom Group to begin to provideInternet services in July 1999 and IP telephony services on a trial basisin 12 cities in April 1999 and on a nationwide basis in March 2000.

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Unicom Group offers local telephony services in themunicipalities of Chengdu, Chongqing and Tianjin. It also offers satellitetransmission services through its subsidiary, China United TelecommunicationsSatellite Communication Co. Ltd., or Unisat.

**The Restructuring of Unicom Group and OurInitial Public Offering in 2000**

We are a company limited by shares incorporated underthe Companies Ordinance of Hong Kong on February 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 reorganization agreement, dated April 21,2000, between Unicom Group and CUCL, Unicom Group transferred to CUCL certainof its assets, rights and liabilities in preparation for our initial publicoffering, or IPO. Under an equity transfer agreement, dated April 21,2000, among us, Unicom Group, China Unicom (Hong Kong) Group Limited and ChinaUnicom (BVI) Limited, or Unicom BVI, Unicom Group transferred to us its 100%equity interest in CUCL, which became our wholly-owned operating subsidiary inChina. In return, we issued 9,725 million shares to Unicom BVI, then anindirectly controlled subsidiary of Unicom Group.

In June 2000, we successfully completed our IPO,raising approximately US$5.65 billion. Upon completion of our IPO, our sharesbecame listed and traded on The Stock Exchange of Hong Kong Limited and ADSsrepresenting our shares became listed and traded on the New York StockExchange.

**Further Restructuring of Unicom Group andInitial Public Offering of the A Share Company in 2002**

After our IPO, Unicom BVI, which was a wholly-ownedsubsidiary of China Unicom (Hong Kong) Group Limited, or Unicom HK, awholly-owned subsidiary of Unicom Group, directly held 77.47% of ouroutstanding shares. In October 2002, Unicom Group completed an internalrestructuring of its shareholding in our company. 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 businessis limited to indirectly holding the equity interest of our company without anyother direct business operations.

Following the restructuring, the A Share Companysuccessfully completed its IPO in the PRC and the listing of its ordinaryshares on the Shanghai Stock Exchange, or A Shares. 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.

In accordance 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 thevoting in respect of its direct equity interest in Unicom BVI. This mechanismfor voting is designed to allow public shareholders of the A Share Company toindirectly participate in our shareholders’ meeting.

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The voting mechanism described above, however, will notapply to the approval process for any connected transactions between us or oursubsidiaries and Unicom Group or its subsidiaries, on which Unicom BVI will notbe permitted to vote under the Rules Governing the Listing of Securitieson The Stock Exchange of Hong Kong Limited, or the HKSE Listing Rules. Instead,our significant connected transactions would require the separate approvals ofthe public shareholders both of our company and of the A Share Company. Accordingto the two-step voting arrangements we and the A Share Company haveestablished, each connected transaction between us or our subsidiaries andUnicom Group or its subsidiaries will consist of an initial agreement and afurther agreement. The initial agreement would be entered into by Unicom Groupor its subsidiaries (excluding the A Share Company and its subsidiaries) on theone hand and the A Share Company or Unicom BVI on the other hand. Thisagreement would contain the following terms:

·                                          the closing of the initial agreement would be subject tothe (i) successful transfer of all rights and obligations of the A ShareCompany or Unicom BVI under the initial agreement to us or our subsidiaries,and (ii) the approval of the further agreement by our independentshareholders, and

·                                          Unicom Group or its subsidiaries (excluding the A ShareCompany and its subsidiaries) would agree and acknowledge that all rights andobligations under the initial agreement can be transferred to us or oursubsidiaries without any further consent requirements.

The initial agreement will constitute a connectedtransaction of the A Share Company and, if certain thresholds are met, willrequire the approval of the public or independent shareholders of the A ShareCompany under the rules of the Shanghai Stock Exchange. The furtheragreement would be entered into by the A Share Company or Unicom BVI on the onehand and us or our subsidiaries on the other hand, and would provide for thetransfer of all rights and obligations of the A Share Company or Unicom BVI onthe one hand under the initial agreement to us or our subsidiaries on the otherhand. 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 HKSE Listing Rules. We expect, to the extentthe nature of a particular connected transaction allows, the two-stepvoting arrangements to apply as described above. However, there may becircumstances where the nature of the connected transaction requires theapplication of the two-step voting arrangements to be adjusted. This may arisewhere we or our subsidiaries are the providers, rather than recipients, ofcertain services. In this event, the two-step voting arrangements will need tobe adjusted so that the process as described above is effectively reversed,such that the initial agreement is entered into by us or oursubsidiaries rather than Unicom Group or its subsidiaries (excludingthe A Share Company and its subsidiaries) with the A Share Company or UnicomBVI. Unicom Group or its subsidiaries (excluding the A Share Company and itssubsidiaries), rather than us or our subsidiaries, will be party tothe further agreement. The arrangements (including the conditions)will apply correspondingly. This two-step structurewill be applied in all future connected transactions between us and UnicomGroup and will effectively require the separate approvals of the public orindependent shareholders both of our company and of the A Share Company forsuch connected transactions.

**Acquisitions of Unicom New Century andUnicom New World and the Sale of Guoxin Paging**

On December 31, 2002, in accordance with the two-stepapproach outlined above, we successfully completed the acquisition from UnicomGroup of Unicom New Century, which holds cellular telecommunications businesses(including GSM assets and businesses and CDMA businesses) in the following nineprovinces, autonomous regions and municipalities in China:  Jilin, Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces, Guangxi Zhuang Autonomous Region,Xinjiang Uygur Autonomous Region and Chongqing municipality. The total purchaseprice was HK$4,523,181,304 (approximately RMB4.8 billion), payable in cash.

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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 Zang autonomous regions. Thetotal purchase price was HK$3,014,886,000 (approximately RMB3.2 billion),payable in cash. On the same date, we also completed the sale of the entireequity interests of Guoxin Paging to Unicom Group for a total sale price of HK$2,590,917,656(approximately RMB2.75 billion), and such proceeds were applied to our generalworking capital.

As a result ofthe acquisitions of Unicom New Century and Unicom New World, CUCL extended itscellular businesses to 30 provinces, autonomous regions and municipalities inChina.

**Mergers of Unicom New Century** and Unicom New World into CUCL

On July 30,2004, Unicom New Century was merged into CUCL and legally dissolved upon thecompletion of such merger. On September 1, 2005, Unicom New World was mergedinto CUCL and legally dissolved upon the completion of such merger.

**Acquisitionof China Unicom International Limited**

In September 2004,we acquired from Unicom Group of Unicom International, a limited liabilitycompany established in Hong Kong engaging in voice wholesale business,telephone cards business, line leasing services, managed bandwidth services andmobile virtual network services. Unicom International’s wholly-owned USsubsidiary, China Unicom USA Corporation, or Unicom USA, carries wholesalebusiness of voice traffic between the United States and mainland China. Thetotal purchase price was HK$37,465,996 (approximately RMB39.74 million),payable in cash.

**Establishmentof Unicom Macau and the Launch of CDMA Services in Macau**

On October 15,2004, we set up China Unicom (Macau) Company Limited, or Unicom Macau, in theMacau Special Administrative Region of the PRC, or Macau. In March 2005,the Macau government granted Unicom Macau a CDMA license, which allows UnicomMacau to provide roaming services and, subject to the Macau government’sfurther approval, provide CDMA cellular services to local CDMA users in Macauafter the first year of its operation. In October 2005, Unicom Macau completed the construction of CDMAnetwork in Macau and launched the CDMA roaming service to CDMA users in Macau.

**Incorporationof Unicom Huasheng**

On July 1,2005, CUCL and Unicom Xingye Science and Technology Trade Co., or UnicomXingye, a subsidiary of Unicom Group, incorporated Unicom Huasheng, a 95%-ownedsubsidiary of CUCL. Unicom Huasheng is principally engaged in salesof handsets and telecommunication equipment and provision of technical servicesfor us.

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**ShareSegregation Reform of the A Share Company**

On May 11,2006, the relevant shareholders of the A Share Companyapproved a proposal by all the holders of the non-tradable shares of the AShare Company, including Unicom Group, to convert their non-tradable sharesinto shares that are listed and tradable on the Shanghai Stock Exchange. Thisproposal was made pursuant to and in compliance with PRC regulations in respectof share segregation reform of companies listed in the PRC. In connection withthe conversion of all non-tradable shares into tradable shares, holders of thenon-tradable shares of the A Share Company will transfer to each holder oftradable shares 2.8 non-tradable shares for every ten tradable shares held bysuch holder as of May 17, 2006. The tradable shares converted fromnon-tradable shares are subject to certain lock-up restrictions as required bythe relevant PRC regulations. As a result of the implementation of thisproposal, Unicom Group’s ownership interest in the A Share Company decreasedfrom 69.32% to 60.74%.

As of May 31,2006, Unicom Group held a 60.74% equity interest in the A Share Company. The AShare Company in turn held 82.10% of the total equity interest in Unicom BVI,with the remaining 17.90% held directly by Unicom Group. Unicom BVI continuesto hold 77.27% of our outstanding shares and Unicom Group remains our ultimatecontrolling shareholder. See also the chart below for the current shareholdingstructure of our company.

Set forth below is our shareholding structure andsubsidiaries as of May 31, 2006.

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** **

**Our Relationship with Unicom Group**

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** **

Unicom Group continues to own and manage theinternational gateways that provide international connections to our longdistance network. Unicom Group also continues to operate the followingtelecommunications networks:

·                                          its cellular networks inGuizhou province,

·                                          its local telephony networksin Chengdu, Chongqing and Tianjin municipalities,

·                                          the satellite transmissionnetworks operated through Unisat, and

·                                          the paging networks operatedthrough Unicom Paging and Guoxin Paging.

Unicom Group holds the licenses required for ourtelecommunications businesses and we derive our rights to operate ourbusinesses from our status as a subsidiary of Unicom Group. Under therespective reorganization agreements entered into by CUCL, Unicom New Centuryand Unicom New World with Unicom Group referred to above, Unicom Groupundertook to hold and maintain all licenses received from the MII in connectionwith our businesses solely for our benefit during the term of the licenses andat no cost to us. In addition, Unicom Group undertook to take all actions necessaryto obtain and maintain for our benefit such governmental licenses or approvalsas we shall require to continue to operate our businesses. Unicom Group alsoagreed not to engage in any business which competes with our businesses exceptfor the then-existing competing businesses of Unicom Group and to grant us aright of first refusal in relation to any government authorization, license orpermit, or other business opportunity to develop any new telecommunicationstechnology, product or service. Finally, Unicom Group also gave us anundertaking not to seek an overseas listing for any of its businesses or thebusinesses of its subsidiaries in which we are engaged or may engage in thefuture, except through us.

In connection with the restructuring of Unicom Groupand the acquisitions of Unicom New Century, Unicom New World and UnicomInternational, 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 includearrangements for interconnection and roaming services between thetelecommunications networks owned by us and Unicom Group and for the provisionor sharing of telecommunications and ancillary services and facilities betweenus and Unicom Group. Unicom Group also retains its interests in its othersubsidiaries that provide ancillary services to us, including the procurementof telecommunications equipment and the supply of SIM cards and calling cards. InMarch 2005, we entered into several new agreements with Unicom Group toreplace the existing arrangements. See “B. Related Party Transactions” underItem 7 for a detailed description of our agreements with Unicom Group.

Unicom Group has constructed nationwide cellularnetworks based on CDMA IX technology. We entered into lease agreements withUnicom Group 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 2005, we entered into a new CDMA lease agreement withUnicom Group to replace the then existing CDMA lease agreements. Unicom Grouponly operates its CDMA networks in Guizhou province, which is outside of ourcellular service areas. We also have an option to acquire the CDMA networksfrom Unicom Group. See “B. Related Party Transactions - Leasing of CDMA Network Capacity” under Item 7.

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**Capital Expenditures and Divestitures**

See “Liquidityand Capital Resources - Capital Expenditures” underItem 5 for information concerning our principal capital expenditures for theprevious three years and those planned for 2006. We have not undertaken anysignificant divestitures.

### ***B.            Business Overview***

**General**

We are an integratedtelecommunications operator in China, offering a comprehensive range of telecommunicationsservices, including cellular, international and domestic long distance, data and Internet services based on ouradvanced, uniform nationwide network system. We offered cellular communications services based on both GSMand CDMA technologies in 30provinces,autonomous regions andmunicipalities in China (i.e., allprovinces, autonomous regions and municipalities in China except for Guizhouprovince). Weand China Mobile are currently the two cellular service providersin our cellular service areas.

We had a total of 95.07****millionGSM cellular subscribers in our cellular service areas as of December 31, 2005, representing a 12.7% increase from 84.27millionsubscribers as of December 31, 2004.Our GSM cellular business accounted for 59.9% of our total revenue in the yearended December 31, 2005. We had approximately 32.72****million CDMA cellular subscribers in our cellular serviceareas as of December 31, 2005, representing a 17.6% increase from27.81 million subscribers as of December 31, 2004. Our CDMA Cellular business contributed 34.8% of ourtotal revenue in the year ended December 31, 2005. At the end of 2005, our marketshare in our cellular service areas was 34.5%, slightly decreasing from 35.6%at the end of 2004.

We provide international and domestic long distance,data and Internet services nationwide in China. These businesses currentlyrepresent a relatively small portion of our overall business. Our longdistance, data and Internet businesses collectively accounted for 5.3% of ourtotal revenue in 2005, compared to 7.0% in 2004. Outgoing public switched andIP telephony long distance calls totaled 10.48****billionand 14.73****billion minutes, respectively, in2005, compared to 10.10 billion and 13.95 billion minutes, respectively,in 2004. Our incoming internationallong distance calls (including incoming calls from Hong Kong, Macau and Taiwan)totaled 2.59****billion minutes in 2005, downfrom 2.75 billion minutes in 2004. As of December 31, 2005, thebandwidth of our data network, international interconnection bandwidth anddomestic interconnection bandwidth had reached 54,828MGbps, 4,272MGbps and17,755MGbps, respectively. We had 8.53 million Internet subscribers at the endof 2005.

Our fiber optic transmission network continued to expand in 2005. As of December 31, 2005, thetotal cable length of our transmission network reached 796,000****km, including 122,000****km for ourbackbone transmission network, representing an increase of 11.8% and 1.7%,respectively, from the end of 2004.

**Recent Developments**

As of March 31, 2006, the total number ofour GSM subscribers in our cellular service areas has increased to 97.91 million,including 49.71 million post-paid subscribers and 48.20 million pre-paidsubscribers. As of March 31, 2006, we also had a total of 33.64 millionsubscribers to our CDMA services. Average minutes of usage, or MOU, persubscriber per month for GSM services in our combined service areas were 218.9minutes for the three months ended March 31, 2006. Average MOU persubscriber per month for CDMA services in combined service areas were 264.1minutes for the three months ended March 31, 2006. ARPU for GSM servicesin our combined service areas was RMB49.4 for the three months ended March 31,2006. ARPU for CDMA services in our combined service areas was RMB68.5 for thethree months ended March 31, 2006. For the three months ended March 31, 2006,outgoing public switched and IP telephony long distance calls totaled2.40 billion minutes and 3.28 billion minutes,respectively. As of March 31, 2006, we had 8.04 million Internet subscribers.

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On June 20,2006, we entered into a strategic alliance framework agreement with SK TelecomCo., Ltd., or SKT, a mobile telecommunications service provider in Korea.Pursuant to this agreement, we and SKT agreed to cooperate on the furtherdevelopment of CDMA cellular communication services in China.  We have appointed SKT as our sole andexclusive partner in relation to our CDMA cellular communication businessoperations for a maximum period of 18 months in PRC in the areas of CDMAhandsets, value-added services and related business platform, marketing,information technology infrastructure and network technologies.  Detailed terms of our business cooperationwith SKT will be negotiated in the future and set forth in definitive legalagreements to be entered into by us and SKT. We and SKT will establish a joint designated team to implement thebusiness cooperation initiatives.  Inaddition, pursuant to this agreement, if SKT and/or any of its affiliates,individually or collectively, hold more than 5% of our issued share capital,SKT will be entitled to nominate a representative to our board ofdirectors.  SKT has undertaken to causesuch director to resign if it and/or its affiliates, individually orcollectively, hold no more than 5% of our issued share capital for a period ofthree months.

On June 20,2006, we and SKT also entered into a subscription agreement whereby SKT agreedto subscribe for US$1,000,000,000 zero coupon convertible bonds due 2009 to beissued by us on July 5, 2006, or such other date agreed by us and SKT which maynot be later than July 12, 2006.  Subjectto certain adjustments pursuant to the terms of the bonds, such bonds can beconverted into our ordinary shares one year after the issuance at an initialconversion price of HK$8.63 (US$1.11) per share, representing a 28.8% premiumover the closing price of our ordinary shares on the Hong Kong Stock Exchangeon June 20, 2006.  Assuming a full conversionof the bonds at this initial conversion price, the bonds would be convertibleinto 899,745,075 ordinary shares, representing approximately 7.15% of ourissued and outstanding share capital as of June 20, 2006 and approximately6.67% of our enlarged issued and outstanding share capital as of the date ofthe conversion.  Unless previouslyredeemed, converted or purchased and cancelled pursuant to the terms of thebonds, we will redeem all the outstanding bonds at 104.26% of their principalamount on July 5, 2009.  In addition, theholders of such bonds, with prior written notice to us, may require us toredeem, on July 5, 2008, all or a portion of their bonds at 102.82% of theprincipal amount of the bonds to be redeemed. The proceeds from this issuance of convertible bonds are currentlyintended to be used for general operational purposes.

**CellularServices**

Our cellularbusiness is our largest business, with our GSM and CDMA businesses togetherhaving contributed 94.7% of our total revenue in 2005.

We offer bothGSM and CDMA cellular services in our service areas. We began to offer GSMcellular services in 1995 and currently a majority of our existing cellularusers subscribe to our GSM cellular services. We began to offer CDMA cellularservices in 2002. In 2003, we introduced wireless data services that utilizeCDMA 1X technology. We also offer GSM international roaming services inconjunction with 248 operators in 118 countries and regions and CDMAinternational roaming services in conjunction with 18 operators in 15 countriesand regions.

In 2004, webegan to offer GSM and CDMA dual mode cellular handset service under the brandname “Worldwind”. In April 2005, we launched “Worldwind” dual-mode cardservice based on the handset business. As of December 31, 2005, we had 254,000 “Worldwind” dual-mode service subscribers.

In October 2005,we successfully launched the CDMA network in Macau to provide roaming servicesfor all CDMA users in Macau. This was the first time a PRC telecommunicationsoperator launched a cellular network outside mainland China.

We also offera broad range of value-added services to our cellular subscribers, includingshort message services, or SMS, personalized call-back ring tone services, CDMA 1X wireless data services and GSM wirelessdata services, under the integrated business brand of “uni”,which represents various wireless value-added services we offer for our cellular subscribers. In 2005, the proportion of our total cellular service revenue generated from value-added services increased to15.0% from 10.1% in 2004.

***GSM Cellular Services***

We centrallyplan and oversee our GSM cellularbusiness, which are operated by provincial branches of our operatingsubsidiary, CUCL. We centrally manage the key aspects of network constructionsuch as network planning and design and selection of major equipment. We alsocentrally devise the overall business strategies to be carried out by theprovincial operating branches.

Our GSMcellular networks reach all cities, county centers, major towns, major highwaysand railways in our cellular service areas. We continue to selectively deployGSM systems that operate in the 1800 MHz frequency band in high-densitypopulation and high call volume centers to supplement our GSM networksoperating in the 900 MHz frequency band. In 2005, we focused on optimizing theoperational efficiency and stability of our GSM networks, and will continue tomanage our GSM networks to support the development of our various cellularservices. In addition, we upgraded our GSM networks in 2005 to launch generalpacker radio service, or GPRS, services in Beijing, Shanghai, Guangzhou, Shenzhen, Zhuhai, Dongguan and Suzhou. In 2006, we plan to upgrade our GSM networks in additional 50 to 100 major cities to offer GPRS services in those cities.

*Post-paid Services and Pre-paidServices*

We offer twomain categories of GSM cellular services: post-paid and pre-paid services that target different consumer segments.Generally, we promote our pre-paid services to migrant population and temporaryresidents as well as mass market subscribers and target our post-paid servicesat consumers who have relatively high usage of telecommunication services.

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We grant tailored credit lines to post-paid servicesubscribers based on their usage and creditworthiness. 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 service contract. Apost-paid subscriber pays per-minute usage and roaming charges. We maintain andupdate detailed customer data for post-paid subscribers and implement othercredit control measures to ensure they generally have good creditworthiness.

To subscribe for our pre-paid services, a customersimply purchases a SIM card with a pre-paid amount of service charges. Thecustomer can add to the pre-paid balance by purchasing rechargeable cards. Wedo not grant credit lines to our pre-paid service subscribers.

Our pre-paid services target mass market cellular subscribers. These services are generally supported byintelligent networks built by us. The intelligent network platform enables usto offer nationwide roaming services and monitor in real time the accountbalance of pre-paid subscribers.

*Subscribers and Usage*

The following table sets forth selected historicalinformation about our GSM cellular operations and our subscriber base for theperiods indicated.
| ** **                                            | ** ** | **CUCL and Unicom   New Century,  as of or for the year  ended December 31,** | ** ** | **CUCL**(5) and  Unicom New  World, as of or for  the year ended  December 31 | ** ** | **CUCL**(6) as of or for  the year ended  December 31 | ** ** | **CUCL**(6), as of or  for the three  months ended  March 31, | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2003**                                                                                                                             | ** ** | **2004**                                                                                                                   | ** ** | **2005**                                                                                 | ** ** | **2006**                                                                                         | ** ** |
| Number of  subscribers (in thousands)                 |       | 63,923                                                                                                                               |       | 84,267                                                                                                                     |       | 95,071                                                                                   |       | 97,908                                                                                           |       |
| Post-paid                                             |       | 32,458                                                                                                                               |       | 42,844                                                                                                                     |       | 48,166                                                                                   |       | 49,711                                                                                           |       |
| Pre-paid                                              |       | 31,465                                                                                                                               |       | 41,423                                                                                                                     |       | 46,905                                                                                   |       | 48,197                                                                                           |       |
| Estimated  market share in our service areas(1)       |       | 27.4                                                                                                                                 | %          | 26.8                                                                                                                       | %          | 25.6                                                                                     | %          | 25.2                                                                                             | %          |
| Average  churn rate(2)                                |       | 29.1                                                                                                                                 | %          | 27.6                                                                                                                       | %          | 28.9                                                                                     | %          | 7.2                                                                                              | %          |
| Average  minutes of usage per subscriber per month(3) |       | 173.70                                                                                                                               |       | 188.9                                                                                                                      |       | 202.2                                                                                    |       | 218.9                                                                                            |       |
| Average  revenue per subscriber per month (in RMB)(4) |       | 56.74                                                                                                                                |       | 49.4                                                                                                                       |       | 48.5                                                                                     |       | 49.4                                                                                             |       |
| SMS Volume (in billions)                              |       | 25.034                                                                                                                               |       | 32.39                                                                                                                      |       | 39.51                                                                                    |       | 12.91                                                                                            |       |

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(1)             Marketshare in a given area is determined by dividing the number of our GSMsubscribers in the area by the total number of cellular subscribers in the area.*Source*:  Ministry of Information Industry.

(2)             Averagechurn rate is the rate of subscriber disconnections from our GSM cellularnetwork, which we have determined by dividing the sum of voluntary andinvoluntary deactivations during the period by the average of the number of ourGSM subscribers during the period.

(3)             Averageminutes of usage per subscriber per month is calculated by dividing the totalminutes of usage during the period by the average of the number of our GSMsubscribers during the period, and dividing the result by the number of monthsin the relevant period.

(4)             Averagerevenue per subscriber per month, or ARPU, is calculated by dividing the sum ofGSM cellular services revenue during the relevant period by the average of thenumber of our GSM subscribers during the period, and dividing the result by thenumber of months in the period.

(5)             IncludesUnicom New Century, which merged into CUCL on July 30, 2004.

(6)             IncludesUnicom New Century and Unicom New World, which merged into CUCL on July 30,2004 and September 1, 2005, respectively.

*Subscriber Increase:*  Our subscriber base continued to grow rapidly.As of December 31, 2005, the total number of GSM subscribers in ourcellular service areas increased to 95.07 million, including 48.17 millionpost-paid subscribers and 46.91 million pre-paid subscribers. Our share of thecellular market in terms of total cellular subscribers in our GSM cellularservice areas was 34.5% as of December 31, 2005. We attracted 27.4% of thenet cellular subscriber additions in those service areas during 2005. Webelieve that this growth was attributable to a number of factors, including,among others, (i) continued growth of the Chinese cellulartelecommunications market, driven by economic growth and reduction in the costof cellular handsets and services, (ii) our sales and marketing efforts, (iii) relatively competitive pricing of ourservices and (iv) our customer service.

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*Pre-paid Subscribers:*  The rate of increase in our pre-paidsubscribers has generally been at the same level as the rate of increase in ourpost-paid subscribers in recent years. As of December 31, 2005, we had46.91 million pre-paid subscribers in our cellular service areas,representing 49.3% of our total subscriber base, an increase of 0.1% from 49.2%****as at the end of 2004.

*MOU and ARPU:*  MOU and ARPU of our GSM services were217.44 billion minutes and RMB48.5, respectively, in 2005. The average MOUper subscriber per month was 202.2 minutes in 2005, an increase of 13.3 minutesfrom 188.9 minutes in 2004. The increase in MOU was attributable to increasedcompetition with our competitor, which resulted in the provision of more call minutes in the package service plans offered to subscribers. The decreasing effective tariffs as a result of such competitionalso encouraged higher usage among subscribers. ARPU of our GSM servicescontinued to decline from RMB49.4 in 2004 to RMB48.5 in 2005, which decline wasattributable to intensified market competition and regional promotionalactivities that led to a decline in effective tariffs, as well as the fact thatan increasing proportion of our new subscribers are mid- to low-end users. Ourpre-paid subscribers in general have lower MOUs and ARPUs compared to ourpost-paid subscribers.

*Churn Rate:*  For the year ended December 31, 2005,the churn rate for GSM services in our cellular service areas increased from27.6% in 2004 to 28.9% primarily as a result of intensified competition and thefact that a larger portion of our GSM subscribers are low-to mid-end subscribers. Our calculation of churn rate reflects thosesubscribers who switch to services of other operators and those whose serviceswe terminate as a result of account inactivity or payment delinquency.

As competition continues to intensify, our churn ratefrom subscribers voluntarily discontinuing our services may further increase inthe future. The churn rate for our pre-paid services is generally higher thanthat for our post-paid services because of the price sensitivity and themigrant and temporary nature of many pre-paidsubscribers.

*Payment Delinquency:*  Payment delinquency stabilized in 2005. As ofDecember 31, 2005, the doubtful debt ratio for GSM cellular services inour cellular service areas, calculated as the amount of provision for doubtfuldebt divided by revenue from GSM cellular services, is 1.7%, significantly lower than the 2.8% at the end of 2004. Thedecrease was primarily due to our improved management of payment delinquencies.In some of our cellular service areas we require our post-paid subscribers todeposit service charges and maintain a certain level of account balances withus or with commercial banks that collect service fees for us. We classify thecreditworthiness of our subscribers into various levels and have adopted othercredit control measures. We also closely manage payment delinquencies throughconfirmation of customer address and other registration information, expansionof collection channels, advance notification of inadequate deposits, closemonitoring of call patterns and account balances and prompt termination ofservices.

*Tariffs*

Generally the categories of tariffs we charge ourcellular subscribers include, among others, basic monthly fees, usage chargesfor both local incoming and outgoing calls, domestic and international roamingcharges, long-distance call charges and charges for value-added services.

The cellular tariffs are set forth by the MII andtariff adjustments are subject to regulation by various government authorities,including the MII, the National Development and Reform Commission and priceregulatory authorities. The following table summarizes the present Stateguidance tariff rates for post-paid and pre-paid cellular services: 

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** **
| ** **                            | ** ** | **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 in our cellular service areas hasresulted in tariff discounts and service promotions offered by both us and ourmain competitor from time to time, which may 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 variousfeatures of our package service plans are coordinated on a nationwide basis,the tariff structure of the various plans are determined by us based on thelocal competitive environment. See “D. Risk Factors—RisksRelating to the Overall Telecommunications Industry in China—Regulatory orpolicy changes relating to the PRC telecommunications industry or futureindustry restructuring may materially adversely affect our financial condition,results of operations and growth prospects” under Item 3.

We have introduced a number of package service plansin our cellular service areas. Under these plans, subscribers pay a fixedmonthly fee for a specified number of call minutes. The plans vary in the levelof the fixed monthly fee, the number of specified call minutes and the tariffrates for call minutes in excess of the specified call minutes. The terms ofthese plans also vary depending on the local markets and generally offer someprice discounts to similar plans of our main competitor. We have alsointroduced in selected cities promotional plans for certain qualifiedsubscribers, which allow such subscribers to receive incoming calls withoutincurring per-minute usage charges in exchange for a fixed monthly fee.

In 1997, the PRC government granted us preferentialtreatment by allowing us to reduce our tariffs by up to 10% below the Stateguidance tariff rates. In the past, this preferential treatment has helped uscapture a significant number of cellular subscribers by allowing us to marketour cellular services at discounted rates. As we and our main competitorintroduced various package service plans and other promotional programs, thetariff structure has become more complex. While we continue to maintain tarifflevels that are generally lower than those of our main competitor, the morecomplex tariff structure has, to some extent, made our price advantages lessobvious to subscribers compared to previous tariff schemes that were largelybased on simple per-minute charges. In 2005, as we continued to offer packageservice plans in our service areas, we have significantly reduced the varietyof such plans and stopped offering service plans that were not profitable. Wealso further centralized the package service planning to provincial-level branches and higher.

***CDMA Cellular Services***

Our controlling shareholder, Unicom Group, currentlyhas the exclusive license to offer CDMA cellular services in China. It hasconstructed a CDMA network with comprehensive nationwide coverage through its wholly-owned subsidiary, Unicom New Horizon MobileTelecommunications Company Limited, or Unicom New Horizon. We have leased CDMAnetwork capacity from Unicom Group and offer CDMA cellular services and CDMA 1Xwireless data services.

*UnicomGroup’s Construction of CDMA Networks*

In May 2001, Unicom Group began to build CDMAnetworks nationwide. The networks are expected to be expanded in phases. Thenumber and size of each phase will depend upon actual and forecast CDMAsubscriber growth and anticipated capacity requirements. In the first phase ofthe construction, which was completed by the end of 2001, the networksachieved a nationwide coverage of approximately 330 cities in China, witha total capacity of 15.81 million subscribers.

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In 2003, Unicom Group completed the second phase ofthe CDMA network construction, which included the upgrade of the network toCDMA 1X technology. The second phase of the construction also added capacityfor 20.69 million additional subscribers.

By the end of 2005, Unicom Group has substantially completed the third phase of the CDMA network construction,which increased the total CDMA networkcapacity to 82.2 million subscribers, with 80.8 million of capacitywithin our service areas. Such level of capacity improved our CDMA nationwidenetwork coverage and telecommunications quality, including both outdoor andindoor coverage, as well as the data-processing capacity of our CDMA 1Xservices.

*OurLease of CDMA Networks from Unicom Group*

Our wholly-owned operating subsidiary, CUCL, enteredinto a lease agreement with Unicom Group and its subsidiary Unicom New Horizon,dated November 22, 2001, which sets forth the principal terms of thenetwork capacity leasing arrangement between us and Unicom Group. Unicom NewCentury and Unicom New World have also entered into lease agreements, dated November 20,2002 and November 20, 2003, respectively, with Unicom Group and Unicom NewHorizon on similar terms and conditions. We entered into a new, consolidatedlease agreement, or the New CDMA Lease, with Unicom Group and Unicom NewHorizon on March 24, 2005 to replace the three then existing leaseagreements, or the Old CDMA Leases. See “B. Related Party Transactions—Leasingof CDMA Network Capacity” under Item 7.

The New CDMA Lease has an initial term of two yearscommencing from January 1, 2005, during which (i) the lease fee forthe first year will be 29% of the audited service revenue generated by our CDMAcellular business and (ii) the lease fee for the second year will be 30%of the audited service revenue generated by our CDMA business. The term of theNew CDMA Lease may be renewed at our option, with the length of the renewedterm to be agreed upon. We are currently considering our renewal option upon the expiration ofthe initial two-year term of the New CDMA Lease.

We lease all constructed CDMA network capacity fromUnicom Group and operate these CDMA networks in our cellular service areas onan exclusive basis and receive all revenue generated from the operation. We mayterminate the lease arrangements upon giving at least six months’ prior noticeto Unicom Group.

In addition to leasing network capacity, we also havethe option, exercisable at any time during the lease period and for anadditional year thereafter, to purchase the CDMA network in our cellularservice areas. The acquisition price will be negotiated between Unicom New Horizonand us. It will be based on the appraisal value of the CDMA network determinedby an independent appraiser in accordance with applicable PRC laws andregulations and take into account the then prevailing market conditions andother factors. However, the purchase price will not exceed an amount whichwould, taking into account all lease fee payments made by us to Unicom NewHorizon and lease fee discounts as a result of any delay of delivery, enableUnicom New Horizon to recover its total network construction costs, togetherwith an internal rate of return of 8%. The exercise of the purchase option willbe subject to the relevant laws, regulations and the HKSE Listing Rules,including approvals of our minority shareholders for connected transactions. See“B. Related Party Transactions — Leasing of CDMA Network Capacity” underItem 7 for a more detailed description of the New CDMA Lease.

*Services*

The CDMA services we offer in our cellular serviceareas include basic voice and value-added services such as call forwarding andvoicemail, caller identity display, SMS services and CDMA 1X wireless dataservices. The features of our pre-paid and post-paid CDMA services are similarto pre-paid and post-paid GSM services. See “B. Business Overview — CellularServices — GSM Cellular Services — Post-paid Services and Pre-paidServices” under this Item 4.

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In August 2004 and April 2005, we launchedCDMA and GSM dual-mode cellular handset and card services, respectively,under the brand name “Worldwind”. As of December 31, 2005, we hadapproximately 254,000 subscribers of the “Worldwind” dual-mode cellularservices. “Worldwind” dual-mode services, which are available to our subscribers who use either adual-mode handset or a dual-mode user card, have the following features:

·                                          Users can switch between ourGSM and CDMA networks in China, thereby offering wireless coverage in areas ofthe country covered by any one of these networks;

·                                          When roaming in areas outsideof China, users can use the cellular services of local operators, whether theyare GSM or CDMA, who signed roaming agreements with us; and

·                                          Our GSM users who sign up for “Worldwind”can continue to use the basic GSM services, while enjoying the additionalbenefits of the CDMA 1X services.

*SubscriberBase*

The following table sets forth selected historicalinformation about our CDMA cellular operations and our subscriber base for theperiods indicated.

 
| ** **                                            | ** ** | **CUCL and Unicom  New Century**,  as of or for the  year ended  December 31, | ** ** | **CUCL**(5) and  Unicom New  World,  as of or for the year  ended December 31, | ** ** | **CUCL**(6) as of or for   the year ended   December 31 | ** ** | **CUCL**(6) as of or  for the three  months ended   March 31, | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2003**                                                                                                                   | ** ** | **2004**                                                                                                                    | ** ** | **2005**                                                                                             | ** ** | **2006**                                                                                              | ** ** |
| Number  of subscribers (in thousands)                 |       | 16,910                                                                                                                     |       | 27,814                                                                                                                      |       | 32,722                                                                                               |       | 33,636                                                                                                |       |
| Post-paid                                             |       | 16,046                                                                                                                     |       | 25,824                                                                                                                      |       | 30,010                                                                                               |       | 30,888                                                                                                |       |
| Pre-paid                                              |       | 864                                                                                                                        |       | 1,991                                                                                                                       |       | 2,713                                                                                                |       | 2,748                                                                                                 |       |
| Estimated  market share in our service areas(1)       |       | 7.2                                                                                                                        | %          | 8.8                                                                                                                         | %          | 8.8                                                                                                  | %          | 8.7                                                                                                   | %          |
| Average  churn rate(2)                                |       | 11.5                                                                                                                       | %          | 17.9                                                                                                                        | %          | 17.9                                                                                                 | %          | 4.6                                                                                                   | %          |
| Average  minutes of usage per subscriber per month(3) |       | 337.5                                                                                                                      |       | 292.3                                                                                                                       |       | 276.9                                                                                                |       | 264.1                                                                                                 |       |
| Average  revenue per subscriber per month (in RMB)(4) |       | 128.4                                                                                                                      |       | 85.3                                                                                                                        |       | 75.1                                                                                                 |       | 68.5                                                                                                  |       |
| SMS Volume  (in billions)                             |       | 6.231                                                                                                                      |       | 11.83                                                                                                                       |       | 15.02                                                                                                |       | 4.15                                                                                                  |       |

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(1)             Marketshare in a given area is determined by dividing the number of our CDMAsubscribers in the area by the total number of cellular subscribers in the area.*Source*:  Ministry of Information Industry.

(2)             Averagechurn rate is the rate of subscriber disconnections from our CDMA cellularnetwork, which we have determined by dividing the sum of voluntary andinvoluntary deactivations during the period by the average of the number of ourCDMA subscribers during the period.

(3)             Averageminutes of usage per subscriber per month is calculated by dividing the totalminutes of usage during the period by the average of the number of our CDMAsubscribers during the period, and dividing the result by the number of monthsin the relevant period.

(4)             Averagerevenue per subscriber per month, or ARPU, is calculated by dividing the sum ofCDMA cellular services revenue during the relevant period by the average of thenumber of our CDMA subscribers during the period, and dividing the result bythe number of months in the period.

(5)             IncludesUnicom New Century, which merged into CUCL on July 30, 2004.

(6)             IncludesUnicom New Century and Unicom New World, which merged into CUCL on July 30,2004 and September 1, 2005, respectively.

As of December 31, 2005, our total CDMAsubscriber base in our cellular service areas reached 32.72 million,representing an increase of 17.7% from 27.81 million subscribers at December 31,2004. Among the total CDMA subscribers, post-paid subscribers increased by16.2% from 25.82 million as of December 31, 2004 to 30.01 million as of December 31,2005, while pre-paid subscribers increased by 36.2% from 1.99 million as of December 31,2004 to 2.71 million as of December 31, 2005. Pre-paid subscribersrepresented 8.3% of the total number of CDMA subscribers in 2005. We believethe growth in our CDMA subscriber base was primarily attributable to:

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·                                          increased brand awareness andour promotions and marketing efforts, including our adoption of new handsetsubsidizing policy that ties the handset subsidy to subscribers’ committed service fees,

·                                          the availability of more affordable quality CDMAhandsets as a result of our centralized purchasing policy,

·                                          improved network coverage andquality, and

·                                          the advantages of the CDMAtechnology, including the lower radio transmitting power of CDMA handsets ascompared to GSM handsets, better voice quality and enhanced security.

*MOU, ARPU and Churn Rate*

In 2005, total MOU for our CDMA serviceswas 101.75 billion minutes, an increase of 22.6% from 82.96 billion minutes in2004, and ARPU for our CDMA services was RMB75.1, a decrease from RMB85.3 in2004. Average MOU per subscriber per month for our CDMA services was 276.9minutes, 36.9% higher than the average MOU of 202.2 minutes for GSM services,while our CDMA ARPU was 54.8% higher than the ARPU of RMB48.5 for our GSMsubscribers. The reasons for the increase in MOU and thedecrease in ARPU for our CDMA services in 2005 are similar to the reasons for similartrends in GSM services. See “B. Business Overview—Cellular Services—GSM Cellular Services—MOU and ARPU”under this Item 4.

The churn rate for our CDMA services is calculated inthe same way as the churn rate for our GSM services and was 17.8% in 2005, sameas that****in 2004, but is significantly lowerthan the 28.9% churn rate for our GSM services.

*PaymentDelinquency*

As of December 31, 2005, the doubtful debt ratiofor CDMA cellular services in our cellular service areas, calculated as theamount of provision for doubtful debt divided by revenue from CDMA cellularservices, is 1.7%, significantly lower than 2.6% in 2004. We have taken various measures tocontrol payment delinquency for our CDMA services, which measures are similarto the ones taken to control payment delinquency for our GSM services. See “B.Business Overview — Cellular Services — GSM Cellular Services — PaymentDelinquency” under this Item 4.

*Tariffsand Promotion*

The tariff rates for our CDMA services are generallythe State guidance rates for cellular services without the 10% discount we arepermitted to adopt for GSM services. However, we have adopted other promotionalprograms. Generally we charge our CDMA subscribers the following categories oftariffs:  basic monthly fees, usagecharges for both local incoming and outgoing calls, domestic and internationalroaming charges, long-distance call charges and charges for value-addedservices.

To accelerate the growth in our CDMA subscriber base, wehave been offering certain CDMA handset promotional packages since the secondhalf of 2002, providing discounts towards our customers’ CDMA handset purchaseprices on the basis of their committed minimum amount of monthly service fees.

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Due to the high cost of the handset promotionalpackages and the improved coverage of CDMA network, as well as the increasingCDMA 1X functions, we have reduced the use of such packages recently, and concentrated instead on alternative promotionalprograms to develop our CDMA services. We offer differentiated services withvarious combination of voice and value-added services to effectively targetvarious market sectors. In addition, we focused on expanding the sales and marketing channelsfor our CDMA services by significantly increasing the number of sales agents. Moreover,we have established a subsidiary, Unicom Huasheng, in 2005 to centralize thepurchases and distribution of CDMA handsets to control the costs of our CDMApromotional packages.

***See “D. Risk Factors — Risks Relating to Our Business — OurCDMA services may not succeed in gaining a broader market acceptance in China.***” under Item 3.

***Value-added Services***

By leveraging our integrated telecommunicationoperations and advanced network system, we offer a broad range of value-addedcellular services under a uniform business brand of “uni”, including SMS,wireless internet services, personalized call-back ring tone services and otherwireless information services. Our value-added services have achieved rapidgrowth in recent years.

The volume of our SMS continued to increase rapidly in2005. A total number of 54.53 billion short messages were transmitted by ourGSM and CDMA subscribers in 2005, an increase of 23.3% over 2004. Our SMSservices mainly include the following services: SMS transmission and receiptthrough handsets, service provider-assisted SMS, business SMS platform, voiceSMS and other information services. We continue to promote the use of SMS as aconvenient and cost effective method of business and personal communication. TheSMS platforms of our GSM and CDMA networks are interconnected with each other. OurSMS platforms are also interconnected with the SMS platforms of China Mobile’sGSM network, China Telecom’s “Little Smart” network, and China Netcom’s “LittleSmart” network.

In August 2001, Unicom Group and we launched ournationwide GSM wireless data services under the service brand of “Uni-Info”. TheUni-Info services are based on a nationwide wireless information servicesplatform and offer a variety of services including games, downloads and otherentertainment services, information and notification services, personalinformation management and transactions services. We and Unicom Group cooperatewith a number of national and regional service providers that supply oursubscribers with Uni-Info services.

In March 2003, we launched CDMA 1X wirelessvalue-added services under the uniform business brand of “uni”, with individualservices offered under various sub-brands, including “Uni-Info”, “U-Info”, “U-Net”,“U-Mail”, “U-Magic”, “U-Map” and “Uni-Web”. “U-Info” services allow users toconnect to and browse the Internet on their CDMA handsets. “U-Net” provideshigh-speed wireless Internet access to laptop computers and mobile handhelddevices equipped with a wireless Internet card. “U-Mail” services allow usersto (i) send and receive e-mails, either from other e-mail accounts or fromthe Internet and (ii) download and read attachments to the e-mail sent tothe user’s handset. “U-Magic” services allow users to download certainapplications from the Internet to expand the functions of their handsets. Theseexpanded functions include games, entertainment services, information services,image browsing and download services, music listening and browsing services andother applications. “U-Map” services provide location-based information tousers’ handsets. Retail users can find locations and research information withrespect to a particular location. This service also offers industrialapplications, such as the logistics industry and sea rescue services. “Uni-Web”offers a series of services based on CDMA 1X technology, such as videopay-per-view, video download and video streams. In 2005, we focused our effortsin promoting CDMA 1X wireless value-added services in three areas: (1) increasingthe market penetration, (2) easing the handset supply bottleneck bycentralizing the purchase and distribution of CDMA handsets and (3) offeringnew services and service contents to activate more market demand. By the end of2005, we had 15.05 million subscribers of CDMA 1X wireless value-added service,an increase of 72.7% over 2004.

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In late 2003, we began to provide personalizedcall-back ring tone service under the brand name “Cool Ringtong”, which allowsa cellular subscriber to select personalized ring tones that his or her callerswill hear after dialing his or her cell phone number. This new value-addedservice has grown rapidly since its introduction. As of December 31, 2005,we had a total number of 21.95 million subscribers of our Cool Ringtongservices, representing 17.2% of our total cellular subscriber base.

In 2004 and 2005, in order to develop our value-addedservices, we took the following measures:

·                                          Through the improvement of thevalue-added services, more staff training, advertising and promotions, trialprograms and our various other efforts, we strengthened marketing efforts forour value-added services under the uniform business brand of “uni”;

·                                          We improved the content of ourvalue-added services, through strengthening service support of and cooperationwith content providers and service providers, in order to increase the appealof these services;

·                                          Through cooperation withpartners in specific industries, we launched new applications such as “PoliceHorizon”, “Maritime Horizon”, “Stock-in-Palm” and “Traffic Horizon”; and

·                                          We introduced value-addedservices specifically catering to the youth to support the launch of the “U-Power”customer brand that is designed for the youth market.

We have designed a fee structure under which we earntransmission fees from the use of our GSM and CDMA value-added services andcharge a certain percentage of information service fees for the billing andcollection services we provide to content providers and service providers.

**Long Distance, Data and Internet Services**

We offer international and domestic long distanceservices in China based on both the PSTN standard and the IP telephony standard.We leverage our ability to integrate our long distance services with a broadrange of services to target different customer segments. We have also developeda nationwide video-conferencing network that reaches over hundreds of cities. Wealso offer data and Internet services throughout China. Our long distance, data and Internet servicesare supported by our advanced, unified nationwide network system.

 

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The following table setsforth the total number of outgoing call minutes for our long distance services,leased bandwidth of our data services and number of dedicated accesssubscribers of Internet services for the periods indicated.
| ** **                                           | ** ** | **As of or for the year ended December 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2003**                                                                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Public  switched telephony (in billions of minutes): |       |                                                                                 |       |   |   |   |   |
| Domestic                                             |       | 8.31                                                                                 |       | 9.94 |   | 10.33 |   |
| International                                        |       | 0.13                                                                                 |       | 0.16 |   | 0.15 |   |
| Total                                                |       | 8.44                                                                                 |       | 10.10 |   | 10.48 |   |
| IP telephony  (in billion of minutes):               |       |                                                                                 |       |   |   |   |   |
| Domestic                                             |       | 11.25                                                                                |       | 13.81 |   | 14.60 |   |
| International                                        |       | 0.14                                                                                 |       | 0.14 |   | 0.13 |   |
| Total                                                |       | 11.39                                                                                |       | 13.95 |   | 14.73 |   |
| Data  Services                                       |       |                                                                                 |       |   |   |   |   |
| Bandwidth  leased to customers (2Mbps)               |       | 7,194                                                                                |       | 9,007 |   | 8,706 |   |
| Internet  Services                                   |       |                                                                                 |       |   |   |   |   |
| Dedicated  access subscribers                        |       | 47,750                                                                               |       | 61,569 |   | 38,000 |   |

 

***Public Switched Telephony Services***

We offer PSTN services to business and residentialcustomers who register their telephone numbers with us. They can access ourservices by dialing a prefix of “193”. We also distribute pre-paid longdistance calling cards that purchasers can use to access our services bydialing a prefix of “193300”. For some corporate and government customers, wealso offer our public switched long distance services over dedicated lines,frequently as part of our integrated offerings of long distance and dataservices.

The following table setsforth selected information about our PSTN services for the periods indicated.
| ** **                                              | ** ** | **As of or for the year ended on December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **2003**                                                                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| Number of  cities reached                               |       | 329                                                                                          |       | 332 |   | 333 |   |
| Minutes of  outgoing long distance calls (in billion)   |       | 8.44                                                                                         |       | 10.10 |   | 10.48 |   |
| Market share  of outgoing long distance call minutes(1) |       | 14.33                                                                                        | %          | 13.6 | % | 11.57 | % |
| Minutes of incoming international calls (in billion)    |       | 1.78                                                                                         |       | 2.47 |   | 2.34 |   |

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(1)             *Source*: MII. Incalculating market share, the total minutes of outgoing long distance callsinclude ours and those of the incumbent operators.

Starting from October 2005, the PRC governmentregulates the tariff rates for PSTN services by setting the maximum tariffrates. The following table sets forth our present tariff rates (including ratesapplicable to domestic and international long distance calls made by ourcellular subscribers):
| ** **                                    | ** ** | **Maximum Tariff Rates**     | ** ** | **Preferential Rates**            | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **RMB per six seconds** | ** ** | **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                                   |       |

 

Effective August 21, 2001, we adjusted thediscount rates set forth in the table above as follows:

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·                                          RMB0.04 per six seconds everyday from 8pm to 10pm;

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

·                                          RMB0.04 per six seconds onpublic holidays and weekends from 7am to 8pm.

Settlement of outgoing and incoming internationalcalls with international operators is conducted through negotiated contracts withsuch individual international operators, which contracts must be approved bythe MII.

***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 forthselected information about our IP telephony services for the periods indicated.
| ** **                                            | ** ** | **As of or for the year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2003**                                                                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| Number  of cities reached                             |       | 337                                                                                  |       | 341 |   | 341 |   |
| Minutes  of outgoing IP telephony calls (in billion)  |       | 11.39                                                                                |       | 13.95 |   | 14.73 |   |
| Minutes of  incoming international calls (in billion) |       | 0.13                                                                                 |       | 0.28 |   | 0.25 |   |

 

Our IP telephony services include the followingservices:

·                                          IP telephony services usingthe “17910” access code, which allows users to dial long distance phone numbersas follows: “17910 + IP card number + password + long distance number”. Thereare three types of such services:  (i) userscan register for an IP card, pay the accumulated charges on the card on amonthly basis after receipt of a bill from us, (ii) users can purchase anIP telephony card with a pre-paid value, which can be re-filled after the userhas used up the value on the card, or (iii) users can purchase an IP cardwith a one-time-only pre-paid value.

·                                          IP telephony services usingthe “17911” access code, which allows users to dial long distance phone numbersas follows:  “17911 + long distancenumber”. There are two types of such services: (i) users can register for our services at any of our offices orour designated agents’ offices free of charge, or (ii) users can purchasea pre-paid IP card from us, input the card number and password the first timethe IP card is used, and thereafter dial international or domestic longdistance calls only with the 17911 prefix.

·                                          Dedicated IP telephonyservices — users of these services only need to dial the long distance phonenumber to be connected.

·                                          Direct IP telephony services —Pursuant to authorization from the MII, we are providing fixed long distancedirect-dialing IP telephony services nationwide. To promote our direct IPtelephony services, we have set up many “IP convenient stores” nationwide. “IPconvenient stores” are fixed-line long distance call centers in locations witha high concentration of the population who do not otherwise have access tofixed or wireless telephony services. These call centers provide long distancetelephony services to customers on a pre-paid basis.

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In February 2001, the PRC government ceasedregulatory control of tariffs for IP telephony long distance calls and allowedoperators to set their own rates. The following table sets forth our presenttariff rates for our IP telephony services (including rates applicable to IPlong 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 ourtariff rates for our IP telephony services for certain internationaldestinations. The tariff rate for calls to 14 countries, including India, wasadjusted to RMB4.60 per minute, and the tariff rate for calls to the U.S. andCanada was adjusted to RMB2.40 per minute.

***Data Services***

We presently provide data services in 328 cities inChina. We target high volume users of integrated voice, data and videocommunications and offer them data services as part of our integrated offeringsof long distance, data and Internet services. Our target customer groups aregovernment offices, financial institutions, multinational or multi-regionalcorporations, large- and medium-sized enterprises in China, and Internetservice providers and Internet content providers that provide telecommunicationsservices. As of December 31, 2005, the total leased bandwidth of ourATM and FR data services was 8,706 x 2 Mbps.

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

·                                          Frame relay, or FR, services,which provide high speed and cost effective data communications serviceslinking remote business sites using FR technology;

·                                          Asynchronous transfer mode, orATM, services, which employ ATM technology and are able to handle highbandwidth, integrated voice, video, data and Internet traffic; and

·                                          Broadband video-conferencingand video-telephony services, which are provided under the brand name of “Uni-Video”.These services currently include video-conferencing, video-telephony, videoconference room leasing and video public telephony services. These services arebased on our existing unified data network platform. Two or more users can useour services by connecting to the Internet or our video network throughvideo-conferencing terminals or computer terminals.

The following table sets forth selected informationabout our data services for the periods indicated.
| ** **                     | ** ** | **As of December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|
| ** **                     | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| Number  of cities reached      |       | 316                                   |       | 328 |   | 328 |   |
| Bandwidth  leased to customers |       | 7,194                                 |       | 9,007 |   | 8,706 |   |

 

We provide data services through an advanced, unifiednationwide network system, the backbone of which is our advanced nationwidefiber optic transmission network. This network is the second largest fiberoptic transmission network in China. We have also built metropolitan area networksin many****cities throughout China. Thesenetworks provide local transmission capacity for our different services. See “— Networks— Transmission Network” below.

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We believe that our ability to offer integrated accessto customers’ premises is important to the success of our data services. Wecontinue to build integrated access networks linking major office buildings toour networks in major cities. See “— Networks — Long Distance, Data andInternet Networks” below.

Our charges for ATM and FR services include one-time,up-front charges for installation materials (currently RMB500 per port for ATMservices and RMB300 per port for FR services) and testing (currently RMB500 percircuit or port for ATM services and RMB300 per circuit or port for FR services),a monthly port fee and a monthly circuit fee. Our tariff charges are generallyoffered at a 10% discount from the State guidance tariffs.

The following table sets forth our tariff rates formonthly port fees for FR data services of selected bandwidths.

| FR Services Port Fee (RMB per month) |
|--------------------------------------------------------------------|
| **Bandwidth (bps)**                                           | ** ** | **Port Fee** |
| 64k                                                                |   | 260 |
| 128k                                                               |   | 300 |
| 256k                                                               |   | 400 |
| 384k                                                               |   | 450 |
| 512k                                                               |   | 500 |
| 768k                                                               |   | 650 |
| 1M                                                                 |   | 750 |
| 2M                                                                 |   | 1,000 |

 

The following table sets forth our tariff rates formonthly permanent virtual circuit (PVC) fees for FR data services of selectedbandwidths and selected distance categories.
| **Bandwidth** | ** ** | **FR Services PVC Fee (RMB per month)** | ** ** |
|---------------|------------|-----------------------------------------------------------------------|------------|
| ** **    | ** ** | **Local  (intra-district)**                                           | ** ** | **Local  (inter-district)** | ** ** | **Domestic  long distance** | ** ** | **Hong Kong,  Macau &  Taiwan** | ** ** | **International  long distance  (Asia)** | ** ** | **International  long distance  (outside of  Asia)** | ** ** |
| 8kbps         |       | 290                                                                   |       | 440 |   | 990 |   | 1,550 |   | 8,800 |   | 9,400 |   |
| 16kbps        |       | 390                                                                   |       | 540 |   | 1,190 |   | 1,800 |   | 10,000 |   | 10,500 |   |
| 32kbps        |       | 450                                                                   |       | 650 |   | 1,300 |   | 2,000 |   | 11,500 |   | 11,500 |   |
| 48kbps        |       | 500                                                                   |       | 750 |   | 1,500 |   | 2,300 |   | 13,000 |   | 13,500 |   |
| 64kbps        |       | 550                                                                   |       | 800 |   | 1,700 |   | 2,600 |   | 14,500 |   | 14,600 |   |
| 128kbps       |       | 700                                                                   |       | 1,000 |   | 2,100 |   | 3,400 |   | 18,000 |   | 18,400 |   |
| 256kbps       |       | 800                                                                   |       | 1,150 |   | 2,200 |   | 3,500 |   | 19,000 |   | 19,600 |   |
| 384kbps       |       | 850                                                                   |       | 1,350 |   | 2,300 |   | 3,800 |   | 20,000 |   | 20,500 |   |
| 516kbps       |       | 1,000                                                                 |       | 1,450 |   | 2,500 |   | 4,100 |   | 22,300 |   | 23,100 |   |
| 768kbps       |       | 1,150                                                                 |       | 1,600 |   | 2,700 |   | 4,600 |   | 25,800 |   | 26,550 |   |
| 1Mkbps        |       | 1,250                                                                 |       | 2,000 |   | 3,000 |   | 5,200 |   | 28,900 |   | 30,050 |   |
| 2Mkbps        |       | 1,500                                                                 |       | 2,200 |   | 4,000 |   | 7,000 |   | 39,000 |   | 39,000 |   |

 

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The following table sets forth our tariff rates formonthly port fees for ATM services of selected bandwidth.

| ATM Services Port Fee (RMB per month) |
|---------------------------------------|
| **Bandwidth**                         | ** ** | **Port Fee** |
| 256K                                  |   | 400 |
| 512K                                  |   | 500 |
| 1M                                    |   | 750 |
| 2M                                    |   | 1,000 |
| 4M                                    |   | 2,000 |
| 6M                                    |   | 3,000 |
| 8M                                    |   | 4,000 |
| 10M                                   |   | 5,000 |
| 12M                                   |   | 6,000 |
| 34M                                   |   | 7,000 |
| 45M                                   |   | 8,000 |
| 100M                                  |   | 9,000 |
| 155M                                  |   | 10,000 |

 

The following table sets forth our tariff rates formonthly circuit fees for ATM data services of selected bandwidths and selecteddistance categories. 
| **Bandwidth** | ** ** | **ATM Services Circuit Fee (RMB per month)** | ** ** |
|---------------|------------|----------------------------------------------------------------------------|------------|
| ** **    | ** ** | **Local  (intra-district)**                                                | ** ** | **Local  (inter-district)** | ** ** | **Domestic  long distance** | ** ** | **Hong Kong,  Macau &  Taiwan** | ** ** | **International   long distance  (Asia)** | ** ** | **International  long distance  (outside of  Asia)** | ** ** |
| 256Kbps       |       | 800                                                                        |       | 1,150 |   | 2,200 |   | 3,500 |   | 19,000 |   | 19,600 |   |
| 512Kbps       |       | 1,000                                                                      |       | 1,450 |   | 2,500 |   | 4,100 |   | 22,300 |   | 23,100 |   |
| 1Mbps         |       | 1,250                                                                      |       | 2,000 |   | 3,000 |   | 5,200 |   | 28,900 |   | 30,050 |   |
| 2Mbps         |       | 1,500                                                                      |       | 2,200 |   | 4,000 |   | 8,000 |   | 39,000 |   | 39,000 |   |
| 4Mbps         |       | 2,000                                                                      |       | 3,000 |   | 6,000 |   | 12,900 |   | 72,200 |   | 72,200 |   |
| 6Mbps         |       | 2,500                                                                      |       | 5,500 |   | 9,000 |   | 19,800 |   | 105,400 |   | 105,400 |   |
| 8Mbps         |       | 3,500                                                                      |       | 8,500 |   | 12,000 |   | 26,700 |   | 138,700 |   | 138,700 |   |
| 10Mbps        |       | 5,000                                                                      |       | 11,500 |   | 15,500 |   | 30,600 |   | 157,800 |   | 157,800 |   |
| 15Mbps        |       | 7,000                                                                      |       | 15,000 |   | 22,000 |   | 40,000 |   | 205,000 |   | 205,000 |   |
| 20Mbps        |       | 7,500                                                                      |       | 17,500 |   | 29,000 |   | 49,000 |   | 252,300 |   | 252,300 |   |
| 25Mbps        |       | 8,000                                                                      |       | 21,000 |   | 36,000 |   | 59,000 |   | 300,000 |   | 300,000 |   |
| 30Mbps        |       | 9,000                                                                      |       | 24,000 |   | 42,000 |   | 69,000 |   | 348,500 |   | 348,500 |   |
| 40Mbps        |       | 10,000                                                                     |       | 29,000 |   | 52,000 |   | 88,500 |   | 416,000 |   | 416,000 |   |
| 50Mbps        |       | 10,500                                                                     |       | 32,000 |   | 60,000 |   | 108,200 |   | 486,600 |   | 486,600 |   |
| 60Mbps        |       | 11,000                                                                     |       | 33,000 |   | 68,000 |   | 122,600 |   | 567,900 |   | 567,900 |   |
| 70Mbps        |       | 11,500                                                                     |       | 35,000 |   | 76,000 |   | 137,000 |   | 649,100 |   | 649,100 |   |
| 80Mbps        |       | 12,000                                                                     |       | 36,000 |   | 84,000 |   | 151,300 |   | 730,400 |   | 730,400 |   |
| 90Mbps        |       | 12,500                                                                     |       | 37,000 |   | 92,000 |   | 165,700 |   | 811,600 |   | 811,600 |   |
| 100Mbps       |       | 13,000                                                                     |       | 37,500 |   | 100,000 |   | 180,100 |   | 892,900 |   | 892,900 |   |
| 110Mbps       |       | 13,500                                                                     |       | 38,000 |   | 107,500 |   | 187,300 |   | 933,500 |   | 933,500 |   |
| 130Mbps       |       | 13,800                                                                     |       | 38,500 |   | 122,500 |   | 201,600 |   | 1,014,800 |   | 1,014800 |   |
| 155Mbps       |       | 14,500                                                                     |       | 39,000 |   | 130,000 |   | 216,000 |   | 1,096,000 |   | 1,096,000 |   |

 

Effective April 2003, we began charging ourcorporate customers fees for our “Uni-Video” services based on package serviceplans, including up-front charges for testing, a monthly fee and usage charges.Retail customers of our “Uni-Video” services purchase re-chargeable cardsto pay for such services.

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***Internet Services***

We offer the following Internet services:

·                                          Dedicated Internet Access. We began to offer businesscustomers high speed Internet access through dedicated lines in 2000. As of December 31,2005, we had a total of 38,000 subscribers for dedicated Internet access. Wepackage this service with voice and data services to provide integratedcommunications solutions to our business customers and cooperate with cableoperators and real estate developers to offer broadband access to residentialcustomers.

·                                          IDC Services. We have built Internet datacenters, or IDCs, in selected cities including Shanghai, Beijing, Guangzhou andcertain provincial capitals, and provide server hosting, server rental, virtualservers and other IDC services to commercial customers and virtual IDCoperators.

·                                          Dial-up Internet Access. We began to offer dial-upInternet access services to customers in 2000. As of December 31, 2005,the total number of our dial-up subscribers decreased to 7.15 million from13.56 million in 2004. This decrease is primarily the result of many dial-upsubscribers switching to broadband Internet services that offer better qualityand higher connection speed.

·                                          *“*Ruyi Mailbox” Services. This service allows ourcellular subscribers to use their cellular phone numbers as e-email address. Asof December 31, 2005, the number of “Ruyi Mailbox” subscribers was8.47 million.

·                                          Others Internet Services. Other Internet services weoffer include a chain of Internet cafes (Unicom’s Internet Plaza services),international Internet Protocol-Virtual Private Network (or IP-VPN), VirtualPrivate Data Network (or VPDN), Virtual Internet Service Provider (or VISP),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,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| Number  of cities reached by our dedicated Internet access services |       | 323                                   |       | 327 |   | 334 |   |
| Number  of cities reached by our dial-up Internet access services   |       | 325                                   |       | 328 |   | 329 |   |
| Number of  subscribers of dedicated Internet access services        |       | 47,750                                |       | 61,569 |   | 38,000 |   |

 

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Our tariff charges for dedicated Internet accessinclude a network usage fee, an account set-up fee and a fixedtelecommunications fee. Network usage fee is calculated based on monthlyservice plans. The account set-up fee is RMB100. The fixed telecommunicationscharge is based on the relevant tariff for the particular type and bandwidth ofleased lines****used to access theInternet. The following table summarizes the monthly network usage fees forselected bandwidths denoted as “R”.
| **Bandwidth**              | ** ** | **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 tomake tariff decisions within the range set forth above. For customers who leasea high number of dedicated access lines, we provide discounts of up to 20% ofthe tariffs set forth in the table above.

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

We charge a network usage fee and a fixedtelecommunications fee for our dial-up Internet services. The network code forour nationwide dial-up Internet services is “16500”. We distribute dial-upInternet access services through a variety of methods. A customer canpre-register for our dial-up services or purchase dial-up passwords with apre-paid amount of on-line charges that can be used nationwide to access theInternet. We also have arrangements with a number of commercial banks thatallow the banks’ customers to access our dial-up services using their bankaccount numbers, with on-line charges being automatically debited from theirbank accounts.

***Leased Line Services***

We began to lease transmission lines to large businesscustomers and other telecommunications operators in April 2000. Our leasedline services provide customers with dedicated digital links directlyconnecting customer sites. As of December 31, 2005, we had a total leasedbandwidth of an equivalent of 55,741 x 2 Mbps circuits, representing an 8.0%increase from 51,598 x 2 Mbps circuits at the end of 2004.

Leased line tariffs are primarily based on thebandwidths of the lines leased and the distance of transmission. The followingtable sets forth State tariff rates for monthly fees of selected types andbandwidths of leased lines and selected 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.

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Similar to PSTN services, operators other thanincumbent operators, including us, can adopt tariffs that are different fromthe above State tariff rates upon approval by the MII as long as they do notoffer services at tariff rates below cost. We generally offer leased lineservices at a 10% 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.

**Interconnection and Roaming Arrangements**

***Interconnection***

Interconnection refers to various arrangements thatpermit the connection of our telecommunications networks to other networks. Ourcellular and long distance networks interconnect with Unicom Group’s cellularnetworks. Under current arrangements, settlement between Unicom Group and us isbased on an internal settlement standard that takes into account either theinternal costs of the relevant networks or the government standard applicablebetween third-party operators, whichever is the more favorable to us.

Unicom Group’s cellular networks, our cellularnetworks and our long distance networks interconnect with the fixed telephonenetworks of China Telecom, China Netcom and China Railcom. Unicom Group’scellular networks and our cellular networks also interconnect with China Mobile’scellular networks. Our Internet network interconnects with the Internetnetworks of China Telecom and China Netcom. Although we continue to encountersome difficulties in the execution of our interconnection arrangements withother operators in some service areas, the situation has been improved since2004 due to improved regulatory supervision by the PRC government in this area.

In October 2003, the MII issued regulationsrelating to settlement between telecommunications networks. These newregulations contain provisions regarding revenue sharing methods and settlementmechanisms for interconnection arrangements between us and other operators. Theseinterconnection arrangements under the new regulations are described in “- Regulatory and Related Matters - Interconnection Arrangements” below.

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

·                                          Framework interconnection andsettlement agreement between Unicom Group and the former China Telecom, dated September 30,2001, the rights and obligations of which were divided and continued after theformer China Telecom was split into China Telecom and China Netcom pursuant toan agreement among Unicom Group, China Telecom and China Netcom, dated April 23,2003. These interconnection and settlement arrangements with China Telecom andChina Netcom were superseded by the interconnection and settlement agreementbetween 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 2004 agreements contained more detailedprovisions relating to interconnection quality, pursuant to new MII directivesin this area.

·                                          Agreement between UnicomGroup, China Telecom and China Netcom, relating to the continuation anddivision of rights and obligations of the parties under Unicom Group’s priorinterconnection agreement with the former China Telecom, dated April 23,2003.

 

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·                                          Interconnection and settlement agreementsbetween Unicom Group and China Mobile relating to the interconnection betweenUnicom Group’s GSM and CDMA cellular networks and China Mobile’s GSM cellularnetworks, both dated November 14, 2001, which were amended by the partieson December 31, 2003.

·                                          Interconnection and settlement agreementbetween Unicom Group and China Mobile regarding the interconnection ofpoint-to-point short messaging services, dated April 1, 2002.

·                                          Interconnection and settlement agreementbetween Unicom Group and China Mobile regarding the interconnection betweenChina Mobile’s GSM cellular networks and Unicom’s telecommunications networks,including its local fixed line telephony networks, cellular networks, domesticlong distance telephony networks, international telephony networks and IPtelephony network, and the interconnection between China Mobile’s internationalgateways and IP telephony network and Unicom Group’s cellular networks andlocal fixed line telephony networks, dated December 31, 2003.

·                                          Agreement between Unicom Group and ChinaMobile regarding the mutual provision of open service platforms, dated November 5,2003.

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

·                                          Interconnection and settlement agreementsbetween Unicom Group and China Railcom relating to the interconnection ofUnicom Group’s cellular networks and local fixed line telephony networks andChina Railcom’s local fixed line telephony networks, domestic long distancenetworks and IP telephony networks, dated January 25, 2002 and April 9,2002.

·                                          Supplemental agreements between UnicomGroup and China Railcom, which allows each party to offer its domestic andinternational long distance telephony services and IP telephony services to thecellular or fixed line telephony service subscribers of the other party, dated April 23,2003.

·                                          Interconnection and settlement agreementbetween Unicom Group and China Satellite Communications Corp, or China Satcom,relating to the interconnection between Unicom Group’s networks and ChinaSatcom’s “Global Star” satellite mobile communications network, dated September 27,2003.

·                                          Framework interconnection and settlementagreement between Unicom Group and China Satcom relating to the interconnectionbetween Unicom Group’s cellular networks and China Satcom’s IP telephonynetworks, dated September 24, 2003.

·                                          Interconnection agreement among majorInternet operators, including Unicom Group, and three national Internetswitching centers relating to the interconnection of Internet backbonenetworks, dated December 20, 2001.

·                                          Interconnection and settlement agreementbetween Unicom Group and China Telecom relating to the provision ofpoint-to-point SMS services between Unicom Group’s and China Telecom’snetworks, dated October 10, 2004.

·                                          Interconnection and settlement agreementbetween Unicom Group and China Netcom relating to the provision ofpoint-to-point SMS services between Unicom Group’s and China Netcom’s networks,dated October 11, 2004.

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Forall interconnection services, we are required to pay the interconnection feesregardless of our ability or inability to collect the tariff from oursubscribers. The fixed line operators are required to pay interconnection feesregardless of their ability or inability to collect the tariff from theirsubscribers. Interconnection charges are accrued on a monthly basis based onthe actual call volume and applicable tariff rate. See “B. Related PartyTransactions — Provision of Ongoing Telecommunications and Ancillary Servicesand Premises — Interconnection Arrangements” under Item 7 below for theinterconnection and settlement arrangements between Unicom Group and us.

***Roaming***

As of December 31, 2005, our cellularsubscribers can roam on cellular networks in Europe, North America and otherAsian countries and regions through Unicom Group’s international roamingagreements with 248 GSM operators in 118 countries and regions and 18 CDMAoperators in 15 countries and regions. Unicom Group has also agreed to arrangefor us to participate 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. Under our roaming agreement with UnicomGroup, our subscribers who roam on Unicom Group’s networks are charged for eachcall made or received. We collect this tariff, retain RMB0.20 and pay theremaining amount to Unicom Group. On the other hand, when Unicom Group’ssubscribers roam on our networks, Unicom Group collects the roaming tariff,retains only RMB0.04 and pays us the remaining amount.

The following table is asummary of roaming settlement between 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)                                                                |       | 0.60                    |       | 0.40                                      |       | 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)                                                                    |       | 0.60                    |       | 0.56                     |       | 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 — Provision of Ongoing Telecommunications and Ancillary Servicesand Premises — Roaming Arrangements” under Item 7 below for further informationregarding the roaming arrangements between Unicom Group and us.

**Networks**

We operate an advanced network system to support ourintegrated operations. The backbone of the system is a nationwide fiber optictransmission network, which serves as the common platform for our cellular,long distance, data and Internet networks. In addition, we continue to developmanagement and network support systems to enhance the quality and reliabilityof our networks and improve our customer service and operating efficiency. Wegenerally utilize a centralized network planning and equipment selectionprocess, which ensures uniform nationwide design and network compatibility.

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***Transmission Network***

We own and operate an advanced nationwide fiber optictransmission network (except for the Xizhang Autonomous Region, in which welease capacity from other operators). As of December 31, 2005, our fiberoptic transmission network reached 333 cities with a total cable length ofapproximately 796,000 km, of which fiber optic backbone transmissionnetwork accounted for approximately 122,000 km.

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

·                                          synchronous digital hierarchy, or SDH,architecture with protective two- or four-fiber rings, a self-healing systemthat allows for instantaneous rerouting, automatically protects servicecircuits and minimizes down time in the event of a fiber cut or equipmentmalfunction;

·                                          dense wave division multiplexing, orDWDM, technology, a means of increasing transmission capacity by transmittingsignals over multiple wavelengths through a single fiber; and

·                                          digital cross connection, or DXC, system,a specialized high-speed data channel exchange and connection system thateffectively manages the routing and channeling of our services.

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. We deploy mainly transmission equipmentand technology supplied by Siemens, Nortel, Lucent, Alcatel, Huawei, ZTE andother vendors.

Concurrent with the construction and expansion of ourdomestic backbone transmission network, we also seek to expand ourinternational bandwidth. Through our participation in the Asia Pacific CableNetwork No. 2 Project (APCN 2), a trans-pacific submarine cable projectthat connects major countries and regions in eastern Asia and southeastern Asiaand links them to North America through Japan, and our membership in theUS-Japan Sub-marine Cable Organization, we are linked with 11 operators inJapan, U.S., South Korea, Singapore and Taiwan with 155x30 Mbps capacity. Wealso lease 3669 Mbps of international broadband transmission capacity. We havealso opened transmission lines on land with the main operators in Hong Kong andMacau, with 15Gbps and 622Mbps of transmission capacity. In addition, we haveestablished fiber-optic interconnections among China, Mongolia and Russia,between China and North Korea and between China and Russia, with transmissioncapacity of 622Mbps, 622Mbps and 10Gbps, respectively.

As of March 31, 2006, our metropolitan areanetworks cover 341 cities throughout China, with a total length ofapproximately 681,000 km. These networks provide a unified, high-speedlocal transmission platform for our cellular, data and Internet services.

***Cellular Networks***

A cellular network consists of:

·                                          cell sites, which are physical locations,each equipped with a base station that houses transmitters, receivers and otherequipment used to communicate through radio channels with subscribers’ cellularhandsets within the range of a cell;

·                                          base station controllers, which connectto, and control, the base stations;

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·                                          mobile switching centers, which controlthe base station controllers and the routing of telephone calls; and

·                                          transmission lines, which link the mobileswitching centers, base station controllers, base stations and the publicswitched telephone network.

We own most of the GSM cellular transmission networkat the local and provincial level. We lease a portion of our inter-provincialtransmission capacity for our GSM cellular networks as well as the CDMAcellular transmission network. We also use our own backbone fiber optic transmissionnetwork to provide transmission capacity for our cellular networks. We continueto focus on the management and operation of our cellular networks.

*GSM Cellular Networks.*The following table sets forth selectedinformation regarding our GSM cellular networks in our service areas as of thedates indicated.
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2005** | ** ** |
| Network  subscriber capacity (in thousands of subscribers) |       | 68,050                                |       | 84,552 |   | 89,461 |   |
| Base stations                                              |       | 56,653                                |       | 81,819 |   | 94,444 |   |
| Base station  controllers                                  |       | 1,345                                 |       | 1,653 |   | 1,781 |   |
| Mobile switching  centers                                  |       | 469                                   |       | 477 |   | 502 |   |

 

Currently our GSM cellular network mainly operates at900 MHz. We have deployed GSM technology that operates at 1800 MHz in somemajor metropolitan areas to supplement the capacity of our existing cellularnetwork. We have the right to use 6 x 2 MHz of spectrum in the 900 MHzfrequency band and 10 x 2 MHz in the 1800 MHz frequency band for our GSMnetwork.

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 installedintelligent networks that enable us to provide pre-paid services and a widerange of call features and value-added services.

In 2005, we upgraded our GSM networks in Beijing,Shanghai, Guangzhou, Shenzhen, Zhuhai, Dongguan and Suzhou to GPRS networks. In2006, we plan to expand such upgrade to 50 to 100 major cities in China.

*CDMA Cellular Network.*Unicom Group completed the constructionof the first phase of its nationwide CDMA network at the end of 2001. In 2003,Unicom Group completed the second phase of the CDMA network construction, whichadded an additional capacity of 20.69 million subscribers nationwide andincluded the upgrade of the network to CDMA 1X technology. The CDMA networksconstructed in the second phase did not share as much infrastructure with theGSM network. By the end of 2005, Unicom Group has substantially completed thethird phase of the CDMA network construction, adding an additional capacity ofapproximately 45.69 million subscribers nationwide and significantlyimproving the coverage and quality of the CDMA network. We lease CDMA networkcapacity in our cellular service areas and have the exclusive right to operateits network in those areas. We have the right to use 10x2 MHz of spectrum inthe 800 MHz frequency band for our CDMA services.

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

By the end of 2005, our PSTN network reached 333 cities, while thecoverage of our Internet networks, including our IP telephony networks,included over 300 cities throughout China.

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* *

*Long Distance Network.*Our long distance network is supported bya nationwide billing system and an intelligent network, which allows us toprovide multiple services. Our cellular subscribers can access these servicesdirectly through our cellular networks, but our other customers typicallyaccess our long distance telephony, IP telephony and Internet services throughthe public switched telephone networks of China Telecom and China Netcom. As ofDecember 31, 2005, the total network capacity for our IP telephonyservices reached 22,919E1, or a voice capacity of 20 billion minutes per year. E1is the European format for digital transmission and carries signals at 2Mbps.

*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 switchesperform high-speed switching of voice and data traffic and minimize time delayand congestion. They can also prioritize applications that least tolerate timedelay, such as telephony and video, over less time-sensitive applications suchas e-mails and file transfer. As of December 31, 2005, the internationaland domestic interconnection bandwidths have reached 4.27Gbps and 17Gbps,respectively.

*Internet Network.*Our Internet network, branded as “Uninet”,is also centrally designed and has a nationwide uniform architecture. It issupported by a nationwide, advanced billing system that facilitates roamingaccess and delivery of virtual ISP services and other value added services.

*Broadband Video Network*. Our broadband video network utilizesthe H.323 technological standard and two-tier network structure. H.323 is awidely used multi-media conferencing protocol approved by the InternationalTelecommunications Union. As of December 31, 2005, it can provide videoconference and video telephone services and currently reaches 330****cities nationwide as well as the United States and HongKong.

*IntegratedAccess Networks.*We believe that the key to the success of our dataservices is our ability to offer integrated access to customers’ premises. Weare building integrated access networks in many cities throughout China. Wefocus the construction of our access networks on linking major office buildingsto our metropolitan area transmission networks. We rely mainly on fiber opticcables to link office buildings to our networks and have offered narrow-bandwireless access at the 3.5 GHz frequency band in approximately 3municipalities, 18 provincial capitals and 14 provinces.

***Integrated Management and Network Support Systems***

We have developed various management and networksupport systems to support and manage our various networks. We haveestablished, in each province, municipality or autonomous region, an integratedbilling and settlement system that supports the billing and settlement servicesof our cellular, data and long distance businesses. We have also developed amanagement support system (MSS) that supports our business support system (BSS)and enterprise resource planning systems (ERP). We have integrated the billingand settlement system and business management system at our headquarters tomanage our businesses.

**Marketing, Sales and Distribution**

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. In2005, we focused our marketing strategies on enhancing efficiency andsatisfying customer needs.

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*** ***

***Sales and Marketing***

We focus on developing a strong brand image of “Connectingyou freely” that conveys our strengths in high quality services, comprehensive network coverage,integrated solution offerings, advanced technology and customer focus. Wemarket all of our services under the China Unicom brand name. We continued toemphasize brand management in 2005, by implementing a customer-orientedbranding system focusing on four customer brands — “Worldwind”, “U-Power”, “RuyiTong” and “Unicom Horizon”. We offer customized service packages under thesefour customer brands that are targeted to different market segments. “Worldwind”is our premier customer brand for offering high quality and differentiatedservices to mid- to high-end individual cellular customers; “U-Power” isdesigned for the youth market; “Ruyi Tong” is targeted to offer mainstreamcellular services to individual customers in the mass market; “Unicom Horizon”focuses on providing industry applications or integrated telecommunicationsolutions to institutional customers, including corporate, industry andgovernment entities. In addition to the four customer brands, we recentlylaunched two business brands “uni” and “Unicom Commerce”, which are used tomarket our value-added services to cellular subscribers and long-distance, dataand Internet services to primarily institutional customers, respectively.

Our marketing strategy utilizes our image as an integratedtelecommunications service provider and leverages on our comprehensive servicesand nationwide sales and distribution network. By using direct sales forces andsale agents and active market analysis and through sales channels such asservice centers, sales outlets and large-scale chain stores, our marketingstrategy can be targeted at different customer segments and adjusted timely inaccordance with the demands of different markets. In addition, we also seek toenter into strategic alliances in order to further expand the breath and depthof our marketing and sales efforts. In September 2004, we entered into awireless Internet joint marketing agreement with Intel, HP, IBM, Lenovo andDigital China to develop the industry value chain for our “U-Net” servicesbased on the CDMA 1X network. In June 2005, the Unicom Group and theLenovo Group entered into a business cooperation agreement on Lenovo’s notebookcomputers and “U-Net” business to expand the “Palm Broadband” business. In December 2005,the Unicom Group entered into a full and exclusive strategic partnership withthe Chinese Table Tennis Association to leverage the popularity of table tennisin China to enhance our brand recognition. We expect these arrangements will enhance ourmarketing ability and promote our brand recognition and our marketing in China.

Moreover, we seek to formulate effective marketingstrategies through customer relations management and analysis of customersegmentation, customer demand and consumption trends.

*Customer Segmentation:* We have two main categories of customers: (i) institutionalcustomers, comprised of mainly corporate, industry andgovernment customers, and (ii) individualcustomers. We have set up dedicated sales and service departments forinstitutional customers, both at our headquarters and at our provincial andlocal branches. We focus on promoting our integrated solutions to theseinstitutional customers. For individual customers, we conduct our sales throughour own service centers and the retail outlets of independent sales agents.

*Cellular services*:  We promoteour CDMA services by leveraging our abundant network resources of CDMA networkand the technology advantage of CDMA 1X to provide differentiated servicestargeted at different market segments, including tailoring different servicepackages for different consumer groups. In 2005, we focused on resolving the bottleneck in CDMA handset supply by strengthening centralized handsetspurchasing and implementing marketing strategy of matching handset subsidieswith subscribers’ committed service fees. We have established Unicom Huashengto centralize our purchasing of the CDMA handsets in an attempt to lower theentry barrier of our CDMA services caused by high handset price and make theCDMA services more attractive and affordable to the mass market. In addition,by offering a one-stop solution for customers, based on the integrated servicecapacity of CDMA 1X network technology, we actively pursued integrated servicesmarketing to promote our CDMA 1X services.

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We also continued to expand the subscriber base forour GSM voice and value-added services. Our marketing strategies for GSMservices focused on the continued development of the voice and SMS services andthe rapid expansion of the “Cool Ringtone” service. We also plan to leverageour newly upgraded GSM networks in selected cities to promote GPRS services.

Recognizing the importance and the needs of ourinstitutional customers and utilizing our advantages of being an integratedtelecommunications operator, we formulated marketing strategies for ourcellular services that were tailored to our institutional customers. In 2005,we continued to emphasize the development of advanced and customized industrialapplications for our institutional customers. By offering industrial solutions,our business extended from the provision of basic telecommunications servicesto comprehensive value-added information services. For example, we addedseveral applications based on the CDMA1X network, including “Traffic Horizon”that provide wireless traffic direction services to CDMA subscribers. Welaunched in Sichuan province “Tianfu Agriculture Information Net”, anintegrated agriculture information platform supported by our cellular, data andInternet network resources and information resources, which was named the beste-commerce website at the United Nations Summit on Information Society in November 2005.

*Long distance, data and Internet services*: In 2005, we continued to focus on institutional customers, including financialinstitutions, large corporations, multi-national corporations, governmententities and Internet service providers and Internet content providers, inorder to provide them customized “one-stop” solutions. We launched “Unicom Commerce” tooffer integrated telecommunication services specifically designed to cater toinstitutional customers’ needs. Our marketing efforts with respect to retailcustomers included the marketing of co-branded long 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.

*Service Bundling andCross-Marketing:*  A key element of our sales and distributionstrategy is to promote our strengths as a provider of a comprehensive range ofintegrated services. This strategy is implemented by our service centers,independent sales agents and direct sales forces, which distribute and supportour various product offerings. For example, we cross-sell our long distance,data and Internet  services to ourcellular subscribers. In addition, based on the specific demands of ourindustry and institution clients, we provide customized communicationssolutions by bundling VPN, IP telephony, “Uni-Video” broadband video-telephonyand “U-Net” services under the brand “Unicom Commerce”.

***Distribution***

We have a diversifieddistribution network comprising self-owned sales outlets, agent/distributorsales outlets and direct sales forces. We distribute our services to ourindividual customers through our self-owned sales outlets as well as otherretail outlets. We distribute our services to large customers through ourdirect sales forces and agents. We have developed a nationwide distribution network ofservice centers and sales outlets, of which only a small portion are owned byus and the others are owned by independent agents or distributors. As of December 31,2005, we had a total of approximately 120,000 sales outlets, of which over6,000 were self-owned. These service centers and retail outlets distribute ourcellular, long distance, data and Internet services and provide post-salesservices such as service inquiry, customer complaint and collections.

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We generally aim to maintain a flat distribution structure,but utilize a multi-level distribution system in some service areas, in whichour top-level distributors further distribute to lower level distributors andsales agents. In 2005, we have reduced the levels of such distribution systemto control distribution costs. We are also in the process of setting up directdistribution centers to further flatten the distribution structure in someareas. We have also established direct sales and customer service teams toconduct one-on-one sales to high-usage institutional customers. These directsales and customer service teams’ focus is to promote our cellular, domesticand international long distance, data and Internet services as integratedtelecommunications services in order to provide differentiated andcomprehensive solutions for our customers. In 2005, we also expanded the use of new distributionchannels such as Internet and telephone marketing.

Our controlling shareholder, Unicom Group, enteredinto a strategic cooperation arrangement with 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 our customers. The arrangement uses arevenue-based commission structure for most services. We and China Post havealso agreed to use each other’s services and offer each other preferentialtreatment. We have entered into provincial-level cooperation agreements withChina Post 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. In 2006, we launched a uniform service brand of “Unicom 10010” toconsolidate all customer service resources. Our customer care and servicecenters in each service area can be accessed by our customers by dialing anationwide hotline number “10010”. Our customer service system is a unifiedplatform providing customer services for all of our businesses. This system isbased on the paging centers, and also relies on other systems, includingoperations, billing, account management and network management. This integratedsystem allows us to provide personalized and diversified services through customerservice representatives or automated systems, including service inquiry,billing inquiry, response to customer complaints and suggestions, serviceinitiation and termination, payment reminder services and emergency services,to different types of customers on a 24-hour basis. Our customers canaccess our customer services through various means, including telephone calls,faxes, e-mails and SMSs. To better serve our customers, we provide suchvalue-added services as 10011bill inquiry hotline, 10018 club member service hotline, 13010199999international roaming service hotline, bill payment throughcommercial banks, free copies of detailed statements, Internet account inquiry,a single rechargeable card for all of our services and mobile service centersin remote areas of China. To better meet market demand, we continue to seekinnovation in our customer services, in order to provide more pro-active,comprehensive and targeted customer services. We also continue to promote customer loyalty throughour nationwide club member reward program.

In addition, we also analyzeour customer segments in detail, and tailor our services to the requirements ofdifferent customer segments. While we are focused on retention of ourindividual customers, we pay regular visits and provide one-on-one personalizedservices to our institutional customers and VIP customers and, through “customerclubs”, provide high-quality and differentiated services for high-net-worthindividual customers and important institutional customers. For mass-market customers, we offerstandardized services that aim at enhancing customer experience.

We emphasize customer service and customer relationsmanagement and have taken various measures to improve customer satisfaction. Suchmeasures include establishing and improving the customer service network,standardizing the content, manner and criteria of service and improvingtraining of customer service representatives. We established our customerservice workflow using a consistent set of standards in order to timely resolveproblems for our customers. We have also strengthened our analysis and researchof customer consumption behavior, consumption cycle and satisfaction levels inorder to understand their consumption pattern and influence their consumptiontrend.

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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 to ourinstitutional and individual customers. We also integrate the billing systems for differentservices and distribute unified recharge cards that can be used to rechargevarious pre-paid services, including pre-paid cellular services, long distancetelephony services and Internet dial-up services. Our billing systemcan distinguish between customers based on the marketing method and servicepackage plans applicable to each customer. These additional functions wouldallow us to analyze customer data in more detail, thereby improving our abilityto analyze the age of our accounts and control bad debts. The following tablesets 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-charge 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***

*Cellular Services.*Post-paid subscribers must register with us beforethey can begin using our cellular services. Customer registration allows us tobetter manage customer credit. If subscribers do not pay their bills on time,we charge a late fee and will either call or send SMSs to the delinquentsubscribers to remind them to pay. We generally suspend a post-paid subscriber’saccount if the account is more than 30 days overdue and terminate the accountif it is overdue for more than three months after that. When an account isterminated, we will seek other remedies to collect the overdue payment,including personal visits to the subscriber to collect payments or taking legalactions. At the same time, we encourage our subscribers to pre-deposit servicecharges with us, to be deducted against charges incurred in the future, or useour pre-paid services. Since 2004, we have developed a customer’s credit managementsystem at the provincial branch level to enhance verification of the personalinformation of new subscribers and tighten credit control for new subscribers. Webelieve these measures will improve our bad debt control.

*Domestic and International Long Distance Services.*We actively encourage customers to useour pre-paid services. In addition, we perform credit checks on potentialcustomers. For high-volume users, we open telephone banking accounts atcommercial banks, set credit limits on such accounts and settle with suchcustomers on a monthly basis.

*Internet services.*We send e-mails to delinquent customers and use othermethods to collect payment from delinquent customers. Accounts for individualcustomers which are delinquent for 20 days are suspended, and such accountswill be terminated if they are delinquent for more than 40 days. For corporatecustomers, our actions are based on the credit history of each delinquentcustomer.

**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. In 2005, we were granted seven patents from the State Intellectual Properties Bureauof the PRC, including three technology invention patents, one practical patentand three product design patents. We also successfully developed new technology applicationssuch as “Tianfu Agriculture Information Online”. Major projects of our researchand development efforts in 2005 include:

·                                          the tracking and research of the latesttechnology trends in light of the gradual transition to 3G cellularcommunications technology and next-generation networks and our position as aprovider of integrated services, including participation in the Chinese NextGeneration Internet (CNGI) network construction project (led by the NationalDevelopment and Reform Commission) and the 3G cellular technology testingproject (led by the MII);

·                                          the investigation into coordinateddevelopment of the GSM and CDMA networks and the transition to next-generationnetworks, including the development and testing of GSM and CDMA dual-modehandset, the testing of the enhanced CDMA 1X network technology and evolutiondata optimized technology, the testing of GRPS commercial networks and otherresearch and development of new technologies; and

·                                          the development of new value-addedservices based on GSM and CDMA networks and new applications for institutionalcustomers.

 

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**Competition**

***The Chinese telecommunications market has six basictelecommunications service providers—China Telecom, Unicom Group, China Mobile,China Netcom, China Satcom and China Railcom—and thousands of value-addedservice providers. As a relatively new entrant into this highly competitivelandscape, we believe the following strengths have contributed to thedevelopment and growth of our business in recent years***:

·                                          *Integratedservice offerings and a uniform and advanced telecommunications network*—We offerintegrated cellular, domestic and international long distance, data andInternet services, and have a nationwide, uniform communications network thatsupport voice, data and Internet communications and allow us to provideintegrated services to our customers and utilize our network resources in acost-effective manner.

·                                          *Uniqueservice offerings*—Through our advanced integrated network platformand the implementation of our innovative marketing strategies, we introduced “Worldwind”CDMA and GSM dual-mode cellular services and a series of value-added servicessuch as CDMA 1X wireless data services, “uni” value-addedservices and “Unicom Horizon” industry specific services, in order to satisfy thedifferentiated demand of our various customer segments.

·                                          *Advancedtechnologies*—CDMA technology offers high bandwidth utilization,better voice quality, high data transmission capabilities, better security,lower handset radio transmitting power, and can berelatively cost-effectively and timely upgradedto 3G cellular telecommunications. We are the only provider for CDMAservices in our service areas in China, andour CDMA network has been upgraded to CDMA 1X technology, which has higher datatransmission capabilities. Our GSM services utilize 2G technology that is widelyaccepted internationally and we believe our GSM network coverage and voicequality meet international standards. Our uniform network platform (Unione)utilizes ATM+IP technology solutions to offer quality support to our voice,data, Internet, video conference, video telephony and mobile data services.

·                                          *Professionaland quality customer service*—Using the customer serviceresources of Unicom Group, we have built up a strong brand image in customerservice that can be characterized as professional, differentiated and “one-stop”service under our uniform service brand of “Unicom 10010”.

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

·                                          *Marketposition*—As a relatively new entrant to the market, we arestill behind the traditional operators in such areas as market share andbranding. Due to our late entry, we still need to strengthen our marketposition through expenditures to capture mid- to high-end customers. Inaddition, we are reliant on the dominant operators in terms of interconnectionand settlement.

·                                          *Financialresources*—Comparing to the dominant operators such as ChinaMobile, our capital scale is relatively small, our debt ratio is relativelyhigh, and our share of the market revenue and profit is relatively low.

·                                          *Networkcoverage**and upgrade*—While we havemade significant improvements in network construction in recent years, networkcoverage in certain in-door or remote areas still need improvement. In addition, we are still in the process of upgrading our GSM networksto launch GPRS services in selected cities.

 

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***Cellular Competition***

Our main competitor in the cellular communicationsbusiness is China Mobile. China Mobile continues to have competitive advantagesover us in brand name, market share, financial resources and network managementexperience. To compete against China Mobile, we continue to improve our networkcoverage and voice quality, enhance network quality, develop value-addedservices (such as our CDMA 1X wireless data services), improve customer serviceand customize our package service plans to meet our various subscribers’specific needs. We also seek to leverage our position as a fully integratedtelecommunications operator to provide “one-stop” telecommunications solutionsfor our subscribers. In addition, we seek to compete against China Mobile’sGPRS wireless data services by the development of our CDMA 1X wireless dataservices, which offers such advantages as better voice quality, bettersecurity, higher data transmission rates and more comprehensive value-addedwireless data services. Moreover, we have upgraded our GSM networks in selectedcities to offer GPRS wireless data services to our GSM subscribers since 2005.

Our cellular services also compete with the wirelesslocal communications services of China Telecom and China Netcom, known as “LittleSmart”, which are based on their fixed line networks and primarily utilize PHStechnology. These services were previously offered primarily in small- tomedium-sized cities, but have been introduced in most cities nationwide. The “LittleSmart” services reportedly have attracted a substantial subscriber base inChina and compete with us mostly in the lower end 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 led to decrease in effective cellular tariffs and reduced the overall usage volume ofcellular services. The main competitive advantage of “Little Smart” services istheir lower tariff rates. However, they generally have limited network coverageand roaming capability.

In addition, we expect that the PRC government’sdecision in respect of the 3G licenses may significantlychange the overall competition environment of the PRC wirelesstelecommunication industry and could further intensify the competition amongcellular service providers. See “D. Risk Factors—Risks Relatingto Our Business—Our cellular businesses face intensecompetition from China Mobile,  ChinaTelecom and China Netcom. Such competition may result in slower subscribergrowth, lower tariffs and higher customer acquisitions costs for us, whichwould materially adversely affect our financial condition, results of operationand growth prospects” and “Issuance of additional telecommunication servicelicenses including 3G licenses, may further intensify competition in the PRCtelecommunication industry and materially adversely affect our financialcondition, results of operations and growth prospects” under Item 3.

Since the launch of our CDMA cellular services in2002, we have pursued a strategy of coordinated development of our GSM and CDMAcellular businesses. In 2005, the majority of our CDMA new subscribers wereusers migrating from the GSM services of our competitor, first-time cellularusers, and users who previously subscribed to our GSM services. See “D. RiskFactors—Risks Relating to Our Business—Our CDMA services may not succeed ingaining a broader market acceptance in China.” under Item 3.

***Long Distance Telephony Competition***

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 intheir respective service areas in brand name, market share, financialresources, service area coverage, last-mile access, extensive access networksand experience in fixed line telecommunications business. However, theseparation of China Telecom into two companies along geographic lines weakenedthe competitiveness of the resulting entities on a nationwide basis.

 

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Since our network has been constructed recently and isequipped with the latest technology and advanced features, it enables us tooffer a variety of high-quality services. Our long distance telephony servicesare also supported by a centralized billing system. However, our services arehindered by our lack of fixed line telephone number resources and last-mileaccess.

Since the MII deregulated the tariffs of this marketin 2001, competition in the IP telephony market has been intensifying. Our IPtelephony services currently face intense competition from China Telecom, ChinaNetcom, China Mobile, China Railcom and China Satcom. Currently, China Telecomand China Netcom are the market leaders in their respective service areas.

***Data and Internet Competition***

China Telecom and China Netcom are our major competitors inthe data services business in their respective service areas. Othercompetitors include China Railcom and China Satcom. While China Telecom, ChinaNetcom, China Railcom, China Mobile, China Satcom and we are the only Internetbackbone operators in China, there are many retail Internet service providersthroughout China. ChinaTelecom and China Netcom have leading positions in the Internet access marketand are the largest wholesale Internet service providers in their respectiveservice areas. Our data and Internet networks have nationwide access, whichoffers convenience and flexibility to our institutional customers, whereas therespective networks of China Telecom and China Netcom only extend to theirrespective service areas.

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 buildingadvanced metropolitan area networks and integrated access networks that allowus to connect to key commercial buildings throughout China. We also continue tocooperate with medium- to small-sized Internet service providers and othercompanies that have broadband access to concentrated residential areas toexpand our broadband services.

**Trademarks**

We conduct our businesses under the Unicom name andlogo. Unicom Group is the registered proprietor in China of the “Unicom”trademark in English and the trademark bearing the Unicom logo. Unicom Grouphas also applied and became the registered proprietor of the trademark of theword “Unicom” in Chinese. Unicom Group has granted us the right to use thesetrademarks on a royalty-free basis, and to license to us any trademark that itregisters in China in the future which incorporates the word Unicom.

In March 2006, we replaced our logo to promote amore friendly and internationalized corporate image. The new logo uses acombination of Chinese red and Chinese ink black. The red stands for passion,enthusiasm and energy while the ink black stands for cohesion, steadiness andelegance.

**Regulatory and Related Matters**

The telecommunications industry in China is subject toa high degree of government regulation. The primary regulatory authority of theChinese telecommunications industry is the MII. The State Council, the NationalDevelopment and Reform Commission (the successor of the former StateDevelopment Planning Commission), or the NDRC, the Ministry of Commerce(formerly, the Ministry of Foreign Trade and Economic Cooperation) and othergovernmental authorities also maintain regulatory responsibilities over certainaspects of the Chinese telecommunications industry.

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

·                                          formulating and enforcing industry policies andregulations, as well as technical standards,

 

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·                                          granting telecommunications service licenses,

·                                          supervising the operations and quality of service oftelecommunications service providers,

·                                          allocating and administering telecommunicationsresources such as spectrum and number resources,

·                                          together with other relevant regulatory authorities,formulating tariff standards for telecommunications services,

·                                          formulating interconnection and settlementarrangements between telecommunications networks, and

·                                          maintaining fair and orderly marketcompetition among service providers.

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 currentlyuncertain when the law will be adopted and become effective.

***Telecommunications Regulations***

The State Council promulgated the TelecommunicationsRegulations, which became effective as of September 25, 2000. The TelecommunicationsRegulations are substantially consistent with, and are primarily intended tostreamline and clarify, the existing rules and policies for thetelecommunications 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. TheTelecommunications Regulations address all key aspects of thetelecommunications industry, including entry into the industry, scope ofbusiness, tariff setting, interconnection arrangements, quality of services,technology standards and allocation of telecommunications resources.

***Entry into the Industry***

The Telecommunications Regulations adopt the existingregulatory distinction between basic and value-added telecommunication services.An addendum to the Telecommunications Regulations sub-categorizes basic andvalue-added telecommunication services. In February 2003, the MII revisedthe addendum to the Telecommunications Regulations; and the revised addendumtook effect in April 2003. Basic telecommunications services include,among others, fixed line local and domestic long distance telephony services,international telecommunications services, IP telephony services, mobile voiceand data services, Internet and other public data transmission services, leaseor sale of network elements, and paging services. Value addedtelecommunications services include, among others, e-mail, voice mail,electronic data interchange, Internet access, Internet content and videoconferencing services.

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. Providers of any basic telecommunicationsservices as well as providers of value-added services in two or more provincesautonomous regions and municipalities in China must apply for licenses from theMII. Licenses for basic telecommunications services will be granted through atendering process.

 

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After its accession to the WTO in December 2001,China promulgated the Administrative Regulations on TelecommunicationsCompanies with Foreign Investment, effective on January 1, 2002,implementing its commitments to the WTO. Those commitments include the gradualreduction of foreign ownership restrictions in the telecommunications industryand the step-by-step opening of the telecommunications market in China toforeign operators. However, the presence or absence of foreign investments inan applicant for telecommunications licenses will presumably bear no directrelation to the decision on whether to issue licenses, in as much as theissuance of new licenses is governed by a separate set of rules andregulations. The specific market-opening commitments China made to the WTOregarding, mobile services, value-added telecommunication services and fixedline services are as follows.

·                                          For mobile voice and data services:

·                                          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%;

·                                          Within one year afteraccession: the services areas will be expanded to include services in andbetween the additional 14 cities; foreign ownership shall be no more than35%;

·                                          Within three years afteraccession: foreign ownership shall be no more than 49%; and

·                                          Within five years afteraccession: there will be no geographic restriction and the foreign ownershipshall be no more than 49%.

·                                          For value-added telecommunicationservices:

·                                          Upon accession: foreignservice providers will be permitted to establish joint venture enterprises andprovide services in and between the cities of Shanghai, Guangzhou and Beijing;foreign ownership in such joint ventures shall be no more than 30%;

·                                          Within one year afteraccession: the services areas will be expanded to include services in andbetween the additional 14 cities; foreign ownership shall be no more than49%; and

·                                          Within two years afteraccession: there will be no geographic restriction, foreign ownership shall beno more than 50%.

·                                          For fixed line services:

·                                          Within three years afteraccession: 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%;

·                                          Within five years afteraccession: the services areas will be expanded to include services in andbetween an additional 14 cities of Chengdu, Chongqing, Dalian, Fuzhou,Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhou, Xiamen, Xi’an, Taiyuanand Wuhan, or, the additional 14 cities; foreign ownership shall be no morethan 35%; and

·                                          Within six years afteraccession: there will be no geographic restriction and foreign ownership shallbe no more than 49%.

 

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***Spectrumand Network Number Resources***

The MII allocates all telecommunications-relatedfrequencies, including those used in cellular, paging and microwave operations.The 800 MHZ, 900 MHZ and 1,800 MHZ frequency bands have been reserved formobile cellular applications and parts of the 150 MHZ and 280 MHZ frequencybands have been reserved for paging applications. The frequency assigned to alicensee may not be leased or transferred without obtaining the approval of theMII.

Since July 1, 2002, the standard spectrum usagefees for GSM networks and CDMA networks has been charged based on actual usageat an annual rate of up to RMB15 million per MHz of frequency (upward anddownward frequencies are charged separately) progressively over a period ofthree years and a period of five years, respectively. The current allocation ofspectrum usage fees between Unicom Group and us based on the number ofsubscribers remains unchanged.

The MII is also responsible for the administration ofnetwork number resources within China, including cellular network numbers andsubscriber numbers. In January 2003, it issued the Administrative Rules forTelecommunications Network Numbers, which took effect on March 1, 2003. Accordingto these rules, the telecommunications network number resources are propertiesof the PRC 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 PRC government. The rules also providefor procedures for application for the use, upgrade and adjustment of numberresources by telecommunications operators.

In December 2004, theMII, the Ministry of Finance and the NDRC jointly issued the ProvisionalAdministrative Measures with respect to the Collection of the Usage Fee ofTelecommunications Network Number Resources, under which telecommunicationscompanies are required to pay a usage fee to the PRC government by the 10th dayof the first month of each quarter starting from 2005. Under these provisionalmeasures, mobile telecommunications companies are required to pay an annualusage fee of RMB12 million for each network number. In addition, we are also required to payusage fees for certain other network numbers totaling approximately RMB6million a year. We are required to start paying usage fees in 2005. In2005, the usage fees we paid to the PRC government totaled RMB40.67 million.

***Tariff Setting and Price Controls***

The levels and categories of our current tariffs aresubject to regulation by various government authorities, including the MII, theNDRC, and, at the local level, the relevant provincial TelecommunicationsAdministration Bureaus and price regulatory authorities. Under theTelecommunications Regulations, telecommunications tariffs are categorized intoState-fixed tariffs, State-guidance tariffs and market-based tariffs. For example,there are State-guidance tariffs for cellular services, fixed line telephonyservices and leased lines services that are set jointly by the MII and the NDRC.Tariffs for telecommunications services where adequate competition has alreadydeveloped may be set by the service providers as market-based tariffs. Thegovernment is required to hold public hearings before setting or changingimportant State-tariff rates, which are attended by telecommunicationoperators, consumers and others. Operators are required to provide complete andadequate cost data and other materials for those hearings.

In 1997, the PRC government granted us preferentialtreatment by allowing us to vary our cellular tariffs by up to 10% from thestate-guidance rates.

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, wehave adopted these government tariff adjustments.

 

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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.

In June 2004, the MII and the NDRC jointly issueda notice aimed at further strengthening the regulatory oversight oftelecommunications tariffs. The notice requires telecommunications servicesproviders to strengthen their internal control and management of tariff settingactivities. Specifically, the notice requires services providers to strictlycomply with the relevant government regulation relating to the procedures forthe approval and registration of telecommunications tariffs.

In August 2005, the MII and NDRC jointly issued a noticestipulating that, with the exception of IP telephony services, maximum chargesfor many telecommunications services may not exceed the current level ofcharges.

***Interconnection Arrangements***

In 1999, the MII issued provisional regulations oninterconnection and settlement arrangements. These regulations contain specificprovisions regarding, among other things, revenue sharing methods andsettlement mechanisms and interconnection agreements among telecommunicationsservice providers. The Telecommunication Regulations reaffirmed the obligationsof dominant telecommunications operators in China to provide interconnectionwith other operators. The MII adjusted the interconnection revenue sharing andsettlement arrangements, effective from March 21, 2001, and furtheradjusted them on October 28, 2003. We have entered into interconnectionand settlement agreements with China Telecom, China Netcom, China Mobile andChina 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 after the regulatory adjustment in 2003.
| Network from  which calls originated                  | ** ** | **Network at  which calls terminated**               | ** ** | **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 RMB0.06 per minute to fixed  line operators                                  |
|                                                  |       |                                                 |       |                                                                                              |
| Fixed line  operators’ public fixed line network |       | Unicom’s cellular network                       |       | No revenue sharing or settlement                                                                  |
|                                                  |       |                                                 |       |                                                                                              |
| Unicom’s  cellular network                       |       | China Mobile’s cellular network                 |       | (1) Each of Unicom and China Mobile 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                       |       | (1) Each of Unicom and China Mobile collects  the cellular usage charge from its subscribers |
|                                                  |       |                                                 |       | (2)  China Mobile pays RMB0.06 per minute to  Unicom                                         |

 

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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 after the regulatory adjustment in2003.

 
| Network from  which calls originated                            | ** ** | **Network at  which calls terminated**                                                                                            | ** ** | **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 RMB0.06 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 |
|                                                            |       |                                                                                                                              |       |                                                                                                                        |
| 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 RMB0.06 per minute and pay the rest to Unicom                                          |
|                                                            |       |                                                                                                                              |       |                                                                                                                        |
| 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 RMB0.06 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 RMB0.06 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 RMB0.06 per minute and pays the rest of the domestic long distance  tariff to Unicom          |

 

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

 

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| Type of calls                                                                                                                    | ** ** | **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  RMB0.06 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 RMB0.06 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 other operators for IPtelephony long distance calls through our network after the regulatingadjustment in 2003.

 

 
| Network from  which calls originated                                    | ** ** | **Network at  which calls terminated**                                                                             | ** ** | **Settlement Arrangement  (under 2003 regulations)**                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Unicom’s cellular network at area A                           |       | Other operators’ public telecommunications 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 RMB0.06 per minute to other  operators on the receiving end                                                                     |
|                                                                    |       |                                                                                                               |       |                                                                                                                                                                                                                                                                          |
|                                                                    |       |                                                                                                               |       |                                                                                                                                                                                                                                                                          |
|                                                                    |       |                                                                                                               |       |                                                                                                                                                                                                                                                                          |
| Other operators’ public telecommunications network  at area A |       | Other operators’ public telecommunications 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 RMB0.06 per minute to other  operators on the receiving end

 

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

 

For all interconnection services, we are required topay the interconnection fees regardless of our ability or inability to collectthe tariff from our subscribers. The fixed line operators are required to payinterconnection fees regardless of their ability or inability to collect thetariff from their subscribers. Interconnection charges are accrued on a monthlybasis based on the actual call volume and applicable tariff rate.

***Technical Standards***

The MII sets industry technical standards for theChinese telecommunications industry. Most of the standards set by the MIIconform to the standards recommended by the International TelecommunicationsUnion and other international telecommunications standards organizations. Incases where the MII has not set certain industry technical standards, we setour own enterprise technical standards. The MII also requires all networkoperators in China to purchase only telecommunications equipment certified bythe MII, including cellular and paging equipment, radio equipment andinterconnection terminal equipment.

 

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***Universal Services***

Telecommunications service providers in China arerequired to fulfill universal service obligations in accordance with relevantregulations to be promulgated by the PRC government, and the MII has theauthority to delineate the scope of its universal service obligations. The MIImay also select universal service providers through a tendering process. TheMII, together with the finance and pricing authorities, is also responsible forformulating administrative rules relating to the establishment of auniversal service fund and compensation schemes for universal services. TheMII and other relevant government authorities are still in theprocess of formulating the detailed regulations relating to the provision ofsuch universal services. Such regulations, if promulgated, may require us toincur significant expenses to fulfill our universal service obligations and therefore could materially adverselyaffect our financial condition and results of operations

The MII hasrequired major Chinese telecommunication service providers, including UnicomGroup, to participate in a project to provide telecommunications services in anumber of remote villages in certain designated provinces in China astransitional measures prior to the formalization of a universal serviceobligation framework. Inparticipating in such project, Unicom Group undertook the universal serviceobligation to extend telecommunication service coverage to a total of more than4,600 administrative-level villages in 2004 and 2005 primarily through its CDMAand satellite transmission networks. In 2006, Unicom Group is required toextend telecommunication service coverage to more than 1,500 additionalvillages in remote areas. We have been assisting Unicom Group in providingmobile telecommunication services to these remote villages and are responsiblefor the operation and maintenance of the relevant network facilities in ourservice areas.

See “D. RiskFactors—Risks Relating to the Overall Telecommunications Industry in China—ThePRC government may require us, along with other telecommunication serviceproviders in China, to provide universal services with specified obligations,and we may not be compensated adequately for providing such services.” underItem 3.

***Capital Investment***

On July 16, 2004, the State Council promulgated,effective immediately, the Decision on Reform of Investment System, or theInvestment Reform Decision, which significantly modified the governmentapproval process for major investment projects in China. The Investment ReformDecision eliminated the government approval requirements for investmentprojects that do not involve direct government funding unless the investmentprojects are in the restricted sectors specified in the annually adjustedcatalogue released by the State Council. The 2004 catalogue, which was attachedas an annex to the Investment Reform Decision, sets forth approval requirementsfor individual investment projects in restricted sectors. Within thetelecommunications sector, the investment projects that require the approval ofthe NDRC include:

·                                          domesticbackbone transmission networks (including broadcasting and televisionnetworks);

·                                          internationaltelecommunications transmission circuits;

·                                          internationalgateways;

·                                          internationaltelecommunications facilities for dedicated telecommunications networks; and

·                                          othertelecommunications infrastructure projects involving information security.

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***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, State Administration of Industry and Commerce and localprice bureaus, exercise extensive control over various aspects of ourbusinesses and conduct various regular inspections, examinations and/or auditson us and Unicom Group. As required by the relevant PRC laws and regulations, UnicomGroup, as one of the key State-owned enterprises under the direct supervisionof the SASAC, is also subject to routine audits by the National Audit Office,or the NAO, including the senior management departure audit which involves amandatory review by the NAO of the economic responsibilities of a departingsenior management member of Unicom Group.

In 2004, the NAO conducted a senior managementdeparture audit of Unicom Group after the resignation of Mr. Yang Xian Zu,Unicom Group’s former Chairman, in 2003. We understand that the results of thataudit had no material adverse effect on our company.

In 2005, the NAO conducted another senior managementdeparture audit of Unicom Group after the resignation of Mr. WangJianzhou, Unicom Group’s former Chairman, in 2004. Weunderstand that the results of that audit had no material adverse effect on ourcompany.

In addition, as our controlling shareholder, Unicom Group under thedirect supervision of SASAC, SASAC has an indirect influence over us. Inparticular, SASAC may designate certain nominees and request Unicom Group topropose the appointment of such nominees as our directors and senior management;SASAC may also request Unicom Group to remove our directors and seniormanagement in accordance with relevant procedures provided by applicable lawand our articles of association.

### ***C.            Organizational Structure***

We areincorporated in Hong Kong and are 52.36% indirectly owned by the Unicom Groupand 47.64% owned by public shareholders as of May 31, 2006. See “A.History and Development of the Company” under Item 4. Set forth below aredetails of our significant subsidiaries:
| **Name of Subsidiary**      | ** ** | **Country of Incorporation** | ** ** | **Ownership Interest** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|
| China  Unicom Corporation Limited     |       | China                                  |       | 100                         | %          |
| China  Unicom International Limited   |       | Hong Kong SAR                          |       | 100                         | %          |
| China  Unicom (Macau) Company Limited |       | Macau SAR                              |       | 100                         | %          |

### *** ***

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

Our principal executive offices are located in HongKong. We also maintain executive offices in Beijing. We own and lease a largenumber of offices, retail outlets, equipment rooms and base stations throughoutChina. Some of the properties we lease and operate on do not have land userights certificates or building ownership certificates. In some cases, we havenot entered into formal lease agreements with the lessors or the lessors do notpossess requisite title certificates. We believe that it is unlikely that wewould be denied our right to use a large number of these properties at anygiven time. Our controlling shareholder, Unicom Group, has agreed to indemnifyus against any loss or damages incurred by us that are caused by or arisingfrom any challenge of, or interference with, our right to use these properties.

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**Item4A. Unresolved Staff Comments**

None.

**Item5.    Operating and Financial Review andProspects**

You should read the following discussion and analysistogether with the selected financial data set forth in Item 3 and theconsolidated financial statements included in this annual report. The financialstatements have been prepared in accordance with HKFRS, which differ in certainrespects from US GAAP. Note 37 to the consolidated financial statementssummarizes the nature and effects of significant differences between HKFRS andUS GAAP as they relate to our financial statements and provides areconciliation to US GAAP of our net income and shareholders’ equity. Inaddition, Note 37 to our consolidated financial statements includes our condensedconsolidated financial information prepared and presented in accordance with USGAAP for the relevant periods. Our consolidated financial statements present,and the discussion and analysis under this Item 5 pertain to, ourconsolidated financial position and results of operations as of December 31,2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005. OnDecember 31, 2002 and 2003, we completed the acquisition of Unicom NewCentury from Unicom Group, and the acquisition of Unicom New World from UnicomGroup and sale of Guoxin Paging to Unicom Group, respectively.

Our consolidated financial statements as of and forthe year ended December 31, 2004 reflect the results of operations of bothUnicom New Century (which was merged into CUCL in July 2004) and UnicomNew World (which was merged into CUCL in September 2005), but do notinclude the results of operations of Guoxin Paging. Our consolidatedfinancial statements for the year ended December 31, 2003 reflect theresults of operations of Unicom New Century and Guoxin Paging but do notinclude the results of operations of Unicom New World. In addition, in September 2004, wecompleted the acquisition of Unicom International from Unicom Group. Accordingly,the operating results of Unicom International for the period from the effectivedate of the acquisition to December 31, 2004 have been included in ourconsolidated statement of income for the year ended December 31, 2004. See “— Acquisitions ofUnicom New Century, Unicom New World and Unicom International and the Sale ofGuoxin Paging” below.

Our financial statements are prepared in accordancewith HKFRS, which became effective on January 1, 2005. Prior to January 1,2005, our financial statements were prepared in accordance with HK GAAP. Theadoption of HKFRS resulted in changes in certain accounting policies which havebeen reflected in the financial statements either in accordance with thetransitional provisions in the applicable accounting standards or, to theextent there are no transitional provisions, applied retrospectively. Accordingly, the comparative financial data prior to January 1,2005 presented in this annual report have been restated to conform, as applicable,to the changed accounting policies. A detailed description is set forth in Note2.2 to our consolidated financial statements.

***Overview***

We are an integrated provider of telecommunicationsservices in China and offer a comprehensive range of telecommunicationsservices, including the following, which also constitute our major operatingsegments:

·                                          GSM cellular service in 21provinces, 5 autonomous regions and 4 municipalities;

·                                          CDMA cellular service in 21provinces, 5 autonomous regions and 4 municipalities of China and in Macau;

·                                          domestic and internationallong distance service nationwide in China; and

·                                          data and Internet and otherrelated services nationwide in China.

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The table below sets forth revenue from our majorbusinesses and the respective percentage of our total revenue in 2003, 2004 and2005.
| ** **                              | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                              | ** ** | **2003 (Restated)**(1)                                       | ** ** | **2004 (Restated)**(1) | ** ** | **2005** | ** ** |
| ** **                              | ** ** | **RMB in**                                              | ** ** | **% of Total** | ** ** | **RMB in** | ** ** | **% of Total** | ** ** | **RMB in** | ** ** | **% of Total** | ** ** |
| ** **                              | ** ** | **millions**                                                 | ** ** | **Revenue** | ** ** | **millions** | ** ** | **Revenue** | ** ** | **millions** | ** ** | **Revenue** | ** ** |
| Total  revenue                          |       | 67,154                                                       |       | 100.0 | % | 79,087 |   | 100.0 | % | 87,049 |   | 100.0 | % |
| Total  service revenue                  |       | 64,933                                                       |       | 96.7 | % | 77,397 |   | 97.9 | % | 84,287 |   | 96.8 | % |
| GSM                                     |       | 41,153                                                       |       | 61.3 | % | 47,509 |   | 60.1 | % | 52,135 |   | 59.9 | % |
| CDMA                                    |       | 16,667                                                       |       | 24.8 | % | 24,377 |   | 30.9 | % | 27,577 |   | 31.7 | % |
| Long distance revenue                   |       | 2,273                                                        |       | 3.4 | % | 1,848 |   | 2.3 | % | 1,525 |   | 1.7 | % |
| Data and Internet revenue               |       | 3,437                                                        |       | 5.1 | % | 3,663 |   | 4.6 | % | 3,050 |   | 3.5 | % |
| Paging                                  |       | 1,403                                                        |       | 2.1 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Sales from  telecommunications products |       | 2,221                                                        |       | 3.3 | % | 1,690 |   | 2.1 | % | 2,762 |   | 3.2 | % |

 

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(1)         The adoption of HKFRS on January 1, 2005 resulted in changes incertain accounting policies which have been reflected in the financialstatements either in accordance with the transitional provisions in theapplicable accounting standards or, to the extent there are not transitionalprovisions, applied retrospectively. Accordingly,the comparativefinancial data prior to January 1, 2005 presented herein have beenrestated, as applicable, to conform to the changed accounting policies. SeeNote 2.2 to our consolidated financial statements included in this Form 20-Ffor detailed discussion.

Our service revenue comes primarily from thefollowing:

·                                          Usage fees for our GSM, CDMA,long distance and data and Internet services, including, for our cellularsubscribers, roaming-out fees for calls made by them outside their localservice areas. We recognize usage fee revenue when the service is rendered.

·                                          Monthly fees, of fixedamounts, charged to certain of our GSM, CDMA, data and Internet subscribers foraccess to the relevant service. We recognize monthly fee revenue in the monthduring which the services are rendered.

·                                          Otherrevenue primarily from the provision of valued-added services, such as shortmessage services, personalized call-back ring tone services, CDMA1X wirelessdata services and certain receptionist services to subscribers.

·                                          Interconnection revenue fromother telecommunications operators, including Unicom Group, for calls made fromtheir networks to our networks and roaming-in fees for calls made by cellularsubscribers of other operators using our cellular networks. We recognizeinterconnection revenue when the relevant calls are made by subscribers.

·                                          Rentalincome from leases of transmission lines on our networks and indefeasiblerights of use (“IRU”) to Unicom Group, business customers and othertelecommunications carriers in China. We recognize leased line rental revenueon a straight-line basis over the relevant lease term, except for the lease ofspecific and identified network assets that transfer substantially all therisks and rewards incidental to ownership to the lessee, which is recognized ascapacity sales.

·                                          Sales of telecommunicationcalling cards, representing pre-paid service fees, are recorded as advancesfrom customers and recognized as revenue when the service is rendered uponactual use of the cards.

Along with the continued growth of China’stelecommunications industry, particularly in the cellular communicationssector, our total revenue in 2005 increased by 10.1% from 2004. This increasewas primarily the result of the continued growth in revenue of our GSM and CDMAcellular businesses. Service revenue from our cellular businesses has increasedfrom RMB71,886 million in 2004 to RMB79,712 million in 2005, representing agrowth of 10.9%. We aim to further leverage our position as an integratedtelecommunications operator in order to continue to drive the growth of our GSM and CDMA cellular businesses as well as long distance, data and Internetbusinesses.

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The following table sets forth our major costs andexpenses items and income before income tax,****bothin terms of amount and as a percentage of total revenue in 2003, 2004 and 2005.
| ** **                                             | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2003 (Restated)**                                     | ** ** | **2004 (Restated)** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **RMB in**                                              | ** ** | **% of Total** | ** ** | **RMB in** | ** ** | **% of Total** | ** ** | **RMB in** | ** ** | **% of Total ** | ** ** |
| ** **                                             | ** ** | **millions**                                                 | ** ** | **Revenue** | ** ** | **millions** | ** ** | **Revenue** | ** ** | **millions** | ** ** | **Revenue** | ** ** |
| Total  Revenue                                         |       | 67,154                                                       |       | 100.0 | % | 79,087 |   | 100.0 | % | 87,049 |   | 100.0 | % |
| Costs  and expenses                                    |       | 60,956                                                       |       | 90.8 | % | 72,616 |   | 91.8 | % | 79,947 |   | 91.8 | % |
| Leased line and network capacities                     |       | 4,320                                                        |       | 6.4 | % | 7,398 |   | 9.4 | % | 8,748 |   | 10.0 | % |
| Interconnection charges                                |       | 5,921                                                        |       | 8.8 | % | 7,517 |   | 9.5 | % | 8,372 |   | 9.6 | % |
| Depreciation and amortization                          |       | 16,359                                                       |       | 24.4 | % | 19,011 |   | 24.0 | % | 20,368 |   | 23.4 | % |
| Employee benefit expenses                              |       | 4,596                                                        |       | 6.8 | % | 4,615 |   | 5.8 | % | 5,616 |   | 6.5 | % |
| Selling and marketing                                  |       | 15,264                                                       |       | 22.7 | % | 19,523 |   | 24.7 | % | 20,558 |   | 23.6 | % |
| General, administrative and other expenses             |       | 9,139                                                        |       | 13.7 | % | 10,500 |   | 13.3 | % | 11,742 |   | 13.5 | % |
| Cost of telecommunications products sold               |       | 2,939                                                        |       | 4.4 | % | 2,563 |   | 3.2 | % | 3,575 |   | 4.1 | % |
| Loss on sale of discontinued operation (Guoxin Paging) |       | 663                                                          |       | 1.0 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Finance costs                                          |       | 1,946                                                        |       | 2.9 | % | 1,696 |   | 2.1 | % | 1,099 |   | 1.2 | % |
| Interest income                                        |       | -173                                                         |       | -0.3 | % | -103 |   | -0.1 | % | -96 |   | -0.1 | % |
| Other gains, net                                       |       | -18                                                          |       | 0.0 | % | -104 |   | -0.1 | % | -35 |   | 0.0 | % |
| Income before  income tax                              |       | 6,198                                                        |       | 9.2 | % | 6,471 |   | 8.2 | % | 7,102 |   | 8.2 | % |

 

Our major costs and expenses include thefollowing:

·                                          Selling and marketingexpenses, including commissions, promotion and advertising expenses,amortization of capitalized customer acquisition costs of certain CDMAcontractual subscribers and customer retention costs;

·                                          Depreciation and amortizationexpenses, mainly relating to our property, plant and equipment and otherassets;

·                                          General, administrative andother expenses, primarily including operating lease expenses, repair andmaintenance costs, provision for doubtful debts and provisions for impairmentin the value of property, plant and equipment. Other components of general,administrative and other expenses include utilities, general office expensesand travel expenses;

·                                          Leased line and networkcapacities charges, representing lease expenses for transmission capacity fromother operators and CDMA network capacities from Unicom Group;

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·                                          Interconnection expenses,representing amounts paid to other operators, including Unicom Group, for callsfrom our networks to their networks and roaming-out fees paid to otheroperators, including Unicom Group, for calls made by our subscribers roaming intheir networks;

·                                          Employee benefit expenses,representing staff salaries and wages, bonuses and medical benefits,contributions to defined contribution pension schemes and housing benefits,share-based compensation cost amortized over the vesting period of shareoptions; and

·                                          Costs of telecommunicationsproducts sold.

As we continue to aim to strengthen management,integrate our businesses and control costs to achieve greater overallefficiency, total costs and expenses, as a percentage of total revenue in 2005,was maintain at 91.8%, the same as that in 2004.

***Acquisitions of Unicom New Century, UnicomNew World and Unicom International and the Sale of Guoxin Paging***

In December 2002, we acquired from Unicom Groupthe GSM cellular assets and businesses and CDMA businesses of Unicom NewCentury in the following six provinces, two autonomous regions and onemunicipality in China: Sichuan, Heilongjiang, Jilin, Henan, Jiangxi, Shaanxi,Chongqing, Guangxi and Xinjiang. The total purchase price was HK$4,909,000,000(approximately RMB4.8 billion), payable in cash. On July 30, 2004, UnicomNew Century was merged into CUCL and legally dissolved upon the completion ofsuch merger.

In December 2003, we acquired from Unicom Groupthe GSM cellular assets and businesses and CDMA businesses of Unicom New Worldin the following nine provinces and autonomous regions in China: Shanxi, Hunan,Hainan, Yunnan, Gansu and Qinghai provinces and Inner Mongolia, Ningxia Hui andXizang autonomous regions. The total purchase price was HK$3,014,886,000(approximately RMB3.2 billion), payable in cash. 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. On September 1,2005, Unicom New World was merged into CUCL and legally dissolved upon thecompletion of such merger.

In September 2004, we completed the acquisitionfrom Unicom Group of Unicom International, a limited liability companyestablished in Hong Kong engaging in voice wholesale business, telephone cardsbusiness, line leasing services, managed bandwidth services and mobile virtualnetwork services in Hong Kong and the United States. The total purchase pricewas HK$37,465,996 (approximately RMB39.74 million including direct costs ofacquisition), payable in cash.

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Under HKFRS, we have adopted the purchase method toaccount for our acquisitions from Unicom Group of Unicom New Century, whichbecame effective on December 31, 2002, Unicom New World, which becameeffective on December 31, 2003, and Unicom International, which becameeffective in September 2004. Under the purchase method, in accordance withHKFRS, our consolidated financial statements incorporate the results ofoperations of Unicom New Century, Unicom New World and Unicom Internationalonly from the effective dates of the respective acquisitions. Accordingly, theresults of operations of Unicom International for the period from the effectivedate of the acquisition to December 31, 2004 have been included in ourconsolidated statement of income for the year ended December 31, 2004. Ourconsolidated balance sheet as of December 31, 2004 includes the financialposition of Unicom International. Since the effective date of the Unicom NewWorld acquisition was December 31, 2003, our consolidated financialstatements of income for the years ended December 31, 2003 and 2002included in this annual report do not include the results of operations ofUnicom New World. Our consolidated balance sheet as of December 31, 2003includes the financial position of Unicom New World. Since the effective dateof the Unicom New Century acquisition was December 31, 2002, ourconsolidated financial statements of income for the year ended December 31,2002 do not include the results of operations of Unicom New Century. Ourconsolidated balance sheet as of December 31, 2002 includes the financialposition of Unicom New Century. The differences between the cost of theacquisitions and the fair value of the identifiable assets and liabilitiesacquired was recognized as goodwill or negative goodwill, which were amortizedon a straight line basis over its beneficial life or the remaining weightedaverage useful life of the acquired identifiable non-monetary assets. We ceasedthe amortization of goodwill from January 1, 2005 upon the adoption ofHKFRS and the accumulated amortization as of December 31, 2004 has beeneliminated with a corresponding decrease in the cost of goodwill. We alsoderecognized the negative goodwill previously recognized on or prior to January 1,2005, with a corresponding adjustment to the opening balance of retainedearnings. Starting from January 1, 2005, we no longeramortize goodwill but test it for impairment on an annual basis or when there is indication ofimpairment.

Under US GAAP, theacquisitions of Unicom New Century, Unicom New World and Unicom Internationalare accounted for as a transfer of businesses under common control. Under thismethod, the acquired assets and liabilities are accounted for at theirhistorical cost under US GAAP and the consolidated financial statementsprepared under US GAAP for all periods presented are retroactively restated asif Unicom New Century, Unicom New World and Unicom International had alwaysbeen part of our company since inception. This method is reflected in the significant differences between HKFRS and US GAAP provided in Note 37 toour consolidated financial statements.

Under HKFRS, 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 of December 31,2003 was recorded as the loss on sale of discontinued operation in ourconsolidated income statement for the year ended December 31, 2003. Theoperating results of Guoxin Paging from January 1, 2003 to the effectivedate of the sale of Guoxin Paging were included in our consolidated incomestatement 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.

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The acquisitions of Unicom New Century and Unicom New World and thesale of Guoxin Paging have had a material impact on our overall results ofoperations. In particular, our financial results in 2004 were significantlyaffected by the inclusion of the results of operations for Unicom New World weacquired effective December 31, 2003. By comparison, our financial resultsin 2003 did not include the results of operations of Unicom New World. See “3⁄4 Operating Results 3⁄4Year Ended December 31, 2004 Compared to Year Ended December 31, 2003”below. These acquisitions have, among other things, significantly expanded thesize of the telecommunications markets we serve and increased the number of oursubscribers and usage of our services. As a result, our revenue and costs andexpenses have also increased significantly.

***Critical Accounting Policies***

The preparation of our financial statements and thisannual report requires us to make estimates and judgment 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 identified the accounting policies and estimatesbelow as critical to our business operations and an understanding of ourresults of operations and financial position. 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 of the application of these and otheraccounting policies, see Notes 2.2 and 4 to our consolidated financialstatements included in this annual report. There can be no assurance thatactual results will not differ from those estimates and assumptions.

**Capitalizationof CDMA Customer Acquisition Costs**

We have been operating the CDMA business since thebeginning of 2002. In order to accelerate the development of the CDMA businessand subscriber growth, we began to offer certain promotional packages in thesecond half of 2002. As part of the contractual arrangements with certain CDMAcontractual subscribers under these special promotional packages, CDMA handsetswere provided to the subscribers for their use at no additional charge duringthe specified contract periods, which range from 6 months to 2 years. Inreturn, the subscribers are required to incur a minimum amount of service feesduring the contract period. If the contractual subscribers can fulfill theminimum contract spending amounts by the end of the contract period, they willnot be obliged to repay the remaining costs of the CDMA handsets given fortheir use. In addition, to secure contract performance, these subscribers arerequired under their contracts to (i) prepay certain amounts of servicefees or deposits, (ii) maintain a bank deposit in one of the designatedcommercial banks to secure their minimum contract amounts, or (iii) providea guarantor who will compensate us for any loss in the event of the subscriber’snon-performance of related contractual obligations.

We consider the costs of the CDMA handsets provided tocontractual subscribers under these promotional packages as customeracquisition costs for the development of these new CDMA contractualsubscribers. Such customer acquisition costs are capitalized to the extent reasonably expected to be recoverable, and amortizedover the contractual periods (not exceeding two years), over which futureeconomic benefits are expected to be received by us in the form of minimum contract revenue.

We determined the accounting policy for capitalizationof customer acquisition costs of contractual CDMA subscribers after a carefulevaluation of specific facts and circumstances, and believe that thecapitalization of such costs is appropriate because future economic benefitsare expected to be receivedby us inthe form of future contractual revenues, taking into consideration (i) thehistorically high ARPUs and low churn, default or bad debt rates of thesesubscribers; (ii) our established procedures in and the relative low costof enforcement of contracts in default; and (iii) the existence ofspecified contract periods with minimum contract spending amounts and built-incontractual safeguarding measures such as non-refundable prepayments, bankdeposits, and guarantees received, as well as penalty clauses imposed onsubscribers.

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** **

Therefore, we believe that the capitalized customeracquisition costs are recoverable from future revenue to be derived from thesepromotional packages, and the capitalization and amortization of these customeracquisition costs is an appropriate accounting policy. Furthermore, wecontinuously assess and evaluate the recoverability of these customeracquisition costs, based on detailed review of historical subscriber churnrates and estimated default rates. Based on our current assessment andevaluation, we believe that there is no significant problem in recovering thecarrying amounts of the customer acquisition costs as of December 31,2003, 2004 and 2005.

We have made the above recoverability assessmentsbased on the current legal and operating environment relating to thesubscribers’ contract performance and other information currently available tous. Actual results may differ significantly from the current situation and ourcurrent estimates. If the situation changes significantly in the future, we mayneed to record additional non-recoverable customer acquisition costs based onconditions at that time.

**Recognition ofUpfront Non-refundable Revenue and Direct Incremental Costs**

We capitalize and amortize upfront non-refundablerevenue, including connection fees and activation fees of SIM cards or UIMcards from our GSM and CDMA cellular subscribers over expected customer serviceperiod. Accordingly, the related direct incremental costs of acquiring and activatingGSM and CDMA subscribers, including costs of SIM or UIM cards and commissionswhich are directly associated with upfront non-refundable revenue received uponactivation of cellular services, are also capitalized and amortized over thesame expected customer service period. We only capitalize costs where weconsider that they will generate future economic benefits. The excess of thedirect incremental costs over the corresponding upfront non-refundable revenue,if any, are expensed off to the statement of income immediately.

The expected customer service period for our cellularbusiness is estimated based on the expected stabilized churn rates ofsubscribers after taking into consideration factors such as our customerretention experience, the expected level of competition, the risk oftechnological or functional obsolescence of our services and the currentregulatory environment. If our estimate of the expected stabilized churn ratechanges for future periods as a result of unexpected changes in competitionenvironment, telecommunication technology or regulatory environment, the amountand timing of recognition of these direct incremental costs and our deferredrevenue would also change.

**Lease of CDMANetwork Capacity**

(i)            OriginalCDMA lease agreements

We had entered into a CDMA network capacity leaseagreement with Unicom Group and its wholly-owned subsidiary, Unicom NewHorizon, in December 2001. Pursuant to this CDMA lease agreement, UnicomNew Horizon agreed to lease the capacity of the CDMA network to us covering thenine provinces of Guangdong, Jiangsu, Zhejiang, Fujian, Liaoning, Shandong,Anhui, Hebei, Hubei and the three municipalities of Beijing, Shanghai andTianjin. 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 in the PRC.Unicom New Century and Unicom New World had also respectively entered into aCDMA lease agreement with Unicom Group and Unicom New Horizon on similar termsand conditions. These lease agreements and the lease agreement entered in 2001are collectively referred to as the “Old CDMA Leases”.

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According to the terms of the Original CDMA Leases,the initial lease period is one year, renewable for additional one-year termsat our own option. We have the exclusive right to lease and operate the CDMAnetwork capacity in the above regions. Also, we have the option to add orreduce the capacity leased by giving advance notice. The lease fee per unit ofcapacity is calculated on the basis that if full capacity is leased, it wouldpermit Unicom New Horizon to recover its investment in constructing the CDMAnetwork in seven years, with an internal return of 8%. In January 2004, werenewed the CDMA network capacity for an additional one-year term. We had theoption to purchase the network assets based on the appraised value of thenetwork determined by an independent appraiser.

We assessed the appropriate lease classification atthe inception of the Old CDMA Leases. Factors and related implications we haveconsidered include whether we have taken the risks and rewards of ownership ofthe CDMA assets. Furthermore, we have considered whether the existence of thepurchase option and the annual renewal option, combined with the relatedeconomic penalties, risks and benefits, have caused us to take on risks andrewards similar to those that an owner of these assets would bear.

Unicom New 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 bear the risks associated with the operationof the CDMA business during the relevant leasing periods and are free from anyownership risks of the CDMA network. According to the terms of the Old CDMALeases, the initial lease period was only one year, with renewal of additionalone-year terms at our option. Accordingly, there was no pre-determined leaseperiod and minimum network capacity to be leased in future periods. We had theoption to determine whether we would renewand continue the leases and how much capacity to lease. We also had the optionto decide whether we would exercise the purchase option of CDMAnetwork based on then market conditions and future operating performance of theCDMA business, subject to approvals obtained from our independent minorityshareholders.

Accordingly, if the CDMA business turns out to beunsuccessful, we did not have the obligation under the Old CDMA Leases to continue this CDMA lease arrangement or to exercisethe purchase option.

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 transferto the lessee all the risks and rewards of ownership of the leased assets areaccounted for as finance leases; and leases where substantially all the risksand rewards of ownership of the leased assets remain with the lessor areaccounted for as operating leases. When performing this assessment, we haveconsidered a number of factors as stated above that required significantjudgment.

At the inception of the Old CDMA Leases, there was ahigh degree of uncertainty related to the market condition and operatingresults of the CDMA business. It was highly uncertain whether we would continueto lease the network in the future or to estimate the future network capacityto be leased. We were also unable to determine whether or not we would exercisethe purchase option. Given these uncertainties and due to the fact that therisks associated with the ownership of the CDMA assets substantially remainedwith Unicom Group and Unicom New Horizon, we accounted for the leasing of theCDMA network as operating leases for the initial lease periods, estimated to bethree years, so as to reflect the respective rights and obligations of therelevant parties to the Old CDMA Leases.

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(ii)           NewCDMA lease agreement

On March 24, 2005, wehave entered into the New CDMA Lease with Unicom Group and Unicom New Horizonto replace the Old CDMA Leases. The New CDMA Lease was approved by our minorityshareholders on May 12, 2005 and became retroactively effective from January 1,2005. Key terms of the New CMDA Lease, including exclusive operating rights andpurchase option, are substantially similar to those contained in the Old CDMALeases except that (i) the initial lease period is two years, with fullCDMA constructed network capacity to be leased from Unicom New Horizon, and (ii) theannual lease fee shall be determined based on the audited annual servicerevenue of our CDMA cellular business. For more detailed discussions of theterms of the New CDMA Lease, see “B. Related Party Transactions - Leasing ofCDMA Network Capacity — New CDMA Lease” under Item 7.

Under the New CDMA Lease, we believe the CDMA businesscontinue to involve asignificant  level of uncertainties, particularly due to the fact that (i) theCDMA business still recorded a loss in 2005; (ii) the uncertainty of thefuture success of CDMA business arising from intense market competition; and (iii) theuncertainty in the future changes in technology standards and governmentregulatory environment in relation to 3Gservices. At theinception of the New CDMA Lease, we were unable todetermine whether we would renew the lease after the initialtwo-year lease term or whether we would exercisethe purchase option. Given these uncertainties, we consider the risksassociated with the ownership of the CDMA assets still substantially remainwith Unicom Group and Unicom New Horizon, and have concluded that the New CDMALease should be classified as an operating lease.

At the end of the current leaseterm, we will reassess the appropriate classification based on the relevantfactors and circumstances available at that time. Based on the above accountingjudgment we made, the operating lease expense has been recorded in thestatements of income since the commencement of the Old CDMA Leases and the NewCDMA Lease, and the carrying value of the CDMA assets and the relatedliabilities have not been reflected in the balance sheets. For the year ended December 31,2005, we recorded lease expense of approximately RMB7.92 billion under the NewCDMA Lease.

**Depreciation of Property,Plant and Equipment**

Depreciation of our property, plant and equipment iscalculated using the straight-line method to allocate cost or revalued amountsto residual values over the estimated useful lives. We review the useful livesand residual values periodically to ensure that the method and rates ofdepreciation are consistent with the expected pattern of realization ofeconomic benefits from property, plant and equipment. We use estimates ofuseful lives of property, plant and equipment based on historical experience,taking into account anticipated technological changes. If there are significantchanges from previously estimated useful lives, the amount of depreciationexpense may be adjusted. The cost and accumulated depreciationof property, plant and equipment as of December 31, 2005 amounted toRMB190.9 billion and RMB74.8 billion, respectively, as compared to RMB173.8billion and RMB55.3 billion, respectively, as of December 31, 2004.

**Impairment of Non-currentAssets**

At each balance sheet date, we perform a review ofinternal and external sources of information to identify indications that ournon-current assets, including property, plant and equipment and goodwill, maybe impaired. In addition, we review (i) our assets that have indefiniteuseful life that are not subject to amortization and (ii) our assets thatare subject to depreciation or amortization for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable. We continually monitor our businesses, markets and businessenvironment and make judgments and assessment as to whether any impairmentevent or change has occurred. An impairment loss is recognized whenever thecarrying amount of an asset exceeds its recoverable amount. The recoverableamount is the higher of (i) an asset’s fair value less costs to sell and (ii) value-in-use.We estimate value-in-use based on estimated discounted future cash flows of acash-generating asset unit, which is the smallest group of assets thatgenerates cash flows independently.

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In making judgment on the recoverability ofnon-current assets, we need to assess whether: (i) an event has occurredthat may affect an asset’s value; (ii) the carrying value of an asset canbe supported by the discounted future cash flows from such asset and (iii) thecash flow is discounted at an appropriate rate. Changes in any of theseassessments could result in significant changes to our estimates of therecoverability of our non-current assets.

**Provision for DoubtfulDebts**

Accounts receivables are stated at cost, lessprovision for doubtful debts. We evaluate specific accounts receivable wherethere are indications that the receivable may be doubtful or is not collectible.We record a provision based on our best estimates to reduce the receivablebalance to the amount that is expected to be collected. For the remainingreceivable balances as of each period-end, we make a provision based onobservable data indicating that there is a measurable decrease in the estimatedfuture cash flows from the remaining receivable balances.We make such estimates based on our past experience, historical collectionpatterns, subscribers’ credit worthiness and collection trends. For the generalsubscribers of cellular, long distance, data and Internet services, we make afull provision for receivables aged over 3 months, which is consistent with our creditpolicy with respect to relevant subscribers.

Our estimates described above are based on ourhistorical experience, subscriber creditworthiness and collection trends. Ifcircumstances change (e.g. due to factors including developments in our businessand the external market environment), we may need to re-evaluate our policieson doubtful debts, and make additional provisions in the future.

**Provision for SubscriberReward Program**

Since 2004, we have implemented a subscriber reward program, whichis a bonus point-based scheme that rewards subscribersaccording to their service consumption, loyalty and payment history. Theestimated liability is recognized based on (i) the value of each bonuspoint awarded to subscribers, (ii) the number of bonus points relating tosubscribers who are qualified to exercise their redemption right at the end ofa period and (iii) the estimated number of bonus points relating tosubscribers who have no right to redeem the incentives at the end of a period,but who are expected to ultimately earn and claim awards under the reward program. Whensubscribers redeem rewards or their entitlements expire, the provision will be adjustedaccordingly. We have recognized the liability amounting to RMB337 million as ofDecember 31, 2005, as compared to RMB40 million as of December 31,2004. As we have limited historical data in respect of the redemption of bonus points, we may need to re-assess our accruingmethod for the potential bonus point liability when we obtain a more reliable historicalredemption rate in future.

**Income Tax and DeferredTaxation**

Income tax is provided based on income before tax forstatutory financial reporting purposes, adjusted for income and expense itemsthat 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 financial statements.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.

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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 specialapprovals obtained from relevant tax authorities and any preferential taxtreatment to which we are entitled in each location or jurisdiction in which weoperate. This process involves estimation made by us about our current taxexposure together with an assessment of temporary differences resulting fromdifferent treatment of items for tax and accounting purposes in order todetermine the amount of tax provisions for the period. We believe that we haverecorded adequate tax provisions based on our best estimates and assumptions.For the evaluation of temporary differences, we have assessed the likelihood thatthe deferred taxes could be recovered. Major deferred tax components relate tointerest on loans from China-China-Foreign (“CCF”) joint ventures, loss arisingfrom terminations of CCF arrangements, provisions for doubtful debts, deferraland amortization of upfront non-refundable revenue, capitalization andamortization of direct incremental cost, capitalized interest already deductedfor tax purposes and accruals of expenses not yet deductible for tax purposes.Due to the effects of these temporary differences on income tax, we haverecorded deferred tax assets amounting to RMB335 million and RMB469 million asof December 31, 2005 and 2004, respectively. Deferred tax assets arerecognized based on our estimates and assumptions that they will be recoveredfrom taxable income arising from the continuing operations in the foreseeablefuture.

We believe we have recorded adequate current anddeferred taxes based on prevailing tax rules and regulations and ourcurrent best estimates and assumptions. In the event that future tax rules andregulations or related circumstances change, adjustments to current anddeferred taxes may be necessary.

***Operating Results***

**Year Ended December 31, 2005 Compared to YearEnded December 31, 2004**

In 2005, our revenue continued to increase, by 10.1%from RMB79.09 billion in 2004 to RMB87.05 billion in 2005. This growth wasprincipally due to the relatively rapid growth of our CDMA cellular businessand steady growth of our GSM cellular business. For the reasons discussedbelow, our cellular businesses continued to increase in terms of revenues andin their percentage contribution to our overall business, while our longdistance, data and Internet businesses continued to decrease in terms ofrevenues and in their contribution to our business.

Due to factors discussed below, in 2005 our costs andexpenses grew 10.1%, the same rate as that of our revenue. As a result, whileour income before income tax increased by 9.8% to RMB7.10 billion, our incomebefore income tax margin stood at 8.2%, the same as that of 2004. Segmentincome before income tax margin in our GSM cellular business decreased from14.3% in 2004 to 14.0% in 2005. Our CDMA cellular business maintainedrelatively rapid growth in 2005 and its loss before income tax decreased by64.5%. In our long distance and data and Internet businesses, segment incomebefore income tax decreased 66.8% in 2005 and segment income before income taxmargin decreased to 1.7% in 2005 from 4.8% in 2004.

Our net income in 2005 increased by 9.7% to RMB4.93billion, for reasons discussed below.

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**Revenue**

Revenue from our GSM cellular business grew steadilyin 2005 and continued to generate a majority of our total revenue, whilerevenue from our CDMA cellular business maintained its growth in 2005 and furtherincreased its share of our total revenue for the year. Revenues from our GSMand CDMA cellular businesses represented 94.7% of our total revenue in 2005, ascompared with 93.0% in 2004. The share of revenue from the CDMA cellularbusiness in our total revenue increased from 32.9% in 2004 to 34.8% in 2005,while the share of revenue from the GSM cellular business in our total revenueslightly decreased from 60.1% in 2004 to 59.9% in 2005. Revenues from our longdistance and data and Internet businesses decreased from RMB5,528 million in2004 to RMB4,590 million in 2005. Aggregate revenues from our long distancebusiness and our data and Internet businesses represented 5.3% of our totalrevenue in 2005, as compared with 7.0% in 2004. We believe the changes in ourrevenue composition reflect our focus on the development of our cellularbusinesses.

**Cellular Revenue**

For the reasons discussed below, revenues from our GSMand CDMA cellular businesses (including revenues from sales oftelecommunications products) together increased by 12.1%, from RMB73.56 billionin 2004 to RMB82.46 billion in 2005.

*GSM Cellular Business.*Revenue from our GSM cellular businessincreased by 9.7%, from RMB47.51 billion in 2004 to RMB52.14 billion in 2005,primarily due to the continued increases in the total number of our total GSMcellular subscribers and in our subscribers’ average MOU. The total number ofour GSM cellular subscribers increased by 12.8%, from 84.27 million as of December 31,2004 to 95.07 million as of December 31, 2005. With the continuallyincreasing cellularpenetration in China, an increasing proportion of new subscribers are relatively low-end subscribers. As a result, ARPU from the GSM cellular businessdeclined 1.8%, from RMB49.4 in 2004 to RMB48.5 in 2005. The average MOU persubscriber per month increased 7.0%, from 188.9 minutes in 2004 to 202.2minutes in 2005.

The table below sets forth the revenue composition ofour GSM cellular business and each revenue item’s respective share of total GSMrevenue in the years ended December 31, 2003, 2004 and 2005. 
| ** **                           | ** ** | **2003 (Restated)**     | ** ** | **2004 (Restated)**       | ** ** | **2005**                     | ** ** |
|--------------------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                   | ** ** | **As **percentage of | ** ** | ** **                   | ** ** | **As **percentage of | ** ** | ** ** | ** ** | **As percentage of** | ** ** |
| ** **                           | ** ** | **RMB in million** | ** ** | **total**                      | ** ** | **RMB in million** | ** ** | **total** | ** ** | **RMB in million** | ** ** | **total** | ** ** |
| Revenue                              |       | 41,201                       |       | 100.0                          | %          | 47,513                       |       | 100.0 | % | 52,139 |   | 100.0 | % |
| Service Revenue                      |       | 41,153                       |       | 99.9                           | %          | 47,509                       |       | 100.0 | % | 52,136 |   | 100.0 | % |
| Usage  Fee                           |       | 29,072                       |       | 70.6                           | %          | 31,997                       |       | 67.3 | % | 32,077 |   | 61.5 | % |
| Monthly  Fee                         |       | 7,042                        |       | 17.1                           | %          | 6,922                        |       | 14.6 | % | 6,841 |   | 13.1 | % |
| Interconnection                      |       |                         |       |                           |       |                         |       |   |   |   |   |   |   |
| Revenue                              |       | 1,927                        |       | 4.7                            | %          | 2,614                        |       | 5.5 | % | 3,466 |   | 6.6 | % |
| Others                               |       | 3,112                        |       | 7.5                            | %          | 5,976                        |       | 12.6 | % | 9,752 |   | 18.8 | % |
| Sales of Telecommunications Products |       | 48                           |       | 0.1                            | %          | 4                            |       | 0.0 | % | 3 |   | 0.0 | % |

 

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The growth in total usage of our GSM cellular services has been largelyoffset by the decrease in the ARPU. As a result, usage fees for GSM cellular services only increasedby 0.3% from RMB32.00 billion in 2004 to RMB32.08 billion in 2005, representing 61.5% oftotal GSM service revenue, a decreasefrom 67.3% in 2004. Monthly feesdecreased by 1.2%, from RMB6.92 billion in 2004 to RMB6.84 billion in 2005, andrepresented 13.1% of total GSM service revenue as compared with 14.6% in 2004. This decrease is primarily due to an increasing number of packageservice plans no longer charging monthly fee separately. Interconnection revenue increased by32.6% from RMB2.61 billion in 2004 to RMB3.47 billion in 2005, and represented6.6% of total service revenue as compared with 5.5% in 2004. This increase is primarily due to the increased total usage of our GSMcellular services.

While continuing to meet the diverse needs of ourcustomers in the mass market, our GSM cellular business aims to actively promote value-addedservices. As a result, revenue from value-added services significantly increased its contribution to our total GSM cellular revenue. Revenue fromour GSM value-added cellular services increased 62.8%, from RMB4.86 billion in2004 to RMB7.91 billion in 2005. Its share of total GSM service revenueincreased from 10.2% in 2004 to 15.2% in 2005. Of the total revenue from GSMvalue-added cellular services, revenue from short messaging services increased28.3% from RMB2.79 billion in 2004 to RMB3.71 billion in 2005, and its share oftotal GSM service revenue grew from 6.1% in 2004 to 7.1% in 2005.

*CDMA Cellular Business.*Our CDMAsubscriber base has continued to expandat a relatively fast pace. In 2005, the growth in our CDMA subscriber base resulted in increasedrevenue from the CDMA cellular business. Revenue from our CDMA cellularbusiness reached RMB30.32 billion in 2005, a 16.4% increase over RMB26.05billion in 2004. This increase was primarily due to a 17.6% increase in our CDMA subscribers.

The table below sets forth the revenue composition ofour CDMA cellular business and each revenue item’s respective share of totalCDMA revenue for the years ended December 31, 2003, 2004 and 2005.
| ** **                           | ** ** | **2003 (Restated)**     | ** ** | **2004 (Restated)**       | ** ** | **2005**                     | ** ** |
|--------------------------------------|------------|------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                   | ** ** | **As percentage of** | ** ** | ** **                   | ** ** | **As percentage of** | ** ** | ** ** | ** ** | **As percentage of** | ** ** |
| ** **                           | ** ** | **RMB in million** | ** ** | **total**                      | ** ** | **RMB in million** | ** ** | **total** | ** ** | **RMB in million** | ** ** | **total** | ** ** |
| Revenue                              |       | 18,063                       |       | 100.0                          | %          | 26,046                       |       | 100.0 | % | 30,320 |   | 100.0 | % |
| Service Revenue                      |       | 16,667                       |       | 92.3                           | %          | 24,378                       |       | 93.6 | % | 27,577 |   | 91.0 | % |
| Usage Fee                            |       | 11,672                       |       | 64.6                           | %          | 16,165                       |       | 62.1 | % | 16,727 |   | 55.2 | % |
| Monthly Fee                          |       | 3,488                        |       | 19.3                           | %          | 4,638                        |       | 17.8 | % | 4,905 |   | 16.2 | % |
| Interconnection Revenue              |       | 608                          |       | 3.4                            | %          | 927                          |       | 3.6 | % | 1,399 |   | 4.6 | % |
| Others                               |       | 899                          |       | 5.0                            | %          | 2,648                        |       | 10.1 | % | 4,546 |   | 15.0 | % |
| Sales of Telecommunications Products |       | 1,396                        |       | 7.7                            | %          | 1,668                        |       | 6.4 | % | 2,743 |   | 9.0 | % |

 

CDMA usage fees increased by 3.5% from RMB16.17billion in 2004 to RMB16.73 billion in 2005, and represented 55.2% of totalCDMA service revenue as compared with 62.1% in 2004. The decrease in the percentage of total CDMA service revenue was primarilydue to the rapid increase in revenue from value-added CDMA services. With the expansion of our CDMA 1Xwireless data services in 2005, we have been actively developing our CDMAwireless data business, by making efforts to leverage the competitive edge ofthe CDMA technology. Revenue from CDMA value-added cellular services reachedRMB4.05 billion in 2005, an increase of 70.2% from RMB2.38 billion in 2004, andaccounted for 14.7% of total service revenue from the CDMA cellular business in2005. Of the total revenue from CDMA value-added cellular services, revenuefrom CDMA 1X wireless data services increased 92.1% from RMB0.68****billion in 2004 to RMB1.31****billion****in 2005, and its share of total CDMA service revenue grewfrom 2.8%****in 2004 to 4.8%****in2005. We expect revenue from value-added CDMA services will continue to growsignificantly, as we will continue to focus on the development and marketing ofsuch value-added services.

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Monthly fees increased by 5.8%, from RMB4.64 billionin 2004 to RMB4.91 billion in 2005, and represented 17.8% of total CDMA servicerevenue as compared with 19.0% in 2004. Interconnection revenue increased by50.9% from RMB0.93 billion in 2004 to RMB1.40 billion in 2005, and represented5.1% of total service revenue as compared with 3.8% in 2004. This increase is primarily due to the increased usage of our CDMAcellular services.

***Long Distance and Dataand Internet Revenue***

*Long Distance Business*. Revenue from our domestic and international long distance business decreased by 17.2%, fromRMB1.85 billion in 2004 to RMB1.53 billion in 2005. Such decrease is primarilydue to the decrease in tariffs as a result of intensifiedcompetition.

*Data and Internet Business*. Revenue from our data and Internetbusinesses decreased by 16.9% from RMB3.68 billion in 2004 to RMB3.06 billionin 2005 primarily due to the decrease in tariffs as a result of intensified competition.

As a result of the foregoing, revenues from our long distance and data and Internetbusinesses were RMB4.59 billion, a decrease of 17.0% from 2004.

***Costs and expenses***

Costs and expenses in 2005 were RMB79.95 billion,representing an increase of 10.1% over 2004, same as the 10.1% growth inrevenue for the same period. Certain itemsof costs andexpenses, however, had a higher rate of increase, such as the 18.2% increase inleased lines and network capacities expenses, the 11.4% increase ininterconnection charges and the 21.7%increase in employee benefit expenses. Due to the expansion of our CDMA business, leasedlines and network capacities expenses (which include the expenses from the CDMAnetwork leases) increased faster than our revenue in 2005. As our variousbusiness segments continued to develop, interconnection charges also increasedfaster than our revenue in 2005 since the interconnection rates remainunchanged while our effective tariffs have been declining due to continuedprice competition in 2005. Our employee benefit expenses also grew faster thanour revenue in 2005 due to factors including a general increase in employeeinsurance and social security expenses.

In 2005, we effectively implemented the business strategyof “effective growth”, i.e., profit driven growth, by focusing on cost controland optimization of our expense structure in order to ensure continued growthin earnings. Our costs and expenses as a percentage of total revenue stood at91.8% in 2005, the same as that in 2004.

 

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The table below illustrates the major expense itemsfrom 2003, 2004 and 2005 and their respective shares of total revenue.
| ** **                                                            | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2003 **(Restated)                                     | ** ** | **2004 **(Restated) | ** ** | **2005** | ** ** |
| ** **                                                            | ** ** | **RMB in **million                                 | ** ** | **%** ofTotal Revenue | ** ** | **RMB in million** | ** ** | **%** of   Total Revenue | ** ** | **RMB in million** | ** ** | **%** ofTotal Revenue | ** ** |
| Costs and expenses                                                    |       | 60,956                                                       |       | 90.8 | % | 72,616 |   | 91.8 | % | 79,947 |   | 91.8 | % |
| Leased lines and  network capacities                                  |       | 4,320                                                        |       | 6.4 | % | 7,398 |   | 9.4 | % | 8,748 |   | 10.0 | % |
| Interconnection  charges                                              |       | 5,921                                                        |       | 8.8 | % | 7,517 |   | 9.5 | % | 8,372 |   | 9.6 | % |
| Depreciation and  amortization                                        |       | 16,359                                                       |       | 24.4 | % | 19,011 |   | 24.0 | % | 20,368 |   | 23.4 | % |
| Employee benefit  expenses                                            |       | 4,596                                                        |       | 6.8 | % | 4,615 |   | 5.8 | % | 5,616 |   | 6.5 | % |
| Selling and  marketing                                                |       | 15,264                                                       |       | 22.7 | % | 19,523 |   | 24.7 | % | 20,558 |   | 23.6 | % |
| General,  administrative and other expenses                           |       | 9,139                                                        |       | 13.7 | % | 10,500 |   | 13.3 | % | 11,742 |   | 13.5 | % |
| Include: Impairment loss  and assets write-off of the Paging Business |       | 557                                                          |       | 0.8 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Cost of  telecommunications products sold                             |       | 2,939                                                        |       | 4.4 | % | 2,563 |   | 3.2 | % | 3,575 |   | 4.1 | % |
| Loss on sale of  discontinued operation (Guoxin Paging)               |       | 663                                                          |       | 1.0 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Finance costs                                                         |       | 1,946                                                        |       | 2.9 | % | 1,696 |   | 2.1 | % | 1,099 |   | 1.2 | % |
| Interest income                                                       |       | -173                                                         |       | -0.3 | % | -103 |   | -0.1 | % | -96 |   | -0.1 | % |
| Other gains, net                                                      |       | -18                                                          |       | 0.0 | % | -104 |   | -0.1 | % | -35 |   | 0.0 | % |

 

*Leased Lines and Network Capacities*. With the increase in our CDMAsubscribers, the lease expense for CDMA network capacities increased by 20.3%,from RMB6.59 billion in 2004 to RMB7.92 billion in 2005. Leased lines andnetwork capacities expenses as a percentage of total revenue rose slightly from9.4% in 2004 to 10.0% in 2005.

*Interconnection Charges*. Interconnection charges reached RMB8.37billion in 2005, representing an increase of 11.3% from 2004, primarily due tothe increase in interconnection traffic volume as a result of the developmentof our GSM and CDMA cellular business and long distance, data and Internetbusinesses. As our various business segments continued to develop,interconnection charges as a percentage of total revenue also slightlyincreased from 9.5% in 2004 to 9.6% in 2005.

*Depreciation and Amortization*. Depreciation and amortization expensesincreased by 7.2% to RMB20.37 billion in 2005, a lower growth rate than thegrowth rate in revenue. The increase in depreciation and amortization expensesresulted from expanded network capacity and the expansion of assets scale,which was partly offset by our cessation of the amortization of goodwill in2005 in accordance with the changed accounting policies described above. Depreciationand amortization expenses as a percentage of total revenue decreased slightlyfrom 24.0% in 2004 to 23.4% in 2005.

*Employee Benefit Expenses*. As of the end of 2005, we had 53,070employees, an increase of 34.1% from 39,589 at the end of 2004. Our employeebenefit expenses increased from RMB4.62 billion in 2004 to RMB5.62 billion in2005. Its share as a percentage of total revenue increased from 5.8% in 2004 to6.5% in 2005. The increase in employee benefit expenses in 2005 was mainly dueto the following factors: (i) a general increase in mandatory employeeinsurance and social security expenses; (ii) the adoption of HKFRS whichrequired the share-based payments arising from the share options to beamortized over the vesting period and recorded as employee benefit expenses and(iii) the conversion of a significant number ofpreviously contracted workers to our formal employees.

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*Selling and Marketing*. Our major selling and marketingexpenses included commissions, promotion and advertising expenses, amortizationof customer acquisition costs of contractual CDMA subscribers and customerretention costs. Due to our effectivecost control measures, sellingand marketing expenses totaled RMB20.56 billion in 2005, an increase of 5.3%from 2004, significantly lower than the growth rate of the total revenue in2005. Amortization of contractual CDMA subscribers acquisition costs in 2005were RMB5.95 billion, a decrease of 2.8% from 2004. The balance of unamortizeddeferred CDMA subscriber acquisition costs significantly decreased from RMB4.74billion as of the end of 2004 to RMB2.94 billion as of the end of 2005primarily due to our efforts inreducing the use of CDMA handset promotional packages. Due to the continued growth in thesubscriber base of our various business segments, the commissions todistributors and sales agents rose to RMB8.89 billion, an increase of 7.5%. Promotionand advertising expenses were RMB2.53 billion, an increase of 6.3%. Selling andmarketing expenses as a percentage of revenue decreased from 24.7% in 2004 to23.6% in 2005.

*General, Administrative and OtherExpenses*. As a result of our increased network maintenance costs due to the expirationof many equipment warranties, our general, administrative and other expenses wereRMB11.74 billion in 2005, representing an increase of 11.8% from RMB10.50billion in 2004. General, administrative and other expenses as a percentage oftotal revenue increased slightly from 13.3% in 2004 to 13.5% in 2005. In 2005, as a result of our credit control measures, the provision for doubtful debts fell to RMB1.50billion, a significant decrease of 31.6% from 2004. Provision for doubtfuldebts as a percentage of service revenue decreased from 2.8% in 2004 to 1.7% in2005.

*Cost of Telecommunications ProductsSold*. The cost oftelecommunication products sold increased by 39.5% from RMB2.56 billion in 2004to RMB3.58 billion in 2005. This increasewas primarily due to a significant increase in CDMA handset units purchasedfrom manufacturers and sold to customers during 2005 as compared to 2004. The share of cost of telecommunicationsproducts sold as a percentage of revenue increased from 3.2% in 2004 to 4.1% in2005.

*Interest Income and Finance Costs*. Our interest income was RMB0.10billion in 2005, the same as in 2004. Our financecosts decreased from RMB1.70 billion in 2004 to RMB1.10 billion in 2005,primarily due to the increasedportion of short-term borrowings in our indebtedness. In addition, we recorded a foreignexchange gain of RMB0.20 billion due to the revaluation of Renminbi againstU.S. dollars, which significantly contributed to the decrease of our financecosts. The above factors resulted in net finance costs of RMB1.00 billion in2005, a decrease of 37.0% from the net finance costs of RMB1.59 billion in2004.

***Segmentincome (loss) before income tax***

In 2005, our revenue and our costs and expenses bothincreased by 10.1%. While our income before income tax reached RMB7.10 billion,an increase of 9.8% from 2004, our income before taxation margin was 8.2% inboth 2005 and 2004.

*GSM Cellular Business*. In our GSM cellular business, segmentincome before income tax was RMB7.28 billion in 2005, an increase of 6.5 %from 2004. The increase in the segment income before income tax of our GSMcellular business mainly reflects the 7% increase in the average monthly MOUper subscriber which was partially offset by the 1.8% decline in the ARPU forour GSM cellular business. Our segment income before taxation margin in the GSMcellular business slightly decreased from 14.3% in 2004 to 14.0% in 2005.

*CDMA Cellular Business*. We incurred a segment loss beforeincome tax of RMB0.2 billion in 2005 for our CDMA business, a 64.5% decrease from the segment loss before income tax of RMB0.56 billionin 2004. The decrease of segment loss before income tax of our CDMA cellularbusiness was primarily due to the continued expansionof CDMA cellular business subscriber base, the rapid growth of CDMA value-addedservices and the effective control of sales and marketing costs, partiallyoffset by the decrease in CDMA cellular subscribers’ average MOU per month andthe ARPU.

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*Long Distance Business*. In our long distance business, segmentincome before income tax decreased 62.8%, from RMB0.50 billion in 2004 toRMB0.18 billion in 2005, primarily due to reducedtariff level as a result of increased competition. As a result, the segmentincome before taxation margin in our long distance business decreased from15.9% in 2004 to 6.8% in 2005.

*Data and Internet Business*. In our data and Internet businesses, wehad a segment loss before income tax of RMB0.04 billion in 2005, compared withthe segment loss before income tax of RMB0.07 billion in 2004.

***Net Income***

*Income Tax*. As a result of our increased income before income tax, our income tax increased to RMB2.17 billionin 2005, an increase of 9.8% from 2004. Our effective tax rates in 2004 and2005 were both 30.6%.

*Net Income*. As a result of the foregoing, our netincome was RMB4.93 billion in 2005, representing an increase of 9.7% from 2004.Net income per share increased 8.3%, from RMB0.36 in 2004 to RMB0.39 in 2005.

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

In addition to the above management discussion andanalysis of our results of the operation under HKFRS between the years ended December 31,2005 and 2004, in connection with the preparation and reconciliation of ourconsolidated financial statements in accordance with US GAAP, we believe thereare no material differences between HKFRS and US GAAP that would have asignificant impact on the discussion and analysis of our results of operationsbetween the years ended December 31, 2005 and 2004. Our combined revenueunder US GAAP increased from RMB79.39 billion in 2004, to RMB87.25 billion in2005, representing an increase of 9.9%. Our net income under US GAAP increasedfrom RMB4.71 billion in 2004 to RMB5.01 billion in 2005, representing anincrease of 6.4%. See also Note 37 to the consolidated financial statements fora more detailed summary of all significant accounting differences between HKFRSand US GAAP that are relevant to us.

**Year Ended December 31, 2004 Compared to YearEnded December 31, 2003**

Our results of operations in 2004 were materiallyaffected by our acquisitions of Unicom New World effective December 31,2003. In particular, our revenue and costs and expenses increased significantlyin 2004, which was primarily due to the inclusion of the results of operationsof Unicom New World. By comparison, our results in 2003 did not include theresults of operations of Unicom New World. As a result, our results ofoperations in 2004 are not directly comparable with those in prior years. See “-Acquisitions of Unicom New Century, Unicom New World and Unicom Internationaland Sale of Guoxin Paging” above. See also “A. The History and Development ofthe Company - Acquisitions of Unicom New Century andUnicom New World and Sale of Guoxin Paging” under Item 4 above.

In 2004, ourrevenue continued to increase, by 17.8% from RMB67.15 billion in 2003 to RMB79.09 billion in 2004. This growth was principally due to the strong growth of ourCDMA cellular business and continued growth of our GSM cellular business, aswell as the inclusion of revenue attributable to Unicom New World, which weacquired effective December 31, 2003. Our cellularbusinesses continued to increase in their percentagecontribution to our overall business. Our long distance, data and Internetbusinesses decreased in terms of revenues and in their contribution to ourbusiness.

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Due to factors discussed below, in 2004 our costs and expenses grew19.1%. As a result, our incomebefore income tax increased by 4.4% to RMB6.47 billion,while our income before income tax margin decreased to 8.2%, as compared with 9.2% in 2003. Segment income before taxation margin in our GSMcellular business decreased from17.3% in 2003 to 14.3%in 2004. In our longdistance and data and Internet businesses, segment income before income tax decreased68.0% in 2004 and segment income before taxation margin decreased to 4.8% in2004 from 15.8% in 2003.

Our net income in2004 increased****by 5.3% to RMB4.49 billion, for reasons discussed below.

***Revenue***

Revenue from our GSM cellular business grew steadilyin 2004 and continued to generate a majority of our total revenue, whilerevenue from our CDMA cellular business sustained fast growth in 2004,significantly increasing its share of our total revenue for the year. Our CDMAcellular business, introduced in January 2002, generated RMB26.05 billionin revenue in 2004, contributing 66.9% of our total revenue growth in that year.Revenues from our GSM and CDMA cellular businesses represented 93.0% of ourtotal revenue in 2004, as compared with 88.3% in 2003. The share of revenuefrom the CDMA cellular business in our total revenue increased from 26.9% in2003 to 32.9% in 2004, while the share of revenue from the GSM cellularbusiness in our total revenue decreased from 61.4% in 2003 to 60.1% in 2004. Revenuesfrom our long distance and data and Internet businesses slightly decreased fromRMB5,733 million in 2003 to RMB5,528 million in 2004. Revenues from ourlong distance business and our data and Internet businesses represented 2.3%and 4.6 %, respectively, of our total revenue in 2004, as compared with 3.4%and 5.1%, respectively, in 2003. The growth in our total revenue, however, waspartially offset by the sale of our paging business, effective December 31,2003. We believe the changes in our revenue composition reflect our focus onthe development of our cellular businesses.

***Cellular Revenue***

For the reasons discussed below, revenues from our GSMand CDMA cellular businesses (including revenues from sales oftelecommunications products) together increased by 24.1%, from RMB59.26 billionin 2003 to RMB73.56 billion in 2004.

*GSM Cellular Business *Revenue fromour GSM cellular business increased by 15.3%, from RMB41.20 billion in 2003 toRMB47.51 billion in 2004, primarily due to the continued increase in the totalnumber of our total GSM cellular subscribers as a result of organic subscribergrowth and the effect of our acquisition of Unicom New World. The total numberof our GSM cellular subscribers increased by 31.8%, from 63.92 million asof December 31, 2003 to 84.27 million as of December 31, 2004. Asa result of continuing cellular penetration expansion, an increase in theproportion of low-usage subscribers among new subscribers, an increased numberof pre-paid subscribers, and increasing market competition negatively affectingeffective pricing, ARPU from the GSM cellular business declined 12.9%, fromRMB56.7 in 2003 to RMB49.4 in 2004.

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The table below sets forth the revenue composition ofour GSM cellular business and each revenue item’s respective share of total GSM revenue in the years ended December 31,2002, 2003 and 2004.
| ** **                                | ** ** | **2002** (Restated)     | ** ** | **2003 (Restated)**            | ** ** | **2004 (Restated)**     | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **RMB in million** | ** ** | **As **percentage oftotal | ** ** | **RMB in million** | ** ** | **As **percentage oftotal | ** ** | **RMB in million** | ** ** | **As percentage of  total** | ** ** |
| Revenue                                   |       | 27,927                       |       | 100.0                               | %          | 41,201                       |       | 100.0 | % | 47,513 |   | 100.0 | % |
| Service Revenue                           |       | 27,890                       |       | 99.9                                | %          | 41,153                       |       | 99.9 | % | 47,509 |   | 100.0 | % |
| Usage  Fee                                |       | 20,275                       |       | 72.6                                | %          | 29,072                       |       | 70.6 | % | 31,997 |   | 67.3 | % |
| Monthly  Fee                              |       | 4,169                        |       | 14.9                                | %          | 7,042                        |       | 17.1 | % | 6,922 |   | 14.6 | % |
| Interconnection Revenue                   |       | 1,710                        |       | 6.1                                 | %          | 1,927                        |       | 4.7 | % | 2,614 |   | 5.5 | % |
| Others                                    |       | 1,736                        |       | 6.3                                 | %          | 3,112                        |       | 7.5 | % | 5,976 |   | 12.6 | % |
| Sales of Telecommunications Products |       | 37                           |       | 0.1                                 | %          | 48                           |       | 0.1 | % | 4 |   | 0.0 | % |

 

Due to the growth in total usage of our GSM cellularservices (including the effects of our acquisition of Unicom New World) and theincreasing proportion of pre-paid cellular subscribers (who do not pay monthlyfees), usage fees for GSM cellular services increased by 10.1% fromRMB29.07 billion in 2003 to RMB32.00 billion in 2004, and represented 67.4% of totalGSM service revenue as compared with 70.6% in 2003. For the same reasons,monthly fees decreased by 1.7%, from RMB7.04 billion in 2003 toRMB6.92 billion in 2004, and represented 14.6% of totalGSM service revenue as compared with 17.1% in 2003. Interconnection revenueincreased by 35.7% from RMB1.93 billion in 2003 to RMB2.61 billion in 2004, andrepresented 5.5% of total service revenue as comparedwith 4.7% in 2003.

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 GSM value-added cellular services increased 134.8%, fromRMB2.07 billion in 2003 to RMB4.86 billion in 2004. Its shareof total GSM service revenue more than doubled from 5.0% in 2003to 10.2% in 2004. Of the total revenue from GSM value-added cellular services,revenue from short messaging services increased 103.6% from RMB1.37 billionin 2003 to RMB2.79billion in 2004, and its share of totalGSM service revenue grew from 3.3% in 2003to 5.9% in 2004. Revenue from value-added services contributed significantly tothe increase of our total GSM cellular revenue and, we believe, will continueto enhance our competitiveness in this business.

*CDMA**C**ellular**B**usiness.*Since welaunched CDMA cellular services in 2002, our CDMA subscriber base has expanded rapidly as themarket became more familiar with our CDMA services. In 2004, the growth in ourCDMA subscriber base greatly boosted revenue from the CDMA cellular business. Revenuefrom our CDMA cellular business reached RMB26.05 billion in 2004, a 44.2%increase over RMB18.06 billion in 2003. This increase was primarily due to therapid expansion of our CDMA cellular business as well as the effect ofincluding revenue attributable to Unicom New World, which we acquired effectiveDecember 31, 2003. Our CDMA marketing strategy, which seeks todifferentiate our CDMA services from our GSM services, has resulted in a rapidincrease in the CDMA subscriber base, while successfully positioning the CDMAbusiness in the marketplace as “enterprise, infotainment, health-conscious andtrendy” services. ARPU for our CDMA cellular business reached RMB85.3 in 2004,more than 72.7% higher than the ARPU of RMB49.4 for GSM cellular services.

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The table below sets forth the revenue composition ofour CDMA cellular business and each revenue item’s respective share of total CDMA revenue for the years ended December 31,2002, 2003 and 2004.
| ** **                            | ** ** | **2002 (Restated)**     | ** ** | **2003 (Restated)**              | ** ** | **2004 (Restated)**     | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **RMB in million** | ** ** | **As percentage of  total** | ** ** | **RMB in million** | ** ** | **As percentage of  total** | ** ** | **RMB in million** | ** ** | **As percentage of  total** | ** ** |
| Revenue                               |       | 3,496                        |       | 100.0                                 | %          | 18,063                       |       | 100.0 | % | 26,046 |   | 100.0 | % |
| Service Revenue                       |       | 3,222                        |       | 92.2                                  | %          | 16,667                       |       | 92.3 | % | 24,378 |   | 93.6 | % |
| Usage Fee                             |       | 2,231                        |       | 63.8                                  | %          | 11,672                       |       | 64.6 | % | 16,165 |   | 62.1 | % |
| Monthly Fee                           |       | 713                          |       | 20.4                                  | %          | 3,488                        |       | 19.3 | % | 4,638 |   | 17.8 | % |
| Interconnection Revenue               |       | 184                          |       | 5.3                                   | %          | 608                          |       | 3.4 | % | 927 |   | 3.6 | % |
| Others                                |       | 94                           |       | 2.7                                   | %          | 899                          |       | 5.0 | % | 2,648 |   | 10.1 | % |
| Sales of Telecommunications  Products |       | 274                          |       | 7.8                                   | %          | 1,396                        |       | 7.7 | % | 1,668 |   | 6.4 | % |

 

CDMA usage fees increased by 38.5% from RMB11.67billion in 2003 to RMB16.17 billion in 2004, and represented 66.3% of totalCDMA service revenue as compared with 70.0% in 2003. Monthly fees increased by33.0%, from RMB3.49 billion in 2003 to RMB4.64 billion in 2004, and represented19.0% of total CDMA service revenue as compared with 20.9% in 2003. Interconnectionrevenue increased by 52.5% from RMB0.61 billion in 2003 to RMB0.93 billion in2004, and represented 3.8% of total service revenue as compared with 3.6% in2003.

With the expansion of our CDMA 1X wireless dataservices in 2004, we have been actively developing our CDMA wireless databusiness, 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 fromvalue-added CDMA cellular services reached RMB2.38 billion in 2004, anincrease of 205.1% from RMB0.78 billion in 2003, and accounted for 9.8%of total service revenue from the CDMA cellular business in 2004. We expectrevenue from value-added CDMA services will continue to grow significantly, aswe will continue to focus on the development and marketing of such value-addedservices.

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

Revenue from our long distance and data and Internetbusinesses reached RMB5.53 billion, a decrease of 3.6% from 2003. We intend tocontinue to leverage on our multi-business integrated network platform andactively promote services with distinctive features such as “Ruyi Mailbox”, “UNI-VIDEO”and “U-Net”.

*Long Distance Business.*Revenue from our traditional publicswitchedlong distance business decreased by 19.1%, fromRMB2.29 billion in 2003 to RMB1.85 billion in 2004. Such decrease isprimarily due to increased competition and the decrease in interconnectionrevenue from Unicom New World caused by our acquisition of Unicom New World.

*D**ata and Internet Business.*We have fully leveraged the technologicaladvantage of our multi-businesses integrated network platform. Along with effectivelyexpanding international and domestic call volume for IP telephony services, wehave been targeting institutional subscribers and corporate subscribers inpromoting services with distinctive features such as “UNI-VIDEO” and “U-Net”,and we also have been targeting the mass market in promoting data and Internetservices such as “Ruyi Mailbox”. At the same time, we have been continuing todevelop integrated data, voice and video connection services, and dedicated anddial-up connection services. As a result of these efforts, revenue from ourdata and Internet businesses rose by 6.8% from RMB3.44 billion in 2003 toRMB3.68 billion in 2004.

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***Paging Revenue***

We sold our paging business to Unicom Group, effectiveDecember 31, 2003, and therefore did not have revenue from the pagingbusiness in 2004. See “—Acquisitions of Unicom New Century, Unicom New Worldand Unicom International and Sale of Guoxin Paging” above. See also “A. TheHistory and Development of the Company—Acquisitions of Unicom New Century and UnicomNew World and Sale of Guoxin Paging” under Item 4 above.

***Costs and Expenses***

Costs and expenses in 2004 were RMB72.62 billion,representing an increase of 19.1% over 2003, which was greater than the 17.8%growth in revenue for the same period. As discussed below, a 71.3% increase inleased lines and network capacities expenses, a 27.9% increase in selling andmarketing expenses, a 16.2% increase in depreciation and amortization expensesand a 27.0% increase in interconnection charges were the primary factors in theincrease in costs and expenses. Due to the rapid expansion of our CDMAbusiness, selling and marketing expenses (which include the amortized portionof deferred customer acquisition costs under special promotional packages withcertain CDMA contractual subscribers) and leased lines and network capacitiesexpenses (which include the expenses from the CDMA network leases) increasedfaster than our revenue in 2004. As our various business segments continued todevelop, interconnection charges also increased faster than our revenue in 2004since the interconnection rates remain unchanged while our effective tariffshave been declining due to continuedprice competition. Inaddition, depreciation and amortization expenses increased primarily due to theexpansion of the scale of our fixed assets. Our costs and expenses as apercentage of total revenue increased to 91.8% in 2004, as compared with 90.8%in 2003. Since late 2004, we have emphasized the business strategy of “effectivegrowth”, i.e., profit-driven growth, and will continue to focus on costcontrol and optimization of our expense structure in order to ensure continuedgrowth in earnings.

The table below illustrates the major expense itemsfrom 2002, 2003 and 2004 and their respective shares of total revenue.
| ** **                                                            | ** ** | **For the year ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2002** (Restated)                                     | ** ** | **2003 (Restated)** | ** ** | **2004 (Restated)** | ** ** |
| ** **                                                            | ** ** | **RMB in **million                                 | ** ** | **%** of  Total Revenue | ** ** | **RMB in million** | ** ** | **%** ofTotal Revenue | ** ** | **RMB in **million | ** ** | **%** of  Total Revenue | ** ** |
| Costs and expenses                                                    |       | 33,932                                                       |       | 84.3 | % | 60,956 |   | 90.8 | % | 72,616 |   | 91.8 | % |
| Leased lines and  network capacities                                  |       | 1,583                                                        |       | 3.9 | % | 4,320 |   | 6.4 | % | 7,398 |   | 9.4 | % |
| Interconnection  charges                                              |       | 3,230                                                        |       | 8.0 | % | 5,921 |   | 8.8 | % | 7,517 |   | 9.5 | % |
| Depreciation and  amortization                                        |       | 11,256                                                       |       | 28.0 | % | 16,359 |   | 24.4 | % | 19,011 |   | 24.0 | % |
| Employee benefit  expenses                                            |       | 3,335                                                        |       | 8.3 | % | 4,596 |   | 6.8 | % | 4,615 |   | 5.8 | % |
| Selling and  marketing                                                |       | 5,986                                                        |       | 14.9 | % | 15,264 |   | 22.7 | % | 19,523 |   | 24.7 | % |
| General,  administrative and other expenses                           |       | 5,632                                                        |       | 14.0 | % | 9,139 |   | 13.7 | % | 10,500 |   | 13.3 | % |
| Include: Impairment loss  and assets write-off of the Paging Business |       | 116                                                          |       | 0.3 | % | 557 |   | 0.8 | % | — |   | 0.0 | % |
| Cost of  telecommunications products sold                             |       | 1,890                                                        |       | 4.7 | % | 2,939 |   | 4.4 | % | 2,563 |   | 3.2 | % |
| Loss on sale of  discontinued operation (Guoxin Paging)               |       | —                                                       |       | 0.0 | % | 663 |   | 1.0 | % | — |   | 0.0 | % |
| Finance costs                                                         |       | 1,496                                                        |       | 3.7 | % | 1,946 |   | 2.9 | % | 1,696 |   | 2.1 | % |
| Interest income                                                       |       | -470                                                         |       | -1.2 | % | -173 |   | -0.3 | % | -103 |   | -0.1 | % |
| Other gains, net                                                      |       | -6                                                           |       | 0.0 | % | -18 |   | 0.0 | % | -104 |   | -0.1 | % |

 

 

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*Leased Lines and Network Capacities*. With the significantincrease in our CDMA subscribers, the lease expense for CDMA network capacitiesincreased by 87.4%, from RMB3.52 billion in 2003 to RMB6.59 billion in 2004. Inaddition, the effect of including leased line expenses for transmission linesused by Unicom New World we acquired effective December 31, 2003 alsocontributed to the increasein our leased line expenses. As result, the aggregate amount of our leased lineexpenses and network capacity lease expenses increased to RMB7.40 billion,representing an increase of 71.3% from RMB4.32 billion in 2003. Leasedlines and network capacities expenses as a percentage of total revenue rosefrom 6.4% in 2003 to 9.4% in 2004.

*Interconnection Charges.* Interconnection chargesreached RMB7.52 billion in 2004, representing an increase of 27.0% from 2003,primarily due to the increase in interconnection traffic volume as a result ofthe development of our GSM and CDMA cellular business and long distance, dataand Internet businesses, as well as the effect of including interconnectionexpenses of Unicom New World, which we acquired effective December 31,2003. Interconnection charges for our CDMA cellular business increased by 65.9%. Interconnection charges increased by 17.8% for our GSM cellular business. Interconnectioncharges for long distance, data and Internet business increased by 23.6%. As our various business segments continued todevelop, interconnection charges as a percentage of total revenue alsoincreased from 8.8% in 2003 to 9.5% in 2004.

*Depreciation and Amortization.* Depreciation and amortizationexpenses increased by 16.2%to RMB19.01 billion in 2004, a lower growth rate than the growth in revenue. Theincrease in depreciation and amortization expenses resulted from expandednetwork capacity, the expansion of assets scale and the effect of includingdepreciation expenses attributable to Unicom New World, which we acquired on December 31,2003. Depreciation and amortization expenses as a percentage of total revenuedecreased slightly from 24.4%in 2003 to 24.0% in 2004.

*Employee Benefit Expenses.* As of the end of 2004, we had39,589 employees, an increase of 2.2% from 38,728 at the end of 2003 (includingemployees in the nine provinces, autonomous regions and municipalities weacquired through Unicom New World at the end of 2003). Our employee benefitexpenses slightly increased from RMB4.60 billion in 2003 to RMB4.62 billion in2004. Its share as a percentage of total revenue dropped from 6.8% in 2003 to 5.8% in 2004. In order to align theinterest of our employees with that of our shareholders, we have set up anemployee share option scheme and granted options to qualified employees. During2003 and 2004, total share options involving 105,956,000 and 113,322,000 sharesin our company were granted under the share option scheme respectively.

*Selling and Marketing*. Our major selling andmarketing expenses included commissions, promotion and advertising expenses andamortization of customer acquisition costs of contractual CDMA subscribers. Sellingand marketing expenses totaled RMB19.52 billion in 2004, an increase of 27.9%from 2003. Amortization of CDMA subscribers acquisition costs in 2004 wereRMB6.12 billion, an increase of 4.9%from 2003. The balance of unamortized deferred CDMA subscriber acquisitioncosts increased from RMB4.04 billion as of the end of 2003 to RMB4.75 billionas of the end of 2004 primarily due to continued offering of CDMA handsetpromotion packages as a result of intense competitive pressure. Due to thecontinued growth in the subscriber base of our various business segments(including the effect of our acquisition of Unicom New World), the commissionsto distributors and sales agents rose to RMB9.91 billion, an increase of 35.9%. Promotion and advertising expenses were RMB2.37billion, an increase of 16.2%.Selling and marketing expenses as a percentage of revenue increased from 22.7% in 2003 to 24.7% in 2004.

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*General, Administrative and Other Expenses*. Our general, administrativeand other expenses were RMB10.50 billion in 2004, representing an increase of14.9% from RMB9.14 billion in 2003. General, administrative and otherexpenses as a percentage of total revenue decreased slightly from 13.7% in 2003to 13.3% in 2004. In 2004, the provision for doubtful debts was RMB2.19billion, an increase of 25.1%from 2003. Provision for doubtful debts as a percentage of service revenueincreased slightly from 2.6%in 2003 to 2.8% in 2004. This has also contributed to the increase in ourgeneral, administrative and other expenses.

*Cost of Telecommunications Products Sold.* The cost of telecommunicationproducts sold decreased by 12.9% from RMB2.94 billion in 2003 to RMB2.56billion in 2004. The share of cost of telecommunications products sold as a percentageof revenue decreased from 4.4% in 2003 to 3.2% in 2004.

*Interest**I**ncome and**Finance Costs**.*Our interest income decreased****from RMB0.17 billion in 2003 to RMB0.10 billion in 2004, mainly resulting from a reduction inour cash and cash equivalents. Our finance costs****decreased from RMB1.95 billion in 2003 to RMB1.70 billion in 2004, primarily due to an effectivereduction in interest expenses as a result of our borrowing of syndicated loansto repay the long-term bank loans. The above factors resulted in net financecosts of RMB1.59 billion in 2004, a decreaseof 10.1% from the net finance costsof RMB1.77 billion in 2003.

***Segment income (loss) before income tax***

In 2004, our revenue increased by 17.8%, while ourcosts and expenses increased by 19.1%. As a result, our income before incometax reached RMB6.47 billion, an increase of 4.4% from 2003, and our incomebefore taxation margin decreased from 9.2% in 2003 to 8.2% in 2004.

*GSM Cellular Business.*In our GSM cellular business,segment income before income tax was RMB6.83 billion in 2004, which is adecrease of 4.1% from 2003. The decrease in the segment income before incometax of our GSM cellular business mainly reflects the 12.3% decline in the ARPUfor our GSM cellular business, which was partially offset by the 6.5% increasein the average monthly MOU per subscriber. The decrease in ARPU resulted fromintense competition with our main competitor as well as the “Little Smart”services. In addition, while there was a net addition of 11.70 million subscribersto our GSM services in 2004, a sizable number of subscribers terminated theirGSM services with us, contributing to significant increase in our marketingcost. Our segment income before taxation margin in the GSM cellular businessdecreased****from 17.3% in 2003 to 14.3% in 2004.

*CDMA Cellular Business.*We incurred a segment lossbefore income tax of RMB0.56 billion in 2004 for our CDMA business as comparedwith the segment loss before income tax of RMB0.30 billion in 2003. Theincrease of segment loss before income tax of our CDMA cellular business wasprimarily due to the 32.2% decrease in ARPU as a result of intense competition,the significant increase in lease expenses for our CDMA network capacities as aresult of the growth of our customer base, the continued high level ofmarketing expenses and the significant increase in interconnection charges. Aftertaking into consideration of the improper accounting recordings and errors weidentified in our Jiangxi and Xinjiang branches as described in Item 15 “Controlsand procedures”, the segment losses before income tax of our CDMA business for2004 and 2003 would have been RMB0.44 billion and RMB0.41 billion,respectively.

*Long Distance Business.*In our long distance business,segment income before income tax decreased 23.5%, from RMB0.65 billion in 2003to RMB0.50 billion in 2004, primarily because of reduced tariff level as aresult of increased competition and a reduction in the interconnection revenueafter we acquired Unicom New World in December 2003. As a result, thesegment income before taxation margin in our long distance business decreasedfrom 20.5% in 2003 to 15.9% in 2004.

*Data and Internet Business.*In our data and Internetbusinesses, we had a segment loss before income tax of RMB0.07 billion in 2004,compared with segment income before income tax of RMB0.68 billion in 2003. Thischange was primarily due to reduced tariff level as a result of increasedcompetition.

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***Net Income***

*Income**T**ax.*Our income tax increased toRMB1.98 billion in 2004, an increase of 2.5% from 2003. Our effective tax ratesin 2003 and 2004 were 31.1% and 30.6%, respectively. The lower effective taxrate in 2004, as compared with 2003, was mainly due to write-off of previouslyrecognized deferred tax assets of Guoxin Paging after the sale of Guoxin Pagingin 2003.

*Net Income.*For reasons analyzed in theabove discussion, our net income was RMB4.49 billion in 2004, representing anincrease of 5.3% from 2003. Net income pershare increased 5.9%, from RMB0.34 in 2003 to RMB0.36 in 2004.

***Impact of Differences between HKFRS and USGAAP***

In addition to the above management discussion andanalysis of our results of the operation under HKFRS between the years ended December 31,2004 and 2003, in connection with the preparation and reconciliation of ourconsolidated financial statements in accordance with US GAAP, we believe thefollowing significant accounting differences between HKFRS and US GAAP wouldhave a significant impact on our management discussion and analysis of the resultsof our operation between the years ended December 31, 2004 and 2003.

Under HKFRS, the acquisitions of Unicom Internationalin September 2004 and of Unicom New World on December 31, 2003 havebeen accounted for under the purchase method. Accordingly, the acquired resultsof operations have been incorporated into our operating results only from thedate of the acquisition. In contrast, under US GAAP, our acquisitions of UnicomInternational and Unicom New World have been accounted for as a transfer ofbusinesses 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 International andUnicom New World had always been part of our company.

Under HKFRS, 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 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, thesale of Guoxin Paging is considered a transfer of business between entitiesunder common control and accounted for at historical cost of the net assetstransferred, after reduction, if appropriate, for an indicated impairment ofvalue. In addition, under US GAAP, the results of operations of a component orsegment of an entity that has been disposed of should be reported indiscontinued operations as a separate component of income, separately 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.

Other than the above, there are no major materialdifferences between HKFRS and US GAAP that would have a significant impact onthe discussion and analysis of our results of operations between the yearsended December 31, 2004and 2003. Taking into account theoperating results of the acquired business and the disposed business, ourcombined revenue under US GAAP increased from RMB71.98billion in 2003, to RMB79.39billion in 2004, representing an increase of 10.3%.Our net income under US GAAP decreased from RMB4.74 billion in 2003 to RMB4.71 billion in 2004, representing a decrease of 0.5%. See also Note 37 to the consolidated financialstatements for a more detailed summary of all significant accountingdifferences between HKFRS and US GAAP that are relevant to us.

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***Liquidityand Capital Resources***

***Working Capital and Cash Flows***

As of the end of 2005, we had RMB5.47 billion of cashand cash equivalents and RMB0.28 billion of short-term bank deposits. As of theend of 2005, we had working capital deficit (current assets minus currentliabilities) of RMB35.59 billion, compared to working capital deficit ofRMB28.88 billion at the end of 2004. The decrease in working capital resultedprimarily from the issuanceof RMB10.0 billion short-term bonds in 2005, which was partially offset by thedecrease in current portion of long-term bank loans. In view of our creditworthiness and the current availability of funds in China and Hong Kong, webelieve that we will have access to debt and equity financing, in particularbank financing in the PRC and elsewhere, which together with net cash inflowsfrom operations will be sufficient to fund our capital and liquidity needs.

The following table sets forth cash inflows andoutflows in 2003, 2004 and 2005.
| ** **                                            | ** ** | **For the year ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2003**                                                     | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(RMB in millions)**                              | ** ** |
| Net  cash inflows from operating activities           |       | 22,565                                                       |       | 23,819 |   | 30,804 |   |
| Net  cash outflows from investing activities          |       | (19,051                                                      | )          | (18,958 | ) | (16,748 | ) |
| Net  cash inflows before financing activities         |       | 3,514                                                        |       | 4,861 |   | 14,056 |   |
| Net  cash outflows from financing activities          |       | (8,778                                                       | )          | (9,401 | ) | (13,213 | ) |
| Net  (decrease)/increase in cash and cash equivalents |       | (5,264                                                       | )          | (4,540 | ) | 843 |   |

 

Net cash inflows from operating activities increasedby 29.3%, from RMB23.82****billion in2004 to RMB30.80 billion, mainly reflecting the growth in our business.

Net cash outflows from investing activities wereRMB16.75 billion in 2005, compared to RMB18.96 billion in 2004. This decreasein net cash outflows from investing activities in 2005 primarily resulted fromour effort to control capital investment and reduce investment cost.

Net cash outflows from financing activities wereRMB13.21 billion in 2005, an increase of 40.6% from the outflow of RMB9.40billion in 2004, resulting primarily from an increase in repayment ofshort-term bank loans, from RMB12.27 billion in 2004 to RMB20.10 billion in2005 as we attempted to further optimize our debt structure.

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***Indebtedness and CapitalStructure***

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 2003, 2004 and 2005.
| ** **                                             | ** ** | **As of December 31,**                         | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2003(Restated)**                                            | ** ** | **2004(Restated)** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(RMB in millions, except percentages)** | ** ** |
| Cash  and cash equivalent and short-term bank deposits |       | 10,133                                                        |       | 5,317 |   | 5,754 |   |
| Total  assets                                          |       | 152,870                                                       |       | 149,038 |   | 142,630 |   |
| Short-term  debt                                       |       | 18,173                                                        |       | 20,015 |   | 22,035 |   |
| Long-term  debt                                        |       | 36,213                                                        |       | 26,137 |   | 11,982 |   |
| Shareholders’  equity                             |       | 69,052                                                        |       | 72,442 |   | 76,287 |   |
| Debt-to-assets  ratio(1)                               |       | 44.1                                                          | %          | 38.9 | % | 30.8 | % |
| Debt-to-equity  ratio(2)                               |       | 78.8                                                          | %          | 63.7 | % | 44.6 | % |

_____________________

(1)             Debt-to-assetsratio = (long term debt + short term interest bearing debt)/(long term debt +short term interest bearing debt + shareholders’ equity).

(2)             Debt-to-equityratio = (long term debt + short term interest bearing debt)/shareholders’equity.

Our debt-to-assets ratio decreased from 38.9% at theend of 2004 to 30.8% at the end of 2005. Our debt-to-equity ratio decreasedfrom 63.7% at the end of 2004 to 44.6% at the end of 2005. The sum of ourlong-term and short-term interest bearing debt exceeded****theamount of our cash and cash equivalents and short-term bank deposits by RMB28.3billion as of December 31, 2005. We continue to seek to optimize ourcapital 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, decreased from RMB46.15 billion at theend of 2004 to RMB34.02 billion at the end of 2005 primarily due to our efforts to optimize our debt structure bypaying off bank loans that have become due. Our long-term bank loans generally bearfloating interest rates that ranged from US$ LIBOR plus 0.28% to 0.44% perannum in 2005 with maturity through 2010. The loan agreements do not includefinancial performance or other covenants which materially restrict our operationsor those of CUCL, our principal operating subsidiary in China. As of December 31,2005, no short-term bank loans or long-term bank loans were guaranteed byUnicom Group.

We finance a significant portion of our businessoperations and capital expenditures with short-term and long-term debt. We haveestablished and maintained high credit ratings among PRC financial institutions.In view of our creditworthiness and the current availability of funds in China,we believe that we are able to continue to obtain sufficient financing from PRCfinancial institutions. If, however, we are unable to roll over, extend orrefinance in a timely manner a significant amount of our short-term borrowings,we may be unable to meet our debt service and other obligations.

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Our long-term debt has declined in recent years, whilethe level of our short-term debt has been generally stable. In order to furtherrationalize our debt structure and reduce our interest expense, we willcontinue to finance a portion of our business operations and capitalexpenditures through short-term borrowings. Our liquidity in the future willprimarily depend on our ability to maintain adequate cash inflow fromoperations and obtain adequate external financing to meet our debt serviceobligations and planned capital expenditures. Our operating cash flows could beadversely affected by numerous factors beyond our control, including but notlimited to changes in telecommunication tariffs, decreased demand for ourtelecommunication services and further intensified competition. Our ability toobtain external financing also depends on numerous factors, including but notlimited to our financial condition and creditworthiness as well as ourrelationship with lenders. See “D. Risk Factors — Risks Relating to OurBusiness — We may be unable to fund our capital expenditure and debt servicerequirements, which may adversely affect our financial condition and growthprospects.” under Item 3.

In September 2003 we entered into a US$700million term loan facility with 13 financial institutions, which is consistedof three tranches: a three-year US$200 million tranche, with an interest rateof 0.28% over the US$ LIBOR per annum, a five-year US$300 million tranche, withan interest rate of 0.35% over the US$ 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,entered into a US$500 million term loan facility with 12 financialinstitutions, which is repayable in three years at an interest rate of 0.40%over the US$ LIBOR per annum.

In July 2005, CUCL completed an offering of twotranches of short-term bonds in the PRC interbank debenture market. The firsttranche of the bonds was issued for an aggregate amount of RMB9.0 billion witha maturity period of 365 days. The second tranche of the bonds was issued foran aggregate amount of RMB1.0 billion with a maturity period of 180 days. Theeffective interest rate as at December 31, 2005 was 2.89%.

In June 2006, CUCL applied to the People’s Bankof China, or the PBOC, for an offering of short-term commercial paper, withterm of repayment not exceeding 365 days and the total cumulative outstandingamount not exceeding 40% of the net assets of CUCL as set out in the mostrecent audited financial statements of CUCL. Such offering can be made at anytime within one year after the completion of registration of the applicationwith the PBOC.

***Contractual Obligations and CommercialCommitments***

The following tables set forth the amount of ouroutstanding contractual cash obligations as of December 31, 2005. 
| ** **                                   | ** ** | **Payments Due by Period (RMB in millions)** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Contractual Obligations**             | ** ** | ** **                                                                 | ** ** | **Total** | ** ** | **Due in  2006** | ** ** | **Due in  2007** | ** ** | **Due in  2008** | ** ** | **Due in  2009** | ** ** | **Due in  2010** | ** ** | **Due after  2010** | ** ** |
| Long-term  bank loans(1)                     |       | 17,127                                                                     |       | 5,145 |   | 6,138 |   | 3,502 |   | 353 |   | 1,989 |   | — |   |
| Finance  lease obligations(2)                |       | 566                                                                        |       | 421 |   | 144 |   | 1 |   | — |   | — |   | — |   |
| Interest  payment obligations on bank loans  |       | 812                                                                        |       | 565 |   | 153 |   | 59 |   | 30 |   | 5 |   | — |   |
| Capital  commitments(3)                      |       | 4,209                                                                      |       | 4,209 |   |   |   |   |   |   |   |   |   |   |   |
| Operating  leases(3)                         |       |                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| CDMA network capacity leasing arrangement(4) |       | 7,132                                                                      |       | 7,132 |   |   |   |   |   |   |   |   |   |   |   |
| Others                                       |       | 3,934                                                                      |       | 747 |   | 597 |   | 511 |   | 476 |   | 435 |   | 1,168 |   |
| Other  commitments(3)(5)                     |       | 1,232                                                                      |       | 1,232 |   |   |   |   |   |   |   |   |   |   |   |
| Total  obligations                           |       | 34,978                                                                     |       | 19,445 |   | 7,021 |   | 4,062 |   | 853 |   | 2,429 |   | 1,168 |   |
|                                              |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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____________________

(1)             SeeNote 15 “Long-term Bank Loans” to our consolidated financial statements.

(2)             SeeNote 16 “Obligations Under Finance Leases” to our consolidated financialstatements.

(3)             SeeNote 33 “Contingencies and Commitments” to our consolidated financialstatements.

(4)             Weentered into the CDMA network capacity leasing arrangement with Unicom Groupand its subsidiary Unicom New Horizon by our wholly-owned subsidiaries, CUCL(including Unicom New Century, which was merged into CUCL on July 20,2004, and Unicom New World, which was merged into CUCL on September 1,2005) in our cellular service areas. See Note 33.2 “Contingencies andCommitments — Operating LeaseCommitment” to our consolidated financial statements for details.

(5)             Othercommitments represented our commitment to purchase CDMA handsets from vendors. SeeNote 33.3 “Contingencies and Commitments — Commitment to purchase CDMA handsets” to our consolidated financialstatements for details.

***Off-balanceSheet Arrangements***

As of December 31, 2005, except for the operatinglease for CDMA network capacity set forth above in “— Contractual Obligationsand Commercial Commitments”, we did not have any other off-balance sheetarrangements.

We operate our CDMA cellular business based on theCDMA network capacity we have leased from Unicom New Horizon, a wholly-ownedsubsidiary of Unicom Group. Such CDMA network capacity leasing arrangement isimportant to us in respect of our liquidity, capital resources, market risksupport and credit risk support. The details of the CDMA network capacityleasing arrangement are described in “B. Business Overview — Cellular Services —CDMA Cellular Services — Our Lease of CDMA Networks from Unicom Group” underItem 4; “Critical Accounting Policies — Lease of CDMA Network Capacity” underItem 5;  “B. Related Party Transactions —Leasing of CDMA Network Capacity” under Item 7 and Note 4.2(b) “Leasing ofCDMA Network Capacity” and Note 33.2 “Contingencies and Commitments — OperatingLease Commitments” to our consolidated financial statements. There is no knownevent, demand, commitment, trend or uncertainty that will or is reasonablylikely to result in the termination, or material reduction in availability tous, of the CDMA network capacity lease arrangement.

***CapitalExpenditures***

The following table sets forth our historical andplanned capital expenditure requirements for the periods indicated. Actualfuture capital expenditures may differ from the amounts indicated below. 
| ** **                        | ** ** | **For the years ended December 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                                      | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(RMB in billions)**                               | ** ** |
| Cellular(1)                       |       | 6.40                                                          |       | 7.33 |   | 10.80 |   |
| Long  distance, data and Internet |       | 1.34                                                          |       | 1.18 |   | 1.47 |   |
| Transmission  network(2)          |       | 3.06                                                          |       | 2.95 |   | 3.78 |   |
| Others(3)                         |       | 7.59                                                          |       | 6.15 |   | 5.95 |   |
| Total                             |       | 18.39                                                         |       | 17.61 |   | 22.00 |   |

_______________

(1)             Thecapital expenditures for 2004 onwards represent 30 provinces, municipalitiesand autonomous regions, including the 9 provinces and autonomous regions whichwe acquired at the end of 2003.

(2)             Expenditures ontransmission network refer to investment in the inter-province andintra-province backbone transmission network, the local network and the accessnetwork.

(3)             Otherexpenditures represent investment in telecom equipment buildings, supportingsystems and miscellaneous items.

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Capital expenditures in 2005 totaled RMB17.61 billion.Capital expenditures attributable to the GSM cellular business, the longdistance, data and Internet businesses, the transmission network and otherprojects were RMB7.33 billion, RMB1.18 billion, RMB2.95 billion, and RMB6.15billion, respectively. Expenditures for other projects were mainly related tothe set-up of the billing, customer service and information system,office building, construction of integrated access network and miscellaneouspurchases.

Projected capital expenditures for 2006 is RMB22.00billion, which will be used primarily for improving and upgrading the GSMnetworks and for billing systems,customer services and information technology system.

We expect to fund our capital expenditure needsthrough a combination of cash generated from operating activities, short-termand long-term borrowings and other debt and equity financing. See “D. RiskFactors — Risks Relating to Our Business — We may be unable to fund our capitalexpenditure and debt service requirements, which may adversely affect ourfinancial condition and growth prospects” under Item 3.

**US GAAP Reconciliation**

Our consolidated financial statements are prepared inaccordance with HKFRS, which differs in certain material respects from US GAAP.Differences relate primarily to the effect of the acquisitions of Unicom NewCentury, Unicom New World and Unicom International and the sale of GuoxinPaging, employees’ housing benefits, revaluation of properties performed inconnection with the reorganization, capacity transaction of leased lines andrecognition of employee compensation costs under share options scheme. Reconciliationbetween HKFRS and US GAAP which affect our net income and shareholders’ equityarising from the aforementioned differences are included in Note 37 to theconsolidated financial statements included in this annual report. In addition,additional disclosures on the condensed financial information under US GAAP,including condensed statements of income, changes in shareholders’ equity andcash flows information, as well as condensed balance sheets information andother additional financial information which have been restated for relevantperiods presented to reflect the impact of the effects of the acquisitions of UnicomNew Century, Unicom New World and Unicom International and the sale of GuoxinPaging under common control are included in Note 37 to the consolidatedfinancial statements presented in this annual report.

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## **Item6. Directors, Senior Management and Employees**

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

The following table setsforth certain information concerning our current directors and executiveofficers.
| Name                  | ** ** | **Age** | ** ** | **Position**                                                                     |
|-----------------------|------------|---------|------------|----------------------------------------------------------------------------------|
| Chang Xiaobing        |       | 49      |       | Chairman of the Board  of Directors; Executive Director; Chief Executive Officer |
| Shang Bing            |       | 50      |       | Executive Director;  President                                                   |
| Tong Jilu             |       | 48      |       | Executive Director;  Chief Financial Officer                                     |
| Li Jianguo            |       | 52      |       | Executive Director                                                               |
| Yang Xiaowei          |       | 42      |       | Executive Director;  Vice President                                              |
| Li Zhengmao           |       | 43      |       | Executive Director;  Vice President                                              |
| Li Gang               |       | 48      |       | Executive Director;  Vice President                                              |
| Zhang Junan           |       | 50      |       | Executive Director;  Vice President                                              |
| Lu Jianguo            |       | 60      |       | Non-Executive Director                                                           |
| Wu Jinglian           |       | 76      |       | Independent  Non-Executive Director                                              |
| Shan Weijian          |       | 52      |       | Independent  Non-Executive Director                                              |
| Linus Cheung Wing Lam |       | 58      |       | Independent  Non-Executive Director                                              |
| Wong Wai Ming         |       | 48      |       | Independent Non-Executive Director                                               |

 

ChangXiaobing was appointed in December 2004 as an Executive Director, Chairmanof the Board of Directors and Chief Executive Officer of the Company. Mr. Chang,a professor-level senior engineer, graduated in 1982 from the Nanjing Instituteof Posts and Telecommunications with a B.S. degree in telecommunicationsengineering and received a master’s degree in business administration fromTsinghua University in 2001. He received a doctor’s degree in businessadministration from the Hong Kong Polytechnic University in 2005. Prior tojoining the Unicom Group, Mr. Chang served as a Deputy Director of theNanjing Municipal Posts and Telecommunications Bureau and a Deputy DirectorGeneral of the Directorate General of Telecommunications of the Ministry ofPosts and Telecommunications and a Deputy Director General and Director Generalof the Department of Telecommunications Administration of the MII, as well asVice President of China Telecom Group. Mr. Chang was appointed the Chairmanof Unicom Group in November 2004. He also serves as the Chairman of the AShare Company and CUCL, respectively. Mr. Chang has 24 years ofoperational and managerial experience in the telecommunications industry inChina.

ShangBing was appointed in November 2004 as an Executive Director and Presidentof the Company. Mr. Shang, a senior economist, graduated in 1982 fromShenyang Chemical Industry Institution with a bachelor’s degree in chemicalindustry and received a master’s degree in business administration from NewYork State University. He received a doctor’s degree in business administrationfrom the Hong Kong Polytechnic University in 2005. From 1986 to 1998, Mr. Shangserved as a Director of Industrial Technology Development Centre in Liaoning Province,Deputy General Manager and General Manager of Economic and TechnologicalDevelopment Company in Liaoning Province. Mr. Shang joined Unicom Group inAugust 1998. From 1998 to 2001, Mr. Shang served as Deputy GeneralManager and General Manager of Unicom Group Liaoning Branch. Mr. Shang wasappointed a Vice President of Unicom Group in March 2001 and became aDirector and Vice President of Unicom Group in September 2003. Mr. Shangwas appointed the President of Unicom Group in November 2004. At present, Mr. Shangis also a Director of Unicom Group, a Director and President of the A ShareCompany and a Director and President of CUCL. Mr. Shang has extensivemanagement experience and knowledge in telecommunications operations.

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TongJilu was appointed in February 2004 as an Executive Director and ChiefFinancial Officer of the Company. He assists the President in handling issuesrelating to finance. Mr. Tong graduated in 1987 from the Department ofEconomic Management at the Beijing University of Posts and Telecommunications. Hereceived a master’s degree in business administration from National Universityof Australia in 2002 and is an Executive Director of the Association of ChiefAccountants and Vice Chairman of Internal Audit Association of China. From August 1989to October 1998, he served first as a Deputy Director and later as aDirector of the Finance Bureau of the Posts and TelecommunicationsAdministration of Liaoning Province. From November 1998 to June 2000,Mr. Tong served as Deputy Director General of the Posts andTelecommunications Administration and the Posts Office of Liaoning Province. Mr. Tongjoined Unicom Group in July 2000 and served as Chief Accountant of UnicomGroup from July 2000 to February 2001. Since March 2001, Mr. Tonghas served as Vice President of Unicom Group. He has served as a Director inthe Unicom Group since September 2003 and the Chief Accounting Officer ofthe Unicom Group since December 2004. Mr. Tong is also a Director inthe A Share Company and a Director and Vice President in CUCL. Mr. Tonghas extensive experience in management of telecommunications companies andfinance management of listed companies.

LiJianguo was appointed in April 2006 as an Executive Director of theCompany. She graduated from the Chemical Engineering Department of the XiangtanUniversity in 1982. Ms. Li is a senior economist and held leadingpositions in various enterprises, local governments and state ministries andcommittees for a significant period of time. She joined the Unicom Group in June 2000and has been the Chairlady of the labor union of the Unicom Group since December 2001and a Director of the Unicom Group since September 2003. Ms. Li isalso a Director of CUCL and the Chairman of the board of supervisors of the AShare Company. Ms. Li has extensive experience in working for thegovernment and enterprises and in management.

YangXiaowei was appointed in April 2006 as an Executive Director and VicePresident of the Company. He received a bachelor’s degree from the ComputerApplication Department of Chongqing University in 1998 and a master’s degree inengineering from the Management Engineering Department of Chongqing Universityin 2001. Mr. Yang is a senior engineer. From December 1992 to January 2002,Mr. Yang held the positions of Assistant to Director and Deputy Directorof Chongqing Telecommunications Bureau, Deputy Director of the ChongqingTelecommunications Administration Bureau and Director of Chongqing MunicipalCommunication Administration Bureau. Mr. Yang joined the Unicom Group in January 2002and served as General Manager of the Chongqing branch and the Guangdong branchof the Unicom Group. He has been Vice President of the Unicom Group since December 2003and Director of the Unicom Group since December 2004. Mr. Yang isalso a Director and Vice President of CUCL. Mr. Yang has extensiveexperience in management and the telecommunications industry.

LiZhengmao was appointed in April 2006 as an Executive Director and VicePresident of the Company. He received a doctor’s degree in electronicengineering from the Southeast University in 1988. From 1992 to 1994, he was aProfessor of the University of Electronic Science and Technology of China. Mr. Lijoined the Unicom Group in August 1994 and held various positions in the UnicomGroup, including Deputy Head of the Network Technology Department, Head of theWireless Communication Department, Head of the Technology Department and DeputyChief Engineer. From April 2000 to May 2002, he was ExecutiveDirector and Vice President of the Company. From May 2002 to December 2003,he was General Manager of the Yunnan branch of the Unicom Group. Mr. Lihas been Vice President of the Unicom Group since December 2003 and hasbeen a Director of the Unicom Group since December 2004. Mr. Li alsoserves as the Director and Vice President of CUCL, the Chairman of Unisk(Beijing) Information Technology Co. Ltd. and Unicom-BREW Wireless TechnologiesLtd. Mr. Li has extensive experience in engineering technology andbusiness operations.

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LiGang was appointed in April 2006 as an Executive Director and VicePresident of the Company. He graduated from Beijing University of Posts andTelecommunications in 1985 and received a master’s degree in businessadministration from the Department of Advanced Business Administration of JinanUniversity in 2004. Mr. Li is a senior engineer and previously served asDeputy Director of the Telecommunications Division, Deputy Director of theTelecommunications Department, Deputy Director of the Rural Telephone Bureau,Deputy Director and Director of the Telecommunications Operation andMaintenance Department of the Posts and Telecommunications AdministrationBureau in Guangdong Province and as Director of the Mobile CommunicationBureau. From 1999 to 2005, he served as Vice Chairman, General Manager andChairman of Guangdong Mobile Communication Co., Ltd.****andas Chairman and General Manager of Beijing Mobile Communication Co., Ltd. From2000 to 2005, he also served as Executive Director of China Mobile (Hong Kong)Limited. Mr. Li joined the Unicom Group in December 2005 and iscurrently Vice President of the Unicom Group. Mr. Li is also a Directorand Vice President of CUCL, the Chairman of Unicom Huasheng CommunicationsTechnology Co. Ltd. and Unicom Xin Guo Xin Communications Ltd. Mr. Li hasworked in the telecommunications industry for a long period of time and hasextensive management experience.

ZhangJunan was appointed in April 2006 as an Executive Director and VicePresident of the Company. He graduated from the Nanjing University of Posts andTelecommunications majoring in carrier communication in 1982. He received amaster’s degree in business administration from National Australian Universityin 2002. Mr. Zhang is a senior engineer. He previously served as Directorof the Bengbu Municipal Posts and Telecommunications Bureau in Anhui Provinceand Deputy Director of the Anhui Provincial Posts and TelecommunicationsBureau. From 2000 to 2005, he served as Deputy General Manager and GeneralManager of the Anhui Provincial Telecommunications Company and the Chairman andGeneral Manager of Anhui Provincial Telecommunications Co., Ltd. Mr. Zhangjoined the Unicom Group as Vice President in December 2005. Mr. Zhangalso serves as a Director and Vice President of CUCL. Mr. Zhang has workedin the telecommunications industry for a long period of time and has extensivemanagement experience.

LuJianguo was appointed in April 2006 as a Non-Executive Director of theCompany. He is an engineer. He graduated from the PLA Air Force Academy ofEngineering in 1968 majoring in radio. From 1988 to 1994, he served as Directorof Beijing Long Distance Call Bureau, Deputy Director-General of theCommunication Department of the Posts and Telecommunications Ministry, DeputyDirector of Office of State Radio Regulatory Commission. Mr. Lu served asVice President of the Unicom Group from October 1994 to December 2005and Director of the Unicom Group from February 2000 to December 2005and is currently also a Director of the A Share Company. Mr. Lu isexperienced in telecommunications operations and has extensive managementexperience.

WuJinglian was appointed in April 2000 as an Independent Non-ExecutiveDirector of the Company. Mr. Wu is a senior researcher at the DevelopmentResearch Center of the State Council, or DRC, and a professor at the Graduate School of the Chinese Academy ofSocial Sciences and China Europe International Business School. Mr. Wugraduated from Fudan University and received honorary doctoral degrees inSocial Science from the University of Hong Kong and the Hong Kong BaptistUniversity in 2005 and 2000, respectively. Mr. Wu was previously anExecutive Director of the DRC and Deputy Director of the Programming Office forEconomic Reform of the State Council. Mr. Wu has been a visiting scholarat Yale University, a visiting professor at the Asia-Pacific Research Center ofStanford University and a visiting researcher at the Massachusetts Institute ofTechnology.

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ShanWeijian was appointed in May 2003 as an Independent Non-ExecutiveDirector. Mr. Shan is a Co-Managing Partner of Newbridge Capital Limited. Mr. Shanserves on the boards of BOC Hong Kong (Holdings) Limited, TCC InternationalHoldings Limited and Baoshan Iron and Steel Company Limited, among others.Before joining Newbridge, Mr. Shan was a Managing Director of J.P. Morgan.Prior to that, he taught at the Wharton School of Business at University ofPennsylvania. His earlier employers include the World Bank, Grahman and James,a law firm based in San Francisco, and Beijing University of InternationalBusiness and Economics. Mr. Shan received a Ph.D. degree from theUniversity of California, Berkeley.

LinusCheung Wing Lam was appointed in May 2004 as an Independent Non-ExecutiveDirector of the Company. Before this, Mr. Cheungwas Deputy Chairman of PCCW Limited. Prior to the merger of Pacific CenturyCyberworks Limited and Cable & Wireless HKT Limited, or HongkongTelecom, Mr. Cheung was the Chief Executive of Hongkong Telecom and anExecutive Director of Cable & Wireless plc in the United Kingdom.Mr. Cheung also worked at Cathay Pacific Airways for 23 years beforedeparting as Deputy Managing Director. He was appointed an Official Justice ofthe Peace in 1990 and a Non-official Justice of the Peace in 1992. Mr. Cheungis currently a member of the Chinese People’s Political Consultative Conferencefor the Tianjin Municipal Government. MrCheung received a bachelor’s degree in social science and adiploma in management studiesfrom the University of Hong Kong. He is also an Honorary Fellow of theUniversity of Hong Kong and of The Chartered Institute of Marketing in theUnited Kingdom.

WongWai Ming was appointed in January 2006 as an Independent Non-ExecutiveDirector of the Company. Mr. Wong is an Executive Director and ChiefExecutive Officer of Roly International Holdings Limited and an ExecutiveDirector of Linmark. Mr. Wong is also an Independent Non-ExecutiveDirector of Lenovo Group Limited and I.T Limited. Prior to his currentexecutive position, he was an Executive Director and Chief Executive Officer ofthe Sing Tao News Corporation Limited. Before joining Sing Tao NewsCorporation, he worked as an investment banker with more than 15 years ofexperience in investment banking business in Greater China and was a member ofthe Listing Committee of The Stock Exchange of Hong Kong Limited. Mr. Wongis a chartered accountant and holds a bachelor of science degree (with Honors)in management science from the Victoria University of Manchester in the UnitedKingdom.

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

The aggregate compensation paid by us to our directorsand executive officers as a group in 2005 was approximately RMB19.21****million, including retirement and otherbenefits. Each of our executive directors and executive officers participated in a bonus scheme with us that ties the amount of bonus heor she will receive at the end of a year to our operating results of the yearand his or her job performance. Some of our directors also hold options to purchaseshares in our company. See “E. Share Ownership” below for detailed descriptionsof our share option schemes and options granted to our directors and executiveofficers as well as compensation for the year 2005.

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

**General**

Pursuant to our Articles of Association, at each annualgeneral meeting, one-third of our directors retire from office by rotation. Theretiring Directors are eligible for re-election. The Board may at any timeappoint a new director to fill a vacancy or as an additional director. TheBoard may also appoint and remove our executive officers. No benefits arepayable to our directors or executive officers upon termination of theirservice with us in accordance with the provisions of their service agreements,except certain statutory compensation. The following table sets forth certaininformation concerning our current directors and former directors who served asdirectors in 2005.
| **Name**               | ** ** | **Appointment Date** | ** ** | **Re-appointment Date**                                  | ** ** | **Resignation Date** | ** ** |
|------------------------|------------|---------------------------|------------|---------------------------------------------------------------|------------|---------------------------|------------|
| Current Directors      |       |                      |       |                                                          |       |                      |       |
|                   |       |                      |       |                                                          |       |                      |       |
| Chang Xiaobing         |       | December 21,  2004   |       | May 12,  2006                                            |       | —                    |       |
| Shang Bing             |       | November 5,  2004    |       | May 12,  2005                                            |       | —                    |       |
| Tong Jilu              |       | February 1,  2004    |       | May 12,  2004 and   May 12, 2006                    |       | —                    |       |
| Li Jianguo             |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Yang Xiaowei           |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Li Zhengmao            |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Li Gang                |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Zhang Junan            |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Lu Jianguo             |       | April 1,  2006       |       | May 12,  2006                                            |       | —                    |       |
| Wu Jinglian            |       | April 20,  2000      |       | May 13,  2002,  May 12, 2004 and  May 12, 2005 |       | —                    |       |
| Shan Weijian           |       | May 12,  2003        |       | May 12,  2005                                            |       | —                    |       |
| Cheung Wing Lam, Linus |       | May 12,  2004        |       | May 12,  2006                                            |       | —                    |       |
| Wong Wai Ming          |       | January 19,  2006    |       | May 12,  2006                                            |       | —                    |       |
|                   |       |                      |       |                                                          |       |                      |       |
| Former Directors       |       |                      |       |                                                          |       |                      |       |
|                   |       |                      |       |                                                          |       |                      |       |
| Zhao Le                |       | —                    |       | —                                                        |       | July 19,  2005       |       |
| Li Qiuhong             |       | July 19,  2005       |       | —                                                        |       | April 1,  2006       |       |
| Lo Wing Yan, William   |       | —                    |       | —                                                        |       | April 1,  2006       |       |
| Ye Fengping            |       | —                    |       | —                                                        |       | April 1,  2006       |       |
| Liu Yunjie             |       | —                    |       | —                                                        |       | April 1,  2006       |       |
| Craig O. McCaw         |       | —                    |       | —                                                        |       | May 12,  2005        |       |
| C. James Judson(1)     |       | —                    |       | —                                                        |       | May 12, 2005         |       |

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(1)                  Mr. Judson was an alternate director to Mr. McCaw.

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**Audit Committee**

The audit committee reviews and supervises ourfinancial reporting process and internal financial controls. The duties of theaudit committee include, among others:

·                                          considering and approving theappointment, resignation and removal of our external auditor and the auditor’sfees;

·                                          reviewing our interim and annualfinancial statements and disclosure before submission to the board ofdirectors;

·                                          discussing with the auditor any problemsand reservations arising from the audit of the interim and final results;

·                                          reviewing any correspondence from theauditor to the management and the responses of the management;

·                                          reviewing the relevant reports concerningour internal controls and procedures;

·                                          pre-approving the audit and non-auditservices to be provided by the external auditor, and determining whether anynon-audit services would affect the independence of the auditor; and

·                                          discussing with the management the timingand procedures for the rotation of the partner of the auditing firm responsiblefor the audit of our company and the partner responsible for the review ofaudit related documents.

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

·                                          supervising the internal auditdepartment, which will directly report to the committee; and

·                                          having the right to approve theappointment or removal of the head of internal audit department.

As of May 31, 2006, the members of the audit committeeare Wong Wai Ming, Chairman of the committee, Wu Jinglian, Shan Weijian andLinus Cheung Wing Lam.

**Remuneration Committee**

The remuneration committee meets regularly to considerhuman resources issues, issuance of share options and other matters relating tocompensation. In particular, the remuneration committee makes recommendationsto the Board on executive compensation. The primary duties of the remunerationcommittee are to make recommendations to the Board regarding the remunerationstructure of the executive directors and to determine specific remunerationpackages for the executive directors on behalf of the board. The remunerationcommittee is also responsible for operating our employee share option schemeand any other incentive scheme as they apply to the executive directors,including determining the granting of options to executive directors. As of May 31,2006, the members of the remuneration committee are Wu Jinglian, Chairman ofthe committee, Lu Jianguo and Linus Cheung Wing Lam.

 

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###  

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

As of December 31, 2003, 2004 and 2005, we had38,728, 39,589, and 53,070 employees, respectively. These employees as of December 31,2005 are classified by function as follows:
| **By Function**                           | ** ** | **Number of   Employees** | ** ** | **By Business Segment** | ** ** | **Number of   Employees** |
|------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|-------------------------------------|
| Management and administration                  |       | 7,898                               |       | Cellular                          |       | 45,931                              |
| Other general administration                   |       | 9,426                               |       | GSM                               |       | 29,877                              |
| Marketing and sales                            |       | 15,743                              |       | CDMA                              |       | 16,054                              |
| Technical, engineering and network maintenance |       | 14,509                              |       | Long distance                     |       | 2,322                               |
| Retail and customer service                    |       | 2,348                               |       | Data and Internet                 |       | 4,817                               |
| General support                                |       | 3,146                               |       | **Total**                         |       | 53,070                              |
| **Total**                                      |       | 53,070                              | ** ** | ** **                        |       |                                |

 

As of December 31, 2005, we also employed approximately 80,000temporary employees.

### ***E.            Share Ownership***

As of May 31, 2006, except for Mr. LiZhengmao who holds 20,000 shares of our company, our directors and executiveofficers as a group do not own any shares in our company.

As of May 31, 2006, our directors and executiveofficers as a group hold options for 13,353,600 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** | ** ** | **Compensation    for 2005   (RMB)** | ** ** |
|-----------------|------------|---------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|
| Chang Xiaobing  |       | 526,000                                           |       | December 20, 2010   |       | HK$6.20                    |       | HK$1.00                        |       | 4,213,000                                      |       |
|            |       | 800,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        |       |                                           |       |
| Shang Bing      |       | 292,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        |       | 3,513,000                                      |       |
|            |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        |       |                                           |       |
|            |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        |       |                                           |       |
|            |       | 128,000                                           |       | December 20, 2010   |       | HK$6.20                    |       | HK$1.00                        |       |                                           |       |
|            |       | 700,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        |       |                                           |       |
| Tong Jilu       |       | 292,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        |       | 2,845,000                                      |       |
|            |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        |       |                                           |       |
|            |       | 292,000                                           |       | June 21, 2010       |       | HK$15.42                   |       | HK$1.00                        |       |                                           |       |
|            |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        |       |                                           |       |
|            |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        |       |                                           |       |
| Li Jianguo(1)   |       | 176,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
|            |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 292,000                                           |       | June 21, 2010       |       | HK$15.42                   |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
| Yang Xiaowei(2) |       | 122,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
|            |       | 204,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
| Li Zhengmao(3)  |       | 176,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
|            |       | 100,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|            |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |

 

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| **Name**                      | ** ** | **Number of    Shares    Covered** | ** ** | **Expiration Date** | ** ** | **Exercise    Price** | ** ** | **Consideration    Paid** | ** ** | **Compensation    for 2005   (RMB)** | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|
| Li Gang(4)                    |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
| Zhang Junan(5)                |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
| Lu Jianguo(6)                 |       | 292,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | **3⁄4**                                     | ** ** |
|                          |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|                          |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
|                          |       | 500,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** | ** **                                     | ** ** |
| Wu Jinglian                   |       | 292,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | 316,000                                        |       |
|                          |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
| Shan Weijian                  |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | 316,000                                        |       |
|                          |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
| Cheung Wing Lam,  Linus       |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** | 316,000                                        |       |
| Wong Wai Ming(7)              | ** ** | **3⁄4**                                        |       | **3⁄4**               | ** ** | **3⁄4**                 |       | 3⁄4                         | ** ** | **3⁄4**                                     | ** ** |
| Li Qiuhong(8)(15)             |       | 204,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | 1,013,000                                      |       |
|                          |       | 204,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 204,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 280,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** |                                           |       |
| Zhao Le(9)(15)                |       | 136,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | 1,226,000                                      |       |
|                          |       | 204,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 272,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
| Lo Wing Yan,  William(10)(15) |       | 88,000                                            |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | 2,877,000                                      |       |
|                          |       | 262,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 280,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** |                                           |       |
| Ye Fengping(11)(15)           |       | 132,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | 2,145,000                                      |       |
|                          |       | 204,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 136,000                                           |       | June 21, 2010       |       | HK$15.42                   |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 262,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 280,000#                                          |       | February 14, 2012   |       | HK$6.35                    |       | HK$1.00                        | ** ** |                                           |       |
| Liu Yunjie(12)(15)            |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** | 316,000                                        |       |
|                          |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
| Craig O. McCaw(13)(15)        |       | 292,000                                           |       | July 9, 2008        |       | HK$6.18                    |       | HK$1.00                        | ** ** | 114,000                                        |       |
|                          |       | 292,000                                           |       | May 20, 2009        |       | HK$4.30                    |       | HK$1.00                        | ** ** |                                           |       |
|                          |       | 292,000                                           |       | July 19, 2010       |       | HK$5.92                    |       | HK$1.00                        | ** ** |                                           |       |
| C. James Judson(14)(15)       | ** ** | **3⁄4**                                        |       | **3⁄4**               | ** ** | **3⁄4**                 |       | 3⁄4                         | ** ** | **3⁄4**                                     | ** ** |

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(1)             Ms. Li wasappointed as Executive Director of our company on April 1, 2006.

(2)             Mr. Yangwas appointed as Executive Director and Vice President of our company on April 1,2006.

(3)             Mr. Liwas appointed as Executive Director and Vice President of our company on April 1,2006.

(4)             Mr. Liwas appointed as Executive Director and Vice President of our company on April 1,2006.

(5)             Mr. Zhangwas appointed as Executive Director and Vice President of our company on April 1,2006.

(6)             Mr. Luwas appointed as Non-Executive Director of our company on April 1,2006.

(7)             Mr. Wongwas appointed as Independent Non-Executive Director of our company on January 19,2006.

(8)             Mr. Liwas appointed as Executive Director and Vice President of our company on July 19,2005 and resigned as Executive Director of our company on April 1, 2006.

(9)             Mr. Zhaoresigned as Executive Director and Vice President of our company on July 19,2005.

(10)       Mr. Loresigned as Executive Director and Vice President of our company on April 1, 2006.

(11)       Mr. Yeresigned as Executive Director and Vice President of our company on April 1, 2006.

(12)       Mr. Liuresigned as Non-Executive Director of our company on April 1, 2006.

(13)       Mr. McCawretired as Independent Non-Executive Director on May 12, 2005.

(14)       Mr. Judsonwas an alternate director to Mr. McCaw.

(15)       Forthe directors who resigned during the year 2005 or 2006, the numbers of optionsindicated represent the numbers of options held by the respective directors asof their dates of resignation.

#                    Grantedin 2006.

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*Optionsgranted under the pre-global offering share option scheme*
| **Name**       | ** ** | **Number of   Shares Covered** | ** ** | **Expiration Date** | ** ** | **Subscription   Price** | ** ** | **Consideration Paid** | ** ** |
|----------------|------------|-----------------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| Shang Bing     |       | 204,400                                       |       | June 21,  2010      |       | HK$15.42                      |       | HK$1.00                     |       |
| Li Zhengmao(1) |       | 292,600                                       |       | June 21,  2010      |       | HK$15.42                      |       | HK$1.00                     |       |
| Lu Jianguo(2)  |       | 292,600                                       |       | June 21,  2010      |       | HK$15.42                      |       | HK$1.00                     |       |
| Li Qiuhong(3)  |       | 204,400                                       |       | June 21,  2010      |       | HK$15.42                      |       | HK$1.00                     |       |
| Zhao Le(4)     |       | 204,400                                       |       | June 21,  2010      |       | HK$15.42                      |       | HK$1.00                     |       |
| Liu Yunjie(5)  |       | 292,600                                       |       | June 21, 2010       |       | HK$15.42                      |       | HK$1.00                     |       |

----

(1)             Mr. Liwas appointed as Executive Director and Vice President of our company on April 1,2006.

(2)             Mr. Luwas appointed as Non-Executive Director of our company on April 1, 2006.

(3)             Mr. Liwas appointed as Executive Director and Vice President of our company on July 19,2005 and resigned as Executive Director on April 1, 2006.

(4)             Mr. Zhaoresigned as Executive Director and Vice President of our company on July 19,2005.

(5)             Mr. Liuresigned as Non-Executive Director of our company on April 1, 2006.

**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 providesfor the grant of options to our employees, including executive directors andnon-executive directors. Any grant of share options to a “connected person” (asdefined in the HKSE 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****that cover a total number of ordinaryshares not exceeding 10% of the total number of our issued and outstandingshares as of May 13, 2002. The option period commences on any date after thedate on which an option is offered, but may not exceed 10 years from the offerdate. The subscription price of a share in respect of any particular optiongranted under this share option scheme will be determined by our board ofdirectors in its discretion at the grant date, which shall be no less than thehigher of: (i) the nominal value of the shares; (ii) the closingprice of the shares on the Hong Kong Stock Exchange on the grant date inrespect of such option; and (iii) the average closing price of the shareson the Hong Kong Stock Exchange for the five trading days immediately precedingthe grant date. As of May 31,****2006,413,802,000 options granted by us were outstanding and held by 12 directors and2,900 of our employees. As of May 31, 2006, 10,714,000 options with anexercise price of HK$6.18,****18,631,200options with an exercise price of HK$4.3, 154,000 options with an exerciseprice of HK$4.65 and 2,920,000 options with an exercise price of HK$5.92 hadbeen exercised.

*Pre-Global Offering Share OptionScheme.*We alsoadopted a pre-global offering share option scheme on June 1, 2000. As of May 31,2006, 24,309,600 options granted by us were outstanding and held by 3 directorsand approximately 250 of our employees. We do not expect to grant further optionsunder this scheme. On May 13,2002, this scheme was amended along with the amendment of the share optionscheme described above. The amended terms of the pre-global offering shareoption scheme are substantially the same as the share option scheme, except forthe following:

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·                                          The subscription price of a share inrespect of any particular option granted under the pre-global offeringshare option scheme is HK$15.42, the offer price in the Hong Kong publicoffering portion of our initial public offering, excluding brokerage fees andtransaction levy.

·                                          The period during which an option may beexercised commences two years from the date of grant and ends 10 years from June 22,2000.

As of May 31, 2006, nooptions granted under this scheme had been exercised.

**Item 7. MajorShareholders and Related Party Transactions**

### ***A.            Major Shareholders***

As of May 31, 2006, our controlling shareholder,Unicom Group, through its 17.90% directinterest in Unicom BVI, and its majority-owned subsidiary, China UnitedTelecommunications Corporation Limited, which in turn holds 82.10% of UnicomBVI, beneficially owned 6,590,546,000 shares of Unicom, or 52.36% of our totaloutstanding shares. See “A. History and Development of the Company” under Item4 above. Unicom Group’s shares are held by the SASAC and a group of thirteencompanies, most of which are state-owned enterprises in China. Sharesbeneficially owned by Unicom Group do not carry voting rights different fromour other issued shares.

As of May 31, 2006, most of our recordshareholders were located outside of the United States. In addition, as of May 31,2006, there were approximately 26 million ADSs outstanding, each representing10 shares and together representing 2.1% of our total outstanding shares or4.3% of our total outstanding shares not held by our controlling shareholder.

### ***B.            Related Party Transactions***

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

·                                          leasing of CDMA network capacity by usfrom Unicom Group and related interconnection and roaming arrangements;

·                                          provision of ongoing telecommunications and ancillaryservices and premises;

·                                          agreements relating to the acquisition of UnicomInternational from Unicom Group;

·                                          agreements relating to the acquisition of Unicom NewWorld from Unicom Group and the sale of Guoxin Paging to Unicom Group;

·                                          agreements relating to the restructuring in connectionwith the acquisition of Unicom New Century from Unicom Group; and

·                                          agreements relating to the restructuring in connectionwith our initial public offering.

**Leasing of CDMA Network Capacity**

***Old CDMA Lease***

Under the Old CDMA Leases, Unicom New Horizon agreed to leasecapacity on its CDMA network to each of CUCL, Unicom New Century and Unicom New Worldin their respective cellular service areas. In 2004, our total lease fee payment under the Old CDMA Leases was RMB6.59 billion.

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Under the Old CDMA Leases, Unicom New Horizon agreed to plan,finance and construct the CDMA network, including the procurement of allequipment, and to ensure that the CDMA network was constructed in accordance with thedetailed specifications and timetable agreed between Unicom New Horizon and us.All payments, costs, expenses and amounts paid or incurred by Unicom NewHorizon that were directly attributable to the construction of the CDMAnetwork form the total network construction cost, which was used in calculating the lease feepayable by us, including:

·                                          construction, installation and equipmentprocurement costs and expenses,

·                                          survey and design costs,

·                                          investment in technology, software andother intangible assets,

·                                          insurance premiums and capitalizedinterest on loans,

·                                          any taxes levied or paid in respect ofthe procurement of equipment and the construction of the CDMA network,including import taxes and custom duties, and

·                                          all costs incurred in relation to anyupgrade of technology.

The Old CDMA Leasesrequired that thenetwork construction cost be verified and appropriate documentation provided tous or our auditors for verification. The lease fee was calculated so as to enable Unicom NewHorizon to recover its total network construction cost within seven years,together with an internal rate of return of 8%.

We were responsible for the operation, management andmaintenance of the CDMA network in accordance with the relevant requirements ofthe Old CDMA Leases andhad theexclusive right to provide CDMA services in our cellular service areas. Allrevenue, including airtime charges, monthly subscription fees, interconnectioncharges, income from sales of UIM cards and handsets and other income generatedfrom or in connection with the operation of the CDMA network belonged to us. Allcosts of operating and managing the CDMA network and all maintenance costs of anon-capital nature should be borne by us except that constructed capacityrelated costs (i.e. those costs of operating and managing the CDMA networkwhich related directly to the constructed capacity on the CDMA network,including the rental fees for stations and base stations and related expenses includingwater and electricity charges, heating charges and fuel charges for therelevant equipment etc., as well as maintenance costs of a non-capital nature)should be borne by us only to the extent of such part of the costs thatcorresponded to the proportion of capacity actually leased under the Old CDMALeases. Such part of the Constructed Capacity Related Costs that correspondedto the proportion of capacity not actually leased under the Old CDMA Leasesshould be borne by Unicom New Horizon.

In addition to the capacity that we agreed to lease inthe first term, subject to giving not less than 180 days’ prior notice toUnicom New Horizon, we could request to lease additional capacity. Unicom NewHorizon was required to ensure that all capacity which we had so requested wassupplied by the due date of delivery of the capacity, provided that, unlessotherwise agreed, Unicom New Horizon would not be obliged to expand the CDMAnetwork beyond a certain limit. We could not reduce the amount of capacityleased during the initial one-year lease term. However, subject to providingnot less than 180 days’ prior written notice to or with the prior writtenconsent of Unicom New Horizon, we could reduce the amount of capacity leasedfor any additional lease term, provided that we must lease all capacity whichwe had requested or otherwise committed to lease for at least one yearfollowing the date of delivery or renewal of the lease of such capacity.

Subject to certain exceptions, including delay causedby a force majeure event, a material breach of the Old CDMA Leases by us orcompliance with applicable laws and regulations, if any capacity was not readyfor operational service by the relevant delivery date, then Unicom New Horizonshould be liable to provide a delay discount to us, equal to the daily leasefee in respect of the relevant capacity multiplied by the number of days ofdelay, which should be credited against future lease fee payments.

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We had the option to purchase the CDMA network, whichcould be exercised at any time during the initial lease term or any additionallease term of the lease and within one year thereafter. The acquisition pricewould be negotiated between Unicom New Horizon and us, based on the appraisedvalue of the CDMA network determined by an independent assets appraiser inaccordance with applicable PRC laws and regulations and taking account ofprevailing market conditions and other factors, provided that it would notexceed such price as would, taking into account all lease fee payments made byus to Unicom New Horizon and all delay discounts of lease fee, enable UnicomNew Horizon to recover its total network construction cost, together with aninternal rate of return on its investment of 8%. The exercise of the purchaseoption would be subject to the relevant laws, regulations and listing rules inHong Kong and the PRC, particularly those governing connected transactions. Titleto the CDMA network assets would remain vested in Unicom New Horizon until theCDMA network assets were transferred to us following exercise of the purchaseoption.

In consideration of our entering into the Old CDMALeases, Unicom Group unconditionally and irrevocably guaranteed the due andpunctual performance by Unicom New Horizon of its obligations under the Old CDMALeases. Unicom Group also agreed to indemnify us for any loss suffered as aresult of any defect in any of the equipment or any loss caused by anynegligence, default, act or omission of Unicom New Horizon or Unicom Groupunder the Old CDMA Leases or in connection with the CDMA network. The aggregateliability of Unicom Group for any claim should not exceed the total amount oflease fee payments made to Unicom New Horizon and, where the purchase optionhad been exercised, the total purchase price paid for the CDMA network. Theguarantee and indemnity provided by Unicom Group under the Old CDMA Leaseswould continue in force until the expiration of the relevant Old CDMA Lease.

We could terminate the Old CDMA Leases by not lessthan 180 days’ prior written notice, with effect from the end of any additionalterm. In addition, Unicom Group or we could terminate an Old CDMA Lease if theother committed any continuing or material breach of the relevant Old CDMALeases. Unicom Group or Unicom New Horizon was not otherwise permitted toterminate the lease.

***New CDMA Lease***

On March 24, 2005, we entered into a new CDMAlease agreement, or New CDMA Lease, with Unicom Group and its subsidiary UnicomNew Horizon to replace the Old CDMA Lease. The New CDMA Lease has an initialterm of two years commencing January 1, 2005 and may be renewed at ouroption. The length of each renewed term shall be agreed by all parties to theNew CDMA Lease.

Under the New CDMA Lease, Unicom New Horizon hasagreed to lease all constructed capacity of its CDMA network to us and thelease fee for the CDMA network will be as follows:

·                                          in 2005, 29% of the audited annualservice revenue generated by our CDMA cellular business, or CDMA BusinessIncome; and

·                                          in 2006, 30% of the CDMA Business Income;

provided that the annual lease fee may not be lessthan a certain minimum level. The minimum lease fee for 2005 was 90% of the total amount of lease fee paidby us to Unicom New Horizon pursuant to the Old CDMA Leases for 2004. Theminimum lease fee for 2006 will be 90% of the total amount of lease fee paid byus to Unicom New Horizon pursuant to the New CDMA Lease for 2005. The lease feearrangements for any renewed term of the New CDMA Lease will be subject tonegotiations among the parties to the New CDMA Lease. In 2005, ourtotal lease fee payment under the New CDMA Lease was RMB7.92 billion.

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Subject to certain exceptions, including delay causedby a force majeure event (including natural disasters, national emergencies,civil disturbances, riots, acts of terrorism, industrial disputes and othersimilar events beyond the control of the parties), a material breach of the NewCDMA Lease by us or compliance with applicable laws and regulations, if UnicomNew Horizon fails to provide any capacity of its CDMA network which affects theprovision of services by us, Unicom New Horizon shall be liable to provide adiscount for delay to us, calculated pursuant to the followingformula:
| Discount for delay |   | =      |   | Number of our  CDMA      |   | x      |   | delay period     |   | x      |   | ARPU of CDMA           |
|--------------------|--------|--------|--------|--------------------------|--------|--------|--------|------------------|--------|--------|--------|------------------------|
|               |   |   |   | subscribers  affected by |   |   |   | (number of days) |   |   |   | subscribers            |
|               |   |   |   | the delay                |   |   |   |             |   |   |   | the number of  days in |
|               |   |   |   |                     |   |   |   |             |   |   |   | the relevant  month    |

 

In the above formula, “number of our CDMA subscribersaffected by the delay” shall be confirmed by us on the basis of substantiveevidence; “ARPU of CDMA subscribers” shall be the average monthly ARPU figureof the CDMA subscribers in the relevant areas for the three months immediatelyprior to the delay, as calculated and confirmed by us.

The proportion of the constructed capacity relatedcosts to be borne by us shall be calculated by reference to the actual numberof our cumulative CDMA subscribers at the end of the month prior to theoccurrence of the costs divided by 90%, as a percentage of the total amount ofcapacity (expressed in terms of the number of subscribers) constructed on theCDMA network.

The other key terms of the New CDMA Lease, includingexclusive operating rights, purchase option, guarantee and indemnity, aresubstantially similar to those of the Old CDMA Leases.

**Provision of Ongoing Telecommunications and AncillaryServices and Premises**

We had entered into a number of service arrangementswith Unicom Group and/or its subsidiaries with respect to provision of ongoingtelecommunications and ancillary services between Unicom Group and us,including leasing of satellite transmission capacity, supply of international telecommunicationnetwork gatewayservices, supply of various telephone cards, supply of equipment procurementservices, supply of cellular subscriber services, supply of customer services,supply of agency services, leasing of transmission line capacity andinterconnection and roaming arrangements, as well as provision of premises.

On March 24, 2005, we and Unicom Group enteredinto a comprehensive services agreement, or the New Comprehensive ServicesAgreement, a comprehensive operator services agreement, or the NewComprehensive Operator Services Agreement, and a premise leasing agreement, orthe New Guoxin Premises Leasing Agreement, to replace the previous servicearrangements between Unicom Group and us.

Each of the New Comprehensive Services Agreement, theNew Comprehensive Operator Services Agreement and the New Guoxin PremisesLeasing Agreement has an initial term of two years commencing on January 1,2005 and is renewable for further two-year terms at our option.

***Leasing of Satellite Transmission Capacity***

We lease satellite transmission capacity from a 95.00%owned subsidiary of Unicom Group. We use this capacity to supplement our longdistance network.

That subsidiary of Unicom Group and CUCL previouslyentered into a satellite transmission channel leasing agreement, dated May 25,2000. Under that agreement, payments for leasing of satellite transmissioncapacity were calculatedon the basis of tariffs set by the MII. We paid the minimum applicable tariff for therelevant volume and duration less a discount of up to 10%. The discount would not be less than that offered to anythird party leasing similar transmission capacity.

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The New Comprehensive Services Agreement,which replaced the satellite transmission channel agreement, contains similarterms with respect to the lease of satellite transmission capacity. The total leasing charges for satellitetransmission capacity for 2005 were approximately RMB11.79****million.

***Supply of International Telecommunication Network GatewayServices***

Unicom Group provides us with access to internationalconnections for our international long distance service through itsinternational telecommunication network gateways. CUCL and Unicom Grouppreviously entered into a services agreement, dated May 25, 2000, underwhich Unicom Group agreed to supply international telecommunication network gateway services to us. Unicom Group hasundertaken not to supply international telecommunication network gateway services to third parties. Thecharges for theseservices were based onUnicom Group’s cost of operation and maintenance of the international telecommunicationnetwork gatewayfacilities, including depreciation, plus a margin of 10% over cost. We retained all revenues generated by ourinternational long distance service.

The New Comprehensive Services Agreement, whichreplaced the service agreement entered in 2000, contains similar terms with respect to the supply ofinternational telecommunication network gateway services. Total charges for thesupply of international telecommunication network gateway services in 2005 wereapproximately RMB19.80****million.

***Supply of Telephone Cards***

Each of CUCL, Unicom New Century and Unicom New Worldpreviously entered into a services agreement with Unicom Group, dated May 25,2000, November 20, 2002 and November 20, 2003 respectively, toprovide for a telephone cards supply arrangement under which, Unicom Group agreed through its subsidiary, Unicom Xingye, tosupply various kinds of telephone cards, including SIM cards, UIM cards, IPtelephony cards and rechargeable calling cards, to us. Charges for the supply of these cards were based on the actual cost incurred byUnicom Xingye in supplying the cards plus a margin over cost to be agreed uponfrom time to time, but in any case not to exceed 20%, subject to specifiedvolume discounts. Under these three services agreements, prices and volumes would be reviewed by the parties on an annualbasis.

The New Comprehensive Services Agreement, whichreplaced the previous telephone card supply arrangements, contains similar terms with respect tothe supply of telephone cards. Total charges for the supply of telephone cardsfor 2005 wereapproximately RMB0.67 billion.

***Supply of Equipment Procurement Services***

Prior to the restructuring in connection with ourinitial public offering, Unicom Import and Export Co. Ltd., a 95.0% directsubsidiary of Unicom Group, handled most procurement of foreign and domestictelecommunications equipment and other materials required for construction ofUnicom Group’s networks. Each of CUCL, Unicom New Century and Unicom New Worldpreviously entered into a services agreement with Unicom Group, dated May 25,2000, November 20, 2002 and November 20, 2003 respectively, toprovide for this procurement service arrangement under which we were allowed tocontinue to use Unicom Group’s procuring service at the rate of:

·                                          0.7% of the contract value in the case ofimported equipment, or

·                                          0.5% of the contract value in the case ofdomestic equipment.

These three agreements were amended on November 22,2004 so that with effect from July 1, 2004, the above rates were loweredas follows:

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·                                          0.55% of the contractvalue of those contracts under US$30 million (including US$30 million)and 0.35% of the contract value of those procurement contracts over US$30million, in the case of imported equipment, or

·                                          0.25% of the contractvalue of those contracts under RMB200 million (including RMB 200 million) and0.15% of the contract value of those contracts over RMB 200 million, in thecase of domestic equipment.

Inaddition, pursuant to this amendment on November 22, 2004, UnicomGroup agreed to indemnify us for any loss caused by any negligence, default,act or omission of Unicom Group or Unicom Import and Export Co. Ltd. up to anamount equal to the total amount of agency services fees paid to Unicom Groupunder the three agreements.

Under the New Comprehensive Services Agreement, UnicomGroup agreed to provide us comprehensive procurement services at the same rates asthose applied with effect from July 1, 2004 pursuant to the November 22, 2004amendment mentioned above. Unicom Group has also agreed to continue to agree to indemnify us for any loss causedby any negligence, default, act or omission of Unicom Group or Unicom Importand Export Co. Ltd. up to an amount equal to the total amount of agencyservices fees paid to Unicom Group under the New Comprehensive Services Agreement.Our total payment to Unicom Group for equipmentprocurement services for 2005 was approximately RMB15.79 million.

***Interconnection Arrangements***

Our various telecommunication networks interconnectwith various telecommunication networks of Unicom Group. CUCL previouslyentered into two services agreements with Unicom Group, dated May 25, 2000and November 22, 2001, respectively, and each of Unicom New Century andUnicom New World previously entered into a services agreement with UnicomGroup, dated November 20, 2002 and November 20, 2003 respectively. Thesefour services agreements provided for our interconnection arrangements withUnicom Group, under which interconnection settlement between Unicom Group’snetworks and our networks was based on relevant standards established from time totime by the MII. However, in the case of calls between cellular subscribers ofdifferent networks in different provinces, settlement was based on either the relevant standardsestablished by the MII or a cost-based internal settlement arrangement appliedby Unicom Group prior to the restructuring in connection with our initialpublic offering, whichever is more favorable to us.

Under the New Comprehensive Services Agreement,interconnection settlements between Unicom Group’s networks and our networks are asfollows:

With respect to cellular calls between differentprovinces, settlement between the cellular networks of Unicom Group andus will be made byone of thefollowing twomethods that is more favorable to us:

·                                          the cellular network from which theoutgoing calls originate and the cellular network whichreceives the incoming calls will eachretain 4% of the long distance call fee incurred and theremaining 92%of the long distance call fee will be credited to us; or

·                                          pursuant to the settlement standardstipulated in the Notice Concerning the Issue of theMeasures on Settlement of Interconnectionbetween Public Telecommunications Networksand Sharing of Relaying Fees (Xin Bu Dian**[**2003**]**No. 454) promulgated by the MII on October 28, 2003, the cellularnetwork from which the outgoing calls originate and the cellular network whichreceives the incoming calls will each retain RMB0.06 from the long distancecall fee. The remaining long distance call fee will be credited to us.

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For other interconnection settlement between thenetworks of Unicom Group and us, both parties agree to conduct settlement inaccordance with the relevant provisions in the Notice Concerning the Issue ofthe Measures on Settlement of Interconnection between Public TelecommunicationsNetworks and Sharing of Relaying Fees (Xin Bu Dian [2003] No. 454)promulgated by the MII on October 28, 2003 (as amended from time to time).

In 2005, interconnection revenue and interconnectionexpenses derived from the new arrangements with Unicom Group were approximatelyRMB139.74 million and RMB16.10 million, respectively.

***Roaming Arrangements***

We and Unicom Group provide roaming services to eachother. In addition, we make our long distance network available to Unicom Groupin its implementation of its roaming arrangements with other operators. CUCLpreviously entered into two services agreements with Unicom Group, dated May 25,2000 and November 22, 2001, respectively, and each of Unicom New Centuryand Unicom New World previously entered into a services agreement with UnicomGroup, dated November 20, 2002 and November 20, 2003 respectively. Thesefour services agreements provided for our roaming arrangements with UnicomGroup, under which charges for these roaming services between us andUnicom Group were based on our respective internal costs of providingthese services, and would be on no less favorable terms than those available toany third party. We received 50% of Unicom Group’s roaming revenue from thirdparty operators for calls using our long distance network.

Under the New Comprehensive Services Agreement, theroaming fee arrangements between Unicom Group and us are as follows:

·                                          The cellular subscribers usingroaming services will pay roaming fees at the agreed rate ofRMB0.60 per minute of roaming usage for both incoming and outgoingcalls based on MII guidelines.

·                                          If our cellular subscribers roam in theservice areas of Unicom Group, we will be entitled to receive the roaming fees,which will be apportioned in the following way: (i) RMB0.40 (the rate forlocal call charges under MII guidelines) will be paid to Unicom Group; and (ii) theremaining RMB0.20 will be withheld by us; and

·                                          If the cellularsubscribers of Unicom Group roam in our service areas, Unicom Group will beentitled to receive the roaming fees, which will be apportioned in thefollowing way: (i) RMB0.56 will be paid to us; and (ii) RMB0.04 willbe withheld by Unicom Group; and

·                                          If the network of a third party cellularnetwork operator is made available to the cellular subscribers of Unicom Grouppursuant to the international roaming arrangements of Unicom Group, or if thenetwork of Unicom Group is made available to the subscribers of any third partycellular network operator pursuant tosuch arrangements, we will receive 50% of all roaming revenue to be receivedunder such international roaming arrangements.

In 2005, roaming revenueand roaming expenses derived from the new arrangements with Unicom Group were approximately RMB67.78****million and approximately RMB41.80****million,respectively.

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***Leasing of Transmission Line Capacity***

Unicom Group leases fixed-line transmission capacityfrom CUCL. CUCL previously entered into a services agreement with Unicom Group,dated May 25, 2000, to provide for this transmission line capacity leasingarrangement under which lease charges were based on tariffs stipulated by theMII from time to time less a discount of up to 10%. The discount given by CUCLto Unicom Group must not be more than what CUCL offered to other third party lessees for asimilar lease. When new tariffs were adopted by the MII, the discount rate would be reviewed.

The New Comprehensive Services Agreement containssimilar terms with respect to the leasing of transmission line capacity by usto Unicom Group. In 2005, we received from Unicom Group total leasing fees ofapproximately RMB25.84****million.

***Supply of Cellular SubscriberValue-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 “UnicomAssistant” services. Following the sale of Guoxin Paging to Unicom Group at theend of 2003, Unicom Group has agreed to provide (through the successor companyto Guoxin Paging) to us cellular subscriber value-added services pursuant to aprevious comprehensive operator services agreement dated November 20, 2003. The various local branches of GuoxinPaging and us would 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 value-added telecommunicationscontent providers who provided value-added communications content to us in the sameregion. The revenue sharing proportions would be adjusted annually.

Under the New Comprehensive Operator ServicesAgreement, we will retain 40% of the revenue derived and actually received byus from value-added services provided to our subscribers by Unicom Group(through the successor company to Guoxin Paging) and allocate 60% of suchrevenue to Guoxin Paging, on the condition that such proportion for GuoxinPaging may not be higher than the average agreed-upon proportion forindependent value-added telecommunications content providers who providevalue-added communications content to us in the same region. In 2005, we made total payment of approximatelyRMB412.55 million to Unicom Group in 2005 for its supply of cellular subscribervalue-added services.

***Supply of Customer Services***

Pursuant to a previous comprehensive operator servicesagreement dated November 20, 2003, Unicom Group has agreed to provide (acting on itsown or through Guoxin Paging) to us customer services. These customer servicesincluded businessinquiries, tariff inquiries, account maintenance, complaints handling, customerinterviews and subscriber retention. Service fees payable by us to Unicom Groupor Guoxin Paging were calculated on the basis of the costs of the customerservice plus a profit margin of no more than 10%. The costs of the customerservice were the costs per operator seat multiplied by the number ofeffectively operating operator seats. The cost per operator seat ineconomically developed areas, such as Beijing and Shanghai, was the actualcost, i.e., actual wages, administration expenses, operation and maintenanceexpenses, depreciation of equipment and leasing fees for premises attributable tothe customer service in such area for the previous year. The cost per operatorseat in other area was agreed upon between the local branches of Guoxin Pagingand us, subject to our final confirmation, provided that such cost could not exceed the nationwide (other thanBeijing and Shanghai) weighted average of such costs plus 10%. Unicom Group would notify us the number of effectivelyoperating operator seats of each month within 10 days after the end of thatmonth, and then we would confirm that number within five business days basedon criteria set forth in the relevant MII regulations.

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Under the New Comprehensive Operator ServicesAgreement, the cost per operator seat in economically developed areas such asBeijing and Shanghai remains to be the actual cost per operator seat, while the costper operator seat in an area other than economically developed areas will bethe lower of the actual cost per operator seat in that area and the nationwide(excluding Beijing and Shanghai) average of actual cost per operator plus 10%. Otherthan this, the New Comprehensive Services Agreement contains similar terms withrespect to the supply of customer services. In 2005, our total payment to Unicom Group for itssupply of customer services was RMB562 million.

***Supply of Agency Services***

Pursuant to a previous comprehensive operator servicesagreement dated November 20, 2003,Unicom Group agreed to provide (throughGuoxin Paging) to us subscriber development services, including by telephone orthrough other channels utilizing Guoxin Paging’s paging network, equipment andoperators. Agency fees payable by us to Unicom Group or Guoxin Paging could not exceed the average of agency feespayable to any third party agent providing subscriber development services tous in the same region.

The New Comprehensive Operator Services Agreementcontains similar terms with respect to the supply of agency services. In 2005, we paid agency fees of approximatelyRMB15.31 million to Unicom Group for its supply of agency services describedabove.

***Mutual Provision of Premises***

Unicom Group and CUCL provide to each other premisesfrom time to time pursuant to the services agreement between Unicom Groupand CUCL dated May 25, 2000. Unicom Group also provided premises to Unicom NewCentury and Unicom New World pursuant to services agreements with each of Unicom NewCentury and Unicom New World dated November 20, 2002 and November 20, 2003,respectively. Otherthan premises leased from third parties, the rental rates in each case werebased on the lower of depreciation costs and market prices for similar premisesin that locality, but CUCL could charge Unicom Group market rates for premises leasedto Unicom Group. In cases where the premises were leased from a third party,the rental was the amountpayable in the head lease. In the case of shared premises, the price was split in proportion to the respectiveareas occupied by the parties. In connection with our provision of premises toGuoxin Paging, which was effective from January 1, 2004, the rental was based on the higher of depreciationcosts and market prices for similar premises in each locality.

The terms in the New Comprehensive Services Agreementwith respect to mutual provision of premises and the terms in the New GuoxinPremises Leasing Agreement with respect to our provision of premises to GuoxinPaging are similar to those in the previous agreements. The net charges forpremises leased to us by Unicom Group as offset by our charges for premisesleased to Unicom Group for 2005 were RMB21.06****million.

**Agreements relating tothe Acquisition of Unicom International from Unicom Group**

In relation to theacquisition by us of Unicom International from Unicom Group, we and ChinaUnicom (Hong Kong) Group Limited, which is a indirectly wholly-owned subsidiary of UnicomGroup, entered into a conditional sale and purchase agreement, dated July 28,2004. This agreement includes the following terms:

·                                          China Unicom (Hong Kong) Group Limited’s agreement to transfer all of itsequity interest in Unicom International to us;

·                                          our agreement to pay China Unicom (HongKong) Group Limited a cash consideration in the amount of HK$37,159,995.77; and

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·                                          warranties given by China Unicom (HongKong) Group Limited to us in relation to Unicom International.

**Agreements relating to the Acquisition of Unicom NewWorld from Unicom Group and the Sale of Guoxin Paging to Unicom Group**

***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 November 4,2003. This agreement includes the following terms:

·                                          Unicom Group’s agreement to transfer toUnicom New World the assets and liabilities attributable to the businesses asdescribed under “A. History and Development of the Company -Acquisitionsof Unicom New Century and Unicom New World and Sale of Guoxin Paging” underItem 4;

·                                          mutual warranties and indemnities givenby Unicom Group and Unicom New World in relation to the assets and liabilitiestransferred to Unicom New World and in relation to the restructuring; and

·                                          undertakings by Unicom Group in favor ofUnicom New World, including undertakings:

·                                          to hold and maintain all licensesreceived from the MII in connection with any of the transferred businesses forthe benefit of Unicom New World, and to allocate spectrum and to provide otherresources to Unicom New World;

·                                          subject to applicable Chinese laws andregulations in effect at the relevant time, to take all actions necessary toobtain, maintain, renew and otherwise extend to or for the benefit of UnicomNew World such governmental or regulatory licenses, consents, permits or otherapprovals as Unicom New World may require to continue to operate itsbusinesses; and

·                                          not to engage in any business whichcompetes with our businesses except for the existing competing businesses ofUnicom Group.

***Conditional Sale andPurchase Agreement with respect to Unicom New World***

In relation to theacquisition by us of Unicom New World from Unicom Group, we and Unicom BVIentered into a conditional sale and purchase agreement, dated November 20,2003.  This agreement includes thefollowing terms:

·                                          Unicom BVI’s agreement to transfer all ofits equity interest in Unicom New World (BVI) Limited, which holds 100% of theequity interest in Unicom New World, to us;

·                                          our agreement to pay Unicom BVI a cashconsideration in the amount of HK$3,014,886,000 (approximately RMB3.2 billion);and

·                                          warranties given by Unicom BVI****to us in relation to Unicom New World.

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***Conditional Sale and PurchaseAgreement with respect to Guoxin Paging***

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

·                                          CUCL’s agreement to sell tothe A Share Company, and the A Share Company’s agreement to acquire from CUCL,all of CUCL’s equity interest in Guoxin Paging;

·                                          the A Share Company’sagreement to pay CUCL a cash consideration in the amount of HK$2,590,917,656(approximately RMB2.75 billion); and

·                                          warranties given by CUCL tothe A Share Company in relation to Guoxin Paging.

**Agreements relating to the Restructuring inconnection with Acquisition of Unicom New Century from Unicom Group**

***TheReorganization Agreement***

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 November 18,2002. This agreement includes the following terms:

·                                          Unicom Group’s agreement totransfer to Unicom New Century the assets and liabilities attributable to thebusinesses as described in “A. History and Development of the Company - Acquisitions of Unicom New Century andUnicom New World and Sale of Guoxin Paging” under Item 4;

·                                          mutual warranties andindemnities given by Unicom Group and Unicom New Century in relation to theassets and liabilities transferred to Unicom New Century and in relation to therestructuring; and

·                                          undertakings by Unicom Groupin favor of Unicom New Century, including undertakings:

·                                          to hold and maintain alllicenses received from the MII in connection with any of the transferredbusinesses for the benefit of Unicom New Century, and to allocate spectrum andto provide other resources to Unicom New Century;

·                                          subject to applicable Chineselaws and regulations in effect at the relevant time, to take all actionsnecessary to obtain, maintain, renew and otherwise extend to or for the benefitof Unicom New Century such governmental or regulatory licenses, consents,permits or other approvals as Unicom New Century may require to continue tooperate its businesses; and

·                                          not to engage in any businesswhich competes with our businesses except for the existing competing businessesof Unicom Group.

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***Conditional Sale and PurchaseAgreement***

In relation tothe acquisition by us of Unicom New Century from Unicom Group, we and UnicomBVI entered into a conditional sale and purchase agreement, dated November 20,2002. This agreement includes the following terms:

·                                          Unicom BVI’s agreement totransfer all of its equity interest in Unicom New Century (BVI) Limited, whichholds 100% of the equity interest in Unicom New Century, to us;

·                                          our agreement to pay Unicom BVIa cash consideration in the amount of HK$4,523,181,304 (approximately RMB4.8billion); and

·                                          warranties given by Unicom BVI****to us in relation to Unicom New Century.

**Agreements Relating to the Restructuring inConnection 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. Thisagreement includes the following terms:

·                                          Unicom Group’s agreement totransfer to CUCL the assets and liabilities attributable to the businesses asdescribed “A. History and Development of the Company - The Restructuring of Unicom Group and OurInitial Public Offering in 2000” under Item 4,

·                                          mutual warranties andindemnities given by Unicom Group and CUCL in relation to the assets andliabilities transferred to CUCL and in relation to the restructuring,

·                                          undertakings by Unicom Groupin favor of CUCL, including, among others:

·                                          to hold and maintain alllicenses received from the MII in connection with any of our businesses for ourbenefit, and to allocate spectrum and to provide other resources to us;

·                                          subject to applicable Chineselaws and regulations in effect at the relevant time, to take all actionsnecessary to obtain, maintain, renew and otherwise extend to or for our benefitsuch governmental or regulatory licenses, consents, permits or other approvalsas we shall require to continue to operate our businesses;

·                                          to arrange for us toparticipate in its international roaming arrangements;

·                                          not to engage in any businesswhich competes with our businesses except for the existing competing businessesof Unicom Group;

·                                          to grant us a right of firstrefusal in relation to any government authorization, license or permit, orother business opportunity to develop any new telecommunications technology,product or service;

·                                          to ensure that we can continueto use premises for which title documentation cannot be obtained at this timefor a period of three years following the restructuring;

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·                                          not to dispose of any of ourshares it beneficially owns or to take or permit any other actions, includingprimary issuances of securities by us or CUCL, which would result in us or CUCLno longer constituting majority owned subsidiaries of Unicom Group; and

·                                          not to seek an overseaslisting for any of its businesses or the businesses of its subsidiaries inwhich we are engaged or may engage in the future except through us,

·                                          an option granted by UnicomGroup to us to acquire Unicom Group’s interest in any telecommunicationsinterest such as Unicom Paging, Unicom Xingye and Unicom Group’s CDMA telephonylicense and business, and

·                                          a commitment by Unicom Groupthat it will provide continuous financial support to us when necessary.

***Equity Transfer Agreement***

In relation tothe restructuring in connection with our initial public offering, we, UnicomGroup, China Unicom (Hong Kong) Group Limited and China Unicom (BVI) Limitedentered into an equity transfer agreement, dated April 21, 2000. Thisagreement includes the following terms:

·                                          Unicom Group’s agreement totransfer all of its equity interest in CUCL to us;

·                                          our agreement to issue sharesto China Unicom (BVI) Limited, China Unicom (BVI) Limited’s agreement to issueshares to China Unicom (Hong Kong) Group Limited and China Unicom (Hong Kong)Group Limited’s agreement to issue shares to Unicom Group;

·                                          Unicom Group’s and ouragreement that:

·                                          we shall be entitled to applyin Hong Kong, Macau, Taiwan and in all places outside of China for alltrademarks incorporating the word Unicom in English and Chinese and the Unicomlogo; and

·                                          once these trademarks havebeen registered, we will sublicense these trademarks to Unicom Group, CUCL,Guoxin Paging and Guoxin Paging’s subsidiaries on a royalty-free basis;and

·                                          warranties and indemnitiesgiven 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 aPRC trademark license agreement entered into on May 25, 2000 betweenUnicom Group and CUCL, CUCL and our affiliates were granted the right to usethese trademarks on a royalty-free basis for an initial period of fiveyears, renewable at the option of CUCL. Under the terms of this agreement, weand our affiliates are the exclusive licensees of these trademarks providedthat Unicom Group may also license these trademarks to any of its existing orfuture subsidiaries. Unicom Group also agreed to license to CUCL any trademarkthat it registers in China in the future which incorporates the word Unicom.

CUCL entered into a service agreement with UnicomPaging on August 1, 2001. Under the terms of the agreement, both partiesagreed to license their respective trademarks and logos to each other on equitable terms and free of charge.

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### ***C.            Interests of Experts and Counsel***

Notapplicable.

## **Item 8. Financial Information**

See Item 18, “Financial Statements”.

**Legal Proceedings**

We are not involved in any material litigation,arbitration or administrative proceedings. So far as we are aware, wedo not have any pending or threatened litigation, arbitration or administrativeproceedings that is expected to have a material effect on ourfinancial condition and results of operations.

**Policy on Dividend Distribution**

The objective of our dividend policy is to achieve along-term sustainable and steadily increasing dividend, with a view to maximizeour shareholders’ value. The declaration and payment of future dividends willdepend upon, among other things, financial condition, business prospects,future earnings, cash flow, liquidity level and cost of capital. We believesuch policy will provide our shareholders with a stable return in the long termalong with the growth of our company. We may only pay dividends out of ourdistributable profits.

Having taken into accountsuch factors as our financial condition, cash flow position and requirements toensure the sustainable future growth of our business, our board of directorsrecommended payment of a final dividend of RMB0.11 per share for the financialyear ended December 31, 2005. This represents an increase of 10.0% overthe annual dividend of HK$0.10 per share for the financial year ended December 31,2004 and a dividend payout ratio of 28.1%.

## **Item 9. The Offer and Listing**

**Market Price Information**

Our American depositary shares, each representing tenordinary shares, are listed and traded on the New York Stock Exchange. Ourordinary shares are listed and traded on the 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 |   |
| 2004                 |       | 10.20                                                  |       | 5.20                                   |       | 13.18 |   | 6.78 |   |
| 2005                 |       | 7.20                                                   |       | 5.65                                   |       | 9.19 |   | 7.30 |   |
| Quarterly            |       |                                                   |       |                                   |       |   |   |   |   |
| First Quarter, 2004  |       | 10.20                                                  |       | 7.00                                   |       | 13.18 |   | 8.93 |   |
| Second Quarter, 2004 |       | 7.60                                                   |       | 5.20                                   |       | 9.55 |   | 6.78 |   |
| Third Quarter, 2004  |       | 6.65                                                   |       | 5.55                                   |       | 8.53 |   | 7.10 |   |

 

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| ** **                             | ** ** | **Price per Ordinary Share (HK$)** | ** ** | **Price per ADS (US$)** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **High**                                               | ** ** | **Low**                                | ** ** | **High** | ** ** | **Low** | ** ** |
| Fourth Quarter, 2004                   |       | 6.45                                                   |       | 5.50                                   |       | 8.28 |   | 7.15 |   |
| First Quarter, 2005                    |       | 7.20                                                   |       | 5.65                                   |       | 9.19 |   | 7.30 |   |
| Second Quarter, 2005                   |       | 6.65                                                   |       | 5.90                                   |       | 8.42 |   | 7.61 |   |
| Third Quarter, 2005                    |       | 6.95                                                   |       | 6.15                                   |       | 9.08 |   | 7.83 |   |
| Fourth Quarter, 2005                   |       | 6.65                                                   |       | 5.90                                   |       | 8.55 |   | 7.54 |   |
| Monthly:                               |       |                                                   |       |                                   |       |   |   |   |   |
| January 2006                      |       | 7.10                                                   |       | 6.30                                   |       | 9.13 |   | 8.33 |   |
| February 2006                     |       | 6.95                                                   |       | 6.20                                   |       | 8.89 |   | 8.03 |   |
| March 2006                        |       | 6.75                                                   |       | 6.25                                   |       | 8.65 |   | 8.05 |   |
| April 2006                        |       | 6.85                                                   |       | 6.45                                   |       | 8.90 |   | 8.40 |   |
| May 2006                          |       | 7.75                                                   |       | 6.55                                   |       | 10.33 |   | 8.45 |   |
| June 2006  (through June 28) |       | 7.05                                                   |       | 6.40                                   |       | 8.95 |   | 8.10 |   |

##  

## **Item 10. Additional Information**

### ***A.            Share Capital***

Notapplicable.

### ***B.            Memorandum and Articles of Association***

**General**

Under our Memorandum of Association, we have thecapacity, rights, powers, liabilities and privileges of a natural person. Thefollowing is a summary of selected provisions 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:

·                                          the giving of any security orindemnity either (i) to the director or any of his associates (as definedin the Hong Kong Stock Exchange Listing Rules) in respect of money lent orobligations incurred by him or any of them at the request of or for the benefitof Unicom or any of its subsidiaries or (ii) to a third party in respectof a debt or obligation of Unicom or any of its subsidiaries for which thedirector or any of his associates has himself assumed responsibility orguaranteed or secured in whole or in part;

·                                          an offer of shares ordebentures or other securities of or by Unicom (or any other company whichUnicom may promote or be interested in) where the director or any of hisassociates is a participant in the underwriting or sub-underwriting ofthe offer;

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·                                          any other company in which thedirector or any of his associates is interested only, whether directly orindirectly, as an officer or shareholder or in which the director is beneficiallyinterested in shares of that company, provided that he, together with any ofhis associates is not beneficially interested in 5% or more of (i) theissued shares of any class of such company (or of any third company throughwhich such interest is derived) or (ii) the voting rights attached to suchissued shares or securities (excluding for the purpose of calculating such 5%interest any indirect interest of such director or any of his associates byvirtue of an interest of Unicom in such company);

·                                          the benefit of employees ofUnicom or any of its subsidiaries including (i) the adoption, modificationor operation of any employees share scheme under which the director or any ofhis associates may benefit or (ii) the adoption, modification or operationof a pension fund or retirement, death or disability benefits scheme whichrelates both to directors, their associates and employees of Unicom or any ofits subsidiaries and does not provide in respect of the director or any of hisassociates any privilege or advantage not generally accorded to the class ofpersons to which such scheme or fund relates; or

·                                          any contract or arrangement inwhich the director or any of his associates is interested in the same manner asother holders of shares or debentures or other securities of Unicom by virtueonly of his interest in shares or debentures or other securities of Unicom.

***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. The directors are also entitled to be repaid alltraveling, hotel and other expenses reasonably incurred by them in or about theperformance of their duties as directors. The board of directors may grantspecial remuneration to any director who performs services which in the opinionof the board are outside the scope of the ordinary duties of a director.

The board may establish and maintain any contributoryor non-contributory pension or superannuation funds for the benefit of,or give donations, gratuities, pensions, allowances or emoluments to, anypersons (i) who are or were at any time in the employment or service ofUnicom, or of any company which is a subsidiary of Unicom, or is allied orassociated with Unicom or with any such subsidiary company, or (ii) whoare or were at any time directors or officers of Unicom or of any such othercompany above, and holding or who have held any salaried employment or officein Unicom or such other company, and the wives, widows, families and dependantsof any such persons and may make payments for or towards the insurance of anysuch persons. Any director holding any such employment or office is entitled toparticipate in, and retain for his own benefit, any such donation, 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, whetheroutright or as collateral security for any debt, liability or obligation ofUnicom or of any third party.

***Qualification of Directors***

A director of Unicom is not required to hold anyqualification shares. No person is required to vacate office or be ineligiblefor re-election or reappointment as a director.

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***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 byrotation. The directors to retire in every year shall be those who have beenlongest in office since their last election. In addition, a director appointedby the board to fill in a casual vacancy or as an addition to the board shallretire at the next following general meeting and shall not be taken intoaccount in determining the number of directors who are to retire by rotation ateach annual general meeting. The retiring directors shall be eligible for re-election.

**Rights Attached to Ordinary 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 ordinaryresolution is one passed by the majority of such shareholders as are entitledto, and do, vote in person or by proxy at a general meeting. A specialresolution is one passed by not less than three-quarters of suchshareholders as are entitled to, and do, vote in person or by proxy at ageneral meeting. Most shareholders decisions are passed by ordinary resolutions.However, the Companies Ordinance and our articles of association stipulate thatcertain matters may only be passed by special 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:

·                                          the chairman of the meeting,

·                                          at least three shareholderspresent in person or by proxy and entitled to vote at the meeting,

·                                          any shareholder orshareholders present in person or by proxy and representing in the aggregatenot less than one-tenth of the total voting rights of all shareholdershaving the right to attend and vote at the meeting, or

·                                          any shareholder orshareholders present in person or by proxy and holding shares conferring aright 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 paidup on all shares conferring that right.

On a show of hands, every individual shareholder whois present 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 orcredited as paid up on a share in advance of calls or installments is treatedfor the foregoing purposes as paid up on the share.

Any action to be taken by the shareholders requiresthe affirmative vote of a majority of the shares at a meeting of shareholders. Thereare no cumulative voting rights. Accordingly, the holders of a majority of theshares voting for the election of directors can elect all the directors if theychoose to do so.

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***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. Ourboard of directors may not offer to issue new shares in any other mannerwithout the prior approval of our shareholders in a general meeting. Any suchapproval given in a general meeting will continue in force until the conclusionof the following annual general meeting or the expiration of the period withinwhich the next annual general meeting is required by law to be held or whenrevoked or varied by an ordinary resolution of our shareholders in a generalmeeting, whichever comes first. If such approval is given, the unissued sharesshall be at the disposal of our board of directors, which may offer, allot,grant options over or otherwise dispose of them to such persons, at such timesand for such consideration and upon such terms and conditions as our board ofdirectors may determine.

In accordance with the Listing Rules of the HongKong Stock Exchange, any such approval given by the shareholders must belimited to shares with an aggregate nominal value not exceeding 20 per cent ofthe aggregate nominal value of our share capital in issue plus the aggregatenominal amount of share capital repurchased by us since the granting of suchapproval.

***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 ourshareholders according to their rights and interests in the profits availablefor distribution, 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 of directors may also pay any fixed dividendwhich is payable on any of our shares on any other dates, whenever ourfinancial position, in the opinion of our board of directors, justifies suchpayments.

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 sixyears after having been declared may be forfeited by the board and will revertto 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, 46th Floor, Hopewell Centre, 183 Queen’s RoadEast, Hong Kong.

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***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 issuedshares of that class or with the sanction of a special resolution passed at aseparate general meeting of the holders of shares of that class. The provisionsof our Articles of Association relating to general meetings apply to suchseparate general meetings, except that the necessary quorum is not less thantwo persons holding or representing by proxy one-third in nominal valueof the issued shares of that class, and that any holder of the shares of theclass present in person or by proxy may demand a poll.

**Annual General and Extraordinary General Meetings**

We must hold in each year a general meeting as ourannual general meeting in addition to any other meetings in that year. Theannual general meeting is held at such time (within a period of not more thanfifteen months, or such longer period as the Registrar of Companies of HongKong may authorize in writing, after the holding of the last preceding annualgeneral meeting) and place as may be determined by the Directors. All othergeneral meetings are called extraordinary general meetings. The Directors maycall an extraordinary general meeting at any time or upon request in accordancewith 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’ noticein writing, and any other general meeting can be called by not less thanfourteen days’ notice in writing. The notice must specify the place, date andtime of meeting, and, in the case of special business, the general nature ofthat business.

**Limitations on Rights to Own Securities**

There are no limitations on the rights to ownsecurities, including the rights of non-resident or foreign shareholdersto hold or exercise voting rights on the securities, imposed by Hong Kong lawor by 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 andwarrants at any price or to give, directly or indirectly, by means of a loan,guarantee, the provision of security or otherwise, financial assistance for thepurpose of or in connection with a purchase made by any person of any shares orwarrants in Unicom. Repurchases of our own shares may be made either by way ofa general offer to all shareholders in proportion to their shareholdings, bypurchasing our shares on a stock exchange or by an off-market contract withindividual shareholders. Any such purchase or other acquisition or financialassistance must be made or given in accordance with any relevant rules orregulations issued by the Hong Kong Stock Exchange or the Securities andFutures 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 new shares. Wemay from time to time by ordinary resolution:

·                                          consolidate and divide all or any of ourshare capital into shares of a larger amount than our existing shares;

·                                          divide our shares into several classesand attach to them any preferential, deferred, qualified or special rights,privileges or conditions;

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·                                          cancel any shares which at the date ofthe passing of the resolution have not been taken or agreed to be taken by anyperson, and diminish the amount of our share capital by the amount of theshares so canceled;

·                                          sub-divide our shares or any ofthem into shares of a smaller amount than is fixed by our Memorandum ofAssociation, subject nevertheless to the provisions of the Companies Ordinance;and

·                                          make provision for the issue andallotment of shares which do not carry any voting rights.

### ***C.            Material Contracts***

In addition to contracts we have entered into with ourcontrolling shareholder, Unicom Group, or its subsidiaries, as described in “RelatedParty Transactions” under Item 7, Unicom Group, we or our subsidiaries haveentered into the following contracts that are not in the ordinary course ofbusiness within the two years preceding the date of this annual report that areor may be material:

·                                          Conditional Sale and Purchase Agreementbetween China Unicom (Hong Kong) Group Limited and our Company, dated July 28,2004, relating to our acquisition of Unicom International. See “A. Historyand Development of the Company — Acquisition of China Unicom InternationalLimited” under Item 4.

### ***D.            Exchange Controls***

The ability of our operating subsidiaries, CUCL andUnicom New World, to satisfy their respective foreign exchange obligations andto pay dividends to us depends on existing and future exchange controlregulations in China. The Renminbi is currently convertible under the currentaccount, which includes trade and service related foreign exchange transactions.Renminbi currently cannot be converted under the capital account, whichincludes foreign direct investment. CUCL and Unicom New World, our wholly-ownedsubsidiaries that hold substantially all of our assets, are both foreigninvestment enterprises. The foreign investment enterprise status will allowthese subsidiaries to purchase foreign exchange at designated foreign exchangebanks for settlement of current account transactions without the approval ofthe State Administration for Foreign Exchange. These current accounttransactions include payment of dividends. However, the relevant PRC governmentauthorities may in the future limit or eliminate the authorizations for aforeign investment enterprise to retain its foreign exchange to satisfy itsforeign exchange obligations or to pay dividends in the future. Furthermore,certain foreign exchange transactions of these subsidiaries under the capitalaccount still require approvals from the State Administration for ForeignExchange. This requirement affects our subsidiaries’ ability to obtain foreignexchange through equity financing, including by means of capital contributionsfrom us.

Under existing Hong Kong law, (i) there are noforeign exchange controls or other laws which restrict the import or export ofcapital and which would affect the availability of cash and cash equivalentsfor our use, (ii) there are no foreign exchange controls or other laws,decrees or regulations that affect the remittance of interest, dividends orother payments on our outstanding debt and equity securities to U.S. residentsand (iii) there are no limitations on the rights of non-resident orforeign owners to hold our debt or equity securities.

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### ***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 following summary of certain relevant taxationprovisions is based on current law and practice, is subject to change and doesnot 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 discussion does not address the tax consequences understate, local and other laws, such as non-Hong Kong and non-U.S. federal laws. Thediscussion is based upon laws and relevant interpretations in effect as of thedate of this annual report.

**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, either by withholding or otherwise, unless such dividends areattributable to a trade, profession or business carried on in Hong Kong.

***Profits***

No tax is imposed in Hong Kong in respect of capitalgains from the sale  of shares and ADSs. Tradinggains from the sale of shares or ADSs by persons carrying on a trade,profession or business in Hong Kong where such gains are derived from or arisein Hong Kong from such trade, profession or business will be chargeable to HongKong income tax rates of 17.5% on corporations and 16.0% on individuals. Gainsfrom sales of shares effected on the Hong Kong Stock Exchange will beconsidered to be derived from or arise in Hong Kong. Liability for Hong Kongincome tax would thus arise in respect of trading gains from sales of shares orADSs 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 of0.1% of the higher of the consideration for or the value of the shares, will bepayable by the purchaser on every purchase and by the seller on every sale ofshares. In addition, a fixed duty of HK$5 is currently payable on anyinstrument of transfer of shares. If one of the parties to the sale is anon-resident of Hong Kong and does not pay the required stamp duty, the dutynot paid will be assessed on the instrument of transfer (if any) and thetransferee will be liable for payment of such duty.

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 unless such withdrawal or deposit does notresult in a change in the beneficial ownership of the shares under Hong Konglaw. The issuance of the ADRs upon the deposit of shares issued directly to TheBank of New York, as depositary of the ADSs, or for the account of The Bank ofNew York does not attract stamp duty. No Hong Kong stamp duty is payable uponthe transfer of ADSs outside Hong Kong.

***Estate Duty***

The Revenue (Abolition of Estate Duty) Ordinance 2005became effective on February 11, 2006 in Hong Kong. No Hong Kong estateduty is payable and no estate duty clearance papers are needed for anapplication for a grant of representation in respect of holder of the shares,whose deaths occur on or after February 11, 2006.

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**United States**

***United States Federal Income Taxation***

This section describes the material United States federalincome tax consequences to a U.S. holder (as defined below) of owning shares orADSs. It applies to you only if you hold your shares or ADSs as capital assetsfor tax purposes. This section does not apply to you if you are a member of aspecial class of holders subject to special rules, including:

·                                          a dealer in securities,

·                                          a trader in securities that elects to usea mark-to-market method of accounting for your securities holdings,

·                                          a tax-exempt organization,

·                                          an insurance company,

·                                          a person liable for alternative minimumtax,

·                                          a person that actually or constructivelyowns 10% or more of our voting stock,

·                                          a person that holds shares or ADSs thatare a hedge or that are hedged against currency risks or as part of a straddleor a conversion transaction, or

·                                          a person whose functional currency is notthe 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 lawsare subject to change, possibly on a 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:

·                                          a citizen or resident of the UnitedStates,

·                                          a corporation organized under the laws ofthe United States or any States,

·                                          an estate whose income is subject toUnited States federal income tax regardless of its source, or

·                                          a trust if a United States court canexercise primary supervision over the trust’s administration and one or moreUnited States persons are authorized to control all substantial decisions ofthe 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 for ADSs, and ADSs for shares, generally willnot be subject to United States federal income tax.

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***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 purposes) is subject to United States federaltaxation. If you are a non-corporate U.S. holder, dividends paid to you intaxable years beginning after December 31, 2002 and before January 1,2011 that constitute qualified dividend income will be taxable to you at amaximum tax rate of 15% provided that you hold the shares or ADSs for more than60 days during the 121-day period beginning 60 days before theex-dividend date and meet other holding period requirements. Dividends we paywith respect to the shares or ADSs will be qualified dividend income providedthat, in the year that you receive the dividend, the shares or ADSs are readilytradable on an established securities 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. The dividend will not be eligible for thedividends-received deduction generally allowed to United States corporations inrespect of dividends received from other United States corporations. The amountof the dividend distribution that you must include in your income as a U.S.holder will be the U.S. dollar value of the Hong Kong Dollar payments made,determined at the spot Hong Kong/U.S. dollar rate on the date the dividenddistribution is includible in your income, regardless of whether the payment isin fact converted into U.S. dollars. Generally, any gain or loss resulting fromcurrency exchange fluctuations during the period from the date you include thedividend payment in income to the date you convert the payment into U.S.dollars will be treated as ordinary income or loss and will not be eligible forthe special tax rate applicable to qualified dividend income. The gain or lossgenerally will be income or loss from sources within the United States forforeign 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 foreigntax credit limitation with respect to dividends that are subject to the maximum15% tax rate. Dividends will be income from sources outside the United States,but dividends paid in taxable years beginning before January 1, 2007generally will be “passive income” or “financial services income” and dividendspaid in taxable years beginning after December 31, 2006 will, depending onyour circumstances, be “passive income” or “general income” which, in eithercase, is treated separately from other types of income for purposes ofcomputing the foreign tax credit allowable to you.

***Taxation of Capital Gains***

Subject to the passive foreign investment company rules discussedbelow, if you are a U.S. holder and you sell or otherwise dispose of yourshares or ADSs, you will recognize capital gain or loss for United Statesfederal income tax purposes equal to the difference between the U.S. dollarvalue of the amount that you realize and your tax basis, determined in U.S.dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holderthat is recognized on or after May 6, 2003 and before January 1, 2011is generally taxed at a maximum rate of 15% where the property is held morethan one year. The gain or loss will generally be income or loss from sourceswithin the United States for foreign tax credit limitation purposes. Yourability to deduct capital losses is subject to limitations. Any Hong Kong stampduty that you pay will not be a creditable tax for United States federal incometax purposes, but you may be able to deduct such stamp duty subject tolimitations under the Code.

***Passive ForeignInvestment Company Rules***. We believe that we should not be treated as a passiveforeign investment company for United States federal income tax purposes, butthis conclusion is a factual determination that is made annually and thus maybe subject 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

·                                          at least 50% of the value, determined onthe basis of a quarterly average, of our assets is attributable to assets thatproduce or are held for the production of passive 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 foreign corporation owns directly or indirectly atleast 25% by value of the stock of another corporation, the foreign corporationis treated for purposes of the passive foreign investment company tests asowning its proportionate share of the assets of the other corporation, and asreceiving directly its proportionate 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 withrespect to:

·                                          any gain you realize on the sale or otherdisposition of your shares or ADSs, and

·                                          any excess distribution that we make toyou. Generally, any distributions to you during a single taxable year that aregreater 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:

·                                          the gain or excess distribution will beallocated ratably over your holding period for the shares or ADSs,

·                                          the amount allocated to the taxable yearin which you realized the gain or excess distribution will be taxed as ordinaryincome,

·                                          the amount allocated to each prior year,with certain exceptions, will be taxed at the highest tax rate in effect forthat year, and

·                                          the interest charge generally applicableto underpayments of tax will be imposed in respect of the tax attributable toeach such year.

Special rules apply for calculating the amount ofthe foreign tax credit with respect to excess distributions by a passiveforeign investment company.

If you own shares or ADSs in a passive foreign investmentcompany that are treated as marketable stock, you may make a mark-to-marketelection. If you make this election, you will not be subject to the passiveforeign investment company rules described above. Instead, in general, youwill include as ordinary income each year the excess, if any, of the fairmarket value of your shares or ADSs at the end of the taxable year over youradjusted basis in your shares or ADSs. You will also be allowed to take anordinary loss in respect of the excess, if any, of the adjusted basis of yourshares or ADSs over their fair market value at the end of the taxable year (butonly to the extent of the net amount of previously included income as a resultof the mark-to-market election). Your basis in the shares or ADSswill be adjusted to reflect any such income or loss amounts. Your gain, if any,recognized upon the sale of your shares or ADSs will be taxed as ordinaryincome.

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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 thetaxable year of the distribution or the preceding taxable year. Dividends thatyou receive that do not constitute qualified dividend income are not eligiblefor taxation at the 15% maximum rate applicable to qualified dividend income. Instead,you must include the gross amount of any such dividend paid by us out of ouraccumulated earnings and profits (as determined for United States federalincome tax purposes) in your gross income, and it will be subject to tax atrates 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 Service Form 8621.

### ***F.            Dividends and Paying Agents***

Not applicable.

### ***G.            Statement by Experts***

Not applicable.

### ***H.            Documents on Display***

You can read and copy documents referred to in thisannual report that have been filed with the U.S. Securities and ExchangeCommission, or the SEC, at the SEC’s public reference room located at100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please callthe SEC at 1-800-SEC-0330 for further information on thepublic reference rooms and their copy charges. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy statements and otherinformation regarding registrants that file electronically with the SEC.

The SEC allows us to “incorporate by reference” theinformation we file with the SEC. This means that we can disclose importantinformation to you by referring you to another document filed separately withthe SEC. The information incorporated by reference is considered to be part ofthis annual report on Form 20-F.

### ***I.             Subsidiary Information***

Not applicable.

## **Item11. Quantitative and Qualitative Disclosures About 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. The original maturities of our long-term loansrange from one to five years.

The People’s Bank of China has the sole authority inChina to establish official interest rates for Renminbi-denominated loans. Financialinstitutions in China set their effective interest rates within the rangeestablished by the People’s Bank of China. The fair value of our borrowings isthe same as the carrying value since all our bank loan interest are variable. Mostof our bank loans are denominated in Renminbi and borrowed from domestic banksat interest rates that vary in accordance with the standard guidance interestrates announced by relevant PRC government authorities.

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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, we entered into a US$700million term loan facility with 13 financial institutions, which is consistedof three tranches: a three-year US$200 million tranche, with an interest rateof 0.28% over the US$ LIBOR, a five-year US$300 million tranche, with aninterest rate of 0.35% over the US$ LIBOR, and a seven-year US$200 milliontranche, with an interest rate of 0.44% per annum over the US$ LIBOR.

In February 2004, we entered into a US$500million long-term syndicated loan agreement with 12 financial institutions to financeworking capital and network construction expenditure. This facility isrepayable in three years and carries an interest rate of 0.40% over US$ LIBORper annum.

In July 2005, CUCL completed an offering of twotranches of short-term bonds in the PRC interbank debenture market. The firsttranche of the bonds was issued for an aggregate amount of RMB9.0 billion witha maturity period of 365 days. The second tranche of the bonds was issued foran aggregate amount of RMB1.0 billion with a maturity period of 180 days. Theeffective interest rate as at December 31, 2005 was 2.89%.  As a result, our fixed rate debt obligation asof December 31, 2005 was****RMB9.87billion.

As a result, we are exposed to interest rate riskresulting from fluctuations in interest rates on our debts. Increases ininterest rates will increase the cost of new borrowing and the interest expensewith respect to our outstanding floating rate debt, and therefore could have amaterial adverse effect on our financial position. From time to time, we mayenter into interest rate swap agreements designed to mitigate our exposure tointerest rate risks in connection with our borrowings denominated in foreigncurrencies, although we did not consider it necessary to do so in 2005. We arealso considering hedging our borrowings denominated in Renminbi once interestrate swaps become available for 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, 2005. 
| ** **                          | ** ** | **Expected Maturity Date**                                                | ** ** | **As of December 31,  2005** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2006**                                                                            | ** ** | **2007**                               | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| ** **                          | ** ** | **(RMB equivalent in million, except interest rate)** | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Variable rate  bank and other loans |       | 12,170                                                                              |       | 6,138                                  |       | 3,502 |   | 553 |   | 1,788 |   | — |   | 24,151 |   | 24,151 |   |
| Average interest rate(1)            |       | 5.64                                                                                | %          | 4.86                                   | %          | 4.83 | % | 4.83 | % | 4.80 | % | — |   | — |   | — |   |

----

(1)             Theinterest rates for variable rate bank and other loans are calculated based onthe weighted average interest rates at the end of 2005.

For the year ended December 31, 2005, if theaverage interest rates for our variable rate bank and other loans had increasedby 10%, we estimate that we would have incurred additional interest expenses ofRMB178 million in 2005.

**Exchange Rate Risk**

125

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The majority of ourindebtedness and capital expenditures are in Renminbi. Currency exchange raterisk exists with respect to our repayment of indebtedness to our foreignlenders, payables to equipment suppliers and contractors and our dividendpayments to holders of ordinary shares and ADSs in foreign currencies. As of December 31,2005, we had approximately RMB0.2****billionof capital commitments in currencies other than Renminbi. We also had foreigncurrency-denominate debt outstanding, representing our three-tranche US$700million term loan entered into with 13 financial institutions in September 2003and $500 million long-term syndicated loan entered into with 12 financialinstitutions in February 2004 as described above. In addition, we hadapproximately US$118 million in bank balances and cash, and short-term bankdeposits as of December 31, 2005. Fluctuations in exchange rates may leadto significant fluctuations in the exposure of our foreign-currency-denominatedliabilities and assets. We may, from time to time, enter into currency swapagreements and foreign exchange forward contracts designed to mitigate ourexposure to foreign currency risks, although we did not consider this to benecessary in 2005. Although the Renminbi to US dollar exchange rate has beenrelatively stable since 1994, we cannot predict nor give any assurance of itsfuture stability. On July 21, 2005, the PRC government changed itsdecade-old policy of pegging the value of the Renminbi to the U.S. dollar.As a result of the revaluation of the Renminbi, we recorded a foreign exchangegain of RMB0.27 billion.

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, 2005.
| ** **                                                        | ** ** | **Expected Maturity Date**                                                | ** ** | **As of **December 31, 2005 | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                                                                            | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **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                                                   |       | 282                                                                                 |       |                                            |       |   |   |   |   |   |   |   |   | 282 |   | 282 |   |
| in Hong Kong dollars                                              |       | —                                                                              |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Bank balances and cash:                                           |       |                                                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| in U.S. dollars                                                   |       | 670                                                                                 |       |                                            |       |   |   |   |   |   |   |   |   | 670 |   | 670 |   |
| in Hong Kong dollars                                              |       | 48                                                                                  |       |                                            |       |   |   |   |   |   |   |   |   | 48 |   | 48 |   |
| in MOP                                                            |       | 0.09                                                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | 0.09 |   | 0.09 |   |
| in EUR                                                            |       | 0.86                                                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | 0.86 |   | 0.86 |   |
| **Debts:**                                                        |       |                                                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate  bank and other loans (U.S. dollar)                 |       | 1,614                                                                               |       | 4,035                                           |       | 2,421 |   | — |   | 1,614 |   |   |   | 9,684 |   | 9,684 |   |
| Average interest  rate(1)                                         |       | 4.82                                                                                | %          | 4.79                                            | %          | 4.83 | % | — |   | 4.90 | % |   |   | — |   | — |   |
| **Off-balance  sheet commitments:**                               |       |                                                                                |       |                                            |       |   |   |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Capital commitments authorized  and contracted for in U.S. dollar |       | 218                                                                                 |       |                                            |       |   |   |   |   |   |   |   |   | 218 |   | 218 |   |

----

 

(1)             Theinterest rates for variable rate bank and other loans are calculated based onthe weighted average interest rates at the end of 2005.

## **Item12. Description of Securities Other than Equity Securities**

Not Applicable.

126

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# **PART II**

## **Item13. Defaults, Dividend Arrearages and Delinquencies**

None.

## **Item14. Material Modifications to the Rights of Security Holders and Use ofProceeds**

None.

## **Item15. Controls and Procedures**

**(a)           *Evaluation of DisclosureControls and Procedures***

Our chief executive officer and chief financialofficer, after evaluating the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the Exchange Act of1934, as amended) as of December 31, 2005, the end of the period coveredby this annual report, and taking into consideration the measures discussedbelow, have concluded that, as of such date, our disclosure controls andprocedures were effective to ensure that material information relating to ourCompany was made known to them by others within our Company.

**(d)           *C******h******anges in Internal Control Over Financial Reporting***

Except as stated below, there were nochanges in our internal control over financial reporting that occurred duringthe period covered by this annual report that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

We are fully aware of theimportance of maintaining and improving our controls and procedures in relationto internal control over financial reporting. As disclosed in our annual reporton Form 20-F for the year ended December 31, 2004, we haveidentified a material weakness due to certain improper accounting recordingsand errors at our Jiangxi and Xinjiang branches during our regular internalaudit in 2004 and adopted various measures to prevent a recurrence of suchincidents and to improve our internal control over financial reporting. Actingunder the supervision and guidance of our audit committee and board ofdirectors, our management worked to address the identified material weakness. In 2005, we have implemented a series of measures tostrengthen control processes and procedures andimprove our internal control over financial reporting. These measuresinclude, among others:

·                                          formulating internal audit standards to further clarify the processesand procedures of internal audit;

·                                          upgrading the accounting information technology system, developing andtesting the consolidated financial reporting system;

·                                          establishing the procedures for regulating the financial reporting atour branches;

·                                          continuing to improve the policies and standards for the controlenvironment within The Committee of Sponsoring Organizations of the TreadwayCommission risk control framework;

·                                          engaging external consultants to advise on internal control in respectof our information technology system; and

·                                          formulating company-wide anti-fraud policies and establishing enhancedanti-fraud and whistle-blowing mechanism.

127

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While we have adopted aseries of measures aiming at improving our internal control over financialreporting during 2005, our assessment of the progress made for the periodrelevant for the preparation of our consolidated financial statements as of andfor the year ended December 31, 2005 has revealed that there remainssignificant control deficiencies relating to: (i) the sufficiency ofmonitoring controls over period-end financial closing procedures of certainindividual branches and (ii) the sufficiency of  advanced knowledge, experiences and skills ofour accounting personnel when applying international accounting standards.

Our management, with theoversight of our audit committee and board of directors, is committed to havingproper internal control over financial reporting. We believe that the measuresalready being implemented will continue to improve our internal control overfinancial reporting since many of these measures relate to people and processesthat require time before they are fully effective. With regard to thesignificant control deficiencies discussed above, we have implemented improvedcontrol procedures for regulating the financial reporting at the branch leveland hired accounting professionals with experience infinancial reporting and familiarity with international accounting practices. We believethat our internal control procedures have an adequate design quality, and wewill implement further personnel training and increased supervision toremediate deficiencies in the operation of the procedures.

Section 404 of theSarbanes-Oxley Act of 2002 will require us to include an internal controlreport of management with our annual report on Form 20-F for thefiscal year ending December 31, 2006. Since 2005, in preparation forcompliance with Section 404 of the Sarbanes-Oxley Act of 2002 and underthe supervision and with the participation of our senior management, includingour chief executive officer and chief financial officer, we have beenconducting further evaluation of our internal control over financial reportingand designing and implementing enhanced processes and controls to improve ourinternal control over financial reporting. We are still in the detailedevaluation process and as we implement enhanced processes and controls, and wemay identify additional conditions that may result in significant control deficienciesor material weakness in the future. Should we discover such conditions, we willtake appropriate actions for correction or improvement.

## **Item16A. Audit Committee Financial Expert**

Our board of directors has determined that Mr. WongWai Ming, an Independent Non-executive Director and a member of our auditcommittee, is an audit committee financial expert.

## **Item16B. Code of Ethics**

In 2003, we adopted a code of ethics that applies toour chief executive officer, chief financial officer, president, vice-presidents,controller and other senior officers. A copy of our Code of Ethics for SeniorOfficers was filed as Exhibit 11.1 to our annual report on Form 20-Ffor the fiscal year ended December 31, 2003. In February 2006, weadopted another code of ethics that applies to our employees generally. A copyof our Code of Ethics for Employees is filed as Exhibit 11.2 to thisannual report on Form 20-F for the fiscal year ended December 31,2005. Copies of our Code of Ethics for Senior Officers and Code of Ethics forEmployees may also be downloaded from our website athttp://www.chinaunicom.com.hk. Information on that website is not a part ofthis annual report on Form 20-F.

128

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## **Item 16C. Principal Accountant Fees andServices**

The following table sets forth the aggregate auditfees, audit-related fees, tax fees and other fees for our principal accountantbilled for products and services provided by our principal accountant for auditservices, audit-related services, tax services and other services for each ofthe fiscal years 2003, 2004 and 2005:
| ** **          | ** ** | **For the years ended  December 31,** | ** ** |
|---------------------|------------|-----------------------------------------------------------|------------|
| ** **          | ** ** | **2003**                                                  | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(in US dollars)**                             | ** ** |
| Audit fees          |       | 6,528,000                                                 |       | 6,950,000 |   | 7,350,000 |   |
| Audit-related  fees |       | 1,900,000                                                 |       | 10,000 |   | 3,704,800 |   |
| Tax fees            |       | 2,000                                                     |       | 14,000 |   | 4,300 |   |
| All other fees      |       | —                                                    |       | 190,000 |   | — |   |
| **Total**           |       | 8,430,000                                                 |       | 7,164,000 |   | 11,059,100 |   |

 

Audit services are defined as the standard audit workthat needs to be performed each year in order to issue an opinion on theconsolidated financial statements of our Company and its subsidiaries. It alsoincludes audit services that only the external auditor reasonably can provide,such as pre-issuance reviews of quarterly and interim financial results.

Audit-related services include other assurance andrelated services that can be reasonably provided by the external auditor signingthe audit report. These audit-related services are reasonably related to theperformance of the audit or review of the financial statements of the Companyand its subsidiaries such as acquisition audit, special audit for the issuanceof short-term bonds, agreed-upon procedures on certain transactions, consultations concerning financialaccounting and reporting standards and advisory services in relation to internalcontrol over financial reporting.

Tax services include the assistance with complianceand reporting of enterprise taxes, assistance with our assessment of new orchanging tax regimes, and assistance with assessing relevant rules, regulationsand facts going into our correspondence with tax authorities.

Other services include review of revenue assurance processprovided by our principal accountant to our provincial branch in 2004.

**Audit Committee’s Pre-approval Policies andProcedures**

The Audit Committee of our Board of Directors isresponsible, among other things, for the oversight of the external auditorsubject to the requirements of the Hong Kong Company Ordinance and our Articlesof Association. The Audit Committee has adopted a policy regarding pre-approvalof audit and permissible non-audit services to be provided by our independentaccountants. Under the policy, proposed services either (i) may bepre-approved by the Audit Committee without consideration of specificcase-by-case services; or (ii) require the specific pre-approval of theAudit Committee. General approval applies to services of a recurring andpredictable nature. These types of services, once approved by the AuditCommittee, will not require further approval in the future, except when actualfees and expenses exceed pre-approved budget levels. In such a case, the AuditCommittee may authorize one of its members to approve budget increases subjectto the requirement that such member provide a report on his decision to approveor deny 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. Theseservices must be approved by the Audit Committee on a case-by-case basis afteran application including proposed budget and scope of services to be providedby our independent auditors is submitted to the Audit Committee.

 

129

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**Item16D.**          Exemptions from the Listing Standards for Audit Committees

Not applicable.

**Item16E.**            Purchases of Equity Securities by the Issuer and AffiliatedPurchasers

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 “Indexto Consolidated Financial Statements”for a list of all financial statements filed as part of this annual 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)(6).                                                                                                                                   |
|            |       |                                                                                                                                                                                                               |
| 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).                                                                                                                                                              |
|            |       |                                                                                                                                                                                                               |
| 4.1             |       | CDMA Network Capacity Lease Agreement  among CUCL, Unicom Group and Unicom New 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).                                                                                        |

 

130

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| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                                                          |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                |
| 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 New 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)(6).                                                                                        |
|            |       |                                                                                                                                                                                                                |
| 4.16            |       | Conditional Sale and Purchase Agreement  between Unicom BVI and our Company, dated November 20, 2003(6).                                                                                                       |
|            |       |                                                                                                                                                                                                                |
| 4.17            |       | Conditional Sale and Purchase Agreement  between CUCL and A Share Company, dated November 20, 2003. (English  translation)(6).                                                                                 |
|            |       |                                                                                                                                                                                                                |
| 4.18            |       | Comprehensive Services Agreement between  Unicom Group and A Share Company, dated November 20, 2003. (English translation)(6).                                                                                 |
|            |       |                                                                                                                                                                                                                |
| 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)(6).                                     |
|            |       |                                                                                                                                                                                                                |
| 4.20            |       | CDMA Network Capacity Lease Agreement  among Unicom New Horizon, A Share Company and Unicom Group, dated  November 20, 2003(6).                                                                                |
|            |       |                                                                                                                                                                                                                |
| 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)(6).                                |
|            |       |                                                                                                                                                                                                                |
| 4.22            |       | Comprehensive Operator Services Agreement  between Unicom Group and A Share Company, dated November 20, 2003.  (English translation)(6).                                                                       |
|            |       |                                                                                                                                                                                                                |
| 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)(6). |
|            |       |                                                                                                                                                                                                                |
| 4.24            |       | Service Agreement between  Mr. William Lo Wing Yan, executive director of Unicom, and Unicom. (English  translation)(6).                                                                                       |
|            |       |                                                                                                                                                                                                                |
| 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)(6).     |
|            |       |                                                                                                                                                                                                                |
| 4.26            |       | Conditional Sales and Purchase Agreement  between China Unicom (Hong Kong) Group Limited and our Company with respect  to the acquisition of Unicom International, dated July 28, 2004(7).                     |
|            |       |                                                                                                                                                                                                                |
| 4.27            |       | CDMA Network Capacity Lease Agreement  between Unicom New Horizon, A Share Company and Unicom Group, dated  March 24, 2005(7).                                                                                 |
|            |       |                                                                                                                                                                                                                |
| 4.28            |       | Transfer Agreement of The CDMA Network  Capacity Lease Agreement between A Share Company, CUCL and Unicom New World,  dated March 24, 2005. (English translation)(7).                                          |
|            |       |                                                                                                                                                                                                                |
| 4.29            |       | Comprehensive Services Agreement between  A Share Company and Unicom Group, dated March 24, 2005. (English  translation) (7).                                                                                  |
|            |       |                                                                                                                                                                                                                |
| 4.30            |       | Transfer Agreement of the Comprehensive  Services Agreement between A Share Company, CUCL and Unicom New World, dated  March 24, 2005. (English translation) (7).                                              |

 

131

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| Exhibit  Number | ** ** | **Description of Exhibit**                                                                                                                                                               |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                     |
| 4.31            |       | Operator-based Comprehensive Services  Agreement between Unicom New Guoxin and A Share Company, dated March 24,  2005. (English translation) (7).                                   |
|            |       |                                                                                                                                                                                     |
| 4.32            |       | Transfer Agreement of the Operator-based  Comprehensive Services Agreement between A Share Company and CUCL and Unicom  New World, dated March 24, 2005. (English translation) (7). |
|            |       |                                                                                                                                                                                     |
| 4.33            |       | Premise Leasing Agreement between CUCL,  Unicom New World and A Share Company, dated March 24, 2005. (English translation) (7).                                                     |
|            |       |                                                                                                                                                                                     |
| 4.34            |       | Transfer Agreement of the Premise Leasing  Agreement between A Share Company and Unicom New Guoxin, dated March 24,  2005. (English translation) (7).                               |
|            |       |                                                                                                                                                                                     |
| 4.35            |       | Subscription Agreement between Unicom and  SK Telecom Co., Ltd., dated June 20, 2006.*                                                                                              |
|            |       |                                                                                                                                                                                     |
| 8.1             |       | List of our significant subsidiaries (7).                                                                                                                                                |
|            |       |                                                                                                                                                                                     |
| 11.1            |       | Code of Ethics  for Senior Officers(6)                                                                                                                                                   |
|            |       |                                                                                                                                                                                     |
| 11.2            |       | Employee Code of Ethics  (English translation)*                                                                                                                                          |
|            |       |                                                                                                                                                                                     |
| 12.1            |       | Certification of Chief Excecutive Officer  pursuant to Rule 13a-14(a)*                                                                                                                   |
|            |       |                                                                                                                                                                                     |
| 12.2            |       | Certification of Chief Financial Officer  pursuant to Rule 13a-14(a)*                                                                                                                    |
|            |       |                                                                                                                                                                                     |
| 13.1            |       | Certification of Chief Excecutive Officer  pursuant to Rule 13a-14(b)*                                                                                                                   |
|            |       |                                                                                                                                                                                     |
| 13.2            |       | Certification of Chief Financial Officer  pursuant to Rule 13a-14(b)*                                                                                                                    |

----

(1)             Incorporatedby reference to our Registration Statement on Form F-1 (File No. 333-11938)filed with the SEC in connection with our initial public offering in June 2000.

(2)             Incorporatedby reference to the Registration Statement on Form F-6 (Filed No. 333-11952)filed with the SEC with respect to American Depositary Shares representing ourshares.

(3)             Incorporatedby reference to our Annual Report on Form 20-F (File No. 1-15028)for the year ended December 31, 2000.

(4)             Incorporatedby reference to our Annual Report on Form 20-F (File No. 1-15028)for the year ended December 31, 2001.

(5)             Incorporatedby reference to our Annual Report on Form 20-F (File No. 1-15028)for the year ended December 31, 2002.

(6)             Incorporatedby reference to our Annual Report on Form 20-F (File No. 1-15028)for the year ended December 31, 2003.

(7)             Incorporatedby reference to our Annual Report on Form 20-F (File No. 1-15028)for the year ended December 31, 2004.

*                    Filed herewith.

132

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**SIGNATURE**

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly causedand authorized the undersigned to sign this annual report on its behalf.

Date: June 29,2006
|   |   |   | CHINA UNICOM LIMITED |
|--------|--------|--------|----------------------|
|   |   |   |                 |   |   |
|   |   |   |                 |   |   |
|   |   |   |                 |   |   |
|   | By:    |   | /s/ Chang Xiaobing   |
|   |   |   | Name:                |   | Chang Xiaobing |
|   |   |   | Title:               |   | Chairman and Chief Executive Officer |

 

133

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**CHINA UNICOMLIMITED****ANDITS SUBSIDIARIES**

**AUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARS ENDED**

**DECEMBER 31, 2003, 2004 AND 2005**

----

** **

**INDEX OF CONSOLIDATED FINANCIAL STATEMENTS**

**CHINA UNICOM LIMITED AND ITS SUBSIDIARIES**
| Report of Independent  Registered Public Accounting Firm                                                |   |   |
|---------------------------------------------------------------------------------------------------------|--------|--------|
| Consolidated  balance sheets as of December 31, 2004 and 2005                                      |   |   |
| Consolidated  statements of income for the years ended December 31, 2003, 2004 and  2005           |   |   |
| Consolidated statements of changes in equity for the  years ended December 31, 2003, 2004 and 2005 |   |   |
| Consolidated statements of cash flows for the years  ended December 31, 2003, 2004 and 2005        |   |   |
| Notes to the consolidated financial statements                                                          |   |   |

** **

----

** **

**Report of Independent Registered PublicAccounting Firm**

**TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OFCHINA UNICOM LIMITED***(Incorporated in the Hong KongSpecial Administrative Region of the People’s Republic of China (“Hong Kong”)with limited liability)*

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of income,  of changes in equity and of cash flowspresent fairly, in all material respects, the financial position of ChinaUnicom Limited and its subsidiaries (collectively referred to as the “Group”)at December 31, 2004 and 2005, and the results of their operations and theircash flows for each of the three years then ended, in conformity withaccounting principles generally accepted in Hong Kong. These financialstatements are the responsibility of the Group’s management. Our responsibilityis to express an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States) and auditingstandards generally accepted in Hong Kong, which require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion. 

As discussed in Note 2.2 to these consolidatedfinancial statements, the Group adopted the new/revised standards andinterpretations of Hong Kong Financial Reporting Standards (“HKFRS”) in 2005.The adoption of new/revised HKFRS in 2005 resulted in changes in certainaccounting policies which had been reflected in the financial statements eitherin accordance with the transitional provisions in the applicable accountingstandards or, to the extent there are no transitional provisions, appliedretrospectively so that the comparative figures presented have been restated,as applicable, to conform to the changes in accounting policies. 

Accounting principles generally accepted in HongKong vary in certain significant respects from accounting principles generallyaccepted in the United States of America. Information relating to the natureand effect of such differences is presented in Note 37 to these consolidatedfinancial statements.

** **

**PricewaterhouseCoopers***Certified Public Accountants*

Hong Kong, June 27, 2006

F-2

----

**CHINA UNICOM LIMITED****AND ITS SUBSIDIARIES****CONSOLIDATED BALANCE SHEET****S****AS OF DECEMBER31, 2004 AND 2005****(Expressed in thousands)**
| ** **                                                                | ** ** | **Note**          | ** ** | **200**4                      | ** ** | **200**5    | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|-------------|------------|------------|------------|
| ** **                                                                | ** ** | ** **        | ** ** | **RMB**                       | ** ** | **RMB**     | ** ** | **US$**    | ** ** |
| ** **                                                                | ** ** | ** **        | ** ** | **Restated  (Note 2.2)** | ** ** | ** **  | ** ** | ** ** | ** ** |
| **ASSETS**                                                                |       |              |       |                          |       |        | ** ** | ** ** | ** ** |
| **Non-current  assets**                                                   |       |              |       |                          |       |        |       |       |       |
| Property, plant and equipment                                             |       | 2.2,6             |       | 118,492,120                   |       | 116,056,432 |       | 14,380,862 |       |
| Goodwill                                                                  |       | 2.2,7             |       | 3,136,557                     |       | 3,143,983   |       | 389,579    |       |
| Other assets                                                              |       | 2.2,8             |       | 9,694,761                     |       | 7,818,583   |       | 968,821    |       |
| Deferred income tax assets                                                |       | 2.2,9             |       | 468,774                       |       | 335,234     |       | 41,540     |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
|                                                                      |       |              |       | 131,792,212                   |       | 127,354,232 |       | 15,780,802 |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
| **Current  assets**                                                       |       |              |       |                          |       |        |       |       |       |
| Inventories                                                               |       | 10                |       | 3,114,632                     |       | 2,107,812   |       | 261,185    |       |
| Accounts receivable, net                                                  |       | 11                |       | 5,229,980                     |       | 4,548,429   |       | 563,608    |       |
| Prepayments and other current assets                                      |       | 12                |       | 3,059,714                     |       | 2,342,467   |       | 290,261    |       |
| Amounts due from Domestic Carriers                                        |       | 32.2              |       | 269,919                       |       | 138,485     |       | 17,160     |       |
| Amounts due from Unicom Group                                             |       | 32.1              |       | 61,401                        |       | —      |       | —     |       |
| Amounts due from related parties                                          |       | 32.1              |       | 193,048                       |       | 384,531     |       | 47,648     |       |
| Short-term bank deposits                                                  |       |              |       | 662,025                       |       | 282,457     |       | 35,000     |       |
| Bank balances and cash                                                    |       | 13                |       | 4,655,464                     |       | 5,471,576   |       | 677,998    |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
|                                                                      |       |              |       | 17,246,183                    |       | 15,275,757  |       | 1,892,860  |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
| **Total assets**                                                          |       |              |       | 149,038,395                   |       | 142,629,989 |       | 17,673,662 |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
| **EQUITY**                                                                |       |              |       |                          |       |        |       |       |       |
| **Capital  and reserves attributable to the Company’s shareholders** |       |              |       |                          |       |        |       |       |       |
| Share capital                                                             |       | 14                |       | 1,332,487                     |       | 1,333,621   |       | 165,253    |       |
| Share premium                                                             |       | 14                |       | 52,546,294                    |       | 52,601,014  |       | 6,517,932  |       |
| Reserves                                                                  |       |              |       | 2,259,295                     |       | 2,827,331   |       | 350,342    |       |
| Retained  profits                                                         |       |              |       |                          |       |        |       |       |       |
| - Proposed final dividend                                                 |       | 30                |       | 1,256,349                     |       | 1,383,169   |       | 171,392    |       |
| - Others                                                                  |       |              |       | 15,047,816                    |       | 18,139,210  |       | 2,247,678  |       |
|                                                                      |       |              |       | 72,442,241                    |       | 76,284,345  |       | 9,452,597  |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |
| **Minority interest**                                                     |       | 1.2, 1.5, 20 |       | —                        |       | 2,734       |       | 339        |       |
| ** **                                                                |       |              |       |                          |       |        |       |       |       |
| **Total equity**                                                          |       |              |       | 72,442,241                    |       | 76,287,079  |       | 9,452,936  |       |
|                                                                      |       |              |       |                          |       |        |       |       |       |

 

The accompany notes are an integral part of the consolidated financialstatements.

F-3

----

** **
| ** **                                          | ** ** | **Note**   | ** ** | **200**4                      | ** ** | **200**5    | ** ** | **200**5   | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------|------------|-------------|------------|------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **RMB**                       | ** ** | **RMB**     | ** ** | **US$**    | ** ** |
| ** **                                          | ** ** | ** ** | ** ** | **Restated  (Note 2.2)** | ** ** | ** **  | ** ** | ** ** | ** ** |
| **LIABILITIES**                                     |       |       |       |                          |       |        |       |       |       |
| **Non-current  liabilities**                        |       |       |       |                          |       |        |       |       |       |
| Long-term bank loans                                |       | 15         |       | 26,137,188                    |       | 11,981,518  |       | 1,484,662  |       |
| Obligations under finance leases                    |       | 16         |       | 488,956                       |       | 145,367     |       | 18,013     |       |
| Deferred  income tax liabilities                    |       | 9          |       | 3,262                         |       | 5,613       |       | 695        |       |
| Deferred revenue                                    |       | 2.2        |       | 3,840,493                     |       | 3,348,232   |       | 414,887    |       |
| Other long-term liabilities                         |       |       |       | 2,578                         |       | —      |       | —     |       |
|                                                |       |       |       |                          |       |        |       |       |       |
|                                                |       |       |       | 30,472,477                    |       | 15,480,730  |       | 1,918,257  |       |
|                                                |       |       |       |                          |       |        |       |       |       |
| **Current  liabilities**                            |       |       |       |                          |       |        |       |       |       |
| Payables and accrued liabilities                    |       | 17         |       | 16,785,749                    |       | 18,526,628  |       | 2,295,684  |       |
| Taxes payable                                       |       |       |       | 395,688                       |       | 1,016,128   |       | 125,911    |       |
| Amounts due to Domestic Carriers                    |       | 32.2       |       | 948,574                       |       | 822,006     |       | 101,857    |       |
| Amounts due to Unicom Group                         |       | 32.1       |       | —                        |       | 38,094      |       | 4,720      |       |
| Amounts due to related parties                      |       | 32.1       |       | 5,760                         |       | 116,621     |       | 14,451     |       |
| Short-term bonds                                    |       | 18         |       | —                        |       | 9,865,900   |       | 1,222,510  |       |
| Short-term bank loans                               |       | 19         |       | 8,928,417                     |       | 7,024,358   |       | 870,407    |       |
| Current portion of long-term bank loans             |       | 15         |       | 11,086,305                    |       | 5,145,190   |       | 637,554    |       |
| Current portion of obligations under finance leases |       | 16         |       | 938,189                       |       | 420,631     |       | 52,122     |       |
| Advances from customers                             |       | 2.14       |       | 7,034,995                     |       | 7,886,624   |       | 977,253    |       |
|                                                |       |       |       |                          |       |        |       |       |       |
|                                                |       |       |       | 46,123,677                    |       | 50,862,180  |       | 6,302,469  |       |
|                                                |       |       |       |                          |       |        |       |       |       |
| **Total liabilities**                               |       |       |       | 76,596,154                    |       | 66,342,910  |       | 8,220,726  |       |
| ** **                                          |       |       |       |                          |       |        |       |       |       |
| **Total equity and liabilities**                    |       |       |       | 149,038,395                   |       | 142,629,989 |       | 17,673,662 |       |
| ** **                                          |       |       |       |                          |       |        |       |       |       |
| **Net current liabilities**                         |       |       |       | (28,877,494                   | )          | (35,586,423 | )          | (4,409,609 | )          |
| ** **                                          |       |       |       |                          |       |        |       |       |       |
| **Total assets less current  liabilities**          |       |       |       | 102,914,718                   |       | 91,767,809  |       | 11,371,193 |       |

 

The accompany notes are an integral part of the consolidated financialstatements.

F-4

----

**CHINA UNICOM LIMITED****AND ITS SUBSIDIARIES****CONSOLIDATED STATEMENT****S OFINCOME********FORTHE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005********(Expressed in thousands, except per share data)**
| ** **                                              | ** ** | **Note**             | ** ** | **200**3                       | ** ** | **200**4                       | ** ** | **2005**    | ** ** | **2005**   | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------|------------|------------|------------|
| ** **                                              | ** ** | ** **           | ** ** | **RMB**                        | ** ** | **RMB**                        | ** ** | **RMB**     | ** ** | **US$**    | ** ** |
| ** **                                              | ** ** | ** **           | ** ** | **Restated**  (Notes 2.2) | ** ** | **Restated**  (Notes 2.2) | ** ** | ** **  | ** ** | ** ** | ** ** |
| Revenue  (Turnover)                                     |       |                 |       |                           |       |                           |       |        |       |       |       |
| GSM Business                                            |       | 2.2, 5, 21, 32       |       | 41,152,781                     |       | 47,508,952                     |       | 52,135,528  |       | 6,460,252  |       |
| CDMA Business                                           |       | 2.2, 5, 21, 32       |       | 16,666,510                     |       | 24,377,674                     |       | 27,576,936  |       | 3,417,132  |       |
| Data and Internet Business                              |       | 5, 21, 32            |       | 3,437,083                      |       | 3,662,734                      |       | 3,049,967   |       | 377,930    |       |
| Long Distance Business                                  |       | 5, 21, 32            |       | 2,273,148                      |       | 1,848,009                      |       | 1,524,573   |       | 188,914    |       |
| Paging Business                                         |       | 1.2                  |       | 1,403,053                      |       | —                         |       | —      |       | —     |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| Total service revenue                                   |       |                 |       | 64,932,575                     |       | 77,397,369                     |       | 84,287,004  |       | 10,444,228 |       |
| Sales of telecommunications products                    |       | 2.2, 5, 21, 32       |       | 2,221,263                      |       | 1,689,755                      |       | 2,761,827   |       | 342,225    |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| Total revenue                                           |       | 2.2, 5, 21           |       | 67,153,838                     |       | 79,087,124                     |       | 87,048,831  |       | 10,786,453 |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| Leased  lines and network capacities                    |       | 22, 32               |       | (4,320,382                     | )          | (7,398,128                     | )          | (8,747,317  | )          | (1,083,903 | )          |
| Interconnection  charges                                |       | 32                   |       | (5,920,793                     | )          | (7,516,586                     | )          | (8,372,370  | )          | (1,037,443 | )          |
| Depreciation  and amortization                          |       | 2.2, 22              |       | (16,358,516                    | )          | (19,011,074                    | )          | (20,368,181 | )          | (2,523,876 | )          |
| Employee  benefit expenses                              |       | 2.2, 22, 23, 24,  25 |       | (4,596,253                     | )          | (4,615,057                     | )          | (5,616,312  | )          | (695,932   | )          |
| Selling  and marketing                                  |       | 2.2, 22, 32          |       | (15,263,923                    | )          | (19,523,280                    | )          | (20,557,878 | )          | (2,547,381 | )          |
| General,  administrative and other expenses             |       | 2.2, 22, 32          |       | (9,139,162                     | )          | (10,500,241                    | )          | (11,741,560 | )          | (1,454,928 | )          |
| Cost  of telecommunications products sold               |       | 2.2, 22, 32          |       | (2,938,949                     | )          | (2,562,645                     | )          | (3,575,316  | )          | (443,027   | )          |
| Loss on sale of discontinued operation (Guoxin  Paging) |       | 1.2                  |       | (663,279                       | )          | —                         |       | —      |       | —     |       |
| Finance  costs                                          |       | 26                   |       | (1,945,982                     | )          | (1,696,075                     | )          | (1,099,321  | )          | (136,220   | )          |
| Interest  income                                        |       |                 |       | 173,033                        |       | 102,907                        |       | 96,196      |       | 11,920     |       |
| Other  gains, net                                       |       |                 |       | 18,031                         |       | 103,647                        |       | 34,925      |       | 4,328      |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| **Income before income tax**                            |       |                 |       | 6,197,663                      |       | 6,470,592                      |       | 7,101,697   |       | 879,991    |       |
| Income  tax expenses                                    |       | 2.2, 9               |       | (1,929,143                     | )          | (1,977,141                     | )          | (2,170,411  | )          | (268,941   | )          |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| **Net income**                                          |       |                 |       | 4,268,520                      |       | 4,493,451                      |       | 4,931,286   |       | 611,050    |       |
| ** **                                              |       |                 |       |                           |       |                           |       |        |       |       |       |
| **Attributable  to:**                                   |       |                 |       |                           |       |                           |       |        |       |       |       |
| Shareholders of the Company                             |       |                 |       | 4,278,149                      |       | 4,493,451                      |       | 4,931,052   |       | 611,021    |       |
| Minority interest                                       |       | 1.2, 1.5, 20         |       | (9,629                         | )          | —                         |       | 234         |       | 29         |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
|                                                    |       |                 |       | 4,268,520                      |       | 4,493,451                      |       | 4,931,286   |       | 611,050    |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| Proposed final dividend                                 |       | 30                   |       | 1,255,317                      |       | 1,256,349                      |       | 1,383,169   |       | 171,392    |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |
| Dividend  paid                                          |       | 30                   |       | 1,255,300                      |       | 1,256,160                      |       | 1,256,924   |       | 155,749    |       |
|                                                    |       |                 |       |                           |       |                           |       |        |       |       |       |

 

The accompany notes are an integral part of the consolidated financialstatements.

 

F-5

----

 
| ** **                                                         | ** ** | **Note**     | ** ** | **2003**                      | ** ** | **2004**                      | ** ** | **2005**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------|------------|--------------|------------|-------------------------------|------------|-------------------------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | ** **   | ** ** | **RMB**                       | ** ** | **RMB**                       | ** ** | **RMB**    | ** ** | **US$**    | ** ** |
| ** **                                                         | ** ** | ** **   | ** ** | **Restated  (Note 2.2)** | ** ** | **Restated  (Note 2.2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Earnings per share for income attributable to the shareholders** |       |         |       |                          |       |                          |       |       |       | ** ** | ** ** |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Basic earnings  per share                                          |       | 2.2, 29 |       | 0.34                          |       | 0.36                          |       | 0.39       |       | 0.05       |       |
|                                                               |       |         |       |                          |       |                          |       |       |       | ** ** | ** ** |
| Diluted earnings  per share                                        |       | 2.2, 29 |       | 0.34                          |       | 0.36                          |       | 0.39       |       | 0.05       |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Number of shares  outstanding for basic earnings (in thousands)    |       | 29           |       | 12,553,010                    |       | 12,561,242                    |       | 12,570,398 |       | 12,570,398 |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Number of shares  outstanding for diluted earnings (in thousands)  |       | 29           |       | 12,556,728                    |       | 12,593,054                    |       | 12,607,476 |       | 12,607,476 |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Basic earnings  per ADS                                            |       | 29           |       | 3.41                          |       | 3.58                          |       | 3.92       |       | 0.49       |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Diluted earnings  per ADS                                          |       | 29           |       | 3.41                          |       | 3.57                          |       | 3.91       |       | 0.48       |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Number of ADS  outstanding for basic earnings (in thousands)       |       | 29           |       | 1,255,301                     |       | 1,256,124                     |       | 1,257,040  |       | 1,257,040  |       |
|                                                               |       |         |       |                          |       |                          |       |       |       |       |       |
| Number of ADS  outstanding for diluted earnings (in thousands)     |       | 29           |       | 1,255,673                     |       | 1,259,305                     |       | 1,260,748  |       | 1,260,748  |       |

 

The accompanynotes are an integral part of the consolidated financial statements.

F-6

----

**C****HINA UNICOM LIMITED****CONSOLIDATED****STATEMENTS OF CHANGES IN EQUITY****FOR THE YEARS ENDED DECEMBER31, 2003, 2004 AND 2005****(Expressed in thousands of RMB)**

** **
| ** **                                                                                  | ** ** | **Share  capital** | ** ** | **Share  premium** | ** ** | **Employee**share-based  compensation  reserve | ** ** | **Revaluation  reserve** | ** ** | **Statutory  reserve** | ** ** | **Retained  profits** | ** ** | **Minority**Interest | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|------------------------------------------------|------------|--------------------------|------------|------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| Balance at  December 31, 2002, as previously reported as equity                        |       | 1,331,371          |       | 52,482,127         |       | —                                         |       | 176,853                  |       | 1,123,212              |       | 11,538,972            |       | 566,257              |       | 67,218,792 |       |
| Effects of changes of accounting policies upon adoption of HKFRS                            |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| —Upfront non-refundable  revenue and the related direct incremental cost (Note 2.2(d)) |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | (646,381              | )          | —               |       | (646,381   | )          |
| Balance at  December 31, 2002, as restated                                             |       | 1,331,371          |       | 52,482,127         |       | —                                         |       | 176,853                  |       | 1,123,212              |       | 10,892,591            |       | 566,257              |       | 66,572,411 |       |
|                                                                                        |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| Net income (Restated)                                                                       |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | 4,278,149             |       | (9,629               | )          | 4,268,520  |       |
| Employees share option scheme:                                                              |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| —Value of employee  services                                                      |       | —             |       | —             |       | 21,707                                         |       | —                   |       | —                 |       | —                |       | —               |       | 21,707     |       |
| —Exercise of options (Note  28)                                                        |       | 19                 |       | 1,139              |       | —                                         |       | —                   |       | —                 |       | —                |       | —               |       | 1,158      |       |
| Appropriation  to statutory reserve (Note 27)                                               |       | —             |       | —             |       | —                                         |       | —                   |       | 419,266                |       | (419,266              | )          | —               |       | —     |       |
| Dividends relating to 2002                                                                  |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | (1,255,300            | )          | —               |       | (1,255,300 | )          |
| Dividends paid to minority  shareholders of Guoxin Paging (Note 1.2)                        |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       | (4,937               | )          | (4,937     | )          |
| Sale of discontinued  operation (Guoxin Paging) (Note 1.2)                                  |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | —                |       | (551,691             | )          | (551,691   | )          |
| Balance at December 31,  2003                                                          |       | 1,331,390          |       | 52,483,266         |       | 21,707                                         |       | 176,853                  |       | 1,542,478              |       | 13,496,174            |       | —               |       | 69,051,868 |       |
|                                                                                        |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| Net income (Restated)                                                                       |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | 4,493,451             |       | —               |       | 4,493,451  |       |
| Employees share option scheme:                                                              |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| —Value of employee  services                                                      |       | —             |       | —             |       | 88,957                                         |       | —                   |       | —                 |       | —                |       | —               |       | 88,957     |       |
| —Exercise of options (Note  28)                                                        |       | 1,097              |       | 63,028             |       | —                                         |       | —                   |       | —                 |       | —                |       | —               |       | 64,125     |       |
| Appropriation  to statutory reserve (Note 27)                                               |       | —             |       | —             |       | —                                         |       | —                   |       | 429,300                |       | (429,300              | )          | —               |       | —     |       |
| Dividends relating to 2003                                                                  |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | (1,256,160            | )          | —               |       | (1,256,160 | )          |
| Balance at December 31,  2004                                                          |       | 1,332,487          |       | 52,546,294         |       | 110,664                                        |       | 176,853                  |       | 1,971,778              |       | 16,304,165            |       | —               |       | 72,442,241 |       |
|                                                                                        |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| Derecognition of negative  goodwill (Note 2.2(c))                                           |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | 7,425                 |       | —               |       | 7,425      |       |
| Balance at January 1,  2005, as restated                                               |       | 1,332,487          |       | 52,546,294         |       | 110,664                                        |       | 176,853                  |       | 1,971,778              |       | 16,311,590            |       | —               |       | 72,449,666 |       |
|                                                                                        |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| Net income                                                                                  |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | 4,931,052             |       | 234                  |       | 4,931,286  |       |
| Subscription of shares of  a subsidiary by minority shareholder (Note 1.5)                  |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | —                |       | 2,500                |       | 2,500      |       |
| Employee share option scheme:                                                               |       |               |       |               |       |                                           |       |                     |       |                   |       |                  |       |                 |       |       |       |
| —Value  of employee services                                                      |       | —             |       | —             |       | 108,417                                        |       | —                   |       | —                 |       | —                |       | —               |       | 108,417    |       |
| —Recognition of share  issued on exercise of options (Note 28)                         |       | 1,134              |       | 54,720             |       | (3,720                                         | )          | —                   |       | —                 |       | —                |       | —               |       | 52,134     |       |
| Appropriation  to statutory reserve (Note 27)                                          |       | —             |       | —             |       | —                                         |       | —                   |       | 463,339                |       | (463,339              | )          | —               |       | —     |       |
| Dividends relating to 2004  (Note 30)                                           |       | —             |       | —             |       | —                                         |       | —                   |       | —                 |       | (1,256,924            | )          |                 |       | (1,256,924 | )          |
| Balance at December 31, 2005                                                           |       | 1,333,621          |       | 52,601,014         |       | 215,361                                        |       | 176,853                  |       | 2,435,117              |       | 19,522,379            |       | 2,734                |       | 76,287,079 |       |

 

The accompanynotes are an integral part of the consolidated financial statements.

F-7

----

**CHINA UNICOM LIMITED****CONSOLIDATED STATEMENT****S OF****CASH FLOW****S****FOR THE YEARS ENDED DECEMBER31, 2003, 2004 AND 2005****(Expressed in thousands)**
| ** **                                                                                      | ** ** | **Note**   | ** ** | **2003**            | ** ** | **2004**            | ** ** | **2005**    | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|---------------------|------------|-------------|------------|------------|------------|
| ** **                                                                                      | ** ** | ** ** | ** ** | **RMB**             | ** ** | **RMB**             | ** ** | **RMB**     | ** ** | **US$**    | ** ** |
| ** **                                                                                      | ** ** | ** ** | ** ** | **Restated**        | ** ** | **Restated**        | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | ** ** | ** ** | **(Note 2.2)** | ** ** | **(Note 2.2)** | ** ** | ** **  | ** ** | ** ** | ** ** |
| ** **                                                                                      | ** ** | ** ** | ** ** | ** **          | ** ** | ** **          |       |        |       | ** ** | ** ** |
| **Cash flows from operating  activities**                                                       |       | (a)        |       | 26,449,770          |       | 27,703,311          |       | 33,974,778  |       | 4,209,905  |       |
| Interest received                                                                               |       |       |       | 204,025             |       | 106,365             |       | 95,731      |       | 11,862     |       |
| Interest paid                                                                                   |       |       |       | (2,540,513          | )          | (2,310,270          | )          | (1,792,398  | )          | (222,101   | )          |
| Dividends received                                                                              |       |       |       | 2,573               |       | —              |       | —      |       | —     |       |
| Dividends paid to minority  owners of subsidiaries                                              |       |       |       | (4,689              | )          | —              |       | —      |       | —     |       |
| PRC income tax paid                                                                             |       |       |       | (1,545,907          | )          | (1,680,111          | )          | (1,474,423  | )          | (182,700   | )          |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| Net cash generated from operating activities                                                    |       |       |       | 22,565,259          |       | 23,819,295          |       | 30,803,688  |       | 3,816,966  |       |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| **Cash  flows from investing activities**                                                       |       |       |       |                |       |                |       |        |       |       |       |
| Purchase of property,  plant and equipment                                                      |       |       |       | (21,145,882         | )          | (18,939,138         | )          | (16,643,005 | )          | (2,062,279 | )          |
| Proceeds from sale of property, plant and equipment                                             |       |       |       | 94,804              |       | 53,970              |       | 91,851      |       | 11,382     |       |
| Decrease in short-term bank deposits                                                            |       |       |       | 3,832,411           |       | 250,769             |       | 379,568     |       | 47,033     |       |
| Payment of direct acquisition cost of Unicom New  Century                                       |       |       |       | (59,767             | )          | (4,566              | )          | —      |       | —     |       |
| Purchase of Unicom New World, net of cash acquired                                              |       |       |       | (2,326,449          | )          | —              |       | —      |       | —     |       |
| Payment of direct acquisition cost of Unicom New  World                                         |       | 1.1        |       | —              |       | (14,039             | )          | —      |       | —     |       |
| Purchase of Unicom International, net of cash  acquired                                         |       | 1.3        |       | —              |       | 44,267              |       | —      |       | —     |       |
| Purchase of trading  securities                                                                 |       |       |       | (87,956             | )          | —              |       | —      |       | —     |       |
| Proceeds from of sale of  trading securities                                                    |       |       |       | 118,575             |       | —              |       | —      |       | —     |       |
| Purchase of investment in  associated companies                                                 |       |       |       | (10,062             | )          | —              |       | —      |       | —     |       |
| Proceeds from of sale of investment in associated  companies                                    |       |       |       | 853                 |       | —              |       | —      |       | —     |       |
| Proceeds from of sale of  investment securities                                                 |       |       |       | 19,753              |       | —              |       | —      |       | —     |       |
| Proceeds from of sale of Guoxin Paging, net of cash  disposed                                   |       | 1.2        |       | 1,259,159           |       | 450,000             |       | —      |       | —     |       |
| Purchase of other assets                                                                        |       |       |       | (746,742            | )          | (799,866            | )          | (576,755    | )          | (71,467    | )          |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| Net cash used in investing activities                                                           |       |       |       | (19,051,303         | )          | (18,958,603         | )          | (16,748,341 | )          | (2,075,331 | )          |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| **Cash  flows from financing activities**                                                       |       |       |       |                |       |                |       |        |       |       |       |
| Proceeds from exercise of  share options                                                        |       |       |       | 1,158               |       | 64,125              |       | 52,134      |       | 6,460      |       |
| Repayment to Unicom Group                                                                       |       |       |       | (724,127            | )          | —              |       | —      |       | —     |       |
| Proceeds from minority interest of a  subsidiary in respect of  share capital contribution |       |       |       | —              |       | —              |       | 2,500       |       | 310        |       |
| Proceeds from short-term  bonds                                                                 |       |       |       | —              |       | —              |       | 9,690,800   |       | 1,200,813  |       |
| Proceeds from short-term  bank loans                                                            |       |       |       | 10,901,425          |       | 10,224,971          |       | 12,532,071  |       | 1,552,882  |       |
| Proceeds from long-term  bank loans                                                             |       |       |       | 11,075,836          |       | 11,083,383          |       | 5,798,657   |       | 718,527    |       |
| Repayment of short-term  bank loans                                                             |       |       |       | (10,278,727         | )          | (12,271,753         | )          | (20,104,146 | )          | (2,491,158 | )          |
| Repayment of long-term  bank loans                                                              |       |       |       | (18,497,783         | )          | (17,245,641         | )          | (19,928,416 | )          | (2,469,382 | )          |
| Dividends paid                                                                                  |       | 30         |       | (1,255,300          | )          | (1,256,160          | )          | (1,256,924  | )          | (155,749   | )          |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| Net cash used in financing activities                                                           |       |       |       | (8,777,518          | )          | (9,401,075          | )          | (13,213,324 | )          | (1,637,297 | )          |
|                                                                                            |       |       |       |                |       |                |       |        |       |       |       |
| **Net (decrease)/increase  in cash and cash equivalents**                                       |       |       |       | (5,263,562          | )          | (4,540,383          | )          | 842,023     |       | 104,338    |       |
| Cash and cash equivalents, beginning of year                                                    |       |       |       | 14,433,498          |       | 9,169,936           |       | 4,629,553   |       | 573,660    |       |
| **Cash and cash  equivalents, end of year**                                                     |       | 13         |       | 9,169,936           |       | 4,629,553           |       | 5,471,576   |       | 677,998    |       |
| ** **                                                                                      |       |       |       |                |       |                |       |        |       |       |       |
| **Analysis  of the balances of cash and cash equivalents:**                                     |       |       |       |                |       |                |       |        |       |       |       |
| Cash balances                                                                                   |       |       |       | 4,610               |       | 4,756               |       | 9,319       |       | 1,155      |       |
| Bank balances                                                                                   |       |       |       | 9,215,326           |       | 4,650,708           |       | 5,462,257   |       | 676,843    |       |
| Less: Restricted bank  deposits                                                                 |       | (i)        |       | (50,000             | )          | (25,911             | )          | —      |       | —     |       |
|                                                                                            |       |       |       | 9,169,936           |       | 4,629,553           |       | 5,471,576   |       | 677,998    |       |

----

Note (i):              Asof December 31, 2005, no bank balances (2003: RMB50 million; 2004:RMB26 million) were restricted by the bank as collateral for long-termbank loans.

F-8

----

 

(a)          Thereconciliation of net income to net cash inflow from operating activities wasas follows:

 
| ** **                                                                           | ** ** | **2003**            | ** ** | **2004**            | ** ** | **2005**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|------------|------------|------------|------------|
| ** **                                                                           | ** ** | **RMB**             | ** ** | **RMB**             | ** ** | **RMB**    | ** ** | **US$**    | ** ** |
| ** **                                                                           | ** ** | **Restated**        | ** ** | **Restated**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                           | ** ** | **(Note 2.2)** | ** ** | **(Note 2.2)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                           |       | 4,268,520           |       | 4,493,451           |       | 4,931,286  |       | 611,050    |       |
| Adjustments for:                                                                     |       |                |       |                |       |       |       |       |       |
| Income tax                                                                           |       | 1,929,143           |       | 1,977,141           |       | 2,170,411  |       | 268,941    |       |
| Depreciation and amortization                                                        |       | 16,358,516          |       | 19,011,074          |       | 20,368,181 |       | 2,523,876  |       |
| Amortization of deferred customer acquisition costs  of contractual CDMA subscribers |       | 5,836,587           |       | 6,120,737           |       | 5,947,631  |       | 736,987    |       |
| Interest income                                                                      |       | (173,033            | )          | (102,907            | )          | (96,196    | )          | (11,920    | )          |
| Interest expense                                                                     |       | 1,919,375           |       | 1,668,467           |       | 1,060,271  |       | 131,381    |       |
| Loss on sale of discontinued operation (Guoxin Paging)                               |       | 663,279             |       | —              |       | —     |       | —     |       |
| Loss on disposal of property, plant and equipment                                    |       | 49,940              |       | 10,537              |       | 25,134     |       | 3,114      |       |
| Provision for impairment  loss of property, plant and equipment                      |       | 528,048             |       | —              |       | —     |       | —     |       |
| Share of losses from associated companies                                            |       | 2,275               |       | —              |       | —     |       | —     |       |
| Dividends from investment securities                                                 |       | (2,573              | )          | —              |       | —     |       | —     |       |
| Realized gains on trading securities                                                 |       | (12,045             | )          | —              |       | —     |       | —     |       |
| Unrealized gains on trading securities                                               |       | (10,129             | )          | —              |       | —     |       | —     |       |
| Realized gains on investment securities                                              |       | (13,268             | )          | —              |       | —     |       | —     |       |
| Share-based compensation costs                                                       |       | 21,707              |       | 88,957              |       | 108,417    |       | 13,434     |       |
| Provision for doubtful debts                                                         |       | 1,749,887           |       | 2,191,820           |       | 1,498,510  |       | 185,684    |       |
|                                                                                 |       |                |       |                |       |       |       |       |       |
| Changes in working capital:                                                          |       |                |       |                |       |       |       |       |       |
| Increase in accounts receivable                                                      |       | (2,650,625          | )          | (1,915,496          | )          | (816,959   | )          | (101,232   | )          |
| Decrease/(increase) in inventories                                                   |       | 1,263,299           |       | (939,899            | )          | 1,006,820  |       | 124,758    |       |
| Increase in other assets                                                             |       | (3,748,996          | )          | (5,536,980          | )          | (2,738,580 | )          | (339,345   | )          |
| Increase in prepayments and other current assets                                     |       | (1,342,086          | )          | (792,416            | )          | (477,665   | )          | (59,189    | )          |
| (Increase)/decrease in amounts due from Domestic  Carriers                           |       | (22,227             | )          | (85,306             | )          | 131,434    |       | 16,286     |       |
| Decrease in amounts due from Unicom Group                                            |       | —              |       | —              |       | 61,401     |       | 7,608      |       |
| Decrease/(increase) in amounts due from related  parties                             |       | 553,354             |       | 70,516              |       | (191,483   | )          | (23,727    | )          |
| (Decrease)/increase in payables and accrued  liabilities                             |       | (35,732             | )          | 1,835,813           |       | 604,410    |       | 74,894     |       |
| (Decrease)/increase in advances from customers                                       |       | (55,497             | )          | 367,431             |       | 851,629    |       | 105,528    |       |
| Increase/(decrease)  in deferred revenue                                             |       | 482,486             |       | 244,486             |       | (492,261   | )          | (60,997    | )          |
| (Decrease)/increase in amounts  due to Domestic Carriers                             |       | (161,937            | )          | 169,733             |       | (126,568   | )          | (15,683    | )          |
| (Decrease)/increase in  amounts due to Unicom Group                                  |       | (562,633            | )          | (943,448            | )          | 38,094     |       | 4,720      |       |
| (Decrease)/increase in amounts due to related  parties                               |       | (385,865            | )          | (230,400            | )          | 110,861    |       | 13,737     |       |
|                                                                                 |       |                |       |                |       |       |       |       |       |
| Cash flow from  operating activities                                                 |       | 26,449,770          |       | 27,703,311          |       | 33,974,778 |       | 4,209,905  |       |

 

(b)         Supplementalinformation:

Payables to equipment suppliers forconstruction-in-progress during 2005 increased by approximatelyRMB633 million (2003 and 2004:decreased by approximately RMB3,234 million and RMB775 million respectively).

The accompanynotes are an integral part of the consolidated financial statements.

 

F-9

----

** **

**CHINAUNICOM LIMITED****AND ITS SUBSIDIARIES****NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS(****Amountsexpressed in RMB thousands unless otherwise stated****)**

**1.     ORGANISATIONAND PRINCIPAL ACTIVITIES**

China Unicom Limited(the “Company”) was incorporated as a limited liability company in the HongKong Special Administrative Region (“Hong Kong”), the People’s Republic ofChina (the “PRC”) on February 8, 2000. Theprincipal activities of the Company are investment holding and the Company’ssubsidiaries are engaged in the provision of GSM and CDMA cellular, data,Internet and longdistance services in the PRC. The GSM and CDMA business hereinaftercollectively refer to as the “Cellular Business”. The Company and itssubsidiaries are hereinafter referred to as the “Group”. The address of itsregistered office is 75th Floor, The Center, 99 Queen’s Road Central, HongKong.

The shares of theCompany were listed on the Stock Exchange of Hong Kong Limited on June 22, 2000 and the American Deposit Stock of the Company werelisted on The New York Stock Exchange Inc. on June 21, 2000.

The immediate holdingcompany of the Company is China Unicom (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, withits A shares listed on the Shanghai Stock Exchange on October 9, 2002). The majority of the equity interest in China UnitedTelecommunications Corporation Limited is owned by China UnitedTelecommunications Corporation (a state-owned enterprise established in thePRC, hereinafter referred as “Unicom Group”). The directors of the Companyconsider Unicom Group to be the ultimate parent company.

The Group completed thefollowing acquisitions, sale andactivities in 2003, 2004 and2005 respectively:

**1.1****Acquisition of Unicom NewWorld Telecommunications Corporation Limited (“Unicom********New World”)**

In 2003, the Company acquired the entire equity interests in Unicom NewWorld from Unicom Group (via the intermediary holding company, Unicom New World(BVI) Limited). Unicom New World is a limited liability company established inthe PRC on November 4, 2003 to engage in the provision of GSM and CDMAcellular telecommunications services in 6 provinces and 3 autonomous regions inthe PRC. The Cellular Business of Unicom New World and the relevant net assetswere previously owned and operated by various branches of Unicom Group.

Pursuant to the resolution passed by the Company’s Board of Directors onNovember 20, 2003 and the extraordinary general meeting of the Company’sshareholders on December 23, 2003, the Company acquired the entire equityinterests in Unicom New World at a cash consideration of approximately RMB3,249million (including direct costs of acquisition of approximately RMB49 million).After all the conditions to the acquisition were satisfied and cashconsideration was settled by the Group, the acquisition of Unicom New Worldbecame effective on December 31, 2003. The Company has adopted thepurchase method of accounting to account for this acquisition of entity undercommon control of Unicom Group, according to the previous Hong Kong Statementof Standard Accounting Practice 27 “Accounting for Group Reconstructions”. Thetotal fair value of the identifiable assets and liabilities of Unicom New Worldas of December 31, 2003 amounted to approximately RMB2,104 million, theexcess of purchase consideration over the fair value of identifiable assets andliabilities has been recorded as goodwill amounting to approximately RMB1,145million (Note 7).

F-10

----

 

As this acquisition was effective on December 31, 2003, both theoperating results and the financial position of Unicom New World have beenincluded in the consolidated financial statements of the Group for the yearsended December 31, 2004 and 2005. However, the 2003 comparatives onlyreflected the financial position of Unicom New World in the consolidatedbalance sheets and excluded the operating results of Unicom New World in theconsolidated statements of income of the Group.

The fair value of the net assets acquired and net cash outflow inrespect of the acquisition of Unicom New World as of December 31, 2003 wasas follows:

|                                                                                         | ** ** | **Note**   | ** ** | **As of December 31,   2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
|                                                                                    | ** ** | ** ** | ** ** | **RMB’000**                                  | ** ** |
| The fair value  of the net assets acquired:                                             |       |       |       |                                              |       |
| Property, plant  and equipment                                                          |       |       |       | 12,106,458                                        |       |
| Other assets                                                                            |       |       |       | 583,827                                           |       |
| Deferred income  tax assets                                                             |       |       |       | 206,928                                           |       |
| 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 of bank balances were restricted by the bankas collateral the long-term bank loans.

F-11

----

** **

**1.2****Sale of Guoxin PagingCorporation Limited (“Guoxin Paging”)**

In 2003, China UnicomCorporation Limited (hereinafter referred to as “CUCL”, a direct wholly-ownedsubsidiary of the Company) sold the entire equity interests in Guoxin Paging toUnicom Group. Guoxin Paging was established as a limited liability company in the PRC in September 1998.Guoxin Paging originallyoperated anationwide paging business through its 31 subsidiaries and branches in 27 provinces and autonomous regionsand 4 municipalities in the PRC and was wholly-owned by CUCL. In 2003, minorityinterests only existed in Unicom Guomai Communications Corporation Limited (hereinafter referred to as “Unicom Guomai”), a subsidiary of GuoxinPaging (58.88% owned by Guoxin Paging which has been disposed together withGuoxin Paging on December 31, 2003).

The Group originally had 5 operating segments namely GSM Business, CDMABusiness, Data and Internet Business, Long Distance Business and PagingBusiness (see Note 5). Pursuant to the ordinary resolution passed by the Company’s Board of Directors on November 20, 2003 and the extraordinary general meeting of the Company’s shareholders on December 23, 2003, the Company completed thesale of the entireequity interests of Guoxin Paging to Unicom Group at a cash consideration of RMB2,750million.

The sale of Guoxin Paging became effective on December 31, 2003 after all the conditions to the salewere satisfied, the majority of cash proceeds was settled by Unicom Group, and ownership as well as control was passed to Unicom Group. The total net assetsof Guoxin Paging as of December 31, 2003 amounted to approximatelyRMB3,413million, and the difference between the sale proceeds and the net assets disposed amounting toapproximately RMB663 million, has been recorded as the loss on sale of discontinued operation in 2003. Net cash inflow received fromUnicom Group in respect of the sales of Guoxin Paging in years 2003 and 2004amounted to approximately RMB1,259,159,000 and RMB450,000,000 respectively.

Since the effectivedate of this sale was December 31, 2003, the operating results of GuoxinPaging have been included in the consolidated statements of income of the Group up to this date. For the yearended December 31, 2003, the operating revenue and loss after taxation ofGuoxin Paging amounted to approximately RMB2,387 million and RMB1,404 millionrespectively.

In addition, pursuant to the resolution passed in 2003, UnicomGuomai declared dividends approximatelyRMB4.9 million to its minority owners.

F-12

----

 

(a)          The net assets sold and net cash inflow in respect of the sale of GuoxinPaging as of December 31, 2003 was as follows:

 

|                                                                                       | ** ** | **As of December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                            | ** ** | **RMB’000**                            | ** ** |
| Net assets sold:                                                                      |       |                                        |       |
| Property, plant and  equipment                                                        |       | 3,647,083                                   |       |
| Other assets                                                                          |       | 151,067                                     |       |
| Investment  securities                                                                |       | 99,157                                      |       |
| Investment in  associated companies                                                   |       | 17,185                                      |       |
| Amounts due from Unicom Group                                                         |       | 9,440                                       |       |
| Amounts due from  related parties                                                     |       | 277,457                                     |       |
| Amounts 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                                  | )          |
| Amounts due to  related parties                                                       |       | (121,173                                    | )          |
| Amounts 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-13

----

(b)         The operating results of the Group attributable to the continuingoperations and discontinued operation (Guoxin Paging) were as follows:

|                                         | ** ** | **Continuing operations** | ** ** | **Discontinued operation  (Guoxin Paging)** | ** ** | **Group as a whole** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2003**                       | ** ** | **2003**                                              | ** ** | **2003**                            | ** ** |
| ** **                              | ** ** | **RMB’000**               | ** ** | **RMB’000**                                      | ** ** | **RMB’000**                    | ** ** |
|                                    |       |                           |       |                                                  |       |                                |       |
| Revenue (Turnover)                      |       | 64,766,755                     |       | 2,387,083                                             |       | 67,153,838                          |       |
| Operating expenses                      |       | (54,947,285                    | )          | (3,590,693                                            | )          | (58,537,978                         | )          |
|                                    |       |                           |       |                                                  |       |                                |       |
| Operating income (loss)                 |       | 9,819,470                      |       | (1,203,610                                            | )          | 8,615,860                           |       |
| Loss on sale of discontinued  operation |       | —                         |       | (663,279                                              | )          | (663,279                            | )          |
| Finance costs                           |       | (1,940,744                     | )          | (5,238                                                | )          | (1,945,982                          | )          |
| Interest income                         |       | 163,934                        |       | 9,099                                                 |       | 173,033                             |       |
| Other (loss) income,  net               |       | (21,837                        | )          | 39,868                                                |       | 18,031                              |       |
|                                    |       |                           |       |                                                  |       |                                |       |
| Income (loss) before  taxation          |       | 8,020,823                      |       | (1,823,160                                            | )          | 6,197,663                           |       |
| Taxation                                |       | (2,348,358                     | )          | 419,215                                               |       | (1,929,143                          | )          |
|                                    |       |                           |       |                                                  |       |                                |       |
| Income (loss) after taxation            |       | 5,672,465                      |       | (1,403,945                                            | )          | 4,268,520                           |       |

 

(c)          The cash flows of the Group attributable to the continuing operationsand discontinued operation (Guoxin Paging) were as follows:

|                                                       | ** ** | **Continuing operations** | ** ** | **Discontinued operation  (Guoxin Paging)** | ** ** | **Group as a whole** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                            | ** ** | **2003**                       | ** ** | **2003**                                              | ** ** | **2003**                            | ** ** |
| ** **                                            | ** ** | **RMB’000**               | ** ** | **RMB’000**                                      | ** ** | **RMB’000**                    | ** ** |
|                                                  |       |                           |       |                                                  |       |                                |       |
| Net cash inflow from  operating  activities           |       | 22,141,521                     |       | 423,738                                               |       | 22,565,259                          |       |
| Net cash outflow from  investing activities           |       | (18,660,174                    | )          | (391,129                                              | )          | (19,051,303                         | )          |
| Net cash outflow from  financing activities           |       | (8,752,829                     | )          | (24,689                                               | )          | (8,777,518                          | )          |
|                                                  |       |                           |       |                                                  |       |                                |       |
| Net (decrease)/increase in cash  and cash equivalents |       | (5,271,482                     | )          | 7,920                                                 |       | (5,263,562                          | )          |

 

Guoxin Paging subsequently changed its name to Unicom New GuoxinTelecommunications Corporation Limited (hereinafter referred to as “New Guoxin”)on April 29, 2004.

F-14

----

**1.3 Acquisitionof China Unicom International Limited (“Unicom International”)**

In 2004, the Company acquired the entire equity interests in UnicomInternational, which is a wholly-owned subsidiary of China Unicom (Hong Kong)Group Limited (a wholly-owned subsidiary of Unicom Group, hereinafter referredto as “Unicom Group (HK)”). Unicom International is a limited liability companyestablished in Hong Kong on May 24, 2000 to engage in voice wholesalebusiness, telephone cards business, line leasing services, managed bandwidthservices and mobile virtual network services. Unicom International’swholly-owned US subsidiary, China Unicom USA Corporation (“Unicom USA”),carries on a wholesale voice business for traffic between US and mainlandChina.

Pursuant to the acquisition agreement signed between Unicom Group (HK)and the Company dated July 28, 2004, the Company agreed to acquire theentire equity interests in Unicom International from Unicom Group (HK) for acash consideration of HK$37,465,996 (equivalent to approximately RMB39,740,000,including direct costs of acquisition). After all the conditions to theacquisition were satisfied and cash consideration was settled by the Company,the acquisition of Unicom International became effective in September 2004.The Company has adopted the purchase method of accounting to account for thisacquisition of entity under common control of Unicom Group, according to theprevious Hong Kong Statement of Standard Accounting Practice 27 “Accounting forGroup Reconstructions”. The total fair value of the identifiable assets andliabilities of Unicom International in September 2004 amounted toapproximately RMB47 million. The excess of the fair value of the identifiableassets and liabilities over purchase consideration has been recorded asnegative goodwill amounting to RMB7.73 million (Note 7) in 2004.

As this acquisition was effective in September 2004, accordingly,the operating results of Unicom International for the period from theacquisition effective date have been included in the consolidated statements ofincome of the Group.

**1.4****Incorporation of China Unicom (Macau) Company Limited (“Unicom Macau”)**

On October 15, 2004, the Company together with Unicom International set upand incorporated Unicom Macau in Macau Special Administrative Region of the PRC(“Macau”) to engage in CDMA telecommunication business. The Company effectivelyheld 100% of the entire issued capital of Unicom Macau.

**1.5****Incorporation of Unicom HuashengTelecommunications Technology Company Limited (“Unicom Huasheng”)**

On July 1, 2005, CUCL togetherwith Unicom Xingye Science and Technology Trade Co. (“Unicom Xingye”, asubsidiary of Unicom Group) set up and incorporated Unicom Huasheng. UnicomHuasheng is principally engaged in sales of handsets and telecommunicationequipment and provision of technical services. CUCL effectively held 95% in theentire issued capital of Unicom Huasheng. The paid-in capital of UnicomHuasheng as of December 31, 2005 wasRMB50 million, CUCL has contributed a capital of RMB47.5 million, whereas theminority shareholder Unicom Xingye contributed the remaining capital of RMB2.5million.

F-15

----

**2.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

The principal accounting policies applied in thepreparation of these consolidated financial statements are set out below. Thesepolicies have been consistently applied to all the years presented, unlessotherwise stated.

**2.1****         ****    Basis of Preparation**

The consolidatedfinancial statements have been prepared under the historical cost conventionexcept that, certain buildings are stated at fair value. They have beenprepared in accordance with Hong Kong Financial Reporting Standards (“HKFRS”)issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).This basis of accounting differs from that used in the preparation of statutoryfinancial statements for PRC statutory reporting purposes, which are based onthe accounting principles and financial regulations applicable to enterprisesestablished in the PRC (“PRC GAAP”).

The principaladjustments made to conform to HKFRS include the following:

·      Reversal ofrevaluation surplus and related depreciation and amortization charges arisingfrom the revaluation of assets performed by independent valuers registered inthe PRC;

·      Additional accrual for retirement benefits;

·      Additional provision for housing benefits;

·      Additionalcapitalization of borrowing costs;

·      Provisionfor deferred taxation on HKFRS adjustments;

·      Capitalizationof the direct costs associated with the acquisition of subsidiaries;

·      Recognitionof employee share-based compensation costs (Note 2.2(b));

·      Reversal ofgoodwill amortization and recognition of negative goodwill in opening retainedearnings (Note 2.2(c)); and

·      Capitalizationand amortization of upfront non-refundable revenue and the related directincremental costs for activating cellular subscribers (Note 2.2(d)).

As of December 31, 2005, the current liabilities of the Group hadexceeded the current assets by approximately RMB35.6 billion (2004: RMB28.9billion). This was mainly attributable to the use of short-term bank depositsand short-term bonds to repay long-term bank loans. Taking into account ofavailable financing facilities and continuous net cash inflows from operatingactivities, the Group has sufficient funds to meet its working capitalrequirements and debt obligations. As a result, the consolidated financialstatements of the Group for the years ended December 31, 2004 and 2005have been prepared under the going concern basis.

The preparation of the consolidated financial statements of the Group inconformity with HKFRS requires the use of certain critical accountingestimates. It also requires management to exercise its judgment in the processof applying the Group’s accounting policies. The areas involving a higherdegree of judgment or complexity, or areas where assumptions and estimates weresignificant to the consolidated financial statements are disclosed in Note 4.

F-16

----

**2.2****         ****    The Adoption of New/Revised HKFRS**

In2005, the Group adopted the new/revised standards and interpretations of HKFRSbelow, which are relevant to its operations. The 2003 and 2004 comparativeshave been amended as required, in accordance with the relevant requirements.

| HKAS 1      | Presentation of  Financial Statements                            |
|-------------|------------------------------------------------------------------|
| HKAS 2      | Inventories                                                      |
| HKAS 7      | Cash Flow  Statements                                            |
| HKAS 8      | Accounting Policies,  Changes in Accounting Estimates and Errors |
| HKAS 10     | Events after the  Balance Sheet Date                             |
| HKAS 16     | Property, Plant  and Equipment                                   |
| HKAS 17     | Leases                                                           |
| HKAS 21     | The Effects of  Changes in Foreign Exchange Rates                |
| HKAS 23     | Borrowing Costs                                                  |
| HKAS 24     | Related Party  Disclosures                                       |
| HKAS 27     | Consolidated and  Separate Financial Statements                  |
| HKAS 28     | Investments in  Associates                                       |
| HKAS 31     | Investments in  Joint Ventures                                   |
| HKAS 32     | Financial  Instruments: Disclosures and Presentation             |
| HKAS 33     | Earnings per  Share                                              |
| HKAS 36     | Impairment of  Assets                                            |
| HKAS 38     | Intangible  Assets                                               |
| HKAS 39     | Financial  Instruments: Recognition and Measurement              |
| HKAS Int 15 | Operating Leases  - Incentives                                   |
| HKFRS 2     | Share-based  Payments                                            |
| HKFRS 3     | Business  Combinations                                           |

 

The adoption of new/revised HKASs 2, 7, 8, 10,16, 21, 23, 27, 28, 31, 32, 33, 39 and HKAS Int 15 did not result insubstantial changes to the Group’s accounting policies.

·      HKASs2, 7, 8, 10, 16, 23, 27, 28, 33 and HKAS-Int 15 had no material effect on theGroup’s policies.

·      HKAS21 had no material effect on the Group’s policy. The functional currency of theconsolidated entities has been re-evaluated based on the guidance to therevised standard. All the Group entities have the same functional currency asthe presentation currency for respective entity financial statements.

The adoption of revised HKAS 1 has affected thepresentation of minority interests. In prior years, the minority interests werepresented in the consolidated balance sheets separately from liabilities and asdeduction from net assets. Minority interests in the results of the Group forthe years were also separately presented in the consolidated statements ofincome as a deduction before arriving at the net income. With effect from January 1,2005, minority interests at the balance sheet date are presented in theconsolidated balance sheets within equity, separately from the equityattributable to the Company’s shareholders. In addition, minority interests inthe results of the Group are presented on the face of the consolidatedstatements of income as an allocation of the net income between minorityinterests and the shareholders of the Company. The presentation of minorityinterests in the consolidated balance sheets and consolidated statements ofincome for the comparative periods has been restated accordingly.

F-17

----

The adoption of revised HKAS 17 has resulted in achange in the accounting policy relating to the reclassification of leaseholdland and land use rights from property, plant and equipment to other assets -long-term prepayment for lease of land. The upfront prepayments made for theleasehold land and land use rights are expensed in the statements of income ona straight-line basis over the period of the lease. In prior years, theleasehold land was accounted for at cost less accumulated depreciation.

HKAS 24 has extended the identification of relatedparties and disclosure of related parties to include state-owned enterprises.Related parties include Unicom Group and its related parties, other state-ownedenterprises and their subsidiaries directly or indirectly controlled by the PRCgovernment (other than those shown on the face of balance sheets as relatedparties), other entities and corporations in which the Company is able tocontrol, jointly control or exercise significant influence and key managementpersonnel of the Company and Unicom Group as well as their close familymembers.

The adoption of HKFRS 2 has resulted in a change inthe accounting policy for share-based payments. Until December 31, 2004,the provision of share options to employees did not result in an expense in thestatements of income. Effective on January 1, 2005, the Group expenses thecost of share options in the statements of income over the vesting period ofthe options. As a transitional provision, the cost of share options grantedafter November 7, 2002 and not yet vested on January 1, 2005 wasexpensed retrospectively in the statements of income of the respective periods.

The adoption of HKFRS 3, HKAS 36 and HKAS 38 hasresulted in a change in the accounting policy for goodwill/ negative goodwill.Until December 31, 2004, goodwill was amortized on a straight-line basisover 20 years, and assessed for any indication of impairment at each balancesheet date.

In accordance with the provisions of HKFRS 3, theGroup ceased amortization of goodwill from January 1, 2005, and theaccumulated amortization as of December 31, 2004 has been eliminated witha corresponding decrease in the cost of goodwill. Starting from January 1,2005 onwards, goodwill is no longer amortized but is tested for impairment onan annual basis, as well as when there is indication of impairment.

In addition, in accordance with HKFRS 3, from January 1,2005, if the fair value of the net identifiable assets and liabilities acquiredexceed the purchase consideration (i.e. an amount arises which would have beenrecorded as negative goodwill under the previous accounting policy), the excessis recognized immediately in the consolidated statements of income as itarises. Negative goodwill previously recognized has been derecognized at January 1,2005, with a corresponding adjustment to the opening balance of retainedearnings of the Group.

Upon the adoption of HKFRS on January 1, 2005,the Group changed its accounting policy for recognition of upfrontnon-refundable revenue, such as connection fee and receipts from SIM/UIM cards,which had previously been recognized upon the completion of activationservices. Effective from January 1, 2005, upfront non-refundable revenueand the related direct incremental costs for activating cellular subscribers(including costs of SIM/UIM cards and commissions) are capitalized andamortized over the expected customer service periods. Direct incremental costsare capitalized only to the extent expected to be recoverable. The expectedcustomer service period for the Cellular Business is estimated based on theexpected stabilized churn rates of subscribers. Management judges that thischange of accounting policy provides reliable and more relevant informationbecause it better reflects the economic effects of the transactions.

F-18

----

All changes in the accounting policies have beenmade in accordance with the transitional provisions in the respectivestandards, wherever applicable. All standards adopted by the Group requireretrospective application other than:

·      HKFRS 2 — onlyretrospective application for all equity instruments granted after November 7,2002 and not vested at January 1, 2005; and

·      HKFRS 3 —prospectively after January 1, 2005.

The following tables summarized the effects ofadoption of new accounting policies in 2003, 2004 and 2005:

The following table disclosed the adjustments thathave been made in accordance with the transitional provisions of the respectivenew/revised HKFRSs or the provisions of HKAS 8 to net income in theconsolidated statements of income for the year ended December 31, 2003.

|                                                                                                                 | ** ** | **Effect of new policies in 2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **RMB in millions         (except per share data)** | ** ** | ** **                                                  | ** ** | **HKAS 17  (Notes 2.2 (a))** | ** ** | **HKFRS 2  (Notes 2.2 (b))** | ** ** | **HKAS 38  (Notes 2.2 (c))** | ** ** | **Change in  accounting  policy for  revenue  recognition  (Note 2.2 (d))** | ** ** | **Total** | ** ** |
| ** **                                                                                                      | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease)/increase of net income                                                                               |       | —                                                      |       | (22 | ) | — |   | 83 |   | 61 |   |
| (Decrease)/increase of basic  earnings per share (RMB)                                                          |       | —                                                      |       | (0.002 | ) | — |   | 0.007 |   | 0.005 |   |
| (Decrease)/increase of diluted  earnings per share (RMB)                                                        |       | —                                                      |       | (0.002 | ) | — |   | 0.007 |   | 0.005 |   |
|                                                                                                                 |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

The following table disclosed the adjustments thathave been made in accordance with the transitional provisions of the respectivenew/revised HKFRSs or the provisions of HKAS 8 to net income in theconsolidated statements of income for the year ended December 31, 2004.

|                                                                                                                 | ** ** | **Effect of new policies in 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **RMB in millions         (except per share data)** | ** ** | ** **                                                  | ** ** | **HKAS 17  (Notes 2.2 (a))** | ** ** | **HKFRS 2  (Notes 2.2 (b))** | ** ** | **HKAS 38  (Notes 2.2 (c))** | ** ** | **Change in  accounting  policy for  revenue  recognition  (Note 2.2 (d))** | ** ** | **Total** | ** ** |
| ** **                                                                                                      | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease)/increase of net  income                                                                              |       | —                                                      |       | (89 | ) | — |   | 196 |   | 107 |   |
| (Decrease)/increase of basic  earnings per share (RMB)                                                          |       | —                                                      |       | (0.007 | ) | — |   | 0.016 |   | 0.009 |   |
| (Decrease)/increase of diluted  earnings per share (RMB)                                                        |       | —                                                      |       | (0.007 | ) | — |   | 0.016 |   | 0.009 |   |
|                                                                                                                 |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

F-19

----

The following table disclosed the effects on net income in theconsolidated statements of income for the year ended December 31, 2005that would have occurred had the previous accounting policies been applied inthe year 2005.

|                                                                                                                 | ** ** | **Effect of new policies in 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **RMB in millions         (except per share data)** | ** ** | ** **                                                  | ** ** | **HKAS 17  (Notes 2.2 (a))** | ** ** | **HKFRS 2  (Notes 2.2 (b))** | ** ** | **HKAS 38  (Notes 2.2 (c))** | ** ** | **Change in  accounting  policy for  revenue  recognition  (Note 2.2 (d))** | ** ** | **Total** | ** ** |
| ** **                                                                                                      | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease)/increase of net  income                                                                              |       | —                                                      |       | (108 | ) | 171 |   | 178 |   | 241 |   |
| (Decrease)/increase of basic  earnings per share (RMB)                                                          |       | —                                                      |       | (0.009 | ) | 0.014 |   | 0.014 |   | 0.019 |   |
| (Decrease)/increase of diluted  earnings per share (RMB)                                                        |       | —                                                      |       | (0.009 | ) | 0.014 |   | 0.014 |   | 0.019 |   |
|                                                                                                                 |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |

 

(a)       Theadoption of revised HKAS 17 resulted in:

|                                            | ** ** | **December 31, 200**4 | ** ** | **December 31, 200**5 | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **RMB in millions**   | ** ** | **RMB in millions**   | ** ** |
|                                       |       |                            |       |                            |       |
| Decrease in property,  plant and equipment |       | (412                            | )          | (697                            | )          |
| Increase in other assets                   |       | 412                             |       | 697                             |       |

 

|                                                         | ** ** | **2003**                  | ** ** | **2004**                  | ** ** | **2005**                  | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **RMB in  millions** | ** ** | **RMB in  millions** | ** ** | **RMB in  millions** | ** ** |
|                                                    |       |                      |       |                      |       |                      |       |
| Decrease in  depreciation and amortization              |       | (27                       | )          | (26                       | )          | (28                       | )          |
| Increase in general,  administrative and other expenses |       | 27                        |       | 26                        |       | 28                        |       |

 

(b) The adoption ofHKFRS 2 resulted in:

|                                                        | ** ** | **December 31, 200**4 | ** ** | **December 31, 200**5 | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **RMB in millions**        | ** ** | **RMB in millions**        | ** ** |
|                                                   |       |                       |       |                       |       |
| Increase in employee share-based compensation  reserve |       | 111                        |       | 215                        |       |
| Increase in share premium                              |       | —                     |       | 4                          |       |
| Decrease in retained earnings                          |       | (22                        | )          | (111                       | )          |

 

|                                              | ** ** | **2003**                  | ** ** | **2004**                  | ** ** | **2005**                  | ** ** |
|----------------------------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                   | ** ** | **RMB in  millions** | ** ** | **RMB in  millions** | ** ** | **RMB in  millions** | ** ** |
|                                         |       |                      |       |                      |       |                      |       |
| Increase in employee  benefit expenses       |       | 22                        |       | 89                        |       | 108                       |       |
| Decrease in basic  earnings per share (RMB)  |       | 0.002                     |       | 0.007                     |       | 0.009                     |       |
| Decrease in diluted earnings per share (RMB) |       | 0.002                     |       | 0.007                     |       | 0.009                     |       |

 

 

F-20

----

 

(c) Thefollowing tables disclosed the effects on the relevant line items in theconsolidated financial statements for the year ended December 31, 2005 ascompared to what would have occurred had the previous accounting policy forgoodwill been applied in 2005.

|                               | ** ** | **December 31, 2005** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **RMB in millions**   | ** ** |
| Impact on goodwill - increase |       | 178                             |       |
| Increase in retained earnings |       | 7                               |       |

 

|                                                    | ** ** | **2005**                      | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **RMB in millions** | ** ** |
| Impact on depreciation and amortization (decrease) |       | 171                           |       |
| Increase in basic earnings per share (RMB)         |       | 0.014                         |       |
| Increase in diluted earnings per share (RMB)       |       | 0.014                         |       |

 

(d) Changesin accounting policy for recognition of upfront non-refundable revenue anddirect incremental costs resulted in:

|                                 | ** ** | **December 31, 200**4 | ** ** | **December 31, 200**5 | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **RMB in millions**   | ** ** | **RMB in millions**   | ** ** |
| Increase in other assets        |       | 3,546                           |       | 3,192                           |       |
| Decrease in deferred tax assets |       | (74                             | )          | (34                             | )          |
| Increase in deferred revenue    |       | 3,840                           |       | 3,348                           |       |
| Decrease in retained earnings   |       | (564                            | )          | (368                            | )          |

 

|                                                      | ** ** | **2003**                      | ** ** | **2004**                      | ** ** | **2005**                      | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **RMB in millions** | ** ** | **RMB in millions** | ** ** | **RMB in millions** | ** ** |
| (Decrease)/increase in revenue                       |       | (482                          | )          | (244                          | )          | 492                           |       |
| Increase in selling and marketing expenses      |       | 107                           |       | 579                           |       | 1,140                         |       |
| Decrease in costs of telecommunication products sold |       | 713                           |       | 917                           |       | 786                           |       |
| (Increase)/decrease in income tax expenses      |       | (41                           | )          | 102                           |       | 40                            |       |
| Increase in basic earnings per share (RMB)      |       | 0.007                         |       | 0.016                         |       | 0.014                         |       |
| Increase in diluted earnings per share (RMB)         |       | 0.007                         |       | 0.016                         |       | 0.014                         |       |

 

TheGroup has not early adopted the following new Standards or Interpretations thathave been issued but are not yet effective. The Group has commenced anassessment of the impact of these new standards and interpretations but is notyet in a position to state whether these new standards and interpretationswould have a significant impact on the Group’s consolidated financialstatements.

| HKAS 19 (Amendment) | Actuarial Gains and Losses, Group Plans and  Disclosures                                                                       |
|---------------------|--------------------------------------------------------------------------------------------------------------------------------|
| HKFRS 7             | Financial Instruments: Disclosures                                                                                             |
| HKFRS-Int 4         | Determining whether an Arrangement contains a lease                                                                            |
| HKFRS-Int 5         | Rights to Interests arising from Decommissioning,  Restoration and      Environmental Rehabilitation Funds |

 

F-21

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**2.3****         ****    Consolidation**

The consolidated financial statements include thefinancial statements of the Company and its subsidiaries made up to December 31.

Subsidiaries are those entities in which theCompany, directly or indirectly, controls the composition of the board ofdirectors, controls more than half the voting power or holds more than half ofthe issued share capital.

Subsidiaries are fully consolidated from the dateon which control is transferred to the Group. They are de-consolidated from thedate that control ceases.

The purchase method of accounting is used toaccount for the acquisition of subsidiaries by the Group. The cost of anacquisition is measured at the fair value of the assets given, equityinstruments issued and liabilities incurred or assumed at the date of exchange,plus costs directly attributable to the acquisition. Identifiable assetsacquired and liabilities and contingent liabilities assumed in a businesscombination are measured initially at their fair values at the acquisitiondate, irrespective of the extent of any minority interest. The excess of thecost of acquisition over the fair value of the Group’s share of theidentifiable net assets acquired is recorded as goodwill. If the cost ofacquisition is less than the fair value of the net assets of the subsidiaryacquired, the difference is recognized directly in the statements of income(Note 2.2).

Inter-company transactions, balances and unrealizedgains on transactions between group companies are eliminated. Unrealized lossesare also eliminated unless the transaction provides evidence of an impairmentof the asset transferred. Accounting policies of subsidiaries have been changedwhere necessary to ensure consistency with the policies adopted by the Group.

Minority interests at the balance sheet date, beingthe portion of the net assets of subsidiaries attributable to equity intereststhat are not owned by the Company, whether directly or indirectly throughsubsidiaries, are presented in the consolidated balance sheets and statementsof changes in equity within equity, separately from equity attributable to theequity shareholders of the Company. Minority interests in the results of theGroup are presented on the face of the consolidated statements of income as anallocation of the total profit or loss for the year between minority interestsand the equity shareholders of the Company.

Where losses applicable to the minority exceed theminority’s interest in the equity of a subsidiary, the excess, and any furtherlosses applicable to the minority, are charged against the Group’s interestexcept to the extent that the minority has a binding obligation to, and is ableto, make additional investment to cover the losses. If the subsidiarysubsequently reports profits, the Group’s interest is allocated all such profitsuntil the minority’s share of losses previously absorbed by the Group has beenrecovered.

In the Company’s balance sheets the investments insubsidiaries are stated at cost less provision for impairment losses. Theresults of subsidiaries are accounted for by the Company on the basis ofdividends received and receivable.

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**2.4****         ****    Segment Reporting**

A business segment is agroup of assets and operations engaged in providing products or services thatare subject to risks and returns that are different from those of otherbusiness segments. The Group has not presented geographical segment. This isalso consistent with the Group’s internal financial reporting.

Unallocated costsprimarily represent corporate expenses and income taxes. Segments assetsconsist primarily of property, plant and equipment, other assets, prepayments,inventories, receivables and operating cash. Segment liabilities compriseoperating liabilities. Capital expenditure mainly comprises additions toproperty, plant and equipment.

**2.5****         ****    Foreign Currency Translation**

(a)   Functional and presentation currency

Items included in the financial statements ofthe Group’s entities are measured using the currency of the primary economicenvironment in which the entities operate (“the functional currency”). Theconsolidated financial statements are presented in Renminbi (“RMB”), which isthe Company’s functional and presentation currency.

(b)   Transactions and balances

Foreign currency transactions are translatedinto the functional currency using the exchange rates prevailing at the datesof the transactions. Foreign exchange gains and losses resulting from thesettlement of such transactions and from the translation at year-end exchangerates of monetary assets and liabilities denominated in foreign currencies arerecognized in the statements of income.

For the convenience of the reader,translation of amounts for RMB into United States dollars (“US”) has been madeat the noon buying rate in New York city for cable transfer payables in foreigncurrencies as certified for customers purposes by the Federal Reserve Bank ofNew York on December 30, 2005 of US$1.00=RMB8.0702. No representation ismade that RMB amounts could have been, or could be, converted into US$ at thatrate on December 31, 2005, or at other rate.

F-23

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**2.6****         ****    Property, Plant and Equipment**

(a)   Buildings

Buildings are stated atvaluation. Independent valuations are performed periodically with the lastvaluation performed on March 31, 2000. In theintervening years, the directors review the carrying value of buildings andadjustment is made where in the directors’ opinion there has been a materialchange in value. Any increase in buildings valuation is credited to therevaluation reserve; any decrease is first offset against the increase onearlier valuations recorded in the revaluation reserve, in respect of the sameproperty and is thereafter charged to the statements of income. Upon thedisposal of revalued buildings, the realized portion of the revaluation reserveis transferred from the valuation reserve to retained earnings.

(b)   Other property, plant and equipment

Other property, plantand equipment, comprising leasehold improvements, plant, telecommunicationsequipment, office furniture and fixtures are stated at cost less accumulateddepreciation and accumulated impairment losses. The cost of an asset comprisesits purchase price and any directly attributable costs of bringing the asset toits working condition and location for its intended use. Expenditures incurredafter the property, plant and equipment have been put into operation, such asrepairs and maintenance and overhaul costs, are normally charged to expense inthe year in which they are incurred. In situations where it can be clearlydemonstrated that the expenditure has resulted in an increase in the futureeconomic benefits expected to be obtained from the use of the asset beyond itsoriginally assessed standard of performance, the expenditure is capitalized asan additional cost of the assets.

(c)   Depreciation

Depreciation of property,plant and equipment is calculated using the straight-line method to allocatecost or revalued amounts to their residual values over their estimated usefullives, as follows:

 

|                                            | ** ** | **Depreciable life** | ** ** | **Residual value** | ** ** |
|--------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
|                                       |       |                      |       |                    |       |
| Buildings                                  |       | 8–40  years          |       | 3                       | %          |
| Telecommunications  equipment              |       | 3–15 years           |       | 3                       | %          |
| Office furniture, fixtures and others |       | 4–14 years           |       | 3                       | %          |
|                                       |       |                      |       |                    |       |

 

Leasehold improvements are depreciated over theshorter of their estimated useful lives or the lease periods.

The assets’ residual values and useful lives arereviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written downimmediately to its recoverable amount if the asset’s carrying amount is greaterthan its estimated recoverable amount (Note 2.9).

F-24

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(d)   Construction-in-progress

Construction-in-progressrepresents buildings, plant and equipment under construction and pendinginstallation, and is stated at cost less accumulated impairment losses. Costsinclude construction and acquisition costs, and interest charges arising fromborrowings used to finance the assets during the construction period.

No provision fordepreciation is made on construction-in-progress until such time when theassets are completed and ready for use.

(e)   Gain or loss on disposal

The gain or loss ondisposal of a property, plant and equipment is the difference between the netsales proceed and the carrying amount of the relevant asset, and is recognizedin the statements of income. Any revaluation reserve balance remainingattributable to the relevant asset is transferred to retained earnings and isshown as a movement in reserves.

**2.7****         ****    Goodwill/Negative Goodwill**

In 2003 and 2004, goodwill represented the excessof purchase consideration over the fair values of the Group’s share of the netidentifiable assets and liabilities of the acquired subsidiary/associatedcompany at the date of acquisition. Prior to the adoption of HKFRS 3 on January 1,2005, goodwill was carried at cost less accumulated amortization and accumulatedimpairment losses. Goodwill was amortized using the straight-line method overthe estimated economic lives of the acquired businesses. Goodwill arising onmajor strategic acquisitions of the Group to expand its geographical marketcoverage was amortized over 20 years.

Negative goodwill represented the excess of thefair values of the Group’s share of the net identifiable assets and liabilitiesof the acquired subsidiary over the purchase consideration at the date ofacquisition. Negative goodwill was recognized using the straight-line methodover the remaining weighted average useful life of acquired identifiableon-monetary assets.

The adoption ofHKFRS 3, HKAS 36 and HKAS 38 resulted in a change in the accounting policy forgoodwill/negative goodwill. Effective from January 1, 2005, the Groupceased amortization of goodwill, and the accumulated amortization as of December 31,2004 has been eliminated with a corresponding decrease in the cost of goodwill.Goodwill is tested annually for impairment, as well as when there is indicationof impairment.

In addition, in accordance with HKFRS 3, from January 1, 2005, ifthe fair value of the net identifiable assets and liabilities acquired exceedthe purchase consideration (i.e. an amount arises which would have been knownas negative goodwill under the previous accounting policy), the excess isrecognized immediately in the consolidated statements of income as it arises.Negative goodwill previously recognized hasbeen derecognized at January 1, 2005, with a corresponding adjustment tothe opening balance of retained earnings of the Group (Note 2.2).

Goodwillis allocated to cash-generating units for the purpose of impairment testing.

F-25

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**2.8****         ****    Other Assets**

Other assets mainlyrepresent (i) capitalized direct incremental costs for activating GSM andCDMA subscribers; (ii) capitalized customer acquisition costs undercontractual CDMA subscriber packages; (iii) computer software; (iv) prepaidrentals and leased lines: and (v) prepayment for lease of land.

Capitalized directincremental costs for activating GSM and CDMA subscribers, including costs ofSIM/UIM cards and commissions which are directly associated with upfrontnon-refundable revenue received upon activation of cellular services, areamortized over the expected customer service periods (Note 2.2). The expectedcustomer service periods are estimated based on the expected stabilized churnrates of subscribers.

Capitalized customeracquisition costs under contractual CDMA subscriber packages represent the costof CDMA handsets given to contractual subscribers under special promotionalpackages. Such customer acquisition costs, to the extent recoverable, areamortized over the contractual period (not exceeding 2 years) during which theminimum contract revenue is expected to flow to the Group. Customer acquisitioncosts of contractual CDMA subscribers are included in “prepayment and othercurrent assets” when the customer contract is within 1 year of expiry, whereasthey are recorded as “other assets” when the contract period is over 1 year.

Acquiredcomputer software licences are capitalized on the basis of the costs incurredto acquire and bring to use the specific software. These costs are amortizedover their estimated useful lives.

Long-termprepaid leased lines and rentals are amortized using a straight-line methodover the lease period.

Long-termprepayment for lease of land are amortized over the period of the lease on astraight-line basis (Note 2.2).

**2.9****         ****    Impairment of Assets**

Assets that have an indefinite useful life are not subject toamortization, but are tested at least annually for impairment and are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. Assets that are subject to amortizationare reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable. An impairment loss isrecognized for the amount by which the asset’s carrying amount exceeds itsrecoverable amount. The recoverable amount is the higher of an asset’s fairvalue less costs to sell and value in use. For the purposes of assessingimpairment, assets are grouped at the lowest levels for which there areseparately identifiable cash flows (cash-generating units).

**2.10****  ****    Inventories**

Inventories, whichprincipally comprise handsets, SIM cards, UIM cards and accessories, are statedat the lower of cost and net realizable value. Cost is based on the weightedaverage method and comprises all costs of purchase and other costs incurred inbringing the inventories to their present location and condition. Netrealizable value is determined on the basis of anticipated sales proceeds lessestimated selling expenses.

F-26

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**2.11****  ****    Accounts Receivable and Other Receivables**

Accounts receivable and other receivables are recognized at fair value,less provision for impairment. A provision for impairment of accountsreceivable and other receivables is established when there is objectiveevidence that the Group will not be able to collect all amounts due accordingto the original terms of the receivables. The amount of the provision isrecognized in the statements of income.

**2.12****  ****    Short-term Bank Deposits**

Short-term bank deposits are cash invested in fixed-term deposits withoriginal maturities ranging from more than 3 months to 1 year.

**2.13****  ****    Cash and Cash Equivalents**

Cash and cash equivalents are carried at cost in the balance sheets.Cash and cash equivalents include cash on hand, deposits held at call withbanks and other short-term highly liquid investments with original maturitiesof three months or less.

**2.14****  ****    Deferred Revenue**

(a)   Advances from Customers

Advances from customersare amounts paid by customers for GSM and CDMA prepaid cards, GSM and CDMAprepaid service fees, Internet protocol (“IP”) telephone cards and othercalling cards which cover future telecommunications services (over a period of1 to 12 months). Customer advances are stated at the amount of proceedsreceived less the amount already recognized as revenues upon the rendering ofservices.

(b)   Deferred revenue

Upfrontnon-refundable revenue, including connection fee and receipts from activationof SIM/UIM cards relating to GSM and CDMA businesses, are deferred andrecognized over the expected service period.

F-27

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**2.15****  ****    Employee Benefits**

(a)   Retirement benefits

The Group’scontributions to the defined contribution retirement scheme are expensed asincurred, and for the contributions to the supplementary defined contributionretirement scheme, they are reduced by contributions forfeited by thoseemployees who leave the scheme prior to vesting fully in the contributions.

(b)   Housing benefits

The Group’scontributions to the housing fund, special monetary housing benefits and otherhousingbenefits areexpensed as incurred.

(c)   Share-based compensation cost

The Group operates anequity-settled, share-based compensation plan. The fair value of the employeeservices received in exchange for the grant of the options is recognized as anexpense. The total amount to be expensed over the vesting period is determinedby reference to the fair value of the options granted. At each balance sheetdate, the entity revises its estimates of the number of options that areexpected to become exercisable. The Group recognizes the impact of the revisionof original estimates, if any, in the statements of income, and a correspondingadjustment to equity over the remaining vesting period (Note 2.2).

The proceeds received net of any directly attributabletransaction costs are credited to share capital (nominal value) and sharepremium when the options are exercised.

**2.16****  ****    Provisions**

Provisionsare recognized when the Group has present obligations (legal or constructive)as a result of past events, it is probable (i.e. more likely than not) that anoutflow of resources will be required to settle the obligation, and the amounthas been reliably estimated. Provisions are reviewed at each balance sheet dateand adjusted to reflect the current best estimate. Where the effect of the timevalue of money is material, the amount of a provision is the present value ofthe expenditures expected to be required to settle the obligation.

F-28

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**2.17****  ****     Revenue Recognition**

(a)          Revenue is recognized when it is probable that the economic benefitsassociated with a transaction will flow to the Group and when the revenue andcost can be measured reliably, on the following basis:

·      Usage feesare recognized when the service is rendered;

·      Monthly feesare recognized as revenue in the month during which the services are rendered;

·      Revenue fromtelephone cards, which represent prepaid service fees received from customersfor telephone services, is recognized when the related service is rendered uponactual usage of the telephone cards by customers;

·      Leased linesand indefeasible rights of use (“IRU”) are treated as operating leases withrental income recognized on a straight-line basis over the lease term, exceptfor the lease of specific and identified network assets that transfersubstantially all the risks and rewards incidental to the ownership to thelessee, which is recognized as capacity sales;

·      Sales oftelecommunications products, such as handsets, pagers and accessoriesetc, are recognized when title has been passed to thecustomers; and

·      Upfrontnon-refundable revenue, including connection fee and receipts from activationof SIM/UIM cards related to GSM and CDMA businesses, are capitalized andrecognized over the expected service periods which are estimated based on theexpected stabilized churn rates of subscribers (Note 2.2).

Revenue is stated net ofbusiness tax and government surcharges.

(b)   Interest income

Interest income fromdeposits in banks or other financial institutions is recognized on a timeproportionbasis, usingthe effective interest method.

(c)   Dividend income

Dividend income isrecognized when the rights to receive payment are established.

F-29

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**2.18****  ****    Leases (as the lessee)**

(a)   Operating lease

Leasesin which a significant portion of the risks and rewards of ownership areretained by the lessor are classified as operating leases. Payments made underoperating leases (net of any incentives received from the lessor) are expensedin the statements of income on a straight-line basis over the period of thelease.

(b)   Finance lease

Leasesof assets where the Group has substantially all the risks and rewards ofownership are classified as finance leases. Finance leases are capitalized atthe lease’s commencement at the lower of the fair value of the leased propertyand the present value of the minimum lease payments. Each lease payment isallocated between the liability and finance charges so as to achieve a constantrate on the finance balance outstanding. The corresponding rental obligations,net of finance charges, are included in current and non-current borrowings. Theinterest element of the finance cost is recorded in the statements of incomeover the lease period so as to produce a constant periodic rate of interest onthe remaining balance of the liability for each period.

**2.19****  ****    Costs under Subscriber Point Reward Program**

Underthe subscriber point reward program, the estimated costs of providingtelecommunications services or providing non-cash gifts are calculated based onthe value of bonus points awarded to subscribers, which are recorded as sellingand marketing expenses and accrued as a current liability when subscribersaccumulate bonus points.

**2.20****  ****    Borrowing Costs**

Borrowingcosts are expensed as incurred, except for interest directly attributable tothe acquisition, construction or production of an asset, that necessarily takesa substantial period of time to get ready for its intended use, in which casethey are capitalized as part of the cost of that asset. Capitalization ofborrowing costs commences when expenditures for the asset and borrowing costsare being incurred and the activities to prepare the asset for its intended useare in progress. Borrowing costs are capitalized up to the date when theproject is completed and ready for its intended use.

Tothe extent that funds are borrowed specifically for the purpose of obtaining aqualifying asset, the amount of borrowing costs eligible for capitalization isdetermined at the actual borrowing costs incurred on that borrowing during theperiod less any investment income on the temporary investment of thoseborrowings.

Tothe extent that funds are borrowed generally and used for the purpose ofobtaining a qualifying asset, the amount of borrowing costs eligible forcapitalization is determined by applying a capitalization rate to theexpenditures on that asset. The capitalization rate is the weighted average ofthe borrowing costs applicable to the borrowings of the Group that areoutstanding during the period, other than borrowings made specifically for thepurpose of obtaining a qualifying asset. The amount of borrowing costscapitalized during a period should not exceed the amount of borrowing costincurred during that period. Other borrowing costs are recorded as expenseswhen incurred.

The capitalized borrowing rate represents the cost ofcapital for raising the related borrowings externally and varies from 3.60% to5.58% for the year ended 31 December 2005 (2003: 4.44% to 5.76%; 2004:4.78% to 5.73%).

 

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**2.21****  ****    Taxation**

(a)   Income tax

Income tax is providedon the basis of income for statutory financial reporting purposes, adjusted forincome and expense items, which are not assessable or deductible for taxpurposes.

(b)   Deferred income tax

Deferred income tax isprovided in full, using the liability method, on temporary differences arisingbetween the tax bases of assets and liabilities and their carrying amounts inthe consolidated financial statements. However, if the deferred income taxarises from initial recognition of an asset or liability in a transaction otherthan a business combination that at the time of the transaction affects neitheraccounting nor taxable income or loss, it is not accounted for. Deferred incometax is determined using tax rates (and laws) that have been enacted orsubstantially enacted by the balance sheet date and are expected to apply whenthe related deferred income tax asset is realized or the deferred income taxliability is settled.

Deferred income taxassets are recognized to the extent that it is probable that future taxableincome will be available against which the temporary differences can beutilized.

**2.22****  ****    Dividend Distribution**

Dividend distribution tothe Company’s shareholders is recognized as a liability in the Group’sfinancial statements in the period in which the dividends are approved by theCompany’s shareholders.

**2.23****  ****    Related Parties**

Entities are consideredto be related if one has the ability to control the other, directly orindirectly, or has the ability to exercise significant influence over thefinancial and operating decisions of the other. Entities are also considered tobe related if they are subject to common control or common significantinfluence.

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**2.24****  ****    Investments**

In 2003, the Group classified its investments in securities, other thansubsidiaries, as non-trading securities and trading securities.

(a)   Non-trading securities

Investments which were held for non-trading purpose were stated at fairvalue at the balance sheet date. Changes in the fair value of individualsecurities were credited or debited to the investment revaluation reserve untilthe security was sold, or was determined to be impaired. Upon disposal, thecumulative gain or loss representing the difference between the net sales proceedsand the carrying amount of the relevant security, together with anysurplus/deficit transferred from the investment revaluation reserve, was dealtwith in the statements of income.

Where there was objective evidence that individual investments were impairedthe cumulative loss recorded in the revaluation reserve was taken to thestatements of income.

(b)   Trading securities

Trading securities were carried at fair value. At each balance sheetdate, the net unrealized gains or losses arising from the changes in fair valueof trading securities were recognized in the statements of income. Incomes orlosses on disposal of trading securities, representing the difference betweenthe net sales proceeds and the carrying amounts, were recognized in thestatements of income as they arose.

Upon the sale of New Guoxin on December 31, 2003, there was noinvestment held by the Group for 2004 and 2005.

**2.25****  ****    Contingent Liabilities and Contingent Assets**

A contingent liabilityis a possible obligation that arises from past events and whose existence willonly be confirmed by the occurrence or non-occurrence of one or more uncertainfuture events not wholly within the control of the Group. It can also be apresent obligation arising from past events that is not recorded because it isnot probable that outflow of economic resources will be required or the amountof obligation cannot be measured reliably.

A contingent liabilityis not recognized but is disclosed in the notes to the financial statements.When a change in the probability of an outflow occurs so that outflow isprobable, the liability will then be recorded as a provision.

A contingent asset is apossible asset that arises from past events and whose existence will beconfirmed only by the occurrence or non-occurrence of one or more uncertainevents not wholly within the control of the Group.

Contingent assets arenot recognized but are disclosed in the notes to the financial statements whenan inflow of economic benefits is probable. When an inflow is virtually certain,an asset is recognized.

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**2.26****  ****    Earnings per Share and per AmericanDepository Share (“ADS”)**

Basic earnings per shareis computed by dividing the income attributable to shareholders by the numberof weighted average number of ordinary shares outstanding during the year.

Diluted earnings pershare is computed by dividing the income attributable to shareholders by theweighted average number of ordinary shares, after adjusting for the effects ofthe dilutive potential ordinary shares.

Basic and diluted net earningsper ADS have been computed by multiplying the net income per share by 10, whichis the number of shares represented by each ADS.

**3.     F****INANCIAL RISK MANAGEMENT**

The Group’s activities are exposed  to a variety of financial risks: market risk(including currency risk and fair value interest risk), credit risk, liquidityrisk and cash flow interest-rate risk. The Group’s overall risk managementprogram focuses on the unpredictability of financial markets and seeks tominimize potential adverse effects on the Group’s financial performance.

Risk management is carried out by the Group’s financedepartment, following the overall directions determined by the Board ofDirectors. The finance department identifies and evaluates financial risks inclose co-operation with the Group’s operating units.

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(a)       Marketrisk - Foreign exchange risk

TheGroup’s businesses are mainly conducted in RMB, except the Company and certainsubsidiaries located in HK, Macau and USA. Dividends to shareholders aredeclared in RMB and paid in HK dollars. The Group is exposed to foreignexchange risk arising from various currency exposures, primarily with respectto US dollar and HK dollar. As of December 31, 2005,approximately RMB11,406 million of loans and RMB1,001 million of bank balancesand cash and short-term bank deposits are denominated in US dollar and HKdollar (2004:RMB10,629 million of loans and RMB782 million of bank balances and cash andshort-term bank deposits). The Group hasnot used any forward contracts or foreign currency swap arrangements to hedgeits exposure to foreign currency risk. However, the Group’s treasury departmentin headquarter continuously monitors the foreign exchange risk regardingforeign currency loans and deposits.

(b)       Creditrisk

TheGroup has no significant concentrations of credit risk. The extent of the Group’scredit exposure is represented by the aggregate balance of accounts receivablefor services and amounts due from related parties and other operators.

TheGroup has policies that limit the amount of credit exposure to accountsreceivable for services and amounts due from related parties and otheroperators. The normal credit period granted by the Group is an average 30 daysfrom the date of invoice. The Group believes that adequate provision foruncollectible accounts receivable have been made.

(c)       Liquidityrisk

Prudentliquidity risk management implies maintaining sufficient cash and theavailability of funding through an adequate amount of committed creditfacilities. Due to the dynamic nature of the underlying businesses, the Group’sfinance department aims to maintain flexibility in funding by keeping committedcredit lines available.

(d)       Cashflow and fair value interest rate risk

The Group’s interest-bearing assets are mainlyrepresented by bank deposits. Apart from this, the Group’s income and operatingcash flows are substantially independent of changes in marketinterest rates.

The Group’sinterest-rate risk arises from long-term bank loans. Bank loans issued atfloating rates expose the Group to cash flow interest-rate risk. Bank loans andshort-term bonds issued at fixed rates expose the Group to fair valueinterest-rate risk. As of December 31, 2005, approximately RMB7, 442million of long-term loans (2004: approximately RMB27,292 million), RMB5,303million (2004: approximately RMB8,231 million) of short-term loans and RMB9,866million (2004: Nil) of short-term bonds were at fixed rates, whileapproximately RMB9,684 million (2004: approximately RMB9,932 million) oflong-term loans and RMB1,722 million (2004: approximately RMB697 million) ofshort-term loans were at floating rates.

TheGroup does not expect any significant changes in interest rates which mightmaterially affect the Group’s results of operations.

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**4.    ****CRITICAL ACCOUNTING ESTIMATES ANDJUDGEMENTS**

Estimates and judgements are continually evaluated andare based on historical experience and other factors, including expectations offuture events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning thefuture. The resulting accounting estimates will, by definition, seldom equalthe related actual results. The estimates and assumptions that have asignificant risk of causing a material adjustment to the carrying amounts ofassets and liabilities within the next financial year are discussed below.

**4.1****     ****Accounting Estimates**

(a)       Depreciationof property, plant and equipment

Depreciation of the Group’s property, plant andequipment is calculated using the straight-line method to allocate cost orrevalued amounts to residual values over the estimated useful lives. The Groupreviews the useful lives and residual values periodically to ensure that themethod and rates of depreciation are consistent with the expected pattern of realizationof economic benefits from property, plant and equipment. The Group usesestimates of useful lives of property, plant and equipment based on historicalexperience, taking into account anticipated technological changes. If there aresignificant changes from previously estimated useful lives, the amount ofdepreciation expense may change. The cost and accumulated depreciation ofproperty, plant and equipment as of December 31, 2005 amountedto RMB190.9 billion (2004: RMB173.8 billion) and RMB74.8 billion (2004: RMB55.3billion), respectively.

(b)       Impairmentof non-current assets

TheGroup tests whether non-current assets have suffered from any impairment, inaccordance with the accounting policy stated on Note 2.9. The recoverableamount of an asset is the higher of its fair value less costs to sell and itsvalue in use. Management estimates value in use based on estimated discountedfuture cash flows of the cash generating unit at the lowestlevel to which the asset belongs. If there is a significant change inmanagement’s assumptions and the estimated recoverable amounts of thenon-current assets, the Group’s future results would be affected.

In2003, the Group has recorded an impairment loss for property, plant andequipment of the Guoxin Paging assets amounted to approximately RMB528 millionas of June 30, 2003, based on their estimation of the discounted futurenet cash flows expected to arise from the continuing operations of the Pagingbusiness. Subsequently, the Group sold the paging business to Unicom Group on December 31,2003, and recognized a disposal loss (difference between the sales proceeds andthe carrying amount of the net assets of the paging business as of theeffective date of the disposal) of approximately RMB663 million to the statementof income in 2003.

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(c)       Provisionfor Doubtful Debts

Accountsreceivables are stated at costs, less provision for doubtful debts. The Groupevaluates specific accounts receivable where there are indications that thereceivable may be doubtful or is not collectible. The Group records a provisionbased on its best estimates to reduce the receivable balance to the amount thatis expected to be collected. For the remaining receivable balances as of eachperiod-end, the Group makes a provision based on observable data indicatingthat there is a measurable decrease in the estimated future cash flows from theremaining balances. The Group makes such estimates based on its pastexperience, historical collection patterns, subscribers’ credit worthiness andcollection trends. For the general subscribers of Cellular, Long Distance, Data and Internet services,the Group makes a full provision for receivables aged over 3 months, which isconsistent with its credit policy with respect to relevant subscribers.

The Group’s estimates described above are basedon historical experience, subscriber creditability and collection trends. Ifcircumstances change (e.g. due to factors including developments in the Group’sbusiness and the external market environment), the Group may need tore-evaluate its policies on doubtful debts, and make additional provisions inthe future.

(d)       Provisionfor Subscriber Point Reward Program

The Group has implemented a subscriber PointReward Program since 2004, which is a bonus point based scheme that rewardssubscribers according to their service consumption, loyalty and paymenthistory. The estimated liability is recognized based on (i) the value ofeach bonus point awarded to subscribers, (ii) the number of bonus pointsrelated to subscribers who are qualified to exercise their redemption right atperiod/year end, and (iii) the estimated number of bonus points related tosubscribers who have no right to redeem the incentives at period/year end, butwho are expected to ultimately earn and claim awards under the Reward Program.If subscribers redeem rewards or their entitlements expire, the provision isadjusted accordingly. The Group has recognized the liability amounting toRMB337 million as of December 31, 2005 (2003: Nil; 2004:RMB40 million). As the Group has not had much historical incentive redemptionexperience in the past, the Group may need to re-assess estimates for accruingfor the potential bonus point liability when there is a more stabilized andreliable historical redemption rate in future.

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(e)       Income Tax and Deferred Taxation

Income tax is provided based on income beforetax for 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 the Group is 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 financial statements.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.

In the preparation of the financial statements,the Group estimated its income tax provision and deferred taxation inaccordance with the prevailing tax rules and regulations, taking intoaccount any special approvals obtained from relevant tax authorities and anypreferential tax treatment to which it is entitled in each location orjurisdiction in which the Group operates. This process involves estimation madeby the Group about its current tax exposure together with an assessment oftemporary differences resulting from different treatment of items for tax andaccounting purposes in order to determine the amount of tax provisions for theperiod. The Group believes that it has recorded adequate tax provisions basedon its best estimates and assumptions. For the evaluation of temporarydifferences, the Group has assessed the likelihood that the deferred taxescould be recovered. Major deferred tax components relate to interest on loansfrom China-China-Foreign (“CCF”) joint ventures, loss arising from terminationsof CCF arrangements (Note 9(f)), provisions for doubtful debts and write-downof inventory to net realizable value and additional depreciation deductible fortax purposes. Due to the effects of these temporary differences on income tax,the Group has recorded deferred tax assets amounting to RMB335 million as of December 31, 2005 (2004:RMB469 million). Deferred tax assets are recognized based on the Group’sestimates and assumptions that they will be recovered from taxable incomearising from the continuing operations in the foreseeable future.

The Group believes it has recorded adequatecurrent and deferred taxes based on prevailing tax rules and regulationsand its current best estimates and assumptions. In the event that future tax rules andregulations or related circumstances change, adjustments to current and deferredtaxes may be necessary.

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**4.2****     ****Accounting judgements**

(a)       Capitalization of CDMA CustomerAcquisition Costs

The Group has been operating the CDMA businesssince the beginning of 2002. In order to accelerate the development of the CDMAbusiness and subscriber growth, the Group began to offer certain promotionalpackages in the second half of 2002. As part of the contractual arrangementswith certain CDMA contractual subscribers under these special promotionalpackages, CDMA handsets were provided to the subscribers for their use at noadditional charge during the specified contract periods, which range from 6months to 2 years. In return, the subscribers are required to incur a minimumamount of service fees during the contract period. If the contractualsubscribers can fulfill the minimum contract spending amounts by the end of thecontract period, they will not be obliged to repay the remaining costs of theCDMA handsets given for their use. In addition, to secure contract performance,these subscribers are required under their contracts to (1) prepay certainamounts of service fees or deposits, (2) maintain a bank deposit in one ofthe designated commercial banks to secure their minimum contract amounts, or (3) providea guarantor who will compensate the Group for any loss in the event of thesubscriber’s non-performance of related contractual obligations.

The Group considers the costs of the CDMAhandsets provided to contractual subscribers under these promotional packagesas customer acquisition costs for the development of these new CDMA contractualsubscribers. Such customer acquisition costs are capitalized to the extentexpected to be recoverable, and amortized over the contractual periods (notexceeding two years), over which future economic benefits are expected to flowto the Group in the form of minimum contract revenue (Note 8 and 12).

The Group determined its accounting policy forcapitalization of customer acquisition costs of contractual CDMA subscribersafter a careful evaluation of specific facts and circumstances, and believesthat the capitalization of such costs is appropriate because future economicbenefits are expected to flow to the Group in the form of future contractualrevenues, taking into consideration (1) the historically high ARPUs andlow churn rate, default or bad debt rates of these subscribers; (2) theGroup’s established procedures in and the relative low cost of enforcement ofcontracts in default; and (3) the existence of specified contract periodswith minimum contract spending amounts and built-in contractual safeguardingmeasures such as non-refundable prepayments, bank deposits, and guaranteesreceived, as well as penalty clauses imposed on subscribers.

Therefore, the Group believes that thecapitalized customer acquisition costs are recoverable from future revenue tobe derived from these promotional packages, and the capitalization andamortization of these customer acquisition costs is an appropriate accountingpolicy. Furthermore, the Group continuously assesses and evaluates therecoverability of these customer acquisition costs, based on detailed review ofhistorical subscriber churn rates and estimated default rates. Based on theGroup’s current assessment and evaluation, the Group believes that there is nosignificant problem in recovering the carrying amounts of the customeracquisition costs as of December 31, 2003, 2004 and 2005.

The Group has made the above recoverabilityassessments based on the current legal and operating environment relating tothe subscribers’ contract performance and other information currentlyavailable. Actual results may differ significantly from the current situationand the Group’s current estimates. If the situation changes significantly inthe future, the Group may need to accelerate the amortization of customeracquisition costs based on conditions at that time.

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(b)       Lease of CDMANetwork Capacity

(i)    Original CDMA lease agreements

A CDMA networkcapacity lease agreement has been signed by the Group and Unicom Group’swholly-owned subsidiary, Unicom New Horizon Mobile Telecommunications CompanyLimited (“Unicom New Horizon”). Pursuant to this CDMA lease agreement, UnicomNew Horizon has agreed to lease the capacity of the CDMA network to the Groupcovering the 9 provinces of Guangdong, Jiangsu, Zhejiang, Fujian, Liaoning,Shandong, Anhui, Hebei, Hubei and the 3 municipalities of Beijing, Shanghai andTianjin. This lease became effective on 8 January 2002.

In addition, on December 31, 2002 and 2003, theGroup acquired all the equity interests in Unicom New Century and Unicom NewWorld, respectively, which together operate GSM and CDMA Cellular Businesses inanother 12 provinces, 1 municipality and 5 autonomous regions in the PRC.Unicom New Century and Unicom New World have also respectively entered into aCDMA lease agreement with Unicom Group and Unicom New Horizon on similar termsand conditions. These lease agreements and the Group’s existing lease agreementwill be referred to as the “Original CDMA Lease Agreements”.

According to the terms of the Original CDMA LeaseAgreements, the initial lease period is for one year, renewable for additionalone-year term at the Group’s option. The Group has the exclusive right to leaseand operate the CDMA network capacity in the above regions. Also, the Group hasthe optionto add or reduce the capacity leased by givingspecified period of advance notice. The lease fee per unit of capacity iscalculated on a basis that if full capacity is leased, it would permit UnicomNew Horizon to recover its investment in constructing the CDMA network in 7years, together with an internal return of 8%. In January 2004, the Grouprenewed the CDMA network capacity for an additional one-year term. The Grouphas the option to purchase the network assets based on the appraised value ofthe network determined by an independent appraiser.

The appropriatelease classification at the inception of the Original CDMA Lease Agreement wasassessed. Factors and related implications considered include whether the Grouphas taken the risks and rewards of ownership of the CDMA assets. Furthermore,the Group has considered whether the existence of the purchase option and theannual renewal options, combined with the related economic penalties, risks andbenefits, have caused the Group to take on risks and rewards similar to thosethat an owner of these assets would bear.

Unicom New Horizonhas the legal ownership of the CDMA network, is directly responsible for theplanning, financing and construction of the CDMA network, and directly entersinto all contracts with suppliers and constructors. The Group believes it onlybears the risks associated with the operation of the CDMA business during therelevant leasing periods and are free from any ownership risks of the CDMAnetwork. According to the terms of the Original CDMA Lease Agreements, theinitial lease period was only one year, with renewal of additional one-yearterms at the Group’s option. Accordingly, there was no predetermined leaseperiod and minimum network capacity to be leased in future periods. The Grouphas the option to determine whether they will renew and continue the leases andhow much capacity to lease. The Group also has the option to decide whetherthey will exercise the purchase option for the CDMA network at fair value basedon the then market environment and future operating performance of the CDMAbusiness subject to approvals obtained from the Company’s independent minorityshareholders.

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Accordingly, if theCDMA business turns out to be unsuccessful, the Group does not have theobligation to continue this CDMA lease arrangement or to exercise the purchaseoption.

In general, theclassification of leases is dependent on whether the risks and rewards ofownership of the leased assets rest substantially with the lessor or thelessee. 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 operating leases.When performing this assessment, the Group has considered a number of factorsas stated above that required significant judgments.

At the inception ofthe Original CDMA Lease Agreements, there was a high degree of uncertaintyrelated to the market condition and operating results of the CDMA business. Itwas highly uncertain whether the Group would continue to lease the network inthe future or to estimate the future network capacity to be leased. The Groupwas also unable to determine whether or not they would exercise the purchaseoption. Given these uncertainties and due to the fact that the risks associatedwith the ownership of the CDMA assets substantially remained with Unicom Groupand Unicom New Horizon, the Group accounted for the leasing of the CDMA networkas operating leases for the initial lease periods, estimated to be three years,so as to reflect the respective rights and obligations of the relevant partiesto the Original CDMA Lease Agreements.

(ii)   New CDMA lease agreement

On March 24, 2005, the Groupentered into a new CDMA lease agreement (the “New CDMA Lease Agreement”) withUnicom Group and Unicom New Horizon to replace the Original CDMA LeaseAgreements. Pursuant to the New CDMA Lease Agreement, the CDMA lease has aninitial term of two years, the lease fee of the CDMA network shall bedetermined on the basis of the CUCL’s CDMA services revenue, details asfollows:

·   In 2005, the lease fee shall be 29% of the audited CDMA service revenueof the lessee for that year, but shall not be less than 90% of the total amountof lease fee paid by the Group to Unicom New Horizon pursuant to the old leaseagreement for 2004; and

·   In 2006, the lease fee shall be 30% of the audited CDMA service revenueof the lessee for that year, but shall not be less than 90% of the total amountof lease fee paid by the Group to Unicom New Horizon pursuant to the New CDMALease Agreement for 2005.

The majormodifications which needed to be considered for impact on the accounting forthe lease agreement are a change in the method of calculating leasing fee and achange in the initial lease term from 1 year to 2 years. Under the New CDMALease Agreement, the Group believes the uncertainties of the CDMA businesscontinue to exist, particularly due to the fact that (i) the CDMA businessstill recorded a loss in 2005; (ii) the uncertainty of the future successof CDMA business arising from keen market competition; and (iii) theuncertainty in the future changes in technology, technological standards andgovernment regulatory environment. At the inception of the New CDMA LeaseAgreement, the Company was unable to determine whether it would renew the leaseafter the initial two-year lease term or whether it would exercise the purchaseoption. Given these uncertainties, the Group considered the risks associatedwith the ownership of the CDMA assets still substantially remained with UnicomGroup and Unicom New Horizon, and has concluded the leasing of the CDMA networkwas classified as an operating lease.

F-40

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At the end of the lease term, the Group willreassess the appropriate classification based on the relevant factors andcircumstances available at that time. Based on the above accounting judgementmade, the operating lease expense has been recorded in the statements of incomesince the commencement of the Original CDMA Lease Agreements and the New CDMALease Agreement, and the carrying value of the CDMA assets and the relatedliabilities have not been reflected in the balance sheets. For the year ended December 31, 2005, the leaseexpense of approximately RMB7.92 billion (2003: RMB3.52 billion; 2004: RMB6.59 billion) was recorded under the leased lines and networkcapacities in the statements of income.

**5.     SEGMENT INFORMATION**

The Group is organizedinto 5 business segments based on the varioustypes of telecommunications services provided to customers in the PRC. Themajor business segments operated by the Group are classified as below:

·      GSMBusiness — the provision of GSM telephone and related services;

·      CDMABusiness — the provision of CDMA telephone and related services, through aleasing arrangement ofCDMA network capacities from Unicom NewHorizon (Note 4.2(b));

·      Dataand Internet Business — the provision of domestic and international data,Internet and other related services; and

·      LongDistance Business — the provision of domestic and international long distanceand other related services.

·      PagingBusiness — the provision of paging and related services (discontinued in 2004).

TheGroup’s primary measure of segment results is based on segment income or lossbefore taxation. Unallocated costs primarily represent corporate expenses andincome taxes whilst unallocated income represents interest income that was notidentifiable to different operating segments.

F-41

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**5.1     ****Business Segments**
| ** **                                  | ** ** | **2005**          | ** ** | **2004 (Restated)** | ** ** |
|---------------------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **GSM  Business** | ** ** | **CDMA********Business** | ** ** | **Internet and  Data Business** | ** ** | **Long Distance  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** | **GSM********Business** | ** ** | **CDMA  Business** | ** ** | **Internet and  Data Business** | ** ** | **Long Distance  Business** | ** ** | **Unallocated  amount** | ** ** | **Elimination** | ** ** | **Total** |   |
| Revenue (Turnover):                         |       |              |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                   |       | 32,077,305        |       | 16,726,678               |       | 2,540,574 |   | 599,251 |   | — |   |   |   | 51,943,808 |   | 31,997,020 |   | 16,164,333 |   | 2,685,083 |   | 879,281 |   | — |   |   |   | 51,725,717 |   |
| Monthly fee                                 |       | 6,840,720         |       | 4,905,538                |       | — |   | — |   | — |   |   |   | 11,746,258 |   | 6,922,400 |   | 4,638,024 |   | — |   | — |   | — |   |   |   | 11,560,424 |   |
| Interconnection revenue                     |       | 3,466,067         |       | 1,398,577                |       | 102,989 |   | 434,577 |   | — |   |   |   | 5,402,210 |   | 2,614,268 |   | 927,288 |   | 131,371 |   | 454,383 |   | — |   |   |   | 4,127,310 |   |
| Rental income                               |       | —            |       | —                   |       | 393,659 |   | 489,969 |   | — |   |   |   | 883,628 |   | — |   | — |   | 344,014 |   | 512,134 |   | — |   |   |   | 856,148 |   |
| Other revenue                               |       | 9,751,436         |       | 4,546,143                |       | 12,745 |   | 776 |   | — |   |   |   | 14,311,100 |   | 5,975,264 |   | 2,648,029 |   | 502,266 |   | 2,211 |   | — |   |   |   | 9,127,770 |   |
| Total services revenue                      |       | 52,135,528        |       | 27,576,936               |       | 3,049,967 |   | 1,524,573 |   | — |   |   |   | 84,287,004 |   | 47,508,952 |   | 24,377,674 |   | 3,662,734 |   | 1,848,009 |   | — |   |   |   | 77,397,369 |   |
| Sales of telecommunications products        |       | 3,174             |       | 2,743,337                |       | 7,226 |   | 8,090 |   | — |   |   |   | 2,761,827 |   | 4,128 |   | 1,668,444 |   | 14,782 |   | 2,401 |   | — |   |   |   | 1,689,755 |   |
| Total revenue from external customers       |       | 52,138,702        |       | 30,320,273               |       | 3,057,193 |   | 1,532,663 |   | — |   |   |   | 87,048,831 |   | 47,513,080 |   | 26,046,118 |   | 3,677,516 |   | 1,850,410 |   | — |   |   |   | 79,087,124 |   |
| Intersegment revenue                        |       | —            |       | —                   |       | 2,553,242 |   | 1,189,531 |   | — |   | (3,742,773 | ) | — |   | 135,521 |   | 107,477 |   | 2,059,881 |   | 1,264,140 |   | — |   | (3,567,019 | ) | — |   |
| Total revenue                               |       | 52,138,702        |       | 30,320,273               |       | 5,610,435 |   | 2,722,194 |   | — |   | (3,742,773 | ) | 87,048,831 |   | 47,648,601 |   | 26,153,595 |   | 5,737,397 |   | 3,114,550 |   | — |   | (3,567,019 | ) | 79,087,124 |   |
| Leased lines and network capacities         |       | (253,790          | )          | (8,035,534               | )          | (369,644 | ) | (88,349 | ) | — |   |   |   | (8,747,317 | ) | (284,092 | ) | (6,685,059 | ) | (361,412 | ) | (67,565 | ) | — |   |   |   | (7,398,128 | ) |
| Interconnection charges                     |       | (7,207,123        | )          | (3,345,180               | )          | (600,462 | ) | (962,378 | ) | — |   | 3,742,773 |   | (8,372,370 | ) | (6,452,988 | ) | (2,794,843 | ) | (917,294 | ) | (918,480 | ) | — |   | 3,567,019 |   | (7,516,586 | ) |
| Depreciation and amortization               |       | (17,315,209       | )          | (614,297                 | )          | (1,886,178 | ) | (551,045 | ) | (1,452 | ) |   |   | (20,368,181 | ) | (16,118,746 | ) | (438,957 | ) | (1,795,499 | ) | (530,695 | ) | (127,177 | ) |   |   | (19,011,074 | ) |
| Employee benefits expenses                  |       | (3,550,780        | )          | (1,176,502               | )          | (492,376 | ) | (297,160 | ) | (99,494 | ) |   |   | (5,616,312 | ) | (2,917,299 | ) | (861,614 | ) | (443,466 | ) | (279,664 | ) | (113,014 | ) |   |   | (4,615,057 | ) |
| Selling and marketing                       |       | (7,546,848        | )          | (11,308,449              | )          | (1,386,790 | ) | (315,791 | ) | — |   |   |   | (20,557,878 | ) | (6,324,638 | ) | (11,347,712 | ) | (1,387,453 | ) | (463,477 | ) | — |   |   |   | (19,523,280 | ) |
| General, administrative and other expenses  |       | (8,054,364        | )          | (2,537,950               | )          | (867,670 | ) | (259,705 | ) | (21,871 | ) |   |   | (11,741,560 | ) | (7,068,838 | ) | (2,206,458 | ) | (865,889 | ) | (320,115 | ) | (38,941 | ) |   |   | (10,500,241 | ) |
| Cost of telecommunications products sold    |       | (80,674           | )          | (3,477,893               | )          | (16,315 | ) | (434 | ) | — |   |   |   | (3,575,316 | ) | (135,172 | ) | (2,399,360 | ) | (22,371 | ) | (5,742 | ) | — |   |   |   | (2,562,645 | ) |
| Finance costs                               |       | (943,214          | )          | (42,368                  | )          | (37,043 | ) | (66,787 | ) | (223,682 | ) | 213,773 |   | (1,099,321 | ) | (1,606,741 | ) | (36,755 | ) | (17,569 | ) | (36,962 | ) | (112,429 | ) | 114,381 |   | (1,696,075 | ) |
| Interest income                             |       | 64,626            |       | 8,958                    |       | 2,915 |   | 3,807 |   | 229,663 |   | (213,773 | ) | 96,196 |   | 67,526 |   | 11,093 |   | 5,504 |   | 3,653 |   | 129,512 |   | (114,381 | ) | 102,907 |   |
| Other gains (loss), net                     |       | 25,591            |       | 9,043                    |       | 65 |   | 229 |   | (3 | ) |   |   | 34,925 |   | 22,382 |   | 42,695 |   | (1,195 | ) | 140 |   | 39,625 |   |   |   | 103,647 |   |
| Segment income (loss) before income tax     |       | 7,276,917         |       | (199,899                 | )          | (43,063 | ) | 184,581 |   | (116,839 | ) |   |   | 7,101,697 |   | 6,829,995 |   | (563,375 | ) | (69,247 | ) | 495,643 |   | (222,424 | ) |   |   | 6,470,592 |   |
|                                        |       |              |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expenses                         |       |              |       |                     |       |   |   |   |   | (2,170,411 | ) |   |   | (2,170,411 | ) |   |   |   |   |   |   |   |   | (1,977,141 | ) |   |   | (1,977,141 | ) |
| Net income                                  |       |              |       |                     |       |   |   |   |   |   |   |   |   | 4,931,286 |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,493,451 |   |
| Attributable to:                            |       |              |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders of the Company                 |       |              |       |                     |       |   |   |   |   |   |   |   |   | 4,931,052 |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,493,451 |   |
| Minority interest                           |       |              |       |                     |       |   |   |   |   |   |   |   |   | 234 |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
|                                        |       |              |       |                     |       |   |   |   |   |   |   |   |   | 4,931,286 |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,493,451 |   |
| Other information:                          |       |              |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for doubtful debts                |       | 867,154           |       | 458,161                  |       | 139,327 |   | 33,868 |   | — |   |   |   | 1,498,510 |   | 1,317,374 |   | 645,470 |   | 164,514 |   | 64,462 |   | — |   |   |   | 2,191,820 |   |
| Capital expenditures for segment assets (1) |       | 7,333,030         |       | —                   |       | 1,962,796 |   | 2,162,637 |   | 6,154,335 |   |   |   | 17,612,798 |   | 6,396,406 |   | — |   | 2,444,623 |   | 1,949,202 |   | 7,373,877 |   |   |   | 18,164,108 |   |

 
| ** **                | ** ** | **As of 31 December 2005** | ** ** | **As of 31 December 2004 (Restated)** | ** ** |
|---------------------------|------------|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                | ** ** | **GSM**Business                                | ** ** | **CDMA**Business                                               | ** ** | **Internet and  Data Business** | ** ** | **Long Distance  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** | **GSM**Business | ** ** | **CDMA  Business** | ** ** | **Internet and**

**Data Business** | ** ** | **Long Distance  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| Total segment assets      |       | 107,723,037                                    |       | 4,087,906                                                      |       | 7,518,912 |   | 17,794,349 |   | 55,667,580 |   | (50,161,795 | ) | 142,629,989 |   | 102,693,857 |   | 7,119,115 |   | 9,470,980 |   | 18,042,840 |   | 62,101,761 |   | (50,390,158 | ) | 149,038,395 |   |
| Total segment liabilities |       | 45,706,440                                     |       | 5,620,722                                                      |       | 2,519,018 |   | 4,973,134 |   | 7,523,596 |   |   |   | 66,342,910 |   | 51,493,461 |   | 8,624,230 |   | 4,437,311 |   | 5,408,689 |   | 6,632,463 |   |   |   | 76,596,154 |   |

 

F-42

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** **
| ** **                                             | ** ** | **2003 (Restated)** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|
| ** **                                             | ** ** | **GSM  Business**        | ** ** | **CDMA  Business** | ** ** | **Internet and  Data Business** | ** ** | **Long Distance  Business** | ** ** | **Discontinued**OperationPagingBusiness | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| 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 |   |
| Rental income                                          |       | —                   |       | — |   | 420,433 |   | 701,549 |   | — |   | — |   |   |   | 1,121,982 |   |
| Other revenue                                          |       | 3,111,326                |       | 898,746 |   | 202,441 |   | 57,835 |   | 788,400 |   | — |   |   |   | 5,058,748 |   |
| Total services revenue                                 |       | 41,152,781               |       | 16,666,510 |   | 3,437,083 |   | 2,273,148 |   | 1,403,053 |   | — |   |   |   | 64,932,575 |   |
| Sales of  telecommunications products                  |       | 48,562                   |       | 1,396,018 |   | 7,814 |   | 14,914 |   | 753,955 |   | — |   |   |   | 2,221,263 |   |
| Total revenue from  external customers                 |       | 41,201,343               |       | 18,062,528 |   | 3,444,897 |   | 2,288,062 |   | 2,157,008 |   | — |   |   |   | 67,153,838 |   |
| Intersegment revenue                                   |       | 41,057                   |       | 41,725 |   | 1,826,222 |   | 866,728 |   | 230,075 |   | — |   | (3,005,807 | ) | — |   |
| Total revenue                                          |       | 41,242,400               |       | 18,104,253 |   | 5,271,119 |   | 3,154,790 |   | 2,387,083 |   | — |   | (3,005,807 | ) | 67,153,838 |   |
| 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                         |       | (13,091,129              | )          | (306,754 | ) | (1,305,239 | ) | (419,346 | ) | (1,144,922 | ) | (91,126 | ) |   |   | (16,358,516 | ) |
| Employee benefits expenses                             |       | (2,605,475               | )          | (660,894 | ) | (525,726 | ) | (333,051 | ) | (415,554 | ) | (55,553 | ) |   |   | (4,596,253 | ) |
| Selling and marketing                                  |       | (4,762,505               | )          | (9,092,060 | ) | (883,495 | ) | (405,904 | ) | (126,018 | ) | — |   | 6,059 |   | (15,263,923 | ) |
| General, administrative  and other expenses            |       | (5,598,270               | )          | (1,363,927 | ) | (761,405 | ) | (462,081 | ) | (916,418 | ) | (37,550 | ) | 489 |   | (9,139,162 | ) |
| Cost of telecommunications  products sold              |       | (530,024                 | )          | (1,699,974 | ) | (22,250 | ) | (4,231 | ) | (907,697 | ) | — |   | 225,227 |   | (2,938,949 | ) |
| Loss on sale of  discontinued operation (New Guoxin)   |       | —                   |       | — |   |   |   |   |   |   |   |   |   | (663,279 | ) | (663,279 | ) |
| Finance costs                                          |       | (1,764,010               | )          | (32,078 | ) | (62,791 | ) | (56,946 | ) | (5,238 | ) | (40,727 | ) | 15,808 |   | (1,945,982 | ) |
| Interest income                                        |       | 58,006                   |       | 7,013 |   | 4,589 |   | 3,400 |   | 9,099 |   | 106,734 |   | (15,808 | ) | 173,033 |   |
| Other (loss) gains, net                                |       | (11,649                  | )          | 3,680 |   | (4,741 | ) | 1,488 |   | 39,868 |   | (10,615 | ) |   |   | 18,031 |   |
| Segment income (loss)  before income tax               |       | 7,119,414                |       | (301,988 | ) | 682,963 |   | 647,571 |   | (1,159,881 | ) | (128,837 | ) |   |   | 6,197,663 |   |
| Income tax expenses                                    |       |                     |       |   |   |   |   |   |   |   |   | (1,929,143 | ) |   |   | (1,929,143 | ) |
| Net income                                             |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,268,520 |   |
| Attributable to:                                       |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders of the  Company                           |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,278,149 |   |
| Minority interest                                      |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | (9,629 | ) |
|                                                   |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,268,520 |   |
| 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 statement of income |       | —                   |       | — |   | — |   | — |   | 528,048 |   | — |   |   |   | 528,048 |   |
| Capital expenditures for segment assets (1)            |       | 8,906,166                |       | — |   | 4,128,985 |   | 2,555,252 |   | 35,126 |   | 4,129,690 |   |   |   | 19,755,219 |   |

 
| ** **                | ** ** | **As of December 31, 2003 (Restated)** | ** ** |
|---------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                | ** ** | **GSM  Business**                                               | ** ** | **CDMA  Business** | ** ** | **Internet and  Data Business** | ** ** | **Long Distance  Business** | ** ** | **Discontinued**OperationPagingBusiness | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| Total segment assets      |       | 106,824,362                                                     |       | 5,355,721 |   | 8,611,873 |   | 19,061,967 |   | — |   | 63,234,534 |   | (50,218,142 | ) | 152,870,315 |   |
| Total segment liabilities |       | 59,764,498                                                      |       | 7,230,777 |   | 3,975,293 |   | 6,918,025 |   | — |   | 5,929,854 |   |   |   | 83,818,447 |   |

 

(1)             Capital expenditures classified under “Unallocatedamounts” represent capital expenditures on common facilities, which benefit allbusiness segments.

F-43

----

**5.2****                  ****Geographical Segments**

Theusers of the Group’s services are mainly in the PRC. There is no othergeographical segment with segment revenuefrom customersoutside of the PRC equal to or greater than 10% of total revenue.

Althoughthe Group has its corporate headquarter in Hong Kong, a substantial portion ofthe Group’s non—currentassets (including property, plant andequipment and other assets) are situated in mainland China, as the Group’sprincipalactivities are conducted in the PRC. For the years ended December 31, 2003, 2004 and 2005,substantially all capitalexpenditures were incurred to acquireassets located in the mainland China. Less than 10% of the Group’s assets and operations are located outsidethe PRC. Accordingly, no geographical segment information is presented.

**5.3****                  ****Discontinued operation**

The subsidiary that carried out the PagingBusiness, New Guoxin, was disposed of on December 31, 2003, which has beenreported as a discontinued operation (Note 1.2).

**6.     PROPERTY, PLANT AND EQUIPMENT**

|                                           | ** ** | **2005**      | ** ** | **2004**                             | ** ** |
|-------------------------------------------|------------|---------------|------------|--------------------------------------|------------|
| ** **                                | ** ** | **Buildings** | ** ** | **Telecommuni-  cations  equipment** | ** ** | **Office  furniture,  fixtures and  others** | ** ** | **Leasehold  improvements** | ** ** | **Construction in  progress  (“CIP”)** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | ** **    | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Restated** | ** ** |
| Cost or  valuation:                       | ** ** | ** **    | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                      | ** ** | ** **    | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of year                         |       | 15,394,795    |       | 128,530,475                          |       | 5,103,469 |   | 1,112,408 |   | 23,694,508 |   | 173,835,655 |   | 155,313,692 |   |
| Additions                                 |       | 70,669        |       | 681,730                              |       | 362,792 |   | 40,839 |   | 16,456,768 |   | 17,612,798 |   | 18,811,959 |   |
| Acquisition of Unicom International       |       | —        |       | —                               |       | — |   | — |   | — |   | — |   | 57,425 |   |
| Transfer from CIP                         |       | 2,421,683     |       | 15,819,578                           |       | 3,001,578 |   | 81,749 |   | (21,324,588 | ) | — |   | — |   |
| Disposals                                 |       | (77,797       | )          | (279,079                             | )          | (97,170 | ) | (114,825 | ) | — |   | (568,871 | ) | (347,421 | ) |
| End of year                               |       | 17,809,350    |       | 144,752,704                          |       | 8,370,669 |   | 1,120,171 |   | 18,826,688 |   | 190,879,582 |   | 173,835,655 |   |
| Representing:                             |       |          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| At cost                                   |       | 15,438,577    |       | 144,752,704                          |       | 8,370,669 |   | 1,120,171 |   | 18,826,688 |   | 188,508,809 |   | 171,464,882 |   |
| At valuation                              |       | 2,370,773     |       | —                               |       | — |   | — |   | — |   | 2,370,773 |   | 2,370,773 |   |
|                                      |       | 17,809,350    |       | 144,752,704                          |       | 8,370,669 |   | 1,120,171 |   | 18,826,688 |   | 190,879,582 |   | 173,835,655 |   |
| Accumulated  depreciation and impairment: |       |          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                         |       | 2,398,685     |       | 49,788,957                           |       | 2,499,505 |   | 642,081 |   | 14,307 |   | 55,343,535 |   | 37,450,844 |   |
| Charge for the year                  |       | 1,285,243     |       | 17,360,339                           |       | 1,071,238 |   | 214,681 |   | — |   | 19,931,501 |   | 18,175,605 |   |
| Disposals                                 |       | (62,401       | )          | (206,386                             | )          | (68,274 | ) | (114,825 | ) | — |   | (451,886 | ) | (282,914 | ) |
| End of year                               |       | 3,621,527     |       | 66,942,910                           |       | 3,502,469 |   | 741,937 |   | 14,307 |   | 74,823,150 |   | 55,343,535 |   |
| Net book value:                           |       |          |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| End of year                               |       | 14,187,823    |       | 77,809,794                           |       | 4,868,200 |   | 378,234 |   | 18,812,381 |   | 116,056,432 |   | 118,492,120 |   |
| Beginning of year                         |       | 12,996,110    |       | 78,741,518                           |       | 2,603,964 |   | 470,327 |   | 23,680,201 |   | 118,492,120 |   | 117,862,848 |   |

 

During 2005, interest expense of approximately RMB683 million (2003: RMB604million; 2004: RMB648 million) was capitalized to construction-in-progress.

F-44

----

Buildings of theGroup were valued at March 31, 2000 by an independent property valuationfirm in Hong Kong, using the replacement cost or open market value approach, asappropriate. The resultingrevaluation surplus amounted to RMB177million. The additional depreciation attributable to the revaluation surplusamounted toapproximately RMB8.80 million for the year ended December 31, 2005 (2003: RMB8.80 million; 2004:RMB8.80 million). As of December 31, 2005, the carrying amount of buildingswould have been approximately RMB14,061million (2004:RMB12,860 million) had they been stated at historical cost less accumulateddepreciation. The directors considered the fair values of these buildings werenot materially different from their carrying values as of December 31, 2005.

Telecommunications equipment held under financeleases represents wireless public phone equipment. As of December 31, 2005,net book value of wireless public phone equipment amounted to approximatelyRMB354 million (2004: RMB468 million) (Note 16).

For the year ended December 31, 2005, theGroup recognized losses for disposal of property, plant and equipment ofapproximately RMB25.13 million (2003: RMB49.94 million; 2004: RMB10.54million).

**7.     GOODWILL**

|                                                    | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|----------------------------------------------------|------------|-----------|------------|-----------|------------|
| Cost:                                              |       |      |       |      |       |
| Goodwill arising from acquisitions                 |       | 3,429,706 |       | 3,143,983 |       |
| Negative goodwill arising from acquisition(Note 1) |       | (7,727    | )          | —    |       |
|                                               |       | 3,421,979 |       | 3,143,983 |       |
|                                               |       |      |       |      |       |
| Less:  Accumulated amortization                    |       | (285,723  | )          | —    |       |
| Accumulated amortization - negative goodwill       |       | 301       |       | —    |       |
|                                               |       | 3,136,557 |       | 3,143,983 |       |

 

Goodwill arising from the acquisitions of Unicom New Century and UnicomNew World in 2002 and 2003 (Notes 1.1 and 20), represented the excess of thepurchase considerations over the fair values of the separately identifiable netassets acquired.

From January 1, 2005, the Group ceased amortization of goodwill and the accumulatedamortization as of December 31, 2004 was eliminated against the cost of goodwill (Note 2.2(c)).

Negative goodwill arising from the acquisition of Unicom Internationalrepresented the excess of the fair value of the separately identifiable netassets acquired over the purchase consideration. Upon adoption of HKFRS 3, thenegative goodwill has been derecognized at January 1, 2005, with correspondingadjustments to the opening balance of retained earnings of the Group (Note2.2(c)).

Goodwill is allocated to the Group’scash-generating units (“CGU”) identified according to business segments. Therecoverable amount of goodwill is determined based on value-in-usecalculations. These calculations use cash flow projections based on financialbudgets approved by management, including expected incomemargins, growth rates and theapplicable discount rates. Management determined budgeted income margins basedon past performance and its expectations in relation to market developments.The expected growth rates used are consistent with the forecasts of thebusiness segments. The discount rates used are pre-tax and reflect specificrisks relating to the business. Based on management’s assessment, there was noimpairment of goodwill as of December 31, 2005.

F-45

----

**8.     OTHER ASSETS**

|                                                                   | ** ** | **Note**      | ** ** | **2004**     | ** ** | **2005**   | ** ** | ** ** |
|-------------------------------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|
| ** **                                                        | ** ** | ** **    | ** ** | **Restated** | ** ** | ** ** | ** ** | ** ** |
| Direct  incremental costs                                         |       | 2.2(d)        |       | 3,546,437    |       | 3,191,853  |       |       |
| Customer acquisition  costs of  contractual CDMA subscribers |       | 12(a), 4.2(a) |       | 3,884,685    |       | 2,416,224  |       |       |
| Purchased  software                                               |       |          |       | 295,768      |       | 276,803    |       |       |
| Prepaid rental  and leased lines                                  |       |          |       | 958,886      |       | 858,661    |       |       |
| Long-term  prepayment for lease of land                           |       | 2.2(a), (i)   |       | 411,940      |       | 696,913    |       |       |
| Others                                                            |       |          |       | 597,045      |       | 378,129    |       |       |
|                                                              |       |          |       |         |       |       |       |       |
| Total                                                             |       |          |       | 9,694,761    |       | 7,818,583  |       |       |
|                                                                   |            |               |            |              |            |            |            |            |  |  |  |  |

 

For the year ended December 31, 2005, amortization ofdirect incremental costs for activating GSM and CDMA subscribers and customeracquisition costs of contractual CDMA subscribers amounted to RMB1,582 million(2003: RMB811 million; 2004: RMB936million) and RMB5,948 million (2003: RMB5,837million; 2004: RMB6,121 million), respectively, which had been includedin selling and marketing expenses. For the year ended December 31, 2005, other amortization amounted to approximately RMB437million (2003: RMB295 million; 2004: RMB664million), which had been included in depreciation and amortization.

Note

(i)             The Group’sprepayment for lease of land represents prepaid operating lease payments forland use rights outside Hong Kong and their net book value are analyzed asfollows:

|                               | ** ** | **200**4 | ** ** | **200**5 | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Held on:                      |       |     |       |     |       |
| Leases of 10 to  50 years     |       | 411,940  |       | 682,451  |       |
| Leases of less  than 10 years |       | —   |       | 14,462   |       |
|                          |       |     |       |     |       |
|                          |       | 411,940  |       | 696,913  |       |

 

F-46

----

**9.     TAXATION**

Provision for taxationrepresents:

|                                                                                      | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                                                           | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Provision for  enterprise income tax on the estimated   taxable profits for the year |       | 1,064,968    |       | 1,422,635    |       | 2,034,520  |       |
| Deferred  taxation                                                                   |       | 864,175      |       | 554,506      |       | 135,891    |       |
|                                                                                 |       | 1,929,143    |       | 1,977,141    |       | 2,170,411  |       |

 

(a)          There is noHong Kong profits tax liability of the Company, as the Company does not have any assessable income sourcedfrom Hong Kong for 2003, 2004 and 2005;

(b)         Unicom Internationalassessed its income tax liabilities in Hong Kong using the tax rate of 17.5%.The income tax liability of Unicom International is about RMB1 million for 2005(2004: Nil).

(c)          Unicom Macauassessed its income tax liabilities in Macau, using an aggregated tax rate from3% to 12%. There is no Macau income tax liability for Unicom Macau for 2005 asit was in a loss making position in both years.

(d)         For 2004,both the tax liabilities of CUCL and Unicom New World were assessed inaccordance with FIE (“Foreign Investment Enterprises”) taxation requirements ona consolidated basis as two single entities and settled centrally in Beijing asapproved by the tax authority.

For 2005, the taxliabilities of CUCL and Unicom New World were assessed on a consolidated basisas a single entity and settled centrally in Beijing since the legal entity ofUnicom New World was dissolved and the operations of Unicom New World werecombined with CUCL.

(e)        Variousprovincial branches/municipal cities of CUCL and Unicom New World were grantedthe preferential treatment by tax authorities to assess their enterprise incometax at the rates of 30%, 15% or 10% in years 2003, 2004 and 2005. The remainingprovincial branches were assessed at the standard tax rate of 33%.

Reconciliation between income tax expense and accounting income atapplicable tax rates:

|                                                                                      | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                                                           | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **PRC**                                                                              | ** ** | ** **   | ** ** | ** **   |       |       |       |
| Statutory tax  rate (33%)                                                            |       | 33.0         | %          | 33.0         | %          | 33.0       | %          |
| Non-deductible  expenses                                                             |       | 1.9          | %          | 3.2          | %          | 1.9        | %          |
| Non-taxable income                                                                   |       |         |       |         |       |       |       |
| -Connection fee                                                                      |       | (1.3         | %)         | (2.1         | %)         | (1.2       | %)         |
| -Interest income                                                                     |       | (0.6         | %)         | (0.7         | %)         | (0.1       | %)         |
| -Line leasing income                                                                 |       | —       |       | (0.1         | %)         | (0.1       | %)         |
| Impact of PRC  preferential tax rates                                                |       | (1.5         | %)         | (2.1         | %)         | (2.2       | %)         |
| Increase in  opening deferred tax assets resulting from an increase in tax rate |       | (1.9         | %)         | (0.4         | %)         | —     |       |
| Additional  expense deductible for tax purpose                                       |       | (0.9         | %)         | —       |       | —     |       |
| Write-off of  deferred tax assets previously recognized for New Guoxin               |       | 2.5          | %          | —       |       | —     |       |
| Investment tax  credits for domestic equipment (Note e)                              |       | —       |       | (0.2         | %)         | (0.7       | %)         |
| Effective tax rate                                                                   |       | 31.2         | %          | 30.6         | %          | 30.6       | %          |

 

F-47

----

Tax effect ofpreferential tax rate was as follows:

|                                     | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Aggregate amount  (RMB in millions) |       | 97           |       | 135          |       | 155        |       |
| Per share effect (RMB)              |       | 0.008        |       | 0.011        |       | 0.012      |       |

 

(e)          For 2003, 2004 and 2005, tax credits represented investment tax credits relating tothe additions of certain domestic equipment that were deductible againstcurrent tax.

Deferred tax assets andliabilities are offset when there is a legally enforceable right to offset taxassets against tax liabilities and when the deferred income taxes relate to thesame fiscal authority. The offset amounts are as follows:

|                                                           | ** ** | **200**4     | ** ** | **200**5   | ** ** |
|-----------------------------------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Deferred tax assets:                                      |       |         |       |       |       |
| -Deferred tax  asset to be recovered after 12 months      |       | 1,338,415    |       | 1,004,323  |       |
| -Deferred tax  asset to be recovered within 12 months     |       | 606,009      |       | 737,740    |       |
|                                                      |       | 1,944,424    |       | 1,742,063  |       |
| Deferred tax  liabilities:                                |       |         |       |       |       |
| -Deferred tax  liabilities to be settled after 12 months  |       | (1,475,650   | )          | (1,278,531 | )          |
| -Deferred tax  liabilities to be settled within 12 months |       | —       |       | (128,298   | )          |
|                                                      |       | (1,475,650   | )          | (1,406,829 | )          |
| Net deferred tax assets  after offsetting:                |       | 468,774      |       | 335,234    |       |
| Deferred tax liabilities that can not be offset:          |       | (3,262       | )          | (5,613     | )          |

 

There were no material unrecognized deferredtax assets as of December 31, 2004 and 2005.

The movement on the net deferred taxassets/liabilities is as follows:

|                                                      | ** ** | **200**3     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|------------------------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                           | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| The net deferred  tax assets after offsetting :      |       |         |       |         |       |       |       |
| - Beginning of  year                                 |       | 1,886,283    |       | 1,022,108    |       | 468,774    |       |
| - Deferred tax  charged to the statements of income  |       | (864,175     | )          | (553,334     | )          | (133,540   | )          |
| - End of year                                        |       | 1,022,108    |       | 468,774      |       | 335,234    |       |
| The deferred tax  liabilities that cannot be offset: |       |         |       |         |       |       |       |
| - Beginning of  year                                 |       | —       |       | —       |       | (3,262     | )          |
| - Acquisition of  a subsidiary                       |       | —       |       | (2,090       | )          | —     |       |
| - Deferred tax  charged to the statements of income  |       | —       |       | (1,172       | )          | (2,351     | )          |
| - End of year                                        |       | —       |       | (3,262       | )          | (5,613     | )          |

 

 

F-48

----

 

Deferredtaxation as of year-end represents the taxation effect of the followingtemporary differences:

 
| ** **                                                                        | ** ** | **Note**     | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                                                                        | ** ** | **Restated** | ** ** |
| **PRC Enterprises**                                                               |       |         |       |       | ** ** | ** ** | ** ** |
| Deferred tax assets:                                                              |       |         |       |       |       |       |       |
| Interest on  loans from CCF joint ventures                                        |       | (f)          |       | 150,954    |       | 96,012     |       |
| Loss arising  from terminations of CCF Arrangements                               |       | (f)          |       | 174,637    |       | 111,003    |       |
| Provision for  impairment loss for property, plant and equipment                  |       |         |       | 4,721      |       | 4,721      |       |
| Provision for  doubtful debts                                                     |       |         |       | 526,514    |       | 399,590    |       |
| Write-down of  inventories to net realizable value                                |       |         |       | 39,103     |       | 43,780     |       |
| Accruals of  retirement benefits                                                  |       |         |       | 6,678      |       | 4,670      |       |
| Additional  depreciation deductible for tax in future years                       |       |         |       | 18,258     |       | 12,361     |       |
| Monetary housing  benefits                                                        |       |         |       | 17,171     |       | 11,784     |       |
| Differences on tax basis for the residual value of property, plant and  equipment |       |         |       | 10,045     |       | 10,045     |       |
| Net amount of  deferral and amortization of upfront non-refundable revenue        |       |         |       | 979,603    |       | 891,467    |       |
| Accruals of  expenses not yet deductible for tax purpose                          |       |         |       | —     |       | 137,279    |       |
| Others                                                                            |       |         |       | 16,740     |       | 19,351     |       |
|                                                                              |       |         |       | 1,944,424  |       | 1,742,063  |       |
| Deferred tax  liabilities                                                         |       |         |       |       |       |       |       |
| Accelerated depreciation for tax purpose                                          |       |         |       | (23,018    | )          | —     |       |
| Net amount of  capitalization and amortization of direct incremental costs        |       |         |       | (1,053,760 | )          | (925,462   | )          |
| Capitalized interest  already deducted for tax purpose                            |       |         |       | (398,872   | )          | (481,367   | )          |
|                                                                              |       |         |       | (1,475,650 | )          | (1,406,829 | )          |
|                                                                              |       |         |       |       |       |       |       |
|                                                                              |       |         |       | 468,774    |       | 335,234    |       |
| **Hong Kong Enterprises**                                                         |       |         |       |       |       |       |       |
| Deferred tax  liabilities:                                                        |       |         |       |       |       |       |       |
| Accelerated  depreciation for tax purpose                                         |       |         |       | (3,262     | )          | (5,613     | )          |

 

(f)            Prior to2000, in the process of developing its cellular networks, the GSM Business hasentered into cooperation agreements with certain contractual joint ventures(the “CJVs”) established in the PRC. Each CJV was established by one or moreChinese enterprises and one or more foreign parties. The aforementionedcooperation arrangements are referred to as the China-China-Foreign Arrangement(the “CCF Arrangements”). Pursuant to the CCF Arrangements, the CJVs haveextended funding to the GSM Business for the construction of telecommunicationssystems and 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 at the then prevailing marketborrowing rates. All CCF Arrangements had been terminated in 1999 and 2000, therelated loss on the termination of CCF Arrangements was charged to thestatements of income as incurred. Pursuant to the approval of relevant taxauthorities, all the interest costs and the loss on termination of these CCFArrangements can be deducted against current taxable income over 7 years. Theresulting deferred tax assets were recognized accordingly.

F-49

----

 

**10.  INVENTORIES**

 
| ** **      | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|-----------------|------------|-----------|------------|-----------|------------|
| Handsets        |       | 2,045,502 |       | 1,121,288 |       |
| Telephone cards |       | 832,050   |       | 592,490   |       |
| Others          |       | 237,080   |       | 394,034   |       |
|            |       | 3,114,632 |       | 2,107,812 |       |

 

The cost of inventories recognized as expense andincluded in cost of telecommunications product sold amounted to RMB3,575million (2003: RMB2,857 million; 2004: RMB2,524 million).

For the year ended December 31, 2005, thewrite-down of inventories to net realizable value amounted to RMB20 million (2003:RMB47 million; 2004: RMB69 million), which was mainly due to the decline ofmarket values of handsets. There has been no reversal of write-down ofinventories, arising from an increase in net realizable value, during the yearspresented.

F-50

----

 

**11.  ACCOUNTS RECEIVABLE, NET**

 
| ** **                                          | ** **                                                   | **200**4  | ** ** | **200**5  | ** ** |
|-----------------------------------------------------|--------------------------------------------------------------|-----------|------------|-----------|------------|
| Accounts  receivable for GSM services               |                                                         | 4,464,963 |       | 4,021,887 |       |
| Accounts  receivable for CDMA services              |                                                         | 3,448,273 |       | 2,648,504 |       |
| Accounts  receivable for Data and Internet services |                                                         | 537,418   |       | 522,579   |       |
| Accounts  receivable for Long Distance services     |                                                         | 712,833   |       | 444,010   |       |
| Sub-total                                           |                                                         | 9,163,487 |       | 7,636,980 |       |
|                                                |                                                         |      |       |      |       |
| Less:                                               | Provision for  doubtful debts for GSM services               |      | (2,521,313 | )         | (1,821,057 | ) |
|                                                | Provision for  doubtful debts for CDMA services              |      | (1,110,024 | )         | (954,185   | ) |
|                                                | Provision for  doubtful debts for Data and Internet services |      | (200,373   | )         | (83,711    | ) |
|                                                | Provision for  doubtful debts for Long Distance services     |      | (101,797   | )         | (229,598   | ) |
|                                                |                                                         |      |       |      |       |   |
|                                                |                                                         | 5,229,980 |       | 4,548,429 | )          |

 

The aging analysis of accounts receivable was asfollows:
| ** **                         | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|------------------------------------|------------|-----------|------------|-----------|------------|
| Not yet due (within credit period) |       | 3,595,337 |       | 2,884,068 |       |
| Due within three  months           |       | 1,373,240 |       | 1,062,895 |       |
| Three months to  one year          |       | 2,131,065 |       | 1,636,529 |       |
| More than one  year                |       | 2,063,845 |       | 2,053,488 |       |
|                               |       |      |       |      |       |
|                               |       | 9,163,487 |       | 7,636,980 |       |

 

The normal credit periodgranted by the Group is on average 30 days from the date of invoice.

There is no concentrationof credit risk with respect to individual customers’ receivables, as the Grouphas a large number of customers.

Provision for doubtfuldebts was analyzed as follows:
| ** **                           | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| Balance,  beginning of year          |       | 3,488,959  |       | 3,933,507  |       |
| Provision for  the year              |       | 2,191,820  |       | 1,498,510  |       |
| Acquisition of  Unicom International |       | 9,306      |       | -          |       |
| Written-off  during the year         |       | (1,756,578 | )          | (2,343,466 | )          |
|                                 |       |       |       |       |       |
| Balance, end of year                 |       | 3,933,507  |       | 3,088,551  |       |

 

F-51

----

 

**12.  PREPAYMENTS AND OTHER CURRENT ASSETS**

 
| ** **                                                  | ** ** | **Note** | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|-------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
| Prepaid rental                                              |       |     |       | 277,999   |       | 322,243   |       |
| Deposits and  prepayments                                   |       |     |       | 1,334,220 |       | 973,698   |       |
| Interest  receivable                                        |       |     |       | 1,414     |       | 1,880     |       |
| Advances to  employees                                      |       |     |       | 164,386   |       | 163,838   |       |
| Customer  acquisition costs of contractual CDMA subscribers |       | (a)      |       | 860,225   |       | 527,577   |       |
| Others                                                      |       |     |       | 421,470   |       | 353,231   |       |
|                                                        |       |     |       |      |       |      |       |
|                                                        |       |     |       | 3,059,714 |       | 2,342,467 |       |

 

The aging analysis of prepayments and other current assetswasas follows:

 
| ** **      | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|-----------------|------------|-----------|------------|-----------|------------|
| Within one year |       | 2,855,331 |       | 2,249,097 |       |
| Over one year   |       | 204,383   |       | 93,370    |       |
|            |       |      |       |      |       |
|            |       | 3,059,714 |       | 2,342,467 |       |

 

Note

(a)  For the year ended December 31, 2005,amortization of customer acquisition costs of contractual CDMA subscribersamounted to approximately RMB5,948 million (2003: RMB5,837 million; 2004:RMB6,121 million), which was recorded in “selling and marketing” expenses. Asof December 31, 2005, the carrying amount of unamortized customeracquisition costs of contractual CDMA subscribers totalled approximatelyRMB2,944 million (2004: RMB4,745 million), with approximately RMB528 million(2004: RMB860 million) recorded in “prepayment and other current assets” (forcontracts expiring within 1 year) and approximately RMB2,416 million (2004:RMB3,885 million) recorded in “other assets” (for contracts expiring over 1year) (Note 8).

**13.  BANK BALANCES AND CASH**
| ** **                 | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|----------------------------|------------|-----------|------------|-----------|------------|
| Cash and cash  equivalents |       | 4,629,553 |       | 5,471,576 |       |
| Restricted bank  deposits  |       | 25,911    |       | —    |       |
|                       |       |      |       |      |       |
|                       |       | 4,655,464 |       | 5,471,576 |       |

 

The effective interest rate on cash and cash equivalents ranges from0.72% to 4.32 % (2003: from 0.72% to 1.69%; 2004: from 0.72% to 2.63%); thebank deposits have an average maturity of 45 days.

As of December 31, 2005, no bank balances(2003: RMB50 million; 2004: RMB26 million) was restricted by the bank to securelong-term bank loans.

F-52

----

 

**14.  SHARE CAPITAL**
| ** **                                    | ** ** | **200**4         | ** ** | **200**5         | ** ** |
|-----------------------------------------------|------------|------------------|------------|------------------|------------|
|                                          |       | **HK$’000** | ** ** | **HK$’000** |       |
| Authorized:                                   |       |             |       |             |       |
| 30,000,000,000 ordinary shares of HK$0.1 each |       | 3,000,000        |       | 3,000,000        |       |

 
| ** **                                  | ** ** | **Number of   shares  (’000)** | ** ** | **Ordinary  shares  (HK$’000)** | ** ** | **Share  capital  (RMB’000  equivalent)** | ** ** | **Share  premium** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|--------------------|------------|------------|------------|
| **At January ****1, 2004**             |       | 12,553,172                                    |       | 1,255,317                            |       | 1,331,390                                      |       | 52,483,266         |       | 53,814,656 |       |
| Employee share option scheme           |       |                                          |       |                                 |       |                                           |       |               |       |       |       |
| –proceeds from  shares issued(Note 28) |       | 10,320                                        |       | 1,032                                |       | 1,097                                          |       | 63,028             |       | 64,125     |       |
|                                        |       |                                          |       |                                 |       |                                           |       |               |       |       |       |
| **At December ****31, 2004**           |       | 12,563,492                                    |       | 1,256,349                            |       | 1,332,487                                      |       | 52,546,294         |       | 53,878,781 |       |
| Employee share option  scheme               |       |                                          |       |                                 |       |                                           |       |               |       |       |       |
| –proceeds from  shares issued(Note 28) |       | 10,773                                        |       | 1,077                                |       | 1,134                                          |       | 54,720             |       | 55,854     |       |
| **At December ****31, 2005**           |       | 12,574,265                                    |       | 1,257,426                            |       | 1,333,621                                      |       | 52,601,014         |       | 53,934,635 |       |

 

The total authorized number of ordinary shares is30 billion ordinary shares (2004: 30 billion ordinary shares) with a par valueof HK$0.10 per share (2004: HK$0.10 per share). All issued shares are fullypaid.

Increase of 10,773,200 ordinary shares in year 2005 (2004: 10,320,000)represented the ordinary shares issued under the share option scheme (Note28(g)).

F-53

----

 

**15.  LONG-TERM BANK LOANS**
| ** **                 | ** ** | **Interest rates and final maturity**                                                                                                                              | ** ** | **200**4    | ** ** | **200**5   | ** ** |
|----------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
|                       |       |                                                                                                                                                                                   |       |        |       |       |       |
| RMB denominated bank loans |       | Fixed  interest rate ranging from 3.60% to 5.58%  (2004: 4.78% to 5.73%) per annum with maturity through 2010 (2004: maturity through 2010) (Note(a))                                  |       |        |       |       |       |
| - secured                  |       |                                                                                                                                                                                   |       | 6,804,566   |       | 755,000    |       |
| - unsecured                |       |                                                                                                                                                                                   |       | 20,487,127  |       | 6,687,468  |       |
|                       |       |                                                                                                                                                                                   |       |        |       |       |       |
|                       |       |                                                                                                                                                                                   |       | 27,291,693  |       | 7,442,468  |       |
|                       |       |                                                                                                                                                                                   |       |        |       |       |       |
| USD denominated bank oans  |       | Floating  interest rate of USD LIBOR plus interest margin of 0.28% to 0.44% (2004: 0.28% to  0.44%) per annum with maturity through 2010 (2004: maturity through 2010) (Note (b)) |       | 9,931,800   |       | 9,684,240  |       |
|                       |       |                                                                                                                                                                                   |       |        |       |       |       |
| Less: Current portion      |       |                                                                                                                                                                                   |       | (11,086,305 | )          | (5,145,190 | )          |
|                       |       |                                                                                                                                                                                   |       |        |       |       |       |
|                       |       |                                                                                                                                                                                   |       | 26,137,188  |       | 11,981,518 |       |

 

The repayment schedule of the long-term bank loans is as follows:

 
| ** **                                           | ** ** | **200**4    | ** ** | **200**5   | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------|------------|
|                                                 | ** ** | ** **  |       |       |       |
| Balances due:                                        |       |        |       |       |       |
| - not later than one year                            |       | 11,086,305  |       | 5,145,190  |       |
| - later than one year and not later than two years   |       | 10,226,776  |       | 9,639,408  |       |
| - later than two years and not later than five years |       | 14,092,792  |       | 2,342,110  |       |
| - thereafter                                         |       | 1,817,620   |       | —     |       |
|                                                 |       |        |       |       |       |
|                                                 |       | 37,223,493  |       | 17,126,708 |       |
| Less: Portion  classified as current liabilities     |       | (11,086,305 | )          | (5,145,190 | )          |
|                                                 |       |        |       |       |       |
|                                                 |       | 26,137,188  |       | 11,981,518 |       |

 

F-54

----

 

Notes

(a)           As of December 31,2005, long-term bank loans of the Group denominated in RMB were secured by thefollowing:
|        | (i)    | Approximately RMB755  million (2004: RMB6,805 million) of long-term bank loans were collateralized  by the future service fee revenue to be generated by the cellular business of  the relevant branches. No long-term bank loans were guaranteed by Unicom  Group (2004: RMB2,824 million); |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                         |
|   | (ii)   | There were no long-term  bank loans which had collateral comprising of restricted bank deposits (2004:  RMB26 million).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                         |

(b)         On September 26, 2003, the Company signed an agreement with 13 financialinstitutions for a long-term syndicated loan of USD0.7 billion. This facilitywas split into 3 tranches (i) USD0.2 billion 3-year loan; (ii) USD0.3billion 5-year loan; and (iii) USD0.2 billion 7-year loan andcarried an interest rate of 0.28%, 0.35% and 0.44% over US dollar LIBOR perannum for each tranche respectively. In October 2003, the Company and CUCLentered into an agreement, under which the Company lent the proceeds from thebank loans to CUCL with similar terms to finance the network construction ofCUCL.

In addition, on February 25, 2004, CUCL signed an agreement withvarious financial institutions for a long-term syndicated loan of USD0.5billion to finance working capital and network construction expenditure. Thisfacility was repayable in 3 years and carried an interest rate of 0.40% over USdollar LIBOR per annum.

(c)           The carrying amounts of long-termbank loans approximate their fair value.

F-55

----

 

**16****.****  OBLIGATIONS UNDER FINANCE LEASES**

Obligations under finance leases were analyzed as follows:
| ** **                                              | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|
| * *                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total minimum lease payments under finance  leases:     |       |       |       |       |       |
| - not later than one year                               |       | 938,189    |       | 443,400    |       |
| - later than one year and not later than two years      |       | 405,453    |       | 152,058    |       |
| - later than two years and not later than five years    |       | 74,078     |       | 875        |       |
| - later than five years                                 |       | 137,104    |       | —     |       |
|                                                    |       |       |       |       |       |
|                                                    |       | 1,554,824  |       | 596,333    |       |
| Less: Future finance charges                            |       | (127,679   | )          | (30,335    | )          |
|                                                    |       |       |       |       |       |
| Present value of minimum obligations                    |       | 1,427,145  |       | 565,998    |       |
|                                                    |       |       |       |       |       |
| Representing obligations under finance  leases:         |       |       |       |       |       |
| - current liabilities                                   |       | 938,189    |       | 420,631    |       |
| - non-current liabilities                               |       | 488,956    |       | 145,367    |       |
|                                                    |       |       |       |       |       |
| The present value of obligations under  finance leases: |       |       |       |       |       |
| - not later than one year                               |       | 938,189    |       | 420,631    |       |
| - later than one year and not later than two years      |       | 358,850    |       | 144,541    |       |
| - later than two years and not later than five years    |       | 60,692     |       | 826        |       |
| - later than five years                                 |       | 69,414     |       | —     |       |
|                                                    |       |       |       |       |       |
|                                                    |       | 1,427,145  |       | 565,998    |       |
| Less: Portion classified as current  liabilities        |       | (938,189   | )          | (420,631   | )          |
|                                                    |       |       |       |       |       |
|                                                    |       | 488,956    |       | 145,367    |       |

 

Obligations under finance leases were mainlyrelated to wireless public phone equipment (Note 6).

For 2003, 2004 and 2005, interest rates of obligations under financeleases ranged from 4% to 6% per annum.

The carrying amounts of obligations under finance leases approximatetheir fair value.

F-56

----

 

**17.  PAYABLES AND ACCRUED LIABILITIES**

 
| ** **                                           | ** ** | **Note**   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                 |       |       |       | ** ** |       | ** ** | ** ** |
| Payables to  contractors and equipment suppliers     |       |       |       | 10,592,518 |       | 11,156,462 |       |
| Accrued expenses                                     |       |       |       | 1,315,417  |       | 1,835,353  |       |
| Payables to  telecommunications products suppliers   |       |       |       | 1,772,693  |       | 1,372,853  |       |
| Customer  deposits                                   |       |       |       | 1,370,015  |       | 1,456,601  |       |
| Salary and  welfare payables                         |       |       |       | 465,154    |       | 464,372    |       |
| Amounts due to  Services Provider / Content Provider |       |       |       | 573,804    |       | 716,180    |       |
| Provision for  subscriber points expenses            |       | 4.**1**(d) |       | 39,766     |       | 337,414    |       |
| Maintenance  expense payable                         |       |       |       | 138,301    |       | 542,540    |       |
| Other                                                |       | (a)        |       | 518,081    |       | 644,853    |       |
|                                                 |       |       |       |       |       |       |       |
|                                                 |       |       |       | 16,785,749 |       | 18,526,628 |       |

----

(a)             Otherincluded miscellaneous accruals for housing fund and other governmentsurcharges.

The aging analysis of payables and accrued liabilities wasas follows:

 
| ** **              | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|
|                    | ** ** | ** ** |       | ** ** | ** ** |
| Less than six  months   |       | 13,343,784 |       | 11,260,366 |       |
| Six months to  one year |       | 2,257,802  |       | 4,766,400  |       |
| More than one  year     |       | 1,184,163  |       | 2,499,862  |       |
|                    |       |       |       |       |       |
|                    |       | 16,785,749 |       | 18,526,628 |       |

** **

**18.  SHORT-TERM BONDS**

On July 19, 2005, CUCLcompleted an offering of short-term bonds, consisting of two tranches, in thePRC interbank debenture market. The first tranche of the bonds was issued foran aggregate amount of RMB9.0 billion with a maturity period of 365 days. Thesecond tranche of the bonds was issued for an aggregate amount of RMB1.0billion with a maturity period of 180 days. The effective interest rate as of December 31, 2005 was 2.89%.

F-57

----

 

**19.  SHORT-TERM BANK LOANS**

Supplemental informationwith respect to short-term bank loans was as follows:
| ** **                            | ** ** | ** **          | ** ** | ** **                | ** ** | ** **                    | ** ** | **Average**         | ** ** | ** **                      | ** ** |
|---------------------------------------|------------|---------------------|------------|---------------------------|------------|-------------------------------|------------|---------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | ** **          | ** ** | **Weighted**              | ** ** | **Maximum**                   | ** ** | **amount**          | ** ** | ** **                      | ** ** |
| ** **                            | ** ** | ** **          | ** ** | **average**               | ** ** | **amount**                    | ** ** | **outstanding**     | ** ** | **Weighted average**       | ** ** |
| ** **                            | ** ** | **Balance at** | ** ** | **interest rate**    | ** ** | **outstanding**               | ** ** | **during the** | ** ** | **interest rate**          | ** ** |
| ** **                            | ** ** | **year end**   | ** ** | **at year end** | ** ** | **during the year** | ** ** | **year***           | ** ** | **during the year**** | ** ** |
| ** **                            | ** ** | ** **          | ** ** | **per annum**             | ** ** | ** **                    | ** ** | ** **          | ** ** | **per annum**                   | ** ** |
|                                  |       |                |       |                      |       |                          |       |                |       |                            |       |
| December 31, 2004                |       |                |       |                      |       |                          |       |                |       |                            |       |
| RMB denominated bank loans (Note (a)) |       |                |       |                      |       |                          |       |                |       |                            |       |
| - secured                             |       | 100,000             |       |                      |       |                          |       |                |       |                            |       |
| - unsecured                           |       | 8,131,431           |       |                      |       |                          |       |                |       |                            |       |
|                                  |       | 8,231,431           |       | 4.86                      | %          | 10,975,199                    |       | 9,603,315           |       | 5.06                            | %          |
|                                  |       |                |       |                      |       |                          |       |                |       |                            |       |
| HK$ denominated  bank loans      |       |                |       |                      |       |                          |       |                |       |                            |       |
| - unsecured (Note (b))                |       | 696,986             |       | 0.90                      | %          | 696,986                       |       | 348,493             |       | 1.08                            | %          |
|                                  |       | 8,928,417           |       |                      |       |                          |       |                |       |                            |       |
|                                  |       |                |       |                      |       |                          |       |                |       |                            |       |
| December 31, 2005                |       |                |       |                      |       |                          |       |                |       |                            |       |
| RMB denominated bank loans (Note (a)) |       |                |       |                      |       |                          |       |                |       |                            |       |
| - secured                             |       | 1,000,000           |       |                      |       |                          |       |                |       |                            |       |
| - unsecured                           |       | 4,302,661           |       |                      |       |                          |       |                |       |                            |       |
|                                  |       | 5,302,661           |       | 4.86                      | %          | 10,046,495                    |       | 6,767,046           |       | 4.86                            | %          |
|                                  |       |                |       |                      |       |                          |       |                |       |                            |       |
| HK$ denominated  bank loans      |       |                |       |                      |       |                          |       |                |       |                            |       |
| - unsecured (Note (b))                |       | 1,721,697           |       | 3.10                      | %          | 1,761,748                     |       | 1,209,342           |       | 2.00                            | %          |
|                                  |       | 7,024,358           |       |                      |       |                          |       |                |       |                            |       |

----

*                 Theaverage amount outstanding was computed by dividing the total of outstandingbalance as of January 1 and December 31, asapplicable, by 2.

**          Theweighted average interest rate is computed by dividing the total of weightedaverage interest rates as of January 1 and December 31, asapplicable, by 2.

Notes

(a)          Asof December 31, 2005, there were no short-term bank loansguaranteed by Unicom Group (2004: RMB3,397 million).

As of December 31, 2005, therewere no short-term bank loans secured by future service fee revenue to begenerated by the cellular business (2004: RMB100 million).

As of December 31, 2005,approximately RMB1,000 million (2004: Nil) of short-term loan was borrowed fromZhonghai Trust Investment Co., Ltd., and guaranteed by Industrial andCommercial Bank of China Beijing branch to finance working capital of theGroup. The loan will be repayable in 1 year and carries an interest rate of4.30% per annum.

(b)         Asof December 31, 2005, HK$ denominated short-term bankloans of the Group of approximately HK$1,655 million (equivalentto approximatedRMB1,722 million) (2004: HK$655 million, equivalent to approximated RMB697 million)were borrowed to finance the working capital of the Group. The bank loans wererepayable in 1 year and carried aninterest rate of 0.22% to 0.25%(2004:0.22%) over HIBOR per annum.

(c)          Thecarrying amounts of short-term loans approximate their fair value.

F-58

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**20.  INVESTMENT IN SUBSIDIARIES**

As of December 31, 2005, the details of the Company’s subsidiaries were asfollows:

 
| ** **                                                                                                                                     | ** ** | ** **                                                                       | ** ** | **Percentage of**    | ** ** | ** **             | ** ** | ** **  |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|-------------|
| ** **                                                                                                                                     | ** ** | **Place and date of**                                             | ** ** | **equity interests** | ** ** | **Particular of** | ** ** | ** **  |
| ** **                                                                                                                                     | ** ** | **incorporation** and                                                       | ** ** | **held**                  | ** ** | **issued share**  | ** ** | ** **  |
| **Name**                                                                                                                                       | ** ** | **legal entity**                                                            | ** ** | **Direct**                | ** ** | **Indirect**           | ** ** | **capital** | ** ** | **Principal activities** |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| China Unicom Corporation Limited(On  September 1, 2005, CUCL  combined with Unicom New World, and Unicom New World was legally dissolved) |       | The PRC,  April 21, 2000,  limited liability  company                       |       | 100.00%                   |       | —                 |       | 47,425,763  |   | Telecommunications  operation |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| Unicom New Century (BVI) Limited                                                                                                               |       | British Virgin Islands,  October 23, 2002,  limited liability  company |       | 100.00%                   |       | —                 |       | 12          |   | Investment holding |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| Unicom New World (BVI) Limited                                                                                                                 |       | British Virgin Islands,  November 5, 2003,  limited liability  company      |       | 100.00%                   |       | —                 |       | 1           |   | Investment holding |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| China Unicom International Limited                                                                                                             |       | Hong Kong,  May 24, 2000,limited liability  company                         |       | 100.00%                   |       | —                 |       | 106         |   | Telecommunications  service |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| China Unicom USA Co.                                                                                                                           |       | USA,  May 24, 2002,  corporation                                            |       | —                    |       | 100%                   |       | 83          |   | Telecommunications  service |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| China Unicom (Macau) Company Limited                                                                                                           |       | Macau,  October 15, 2004,  limited liability  company                       |       | 99.00%                    |       | 1.00%                  |       | 60,894      |   | Telecommunications  operation |
|                                                                                                                                           |       |                                                                             |       |                      |       |                   |       |        |   |   |
| Unicom Huasheng Telecommunications Technology  Company Limited                                                                                 |       | The PRC,  July 1, 2005,limited liability  company                           |       | —                    |       | 95.00%                 |       | 50,000      |   | Telecommunication  products sales |

 

F-59

----

 

**21.  REVENUE (TURNOVER)**

Revenue primarilycomprises usage fees, monthly fees, interconnection revenue, rental income fromleased lines and IRU, and sales of telecommunications products earned by theGroup from GSM, CDMA, data, Internet, long distance and Paging. Tariffs forthese services are subject to regulations by various government authorities,including the State Development and Reform Commission, the Ministry ofInformation Industry (“MII”) and the provincial price regulatory authorities.

Revenue is presented netof business tax and government surcharges. Relevant business tax and governmentsurcharges amounted to RMB2,166 million for the year ended December 31, 2005 (2003: RMB1,793million; 2004: RMB2,051 million).

The major components ofrevenue are as follows:

 
| ** **                              | ** ** | **Note**      | ** ** | **2003**     | ** ** | **2004**     | ** ** | **200**5   | ** ** |
|-----------------------------------------|------------|---------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                              | ** ** | ** **    | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **GSM  Business**                       |       |          |       |         |       |         |       |       |       |
| Usage fee                               |       | (a) (i)  |       | 29,072,249   |       | 31,997,020   |       | 32,077,305 |       |
| Monthly fee                             |       | (b)           |       | 7,042,299    |       | 6,922,400    |       | 6,840,720  |       |
| Interconnection revenue                 |       | (c)           |       | 1,926,907    |       | 2,614,268    |       | 3,466,067  |       |
| Other revenue                           |       | (e)           |       | 3,111,326    |       | 5,975,264    |       | 9,751,436  |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Total GSM service revenue               |       |          |       | 41,152,781   |       | 47,508,952   |       | 52,135,528 |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **CDMA  Business**                      |       |          |       |         |       |         |       |       |       |
| Usage fee                               |       | (a) (i)  |       | 11,671,523   |       | 16,164,333   |       | 16,726,678 |       |
| Monthly fee                             |       | (b)           |       | 3,488,411    |       | 4,638,024    |       | 4,905,538  |       |
| Interconnection revenue                 |       | (c)           |       | 607,830      |       | 927,288      |       | 1,398,577  |       |
| Other revenue                           |       | (e)           |       | 898,746      |       | 2,648,029    |       | 4,546,143  |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Total CDMA service revenue              |       |          |       | 16,666,510   |       | 24,377,674   |       | 27,576,936 |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **Data  and Internet Business**         |       |          |       |         |       |         |       |       |       |
| Usage fee                               |       | (a) (ii) |       | 2,443,610    |       | 2,685,083    |       | 2,540,574  |       |
| Monthly fee                             |       | (b)           |       | 9,085        |       | -            |       | -          |       |
| Interconnection revenue                 |       | (c)           |       | 361,514      |       | 131,371      |       | 102,989    |       |
| Rental income                           |       | (d)           |       | 420,433      |       | 344,014      |       | 393,659    |       |
| Other revenue                           |       | (e)           |       | 202,441      |       | 502,266      |       | 12,745     |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Total Data and Internet service revenue |       |          |       | 3,437,083    |       | 3,662,734    |       | 3,049,967  |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **Long  Distance Business**             |       |          |       |         |       |         |       |       |       |
| Usage fee                               |       | (a)(ii)       |       | 1,148,040    |       | 879,281      |       | 599,251    |       |
| Interconnection revenue                 |       | (c)           |       | 365,724      |       | 454,383      |       | 434,577    |       |
| Rental income                           |       | (d)           |       | 701,549      |       | 512,134      |       | 489,969    |       |
| Other revenue                           |       | (e)           |       | 57,835       |       | 2,211        |       | 776        |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Total Long Distance service revenue     |       |          |       | 2,273,148    |       | 1,848,009    |       | 1,524,573  |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **Paging  Business**                    |       |          |       |         |       |         |       |       |       |
| Monthly fee                             |       | (b)           |       | 612,999      |       | —       |       | —     |       |
| Interconnection revenue                 |       | (c)           |       | 1,654        |       | —       |       | —     |       |
| Other revenue                           |       | (e)           |       | 788,400      |       | —       |       | —     |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Total Paging revenue                    |       |          |       | 1,403,053    |       | —       |       | —     |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **Total  service revenue**              |       |          |       | 64,932,575   |       | 77,397,369   |       | 84,287,004 |       |
|                                    |       |          |       |         |       |         |       |       |       |
| Sales of telecommunications products    |       |          |       | 2,221,263    |       | 1,689,755    |       | 2,761,827  |       |
|                                    |       |          |       |         |       |         |       |       |       |
| **Total  revenue**                      |       |          |       | 67,153,838   |       | 79,087,124   |       | 87,048,831 |       |

 

F-60

----

Notes

(a)   Usage fees comprise:

(i)             charges forincoming and outgoing calls made by cellular subscribers including charges forlocal calls, domestic directdial (“DDD”)and international direct dial (“IDD”) as well as roaming fees for calls made bycellular subscribers outsidetheir localservice areas; and

(ii)          charges forIP telephone calls, data and Internet services and fixed line long distancecalls.

(b)       Monthly feesrepresent fixed amounts charged to cellular, data, Internet and paging subscribers on a monthly basis formaintaining their access to the related services.

(c)        Interconnectionrevenue represents amounts received from other operators, including UnicomGroup, for calls from their networks to the Group’s networks. It also includesroaming-in fees received from other operators, including Unicom Group, forcalls made by their subscribers using the Group’s cellular networks (Notes 32.1(a) and32.2(a)).

(d)       Rentalincome represents rentals received for leasing of transmission lines and IRU toUnicom Group, business customers or other Domestic Carriers in the PRC.

(e)        Otherrevenue mainly represents revenue from the provision of value-added servicessuch as short message, CDMA1X wireless data services and secretarial servicesto subscribers.

F-61

----

**22.  EXPENSES BY NATURE**

The following expenses are analyzed by nature:
| ** **                                                                    | ** ** | **Note**   | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                                                    | ** ** | ** ** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **After****charging/(****crediting):**                                        |       |       |       |         |       |         |       |       |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Depreciation:                                                                 |       |       |       |         |       |         |       |       |       |
| — Assets held under  finance leases                                      |       |       |       | 12,154       |       | 111,473      |       | 187,733    |       |
| — Other fixed assets                                                     |       |       |       | 15,936,340   |       | 18,064,132   |       | 19,743,768 |       |
|  Total depreciation                                                      |       | 2.2(a), 6  |       | 15,948,494   |       | 18,175,605   |       | 19,931,501 |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Amortization:                                                                 |       |       |       |         |       |         |       |       |       |
| — Goodwill                                                               |       | 2.2(c), 7  |       | 115,260      |       | 171,184      |       | —     |       |
| —  Other amortization                                                    |       | 8          |       | 294,762      |       | 664,285      |       | 436,680    |       |
|  Total amortization                                                      |       |       |       | 410,022      |       | 835,469      |       | 436,680    |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Amortization of direct incremental costs for activating cellular  subscribers |       | 2.2(d)     |       | 811,466      |       | 936,105      |       | 1,582,282  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Amortization of customer acquisition costs of contractual CDMA  subscribers   |       | 12(a)      |       | 5,836,587    |       | 6,120,737    |       | 5,947,631  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Provision for doubtful debts:                                                 |       |       |       |         |       |         |       |       |       |
| — GSM Business                                                           |       |       |       | 1,116,523    |       | 1,317,374    |       | 867,154    |       |
| — CDMA Business                                                          |       |       |       | 397,810      |       | 645,470      |       | 458,161    |       |
| — Data and Internet Business                                             |       |       |       | 125,676      |       | 164,514      |       | 139,327    |       |
| — Long Distance Business                                                 |       |       |       | 75,870       |       | 64,462       |       | 33,868     |       |
| — Paging Business                                                        |       |       |       | 34,008       |       | —       |       | —     |       |
|  Total provision for doubtful debts                                      |       | 11         |       | 1,749,887    |       | 2,191,820    |       | 1,498,510  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Write-down of inventories to net realizable value                             |       |       |       | 47,101       |       | 69,475       |       | 20,392     |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Employee benefit  expenses                                                    |       | 23         |       | 4,596,253    |       | 4,615,057    |       | 5,616,312  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Cost of inventories                                                           |       | 10         |       | 2,857,138    |       | 2,524,483    |       | 3,575,316  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Auditors’ remuneration                                                   |       |       |       | 54,003       |       | 57,522       |       | 59,884     |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Operating lease expense:                                                      |       |       |       |         |       |         |       |       |       |
| — Leased lines                                                           |       |       |       | 805,018      |       | 809,202      |       | 822,673    |       |
| — CDMA network capacities                                                |       | 4.2(b)     |       | 3,515,364    |       | 6,588,926    |       | 7,924,644  |       |
| — Lease of land                                                          |       | 2.2(a)     |       | 26,777       |       | 26,000       |       | 28,403     |       |
| — Other lease expense                                                    |       |       |       | 882,671      |       | 1,042,020    |       | 1,129,115  |       |
|  Total operating lease expense                                           |       |       |       | 5,229,830    |       | 8,466,148    |       | 9,904,835  |       |
|                                                                          |       |       |       |         |       |         |       |       |       |
| Other expenses:                                                               |       |       |       |         |       |         |       |       |       |
| — Repair and maintenance                                                 |       |       |       | 1,387,466    |       | 1,648,986    |       | 2,397,501  |       |
| — Traveling,  entertainment and meeting                                  |       |       |       | 1,242,166    |       | 1,322,438    |       | 663,774    |       |
| — Power and water charges                                                |       |       |       | 1,313,099    |       | 1,763,766    |       | 2,219,480  |       |
| — Office expenses                                                        |       |       |       | 749,080      |       | 706,892      |       | 986,502    |       |

 

F-62

----

 

**23.  EMPLOYEE BENEFIT EXPENSES**
| ** **                                                                | ** ** | **Note**   | ** ** | **2003**     | ** ** | **2004**     | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|--------------|------------|--------------|------------|------------|------------|
| ** **                                                                | ** ** | ** ** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
|                                                                      |       |       |       | ** **   |       | ** **   |       | ** ** | ** ** |
| Salaries and wages                                                        |       |       |       | 3,676,168    |       | 3,647,629    |       | 4,268,004  |       |
| Contributions to defined contribution pension schemes                     |       | 24         |       | 273,182      |       | 244,397      |       | 412,825    |       |
| Contributions to supplementary defined contribution pension schemes  |       | 24         |       | 39,854       |       | 41,596       |       | 58,222     |       |
| Special monetary housing benefits                                         |       | 25         |       | 109,210      |       | 21,907       |       | 41,136     |       |
| Contributions to other housing fund                                       |       | 25         |       | 170,614      |       | 224,686      |       | 280,393    |       |
| Other housing benefits                                                    |       | 25         |       | 305,518      |       | 345,885      |       | 447,315    |       |
| Share-based compensation costs                                            |       | 2.2(b)     |       | 21,707       |       | 88,957       |       | 108,417    |       |
|                                                                      |       |       |       |         |       |         |       |       |       |
|                                                                      |       |       |       | 4,596,253    |       | 4,615,057    |       | 5,616,312  |       |

 

**23.1        Directors’ and senior management’s emoluments**

The remuneration of every Director for the yearended December 31, 2003 is set out below:
| **Name of Director** | ** ** | **Note** | ** ** | **Fees** | ** ** | **Salary and  allowances** | ** ** | **Bonuses  paid and  payable** | ** ** | **Other  benefits(a)** | ** ** | **Contributions  to pension  schemes** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                           |       |     |       |     |       |                            |       |                                |       |                   |       |                                        |       |      |       |
| Yang Xianzu                    |       | (b)      |       | —   |       | 1,700                           |       | 5,384                               |       | —                 |       | 29                                          |       | 7,113     |       |
| Wang Jianzhou                  |       | (c)      |       | —   |       | 2,338                           |       | 1,488                               |       | —                 |       | 41                                          |       | 3,867     |       |
| Shi Cuiming                    |       | (d)      |       | —   |       | 1,806                           |       | 1,116                               |       | —                 |       | 13                                          |       | 2,935     |       |
| Lo Wing Yan,  William          |       |     |       | —   |       | 2,072                           |       | 850                                 |       | —                 |       | 13                                          |       | 2,935     |       |
| Ye Fengping                    |       |     |       | —   |       | 1,435                           |       | 850                                 |       | —                 |       | 10                                          |       | 2,295     |       |
| Ge Lei                         |       | (e)      |       | 319      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Lee Hon Chiu                   |       | (f)      |       | 319      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Wu Jinglian                    |       |     |       | 319      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Craig O.McCaw                  |       | (g)      |       | 319      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Shan Weijian                   |       |     |       | 319      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Total                          |       |     |       | 1,595    |       | 9,351                           |       | 9,688                               |       | —                 |       | 106                                         |       | 20,740    |       |

 

F-63

----

The remuneration of every Director for the yearended December 31, 2004 is set out below:
| **Name of Director** | ** ** | **Note** | ** ** | **Fees** | ** ** | **Salary and  allowance** | ** ** | **Bonuses  paid and  payable** | ** ** | **Other  benefits(a)** | ** ** | **Contributions  to pension  schemes** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|--------------------------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|-----------|------------|
|                           |       |     |       |     |       |                           |       |                                |       |                   |       |                                        |       |      |       |
| Chang Xiaobing                 |       | (h)      |       | —   |       | 76                             |       | —                              |       | —                 |       | 1                                           |       | 77        |       |
| Shang Bing                     |       | (i)      |       | —   |       | 347                            |       | 201                                 |       | —                 |       | 5                                           |       | 553       |       |
| Tong Jilu                      |       | (j)      |       | —   |       | 1,655                          |       | 879                                 |       | —                 |       | 28                                          |       | 2,562     |       |
| Zhao Le                        |       | (k)      |       | —   |       | 1,316                          |       | 668                                 |       | —                 |       | 12                                          |       | 1,996     |       |
| Lo Wing Yan,  William          |       |     |       | —   |       | 2,105                          |       | 274                                 |       | —                 |       | 13                                          |       | 2,392     |       |
| Ye Fengping                    |       |     |       | —   |       | 1,434                          |       | 730                                 |       | —                 |       | 13                                          |       | 2,177     |       |
| Wang Jianzhou                  |       | (c)      |       | —   |       | 2,160                          |       | —                              |       | —                 |       | 54                                          |       | 2,214     |       |
| Shi Cuiming                    |       | (d)      |       | —   |       | 150                            |       | 2,921                               |       | —                 |       | 2                                           |       | 3,073     |       |
| Ge Lei                         |       | (e)      |       | 27       |       | —                         |       | —                              |       | —                 |       | —                                      |       | 27        |       |
| Liu Yunjie                     |       | (l)      |       | 292      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 292       |       |
| Craig O.McCaw                  |       | (g)      |       | 319      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Lee Hon Chiu                   |       | (f)      |       | 116      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 116       |       |
| Wu Jinglian                    |       |     |       | 319      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Shan Weijian                   |       |     |       | 319      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 319       |       |
| Cheung Wing Lam  Linus         |       | (m)      |       | 203      |       | —                         |       | —                              |       | —                 |       | —                                      |       | 203       |       |
| Total                          |       |     |       | 1,595    |       | 9,243                          |       | 5,673                               |       | —                 |       | 128                                         |       | 16,639    |       |

 

The remuneration of every Director for the yearended December 31, 2005 is set out below:
| **Name of Director** | ** ** | **Note** | ** ** | **Fees** | ** ** | **Salary and  allowances** | ** ** | **Bonuses  paid and  payable** | ** ** | **Other  benefits(a)** | ** ** | **Contributions  to pension  schemes** | ** ** | **Total**  | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|---------------------------------|------------|-------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|------------|------------|
|                           |       |     |       |     |       |                            |       |                                | ** ** | ** **             | ** ** | ** **                                  | ** ** | ** ** | ** ** |
| Chang Xiaobing                 |       | (h)      |       | —   |       | 2,525                           |       | 1,669                               |       | —                 |       | 19                                          |       | 4,213      |       |
| Shang Bing                     |       | (i)      |       | —   |       | 2,209                           |       | 1,285                               |       | —                 |       | 19                                          |       | 3,513      |       |
| Tong Jilu                      |       | (j)      |       | —   |       | 1,788                           |       | 1,038                               |       | —                 |       | 19                                          |       | 2,845      |       |
| Li Qiuhong                     |       | (n)      |       | —   |       | 672                             |       | 335                                 |       | —                 |       | 6                                           |       | 1,013      |       |
| Zhao Le                        |       | (k)      |       | —   |       | 809                             |       | 410                                 |       | —                 |       | 7                                           |       | 1,226      |       |
| Lo Wing Yan,  William          |       |     |       | —   |       | 2,074                           |       | 277                                 |       | 513                    |       | 13                                          |       | 2,877      |       |
| Ye Fengping                    |       |     |       | —   |       | 1,420                           |       | 712                                 |       | —                 |       | 13                                          |       | 2,145      |       |
| Liu Yunjie                     |       | (l)      |       | 316      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 316        |       |
| Craig O.McCaw                  |       | (g)      |       | 114      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 114        |       |
| Wu Jinglian                    |       |     |       | 316      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 316        |       |
| Shan Weijian                   |       |     |       | 316      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 316        |       |
| Cheung Wing Lam  Linus         |       | (m)      |       | 316      |       | —                          |       | —                              |       | —                 |       | —                                      |       | 316        |       |
| Total                          |       |     |       | 1,378    |       | 11,497                          |       | 5,726                               |       | 513                    |       | 96                                          |       | 19,210     |       |

----

Notes

(a)             Other benefits include the benefits relatedto share options;

(b)            Mr. Yang Xianzu resigned as chairman onAugust 28, 2003;

(c)             Mr. Wang Jianzhou resigned as Chairmanon November 5, 2004;

(d)            Mr. Shi Cuiming resigned as ExecutiveDirector on February 1, 2004;

(e)             Mr. Ge Lei resigned as Non-ExecutiveDirector on February 1, 2004;

(f)               Mr. Lee Hon Chiu resigned asIndependent Non-Executive Director on May 12, 2004;

(g)            Mr. Craig O. McCaw resigned asIndependent Non-Executive Director on May 12, 2005;

(h)            Mr. Chang Xiaobing was appointed asChairman on December 21, 2004;

(i)                Mr. Shang Bing was appointed asExecutive Director on November 5, 2004;

(j)                Mr. Tong Jilu was appointed asExecutive Director on February 1, 2004;

(k)             Mr. Zhao Le was appointed as ExecutiveDirector on February 1, 2004 and resigned as Executive Director onJuly 19, 2005;

(l)                Mr. Liu Yunjie was appointed asNon-Executive Director on February 1, 2004;

(m)          Mr. Cheung Wing Lam, Linus wasappointed as Independent Non-Executive Director on May 12, 2004; and

(n)            Mr. Li Qiuhong was appointed asExecutive Director on July 19, 2005.

F-64

----

During 2005, no shareoptions were granted to the directors (2003: 2,772,000; 2004: 4,020,000) and no directors waived the right to receive emoluments during theyear. (2003 and 2004: Nil)

During 2003, 2004 and 2005, the Company did notincur any payment to any director for loss of office or as inducement to anydirector to join the Company.

**23.2    Five highest paid individuals**

The five individuals whose emoluments were the highest of the Group for2003, 2004 and 2005 were all directors of the Company whose emoluments arereflected in the analysis presented above.

**24.  RETIREMENT BENEFITS**

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. The PRC government is responsible for thepension liability to these retired employees. The Group was required to makedefined contributions to the pension scheme at the rate of 19% for the yearended December 31, 2005 (2003 and 2004: 19%) of the employees’ basic salaries.Under this scheme, the Group has no obligation for post-retirement benefits beyondthe annual contributions.

In addition, effectivefrom August 11, 1998, asupplementary defined contribution pension plan managed by an independentinsurance company was established. Under this plan, the Group makes a monthlydefined contribution of 2% to 16% (2003: 2% to6%; 2004: 2% to 24%) of the monthly salary of each employee. Therewere no vested benefits attributable to past services upon adoption of theplan.

Retirementcontributions charged to the statements of income were as follows:

|                                                                     | ** ** | **2003**   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Contributions to defined contribution pension  schemes              |       | 273,182    |       | 244,397    |       | 412,825    |       |
| Contributions to supplementary defined contribution pension schemes |       | 39,854     |       | 41,596     |       | 58,222     |       |

 

F-65

----

 

**25.  HOUSING BENEFITS**

Under 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 New Guoxin, theliving quarters were provided by China Telecom prior to the establishment ofNew Guoxin and the related benefits were not charged to the Group. In the caseof the GSM Business, certain of these living quarters were provided by Unicom Groupand the related benefits were not charged to the Group. Housing benefits whichwere not charged to the Group amounted to approximately RMB14.9 million for2005 (2003: RMB18.5 million; 2004: RMB14.9million).

Subsequent to the establishment of New Guoxin, for living quarterspurchased or built by the Group, the liability to provide the housing benefitswas recognized by the Group upon finalization of the allocation of the housingunits to specific employees. The amount of the benefits was the differencebetween the cost of the quarters purchased by the employees and the amountactually charged to the employees. The benefits are recorded as expenses overthe estimated remaining average service life of the participating employees.

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 of10% (2003 and 2004: 10%) of the employees’ basicsalaries.

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.

The Group finalized its monetary housing benefit scheme as a specialemployee incentive scheme for all qualified employees in year 2001. Accordingto the scheme, the total amount of monetary housing benefit for each employeeis determined based on the working age of the employee and the property marketprice prevailing in the relevant location. The total monetary housing benefitis divided into three annual payments in the proportion of 40%, 30% and 30% respectively.In order to be included in the incentive scheme, employees are required to signa service contract with a minimum service period of three years. The employeeswill be entitled to the first 40% payment only when the following criteria aremet:

(i)             the provincial branchin which the employees are working has achieved the annual performance budgetset by head office management; and

(ii)          the employees continueto be under the employment of the Group at the time of the payment.

Similarly, the employees will only be entitled to the second and thenthe third annual payments when and only when the above two conditions are alsofulfilled in subsequent years.

The Group accrues for each annual payment upon the fulfillment of theabove criteria by the employees, at which time the liability is considered tohave established.

F-66

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For the years ended December 31, 2003, 2004and 2005, certain provincesachieved the annual performance budget and were thus approved by management todistribute and pay out such monetary housing benefits. The provision forspecial monetary housing benefits for qualified employees of these provincesfor the years ended December 31,2003, 2004 and 2005 amounted to approximately RMB109.2 million, RMB21.9 million and RMB41.1million respectively, based on the aforementioned distribution plan. Theremaining provinces were not entitled to the special monetary housing benefitssince they did not achieve their annual performance budget in 2003, 2004 and 2005 and accordingly,no provision for such benefits was made.

The expenses incurred bythe Group in relation to the housing benefits described above are as follows (excludingthose paid by Unicom Group and China Telecom and not charged to the Group):

|                                     | ** ** | **2003** | ** ** | **200**4 | ** ** | **200**5 | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |     |       |
| Special monetary housing benefits   |       | 109,210  |       | 21,907   |       | 41,136   |       |
| Contributions to other housing fund |       | 170,614  |       | 224,686  |       | 280,393  |       |
| Other housing benefits              |       | 305,518  |       | 345,885  |       | 447,315  |       |
|                                |       |     |       |     |       |     |       |
|                                |       | 585,342  |       | 592,478  |       | 768,844  |       |

 

**26.  FINANCE COSTS**

|                                                            | ** ** | **2003**  | ** ** | **200**4  | ** ** | **200**5  | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                       |       |      |       |      |       |      |       |
| Interest on bank  loans repayable over 5 years             |       | 124,105   |       | 537,261   |       | 18,033    |       |
| Interest on bank  loans and bonds repayable within 5 years |       | 2,399,407 |       | 1,750,209 |       | 1,955,231 |       |
| Interest element of finance leases                         |       | 7,050     |       | 28,848    |       | 42,697    |       |
| Less: Amounts capitalized in  construction-in-progress     |       | (604,137  | )          | (647,851  | )          | (682,590  | )          |
|                                                       |       |      |       |      |       |      |       |
| Total interest  expenses                                   |       | 1,926,425 |       | 1,668,467 |       | 1,333,371 |       |
| Exchange  loss/(gain), net                                 |       | 9,960     |       | 7,657     |       | (273,647  | )          |
| Bank charges                                               |       | 9,597     |       | 19,951    |       | 39,597    |       |
|                                                       |       |      |       |      |       |      |       |
|                                                       |       | 1,945,982 |       | 1,696,075 |       | 1,099,321 |       |

 

F-67

----

 

**27.  NET INCOME**

CUCL and Unicom NewWorld (which ceased to be legal entities, with operations succeeded by CUCL),are registered as foreign investment enterprises in the PRC. In accordance withthe Articles of Association of CUCL and Unicom New World, they are required toprovide for certain statutory reserves, namely, general reserve fund and staffbonus and welfare fund, which are appropriated from income after tax andminority interests but before dividend distribution.

CUCL and Unicom NewWorld are required to allocate at least 10% of net income and minorityinterests determined under PRC GAAP to the general reserve fund until thecumulative amounts reach 50% of the registered capital. The statutory reservecan only be used, upon approval obtained from the relevant authority, to offsetaccumulated losses or increase capital.

CUCL appropriatedapproximately RMB463 million (2003: RMB419million; 2004: RMB429 million) to the general reserve fund for the yearended December 31, 2005.

Appropriation to thestaff bonus and welfare fund is at the discretion of the directors. The staffbonus and welfare fund can only be used for special bonuses or the collectivewelfare of the employees and are not distributable as cash dividends. UnderHKFRS, the appropriations to the staff bonus and welfare fund will be chargedto statements of income as expenses incurred since any assets acquired throughthis fund belong to the employees. For the year ended December 31, 2005, no appropriation to staff bonus and welfare fund hasbeen made (2003 and 2004: Nil).

**28.  SHARE OPTION SCHEMES**

The Company adopted ashare option scheme (the “Share Option Scheme”) and a fixed award pre-globaloffering share options scheme (“Pre-GlobalOffering Share Option Scheme”) on June 1, 2000 for the granting of share options to qualifiedemployees, with terms amended on May 13, 2002 to comply with the requirements set out in the NewChapter 17 of theListingRules.

Movements in the numberof share options outstanding and their related weighted average exercise priceswere as follows:

|                             | ** ** | **2003**                                                  | ** ** | **2004**                                         | ** ** | **2005**                                                  | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                  | ** ** | **Average  exercise  price in  HK$ per  share** | ** ** | **Number of  share options**  involved | ** ** | **Average  exercise  price in  HK$ per  share** | ** ** | **Number of  share options**  involved | ** ** | **Average  exercise  price in  HK$ per  share** | ** ** | **Number of  share options**  involved | ** ** |
|                        |       |                                                      |       |                                             |       |                                                      |       |   |   |   |   |   |   |
| Balance,  beginning of year |       | 10.66                                                     |       | 69,868,600                                       |       | 6.72                                                      |       | 172,367,400 |   | 6.45 |   | 274,063,400 |   |
| Granted                     |       | 4.30                                                      |       | 105,956,000                                      |       | 5.92                                                      |       | 113,322,000 |   | — |   | — |   |
| Forfeited                   |       | 12.26                                                     |       | (3,281,200                                       | )          | 4.30                                                      |       | (1,306,000 | ) | 7.15 |   | (5,688,200 | ) |
| Exercised                   |       | 6.18                                                      |       | (176,000                                         | )          | 5.85                                                      |       | (10,320,000 | ) | 4.60 |   | (10,773,200 | ) |
|                        |       |                                                      |       |                                             |       |                                                      |       |   |   |   |   |   |   |
| Balance, end of year        |       | 6.72                                                      |       | 172,367,400                                      |       | 6.45                                                      |       | 274,063,400 |   | 6.51 |   | 257,602,000 |   |

 

As of December 31, 2005, out of the 257,602,000outstanding options (2003: 172,367,400 options; 2004: 274,063,400 options),162,981,160 options(2003: 45,947,320 options; 2004: 87,611,360 options) were exercisable, and the weighted averageexercise price was HK$7.12(2003: HK$12.65; 2004: HK$ 8.69).

F-68

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Asof December 31, 2005, information of outstanding options was summarized as follows:

| 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 options  outstanding as of  December **31, 2005 | ** ** | **Number of options  outstanding as of  December **31, 2004 | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |   |
| Options granted under  the Pre-Global Offering Share Option Scheme: |       |                                                     |       |                                                        |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| June 22, 2000 (Note (a))                                  |       | June 22, 2002 to June 21,  2010                |       | HK$15.42                                                    |       | 24,309,600                                                       |       | 25,436,600                                                       |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |   |
| Options granted  under the Share Option Scheme:                     |       |                                                     |       |                                                        |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| June 30, 2001 (Note (b))                                  |       | June 30, 2001 to June 21,  2010                |       | HK$15.42                                                    |       | 6,508,000                                                        |       | 6,508,000                                                        |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| July 10, 2002 (Note (c))                                  |       | July 10, 2003 to July 9, 2008             |       | HK$6.18                                                     |       | 25,012,800                                                       |       | 25,954,800                                                       |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| May 21, 2003 (Note (d))                                   |       | May 21, 2004 to May 20,  2009                  |       | HK$4.30                                                     |       | 91,381,600                                                       |       | 102,476,000                                                      |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| May 30, 2003 (Note (d))                                   |       | May 21, 2004 to May 20,  2009                  |       | HK$4.66                                                     |       | 212,000                                                          |       | 366,000                                                          |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| July 20, 2004 (Note (e))                                  |       | July 20, 2005 to July 19, 2010            |       | HK$5.92                                                     |       | 109,524,000                                                      |       | 112,668,000                                                      |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
| December 21, 2004 (Note (f))                              |       | December 21, 2005 to December 20, 2010         |       | HK$6.20                                                     |       | 654,000                                                          |       | 654,000                                                          |       |
|                                                                |       |                                                     |       |                                                        |       |                                                             |       |                                                             |       |
|                                                                |       |                                                     |       |                                                        |       | 257,602,000                                                      |       | 274,063,400                                                      |       |
|                                                                     |            |                                                          |            |                                                             |            |                                                                  |            |                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)          According tothe resolution passed by the Board of Directors in June 2000, a total ofthe 27,116,600 options were granted on June 22, 2000 to the senior management, including directors, andcertain other employees (which represent, on their full exercise, 27,116,600shares of the Company) under the fixed award Pre-Global Offering Share OptionScheme adopted by the Company on June 1, 2000 on 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 begranted under the Pre-Global Offering Option Scheme.

ThePre-Global Offering Option Scheme had been amended in conjunction with theamended terms of the Share Option Scheme on May 13, 2002. Apartfrom the above two terms, the principal terms are the same as the amended ShareOption Scheme in all material aspects.

F-69

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(b)        On June 1, 2000, the Company adopted the ShareOption Scheme pursuant to which the directors of the Company may, at theirdiscretion, invite employees, including executive directors, of the Company orany of its subsidiaries, to take up options to subscribe for shares up to amaximum aggregate number of shares (including those that could be subscribedfor under the pre-global offering share option scheme as described above) equalto 10% of the total issued share capital of the Company. According to the ShareOption Scheme, the nominal consideration payable by a participant for the grantof options will be HK$1.00. The exercise price payable by a participant uponthe exercise of an option will be determined by the directors at theirdiscretion at the date of grant, except that such price may not be set below aminimum price which is the higher of:

(i)             thenominal value of a share; and

(ii)          80%of the average of the closing prices of shares on the HKSE on the five tradingdays immediatelypreceding the date of grant of the optionon which there were dealings in the shares on the HKSE.

The period during which an option may be exercisedwill be determined by the directors at their discretion, except that no optionmay be exercised later than 10 years from June 22, 2000. According to aresolution of the Board of Directors in June 2001, the Company has granted6,724,000 share options under the Share Option Scheme which represent, on theirfull exercise, 6,724,000 shares to certain employees of the Group in thefollowing terms:

(i)             theprice of a share payable by a participant upon the exercise of an option shallbe HK$15.42 (excludingthe brokerage fee and HKSE transactionlevy); and

(ii)          theoptions are vested on the date of grant and exercisable from the date of grantto June 22, 2010.

The terms of the Share Option Scheme were amendedon May 13, 2002 to comply with the requirements set out in the New Chapter17 of the Listing Rules which came into effect on September 1, 2001with the following major amendments:

(i)             shareoption may be granted to employees including executive directors of the Groupor any of the non-executivedirectors;

(ii)          theoption period commences on a day after the date on which an option is offeredbut not later than 10 years from the offer date; and

(iii)       minimumsubscription price shall not be less than the higher of:

·      thenominal value of the shares;

·      theclosing price of the shares of the Stock Exchange as stated in the StockExchange’s quotationsheets on the offer date in respect ofthe options; and

·      theaverage closing price of the shares on the Stock Exchange’s quotation sheetsfor the fivetradingdays immediately preceding the offer date.

 

F-70

----

 

(c)         Accordingto resolution passed by the Board of Directors and the IndependentNon-Executive Directors of the Company dated July 10, 2002, a totalof 36,028,000 share options were granted to eligible individuals includingdirectors, independent non-executive directors, and the non-executive directorsof the Company under the amended Share Option Scheme in the following terms:

(i)             aggregateof 2,802,000 options were granted to the executive directors, non-executivedirectors and independentnon-executive directors of the Company;

(ii)          theexercise price is HK$6.18; and

(iii)       thevesting dates and exercisable periods of the options were 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)         Accordingto resolution passed by the Board of Directors and the IndependentNon-Executive Directors of theCompany dated May 21, 2003 and May 30, 2003, a totalof 105,590,000 share options and 366,000 share optionswere granted toeligible individuals (including directors, independent non-executive directors,non-executivedirectors,middle to senior management of the Group) respectively, under the amended ShareOption Scheme inthe following terms:

(i)             anaggregate of 2,772,000 options were granted to the executive directors,non-executive directors andindependent non-executive directors ofthe Company;

(ii)          theexercise prices per share option are HK$4.30 and HK$4.66 respectively; and

(iii)       thevesting dates and exercisable periods of the options were 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-71

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(e)          Accordingto resolution passed by the Board of Directors and the IndependentNon-Executive Directors of the Company dated July 20, 2004, a totalof 112,668,000 share options were granted to eligible individuals (includingdirectors, independent non-executive directors, non-executive directors, middleto senior management of the Group) respectively, under the amended Share OptionScheme in the following terms:

(i)             anaggregate of 3,366,000 options were granted to the executive directors,non-executive directors and independent non-executive directors of the Company;

(ii)          theexercise price per share option is HK$5.92; and

(iii)       thevesting dates and exercisable periods of the options were as follows:

| Vesting dates      | ** ** | **Exercisable  periods**                  | ** ** | **Portions** |
|--------------------|------------|-------------------------------------------|------------|--------------|
|               |       |                                      |       |         |
| July 20, 2005 |       | July 20, 2005 to July 19,  2010 |       | 40%          |
| July 20, 2006 |       | July 20, 2006 to  July 19, 2010 |       | 30%          |
| July 20, 2007 |       | July 20, 2007 to  July 29, 2010 |       | 30%          |

 

(f)           Accordingto resolution passed by the Board of Directors and the IndependentNon-Executive Directors of the Company dated December 21, 2004, a total of654,000 share options were granted to the executive directors of the Company,under the amended Share Option Scheme in the following terms:

(i)             theexercise price per share option is HK$6.20; and

(ii)          thevesting dates and exercisable periods of the options are as follows:

| Vesting dates          | ** ** | **Exercisable  periods**                         | ** ** | **Portions** |
|------------------------|------------|--------------------------------------------------|------------|--------------|
|                   |       |                                             |       |         |
| December 21, 2005 |       | December 21, 2005 to December 20, 2010 |       | 40%          |
| December 21, 2006 |       | December 21, 2006 to December 20, 2010 |       | 30%          |
| December 21, 2007 |       | December 21, 2007 to December 20, 2010 |       | 30%          |

 

All of the options granted are governed by theamended terms of the Share Option Scheme and Pre-Global Offering Share OptionScheme as mentioned above.

 

F-72

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(g)         Detailsof share options exercised during 2004 and 2005 were as follows:

**For the year ended December ****31,****2004**

| Grant date    | ** ** | ** ** | ** ** | **Exercise price** | ** ** | **Weighted average  closing price per  share at respective  days immediately  before the exercise  of options** | ** ** | **Proceeds received** | ** ** | **Number of  shares involved** | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **HK$**    | ** ** | **HK$**                 | ** ** | **HK$**                                                                                                                                                      | ** ** | ** **                 | ** ** |
|               |       |       |       |                    |       |                                                                                                                                                         |       |                       |       |
| July 10, 2002 |       | 6.18       |       | 9.42                    |       | 52,604,160                                                                                                                                                   |       | 8,512,000                  |       |
| May 21, 2003  |       | 4.30       |       | 6.09                    |       | 7,774,400                                                                                                                                                    |       | 1,808,000                  |       |
|               |       |       |       |                    |       |                                                                                                                                                         |       |                       |       |
|               |       |       |       |                    |       | 60,378,560                                                                                                                                                   |       | 10,320,000                 |       |

 

**For the year ended December ****31,****2005**

| Grant date    | ** ** | ** ** | ** ** | **Exercise price** | ** ** | **Weighted average  closing price per  share at respective  days immediately  before the exercise  of options** | ** ** | **Proceeds received** | ** ** | **Number of  shares involved** | ** ** |
|--------------------|------------|------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|
| ** **         | ** ** | **HK$**    | ** ** | **HK$**                 | ** ** | **HK$**                                                                                                                                                      | ** ** | ** **                 | ** ** |
|               |       |       |       |                    |       |                                                                                                                                                         |       |                       |       |
| July 10, 2002 |       | 6.18       |       | 7.69                    |       | 5,821,560                                                                                                                                                    |       | 942,000                    |       |
| May 21, 2003  |       | 4.30       |       | 7.76                    |       | 37,793,560                                                                                                                                                   |       | 8,789,200                  |       |
| May 30, 2003  |       | 4.66       |       | 7.80                    |       | 716,870                                                                                                                                                      |       | 154,000                    |       |
| July 20, 2004 |       | 5.92       |       | 6.90                    |       | 5,256,960                                                                                                                                                    |       | 888,000                    |       |
|               |       |       |       |                    |       |                                                                                                                                                         |       |                       |       |
|               |       |       |       |                    |       | 49,588,950                                                                                                                                                   |       | 10,773,200                 |       |

 

Uponthe adoption of HKFRS 2, the Group changed its accounting policy forshare-based payment. Effective on January 1, 2005, the Group expenses the cost of share options in thestatements of income. The cost of share options granted after November 7, 2002 and not yet vested on January 1, 2005 was expensed retrospectively in the statements ofincome of the respective periods. The Group recognized share-based employeecompensation costs based on the estimated fair value of share options at thegrant date by using the Black-Scholes valuation model. No share options weregranted during 2005. The fair value of options granted during the year ended December 31, 2004 was HK$1.54 (2003:HK$1.26). The significant assumptions used were share prices ofHK$5.90 and HK$6.20 (2003:HK$4.30 and HK$4.66), at the grant dates, exercise pricesshown above, volatility of 40% (2003: 35%), expectedlife of options of 3 years (2003: 3years),expected dividend pay out rate of 2% (2003: 2%) and annualrisk-free interest rate of 3% (2003: 3%). Thevolatility measured at the standard deviation of expected share price returnsis based on statistical analysis of daily share prices over the last 100 days(Note 2.2(b)).

 

F-73

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**29.  EARNINGS PER SHARE**

**Earningsper Share and per American Depository Share (“ADS”)**

Basicearnings per share for the years ended December 31, 2003, 2004 and 2005 were computed bydividing the income attributable to shareholders by the weighted average numberof ordinary shares in issue during the years.

Dilutedearnings per share for the years ended December 31, 2003, 2004 and 2005were computed by dividing the income attributable to shareholders by theweighted average number of ordinary shares in issue during the years, afteradjusting for the effects of the potential dilutive ordinary shares. Allpotential dilutive ordinary shares arose from share options granted under (i) theamended Pre-Global Offering Share Option Scheme; and (ii) the amendedShare Option Scheme. For 2003, 2004 and 2005, all potentialdilutive shares arose from share options granted in 2002, 2003 and 2004 underthe amended Share Option Scheme (see details in Note 28), which if converted toordinary shares would decrease income attributable to the shareholders pershare.

|                                       | ** ** | **2003 (Restated)** | ** ** | **2004 (Restated)** | ** ** | **2005**                 | ** ** |
|---------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                            | ** ** | **Net  Income**          | ** ** | **Shares**               | ** ** | **Per **shareamount | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per **shareamount | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per **shareamount | ** ** |
| ** **                            | ** ** | **RMB’000**         | ** ** | **’000**            | ** ** | **RMB**                  | ** ** | **RMB’000** | ** ** | **’000** | ** ** | **RMB** | ** ** | **RMB’000** | ** ** | **’000** | ** ** | **RMB** | ** ** |
|                                  | ** ** | ** **               | ** ** | ** **               | ** ** | ** **               |       |   |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** | ** ** |
| Basic                                 |       | 4,278,149                |       | 12,553,010               |       | 0.34                     |       | 4,493,451 |   | 12,561,242 |   | 0.36 |   | 4,931,052 |   | 12,570,398 |   | 0.39 |   |
| Effect of conversion of share options |       | —                   |       | 3,718                    |       | —                   |       | — |   | 31,812 |   | — |   | — |   | 37,078 |   | — |   |
|                                  |       |                     |       |                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                               |       | 4,278,149                |       | 12,556,728               |       | 0.34                     |       | 4,493,451 |   | 12,593,054 |   | 0.36 |   | 4,931,052 |   | 12,607,476 |   | 0.39 |   |

 

Basic and dilutedearnings per ADS have been computed by multiplying the earnings per share by10, which is thenumber ofshares represented by each ADS.

**30.  DIVIDENDS**

At the annual generalmeeting held on May 12, 2005, theshareholders of the Company approved the payment of final dividend of RMB0.10per ordinary share for the year ended December 31, 2004 approximately totaling RMB1,256,924,000 which has beenreflected as an appropriation of retained profits for 2005. As of December 31, 2005, such dividends have been fully paid by the Company.

At a meeting held on March 23, 2006, the Board of Directors of the Company proposed thepayment of final dividend of RMB0.11 per ordinary share to the shareholders forthe year ended December 31, 2005totaling approximately RMB1,383,169,000. This proposed dividend has not beenreflected as a dividend payable in the financial statements as of December 31, 2005, but will be reflected as an appropriation of retainedprofits in the financial statements for the year ending December 31, 2006.

 

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**31.  FAIR VALUE OF FINANCIAL INSTRUMENTS**

Financialassets of the Group include bank balances and cash, short-term bank deposits,accounts receivable, prepayments and other current assets, amounts due fromrelated parties and Domestic Carriers. Financial liabilities of the Groupinclude accounts payable and accrued liabilities, bank loans, lease payablesand amounts due to related parties.

Bankbalances and cash and short-term bank deposits denominated in foreigncurrencies, as summarized below, havebeen translated to RMB at the applicablerates quoted by the People’s Bank of China as of December 31, 2004 and 2005.

|                              | ** ** | **200**4               | ** ** | **200**5           | ** ** |
|------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Original  currency** | ** ** | **Exchange  rate** | ** ** | **RMB  equivalent** | ** ** | **Original  currency** | ** ** | **Exchange  rate** | ** ** | **RMB  equivalent** | ** ** |
| ** **                   | ** ** | **‘000**          | ** ** | ** **         | ** ** | **‘000** | ** ** | **‘000** | ** ** | ** ** | ** ** | **‘000** | ** ** |
| **Bank  balances and cash:** |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| - denominated in HK dollars  |       | 75,562                 |       | 1.06               |       | 80,406 |   | 45,791 |   | 1.04 |   | 47,636 |   |
| - denominated in US dollars  |       | 4,803                  |       | 8.28               |       | 39,753 |   | 83,023 |   | 8.07 |   | 670,010 |   |
| - denominated in MOP         |       | —                 |       | —             |       | — |   | 92 |   | 1.01 |   | 93 |   |
| - denominated in EUR         |       | —                 |       | —             |       | — |   | 87 |   | 9.90 |   | 861 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Sub-total                    |       |                   |       |               |       | 120,159 |   |   |   |   |   | 718,600 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| **Short-term  deposits:**    |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| - denominated in US dollars  |       | 79,946                 |       | 8.28               |       | 661,675 |   | 35,000 |   | 8.07 |   | 282,457 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Sub-total                    |       |                   |       |               |       | 661,675 |   |   |   |   |   | 282,457 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Total                        |       |                   |       |               |       | 781,834 |   |   |   |   |   | 1,001,057 |   |

 

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. The carrying amounts of the Group’s bank balancesand cash, short-term bank deposits, other current financial assets andliabilities approximated their fair values as of December 31, 2004 and 2005due to the nature or short maturity of those instruments.

The carrying amounts of receivables and payableswhich are all subject to normal trade credit terms approximate their fair values.

The carrying amounts of long-term bank loansapproximate their fair values based on prevailing market borrowing rates availablefor comparable bank loans with similar terms and maturities.

 

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**32.  RELATED PARTY TRANSACTIONS**

Unicom Group is astate-owned enterprise directly controlled by the PRC government. The PRCgovernment is the Company’s ultimate controlling party. State-owned enterprisesand their subsidiaries, in addition to Unicom Group, directly or indirectlycontrolled by the PRC government are also considered to be related parties ofthe Group. Neither Unicom Group nor the PRC government publishes financialstatements available for public use.

The Group is ultimatelycontrolled by the PRC government, which also controls a significant portion ofthe productive assets and entities in the PRC. The Group providestelecommunications services as part of its retail transactions, thus, is likelyto have extensive transactions with the employees of state-controlled entities,including their key management personnel and their close family members. Thesetransactions are carried out on commercial terms that are consistently appliedto all customers. Management considered state-owned enterprises that hadmaterial transactions with the Group included other telecommunication serviceoperators, equipment vendors, construction vendors, services providers andstate-owned banks in the PRC. Management believes that meaningful informationrelative to related party disclosures has been adequately disclosed.

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 includeChina Telecommunications Corporation and its subsidiaries (“China Telecom”),China Mobile Communications Corporation and its subsidiaries (“China Mobile”)and China Network Communication Group Corporation and its subsidiaries (“ChinaNetcom”). These entities are collectively referred to as “Domestic Carriers”.

 

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**32.1****   ****Unicom Group and its subsidiaries**

Thetable set forth below summarizes the names of significant related parties(excluding other state-owned enterprises which are summarized in Note 32.3) andnature of relationship with the Company as of December 31, 2005:

| 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                |
| 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                |
| Unicom New Guoxin Telecommunications Corporation Limited                                                                                       |       |                                        |
| (“New Guoxin” originally known as “Guoxin Paging”, which changed  to its present name on April 29, 2004)         |       | A subsidiary of Unicom Group                |
| UNISK (Beijing) Information Technology  Corporation Limited (“UNISK”)                                                           |       | A joint venture company of  Unicom Group    |
| China Unicom Corporation Limited (“CUCL”)                                                                                            |       | A subsidiary of the Company                 |
| Unicom New Century Telecommunications  Corporation Limited                                                                                     |       |                                        |
| (“Unicom New Century”, on July 30, 2004,  CUCL combined with Unicom New Century and Unicom New Century was legally  dissolved.) |       | A subsidiary of the Company                 |
| Unicom New World Telecommunications Corporation Limited                                                                                        |       |                                        |
| (“Unicom New World”, on September 1, 2005, CUCL combined with Unicom  New World and Unicom New World was legally dissolved.)    |       | A subsidiary of the Company                 |
| China Unicom International Limited (“Unicom International”)                                                                          |       | A subsidiary of the Company                 |
| China Unicom USA Corporation (“Unicom  USA”)                                                                                         |       | A subsidiary of Unicom International        |
| China Unicom (Macau) Company Limited (“Unicom Macau”)                                                                                |       | A subsidiary of the Company                 |
| Unicom Huasheng Telecommunications  Technology Company Limited (“Unicom Huasheng”)                                              |       | A subsidiary of CUCL                        |

 

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**(a)****  ****Transactions with Unicom Group and its Subsidiaries**

The following is asummary of significant recurring transactions carried out with Unicom Group andits subsidiaries. In the director’s opinion, these transactions were carriedout in the ordinary course of business.

|                                                                                       | ** ** | **Note**    | ** ** | **2003**   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|------------|------------|
| **Transactions  with Unicom Group and its subsidiaries:**                             | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interconnection  and roaming revenues                                                 |       | (i), (iii)  |       | 1,002,702  |       | 220,174    |       | 207,526    |       |
| Interconnection  and roaming charges                                                  |       | (ii), (iii) |       | 316,271    |       | 63,891     |       | 57,902     |       |
| Charge for  cellular subscriber value-added service by New Guoxin                     |       | (iv), (v)   |       | —     |       | 858,778    |       | 412,549    |       |
| Charge for  customer services                                                         |       | (vi)        |       | —     |       | 524,718    |       | 562,003    |       |
| Charge for  cellular subscriber value-added service by UNISK and Unicom NewSpace |       | (vii)       |       | —     |       | 4,228      |       | 28,418     |       |
| Rental charges  for premises, equipment and facilities                                |       | (viii)      |       | 17,936     |       | 25,528     |       | 21,059     |       |
| Rental income  for premises and facilities                                            |       | (ix)        |       | —     |       | 19,475     |       | 18,662     |       |
| Constructed  capacity related cost of CDMA network                                    |       | (iv), (xii) |       | —     |       | 305,903    |       | 176,130    |       |
| Revenue for  leasing of transmission line capacity                                    |       | (x)         |       | 185,086    |       | 38,853     |       | 25,841     |       |
| Charges for  international gateway services                                           |       | (xiii)      |       | 8,631      |       | 17,062     |       | 19,797     |       |
| Leasing of  satellite transmission capacity                                           |       | (xiv)       |       | 26,400     |       | 14,152     |       | 11,794     |       |
| CDMA network  capacity lease rental                                                   |       | (iv), (xi)  |       | 3,515,364  |       | 6,588,926  |       | 7,924,644  |       |
| Purchase of CDMA  handsets                                                            |       | (xv)        |       | —     |       | 14,655     |       | —     |       |
| Purchase of  telecom cards                                                            |       | (xvi)       |       | 1,186,500  |       | 1,087,498  |       | 671,715    |       |
| Commission  expenses for sales agency services incurred for telecom cards        |       | (xvii)      |       | 16,175     |       | 16,023     |       | —     |       |
| Commission fees  to New Guoxin                                                        |       | (xviii)     |       | —     |       | 9,054      |       | 15,312     |       |
| Agency fee  incurred for procurement of telecommunications equipment             |       | (xix)       |       | 17,904     |       | 17,759     |       | 15,791     |       |
| Sales of CDMA handsets                                                                |       | (xx)        |       | 64,929     |       | —     |       | —     |       |

 

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(i)                         Interconnection revenues represent the amounts received or receivablefrom Unicom Group for calls from its networks to the Group’s networks. Roamingrevenues represent revenue for calls made using the Group’s networks by UnicomGroup’s subscribers.

(ii)                      Interconnection charges are for calls made from the Group’s networks toUnicom Group’s networks. Roaming expenses represent expenses for calls made bythe Group’s subscribers using Unicom Group’s networks.

(iii)                   Interconnection settlement between Unicom Group’s network and the Group’snetwork is based on standards established from time to time by the MII. In thecase of calls between cellular subscribers in different provinces, settlementis based on either the standards established by the MII or an internalsettlement arrangement applied by Unicom Group based on their respectiveinternal costs of providing this service. Also, charges for roaming servicesbetween the Group and Unicom Group are based on the respective internal costsof providing these services.

(iv)                  Related party transactions existed between Group and New Guoxin afterthe sale of New Guoxin by CUCL on December 31, 2003. The nature, terms andconditions of these new related party transactions with New Guoxin have beenset forth in the shareholders’ circular “Connected Transactions” of the Companyissued on November 26, 2003. Such transactions mainly included (i) cellularsubscriber value-added services, (ii) customer services, (iii) agencyservices, and (iv) provision of premises. Prior to the sale of New Guoxinas of December 31, 2003, the Group’s transactions with New Guoxin weretreated as inter-group transactions and have been eliminated in the Group’sconsolidated financial statements.

On March 24, 2005, CUCL and Unicom New World (which ceased to belegal entities, with operations succeeded by CUCL) entered into the newagreements, “New Comprehensive Service Agreement”, “New CDMA Lease”, “NewComprehensive Operator Services Agreement” and “New Guoxin Premises LeasingAgreement”, with Unicom Group, Unicom New Horizon and New Guoxin to replace theold agreements. The new agreements became effective from January 1, 2005after being approved at the extraordinary shareholders’ meeting on May 12,2005. Details of the new agreements have already been set forth in theshareholders’ circular “Continuing Connected Transactions” of the Companyissued on April 18, 2005.

(v)                     Pursuant to the Comprehensive Operator Service Agreement (“ComprehensiveService Agreement”) signed between the Group and New Guoxin dated November 20,2003, New Guoxin provides operator-based value-added services to the Group’scellular subscribers through its comprehensive business network. The respectivebranches of New Guoxin and the Group may agree on the proportion for sharingthe revenue derived from such value-added services, on the condition that suchagreed proportion for New Guoxin shall not be higher than the average proportionfor independent value-added telecommunications content providers who providevalue-added telecommunications content to the Group in the same region.

From January 1, 2005, pursuant to New Comprehensive OperatorServices Agreement signed between the Group and New Guoxin, the Group shallretain 40% of the actually received revenue generated from the value-addedservices provided to the Group’s subscribers and allocate 60% of such revenueto New Guoxin. The settlement should be made among branches of the Group andNew Guoxin respectively.

 

F-79

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(vi)                  Pursuant to New Comprehensive Operator Services Agreement, effective fromJanuary 1, 2005, New Guoxin provides business inquiries, tariff inquiries,account maintenance, complaints handling, and customer interview and subscriberretention services to the Group’s customers through the use of its 1001 pagingnetwork. The service fee payable by the Group shall be calculated on the basisof the customer service costs plus an income margin, which shall not exceed10%. The customer service costs were determined by the actual cost per operatorseat and the number of effective operator seats. The terms of new agreement aresimilar to those in original agreement.

(vii)               CUCL signed a Cellular Subscriber Value-Added Services Agreements (the “Agreements”)with UNISK and Unicom NewSpace in March 2004. According to the Agreements,CUCL agreed to provide its telecommunication channel and network subscriberresources to UNISK and Unicom NewSpace, enable them to provide value-addedservices to subscribers through CUCL’s cellular telecommunications network anddata platform. These Agreements also stipulate that the content service feespaid by subscribers for using UNISK’s or Unicom NewSpace’s value-added servicesare shared between CUCL and UNISK, or CUCL and Unicom NewSpace based on anagreed proportion. The content service fees are collected from subscribers byCUCL and the relevant portion is paid to UNISK and Unicom NewSpace on a regularbasis.

(viii)            CUCL and Unicom New World (which ceased to be legal entities, withoperations succeeded by CUCL) respectively signed service agreements withUnicom Group to mutually lease premises, equipment and facilities from eachother. Rentals are based on the lower of depreciation costs and market rates.

(ix)                    Pursuant to New Guoxin premises leasing Agreement, effective from January 1,2005, New Guoxin Premises Leasing Agreement signed between the Group and NewGuoxin, the Group agreed to provide premises to New Guoxin. The rental amountis based on the higher of depreciation costs and market price for similarpremises in that locality. The terms in new agreement are similar to those in originalagreement.

(x)                       Unicom Group leases transmission line capacity from the Group inaccordance with the relevant provision of the services agreement. Revenue forleases of transmission line capacity is based on tariffs stipulated by MII fromtime to time less a discount of up to 10%.

                                    In addition, according to the leased line agreemententered into between the Group and Unicom USA, the Group leases transmissionline to Unicom USA. The revenue for the leases of transmission line wasrecognized based on the market price and amounted to approximately RMB14million for the nine months ended September 2004. This transaction becamean inter-group transactions after the acquisition of Unicom International in September 2004and has been eliminated in the Group’s consolidated financial statements.

 

F-80

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(xi)                    According to New CDMA Lease Agreements entered among CUCL, Unicom NewWorld (which has been merged into and succeeded by CUCL in September 2005),Unicom Group and Unicom New Horizon, Unicom New Horizon agreed to lease thecapacity of CDMA network to CUCL and Unicom New World. Details please see Note4.2(b)(ii).

                                    For the years ended December 31, 2003 and 2004, the Group leasedcapacity of CDMA network under original CDMA Leasing Agreement. Detail pleasesee Note 4.2 (b)(i).

(xii)                 Pursuant to the New CDMA Lease, the constructed capacity related costsin connection with the CDMA network capacity used by the Group, including therental fees for the exchange centres and the base stations, water andelectricity charges, heating charges and fuel charges for the relevantequipment etc., as well as the maintenance costs of a non-capital nature, arecharged to the Group as part of the New CDMA Lease Arrangement. The proportionof the constructed capacity related costs to be borne by the lessee shall becalculated on a monthly basis by reference to the actual number of cumulativeCDMA subscribers of the Group at the end of the month prior to the occurrenceof the costs divided by 90%, as a percentage of the total capacity available onthe Network.

(xiii)              Charges for international gateway services represent the amounts paid orpayable to Unicom Group for international gateway services provided for theGroup’s international long distance networks. The charge for this service isbased on the cost of operation and maintenance of the international gatewayfacilities incurred by Unicom Group, including depreciation, together with amargin of 10% over cost.

(xiv)             Satellite transmission capacity leasing fees represent the amounts paidor payable to Unicom NewSpace for the use of satellite transmission capacity.The charges are based on the MII regulations then in effect less the applicablediscount up to 10% as agreed with Unicom NewSpace.

                                    In the second half of 2004, Unicom NewSpace sold all its satellitetransmission assets to Unicom Group. The rights and liabilities of satellitetransmission capacity lease agreement were taken over by Unicom Group.

(xv)                In 2004, according to the purchase of CDMA handset agreement enteredinto between Unicom NewSpace and certain subsidiaries of the Group, the Groupagreed to purchase CDMA handsets from Unicom NewSpace.

(xvi)             The Group signed a service agreement with Unicom Group to purchase telephonecards from Unicom Group (to be imported by Unicom Xingye) at cost plus a marginto be agreed from time to time, but not to exceed 20%, and subject toappropriate volume discounts.

(xvii)          Unicom International provided sales agency services such as selling oftelecommunications cards, leased lines and transfer calls to the Group.

                                    Prior to September 2004, the Group’s transactions with UnicomInternational (previously a subsidiary of Unicom Group) were treated as relatedparty transactions, and had been included in the related party transactionsdescribed above for the period before its acquisition by the Group in 2004.Subsequent to its acquisition, such transactions became inter-grouptransactions and have been eliminated in the Group’s consolidated financialstatements starting from September 2004.

 

F-81

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(xviii)       Pursuant to New Comprehensive Service Agreement, effective from January 1,2005, New Guoxin provides subscriber development services to the Group throughtelephone or other channels by utilising its own network, equipment andoperators. The agency fee chargeable to the Group does not exceed the averageof agency fees chargeable by any independent third party agent in the sameregion. The terms in new agreement are similar to those in the original agreement.

(xix)               The Group signed a service agreement with Unicom I/E Co., in whichUnicom I/E Co. agreed to provide equipment procurement services to the Group.Unicom I/E Co. charges the Group 0.7% of the value of imported equipment and0.5% of the value of domestic equipment for such services.

                                    On November 22, 2004, the Group entered into an amendment agreementwith Unicom I/E Co., with respect to the above service arrangement.Accordingly, with effect from July 1, 2004, the charge rates for theequipment procurement service have been changed to 0.55% (for contract up to anamount of US$30 million (inclusive)) and 0.35% (for contract with an amount ofmore than US$30 million) of the value of imported equipment, and 0.25% (forcontract up to an amount of RMB200 million (inclusive)) and 0.l5% (for contractwith an amount of more than RMB200 million) of the value of domestic equipment.

(xx)                  According to the sales of CDMA handsets agreement entered into betweenUnicom Group and Unicom Guomai (previously a subsidiary of New Guoxin and soldto China Satellite Communications Corporation in August 2004) on January 1,2003, Unicom Group agreed to purchase CDMA handsets from Unicom Guomai. Theselling price was negotiated on an arm’s length basis, which is not lower thanthe price sold by Unicom Guomai to independent third parties. Upon thecompletion of sale of New Guoxin on December 31, 2003, transactionsbetween Unicom Guomai and Unicom Group did not constitute a related partytransaction of the Company.

(xxi)               Unicom Group is the registered proprietor of the “Unicom’’ trademark inEnglish and the trademark bearing the “Unicom” logo, which are registered atthe PRC State Trademark Bureau. Pursuant to an exclusive PRC trademark licenseagreement entered into between Unicom Group and CUCL, CUCL and its affiliatesare granted the right to use these trademarks on a royalty free basis for aninitial period of 5 years, renewable at CUCL’s option.

                                    As part of the acquisition arrangements of Unicom New Century and UnicomNew World, Unicom New Century and Unicom New World entered into PRC trademarklicense agreement with Unicom Group respectively. Unicom New Century and UnicomNew World (which has been merged into and succeeded by CUCL) are granted theright to use these trademarks on a royalty free basis for an initial period of10 years, renewable for another 10 years at CUCL’s option.

 

F-82

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**(b)****  ****Amounts due from and to Related Parties/Unicom Group**

Amounts due from and to related parties or Unicom Group are unsecured,non-interest bearing, repayable on demand and arise in the ordinary course ofbusiness in respect of transactions with Unicom Group and its subsidiaries asdescribed in (a) above.

**(c)****  ****Amount due to/(from) Unicom Group**

|                                                                             | ** ** | **200**3   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Due to/(from)  Unicom Group, beginning of year                              |       | 562,633    |       | 432,047    |       | (61,401    | )          |
| Interconnection  and roaming revenues                                       |       | (1,002,702 | )          | (220,174   | )          | (207,526   | )          |
| Interconnection  and roaming charges                                        |       | 316,271    |       | 63,891     |       | 57,902     |       |
| Revenue for  leasing of transmission line capacity, premises and facilities |       | (185,086   | )          | (38,853    | )          | (25,841    | )          |
| Rental charges  for premises, equipment and facilities                      |       | 17,936     |       | 25,528     |       | 21,059     |       |
| Sales of CDMA mobile handsets                                               |       | (64,929    | )          | —     |       | —     |       |
| Charges for the  international gateway services                             |       | 8,631      |       | 17,062     |       | 19,797     |       |
| Leasing of  satellite transmission capacity                                 |       | —     |       | 7,076      |       | 11,794     |       |
| Proceeds received/receivable from sale of New Guoxin                        |       | (450,000   | )          | 450,000    |       | —     |       |
| Amounts due to Unicom Group, arising from acquisition of Unicom New  World  |       | 1,005,135  |       | —     |       | —     |       |
| Net receipt /(settlement)  during the year                                  |       | 224,158    |       | (797,978   | )          | 222,310    |       |
| Due to/(from) Unicom  Group, end of year                                    |       | 432,047    |       | (61,401    | )          | 38,094     |       |

 

**(d)****  ****Bank Loans guaranteed by Unicom Group**

As of December 31, 2005, there were no long-term bank loans (2004: RMB6,779million) and short-term bank loans (2004: RMB3,397 million) guaranteed byUnicom Group.

 

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**32.2****   ****Domestic Carriers**

**(a)****         ****Transactions with Domestic Carriers**

The following is asummary of significant transactions with Domestic Carriers in the ordinarycourse of business:

|                         | ** ** | **Note**   | ** ** | **200**3   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interconnection revenue |       | (i)        |       | 1,647,221  |       | 2,889,497  |       | 3,964,977  |       |
| Interconnection charges |       | (i)        |       | 5,301,792  |       | 7,003,262  |       | 7,886,395  |       |
| Leased line revenue     |       | (ii)       |       | 218,974    |       | 247,676    |       | 62,865     |       |
| Leased line charges     |       | (ii)       |       | 722,684    |       | 628,173    |       | 548,481    |       |

 

Notes

(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 the Group and Domestic Carriers on a provincialbasis. 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 provisionof transmission lines. At the same time, the Group leases transmission lines toDomestic Carriers in return for leased line rental income. The charges arecalculated at a fixed charge per line, depending on the number of lines beingused by the Group or Domestic Carriers.

**(b)****         ****Amounts due from and to Domestic Carriers**

|                                                                    | ** ** | **2004** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Amounts due from  Domestic Carriers                                |       |     |       |     |       |
| - Receivables for interconnection  revenue and leased line revenue |       | 270,068  |       | 139,099  |       |
| - Less:  Provision for doubtful debts                              |       | (149     | )          | (614     | )          |
|                                                               |       |     |       |     |       |
|                                                               |       | 269,919  |       | 138,485  |       |
| Amounts due to Domestic  Carriers                                  |       |     |       |     |       |
| - Payables for  interconnection charges and leased lines charges   |       | 948,574  |       | 822,006  |       |
|                                                               |       |     |       |     |       |

 

All amounts due from andto Domestic Carriers were unsecured, non-interest bearing and repayable withinone year.

 

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**32.3****   ****Other major state-owned enterprises**

**(a)****         ****Transactionswith other major state-owned enterprises**

The following is a summary of significanttransactions with other major state-owned enterprises in the ordinary course ofbusiness:

|                                        | ** ** | **2003**   | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of CDMA  handsets             |       | 190,324    |       | 1,818,500  |       | 1,795,009  |       |
| Construction and  installation fee     |       | 133,672    |       | 707,829    |       | 290,170    |       |
| Purchase of equipment                  |       | 4,335,823  |       | 5,757,356  |       | 3,588,153  |       |
| Line leasing revenue                   |       | 45,207     |       | 179,450    |       | 153,837    |       |
| Finance income/costs,  include:        |       |       |       |       |       |       |       |
| Interest income                        |       | 173,034    |       | 102,907    |       | 96,196     |       |
| Interest expense  of loans             |       | 2,283,458  |       | 1,994,986  |       | 1,587,260  |       |
| Short-term bank loan  received         |       | 10,901,425 |       | 10,151,971 |       | 11,946,716 |       |
| Long-term bank loan  received          |       | 11,075,836 |       | 6,893,990  |       | 5,772,746  |       |
| Short-term bank loans  repayments paid |       | 10,278,727 |       | 12,271,753 |       | 14,363,131 |       |
| Long-term bank loans repayments paid   |       | 18,497,783 |       | 17,245,367 |       | 25,869,531 |       |

 

**(b)****         ****Amountsdue from and to other major state-owned enterprises**

The balances with other major state-owned enterprises included invarious line items of the consolidated balance sheets were listed as follows:

|                                         | ** ** | **200**4   | ** ** | **200**5   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
|                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current assets**                      |       |       |       |       |       |
| Prepayment and other  current assets    |       | 764,793    |       | 160,681    |       |
| Short-term bank  deposits               |       | 371,994    |       | 282,457    |       |
| Bank balances and cash                  |       | 4,417,047  |       | 5,191,067  |       |
|                                    |       |       |       |       |       |
| **Non-current liabilities**             |       |       |       |       |       |
| Long-term bank loans                    |       | 22,102,088 |       | 7,946,418  |       |
|                                    |       |       |       |       |       |
| **Current liabilities**                 |       |       |       |       |       |
| Payables and accrued  liabilities       |       | 327,374    |       | 341,446    |       |
| Short-term bank loans                   |       | 8,847,623  |       | 6,431,208  |       |
| Current portion of long-term bank loans |       | 11,086,305 |       | 5,145,190  |       |

 

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**33.  CONTINGENCIES AND COMMITMENTS**

**33.1****   ****Capital Commitments**

As of December 31, 2004 and 2005, the Grouphad capital commitments, mainly in relation to the construction oftelecommunications networks, as follows:

|                                    | ** ** | **2005**                     | ** ** | **2004**      | ** ** |
|------------------------------------|------------|------------------------------|------------|---------------|------------|
| ** **                         | ** ** | **Land and  buildings** | ** ** | **Equipment** | ** ** | **Total** | ** ** | **Total** | ** ** |
|                               | ** ** | ** **                   | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Authorized and  contracted for     |       | 830,099                      |       | 3,049,567     |       | 3,879,666 |   | 5,047,140 |   |
| Authorized but not  contracted for |       | 129,591                      |       | 199,667       |       | 329,258 |   | 1,490,325 |   |
|                               |       |                         |       |          |       |   |   |   |   |
| Total                              |       | 959,690                      |       | 3,249,234     |       | 4,208,924 |   | 6,537,465 |   |

 

As of December 31, 2005, approximately RMB218 million (2004: RMB126 million) ofcapital commitment outstanding was denominated in US dollars, equivalent toUS$27 million (2004: US$15 million).

**33.2****   ****Operating Lease Commitments**

As of December 31, 2004 and 2005, the Group had total futureaggregate minimum operating lease payments under operating leases as follows:

|                                                      | ** ** | **2005**                     | ** ** | **2004**      | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|---------------|------------|
| ** **                                           | ** ** | **Land and  buildings** | ** ** | **Equipment** | ** ** | **CDMA  network  Capacit**ies  (Note (a)) | ** ** | **Total** | ** ** | **Total** | ** ** |
|                                                 | ** ** | ** **                   | ** ** | ** **    | ** ** | ** ** |   |   |   |   |   |
| Leases expiring:                                     |       |                         |       |          |       |   |   |   |   |   |   |
| - not later than  one year                           |       | 665,105                      |       | 81,801        |       | 7,132,179 |   | 7,879,085 |   | 6,681,058 |   |
| - later than one  year and not later than five years |       | 1,919,736                    |       | 99,335        |       | — |   | 2,019,071 |   | 1,914,197 |   |
| - later than  five years                             |       | 1,152,581                    |       | 15,525        |       | — |   | 1,168,106 |   | 1,067,703 |   |
|                                                 |       |                         |       |          |       |   |   |   |   |   |   |
| Total                                                |       | 3,737,422                    |       | 196,661       |       | 7,132,179 |   | 11,066,262 |   | 9,662,958 |   |

----

Note

(a)          In relation to the above CDMA network capacities commitment, it isestimated based on 90% of the total amount of lease fee paid by the Group toUnicom New Horizon in 2005 pursuant to the New CDMA Lease (see Note 4.2(b) fordetails). The New CDMA Lease has been approved by the minority shareholders ofthe Company in 2005.

**33.3****   ****Commitment to purchase CDMA Handsets**

As of December 31,2005, the Group committed to purchase CDMA handsets amounting to approximatelyRMB1,232 million (2004: RMB1,968 million).

 

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**34.  EVENTS AFTER BALANCE SHEETS**

**34.1****   ****Approval of new share option scheme**

Pursuant to a resolution passed by the board of directors, independentnon-executive directors and non- executive directors of the Company dated February 15,2006. A total of 167,466,000 share options were granted to eligible individuals(including directors and middle to senior management of the Group), under theamended share option scheme on the following terms:

(i)             an aggregate of 2,840,000 options were granted to the executivedirectors of the Company;

(ii)          the exercise price per share option is HK$6.35;

(iii)       theentitlement of the above eligible individuals to the exercise of share optionsgranted is subject to the Group’s performance or their own performance in 2006.

(iv)      the vestingdates and exercisable periods of the options are as follows:

| Vesting dates          | ** ** | **Exercisable  periods**                         | ** ** | **Portions** |
|------------------------|------------|--------------------------------------------------|------------|--------------|
| February 15, 2008 |       | February 15, 2008 to February 14, 2012 |       | 50%          |
| February 15, 2009 |       | February 15, 2009 to February 14, 2012 |       | 50%          |

 

**34.2****   ****Proposed final dividend**

After the balance sheet date, the directors proposed a final dividendfor the year 2005 operating results. For details, see Note 30.

**34.3    Strategic Alliance Framework Agreement andSubscription Agreement with SK Telecom Co., Ltd.**

Pursuant to a resolution passed by the board of directors on June 20,2006, the Company has entered into a Strategic Alliance Framework Agreement(“SAFA”) with SK Telecom Co., Ltd. (“SKT”, a company incorporated in Korea withlimited liability and listed on the Stock Market Division of the KoreaExchange) on June 20, 2006. Pursuant to the SAFA, the Company and SKT agreed tocooperate on the further development of CDMA cellular communications servicesin China. The Company has appointed SKT as its sole and exclusive partner in relationto its CDMA cellular communications business operations in certain areas in PRCfor a maximum period of 18 months after the effective date of the SAFA.Detailed terms of implementation will be negotiated in the future and set forthin definitive legal agreements to be entered by the Company and SKT.

At the same time, the Company has also entered into a subscriptionagreement (“Subscription Agreement”) with SKT, whereby SKT agreed to subscribeand pay for the US dollar denominated bonds (the “Bonds”) to be issued at parby the Company in an aggregate principal amount of US$1,000,000,000. The Bondsare expected to be issued on July 5, 2006 (or such other date agreed by us andSKT which may not be later than July 12, 2006) and the maturity date is expectedto be July 5, 2009. Subject to certain adjustments as specified in theSubscription Agreement, the Bonds are convertible, at the option ofbondholders, into ordinary shares of the Company at an initial conversion priceof HK$8.63 (approximately US$1.11) per share at any time one year after theissuance. The Bonds bear zero interest and is redeemable at the bondholders’option at 102.82% of their principal amount on July 5, 2008. Unless previouslyredeemed, converted or purchased and cancelled, the Bonds will be redeemed at104.26% of their principal amount on the expected maturity date of July 5,2009.

Completion of the Subscription Agreement is subject to the satisfactionand /or waiver of the certain conditions precedent therein. The SubscriptionAgreement and the SAFA are not inter-conditional upon the completion of eachother, but upon the termination of the Subscription Agreement, the SAFA willterminate immediately. 

**35. ****COMPARATIVEFIGURES**

Certain comparative figures have been reclassifiedor restated in accordance with disclosure requirements under new HKFRS adoptedin current year.

**36.  APPROVAL OF FINANCIAL STATEMENTS**

# The financial statementswere approved by the Board of Directors on June 27, 2006.

 

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**37.  SIGNIFICANT DIFFERENCES BETWEEN HKFRS AND US GAAP**

The consolidatedfinancial statements of the Group prepared under HKFRS differ in certainmaterial respects from those prepared under generally accepted accountingprinciples in the United States of America (“US GAAP”). Significant differencesbetween HKFRS and US GAAP relating tothe Group are summarized below:

**(A)  Effect of the acquisitions of entities undercommon control**

In 2002, 2003 and2004, the Company has acquired the entire equity interests in (i) UnicomNew Century (which was merged into CUCL and legally dissolved on June 30,2004); (ii) Unicom New World (which was merged into CUCL and legallydissolved on September 1, 2005); and (iii) Unicom International,respectively.

Under HKFRS, theGroup has adopted the purchase method of accounting to account for theacquisitions of Unicom New Century, Unicom New World and Unicom International(the “Acquisitions”). Under the purchase method, the operating results of theseacquired subsidiaries have been included in the consolidated statements of incomeof the Group after the Acquisitions were effective. The differences between the costs ofAcquisitions and the fair valuesof the separately identifiable net assets acquired have been recorded as goodwill/negative goodwill. Under HKFRS 3 “Business Combinations”,goodwill is no longer amortized but is instead subject to impairment test on an annual basis or when there areindications of impairment. This policy is applied prospectively from January 1, 2005. Upon the adoption ofHKFRS 3, negative goodwill has been derecognized at January 1, 2005, witha corresponding adjustment to the opening balance of retained earnings of theGroup.

As the Group, Unicom NewCentury, Unicom New World and Unicom International 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 consolidatedfinancial statements prepared under US GAAP for all periods presented have beenretroactively restated as if Unicom New Century, Unicom New World and UnicomInternational were part of the Group. The cash considerations paid by the Company are treated as capital distribution inthe respective years of the Acquisitions. Goodwill/negative goodwill arising from the Acquisitions and the related amortization of goodwill/negative goodwill in prior periods has beenreversed under US GAAP. Transaction costs, which are capitalized as part of thecost of investment under HKFRS, have been expensed in full under US GAAP. Upfront non-refundable revenue and direct incremental costs occurringprior to the Acquisitions were not recognized as assets and liabilities underthe purchase method of accounting in the financial statements prepared underHKFRS, whereas as a transfer of business under common control under US GAAP,such assets and liabilities have been recognized as if the subsidiaries hadalways been part of the Group.

 

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**(B)  Effect of the disposal of entity under commoncontrol**

In 2003, under the accounting principles generally accepted in HongKong, the sale of New Guoxin has been accounted for as a sale of discontinued operation bythe Group. The difference between the sale proceeds and the carrying amount ofnet assets of New Guoxin as of December 31, 2003 (the effective date ofdisposal) was recorded as the loss on saleof discontinued operation in the consolidated statements of income of theGroup. The operating results of New Guoxin for 2003 were included in the consolidated statements of income ofthe Group up to the effective date of the sale.

Under US GAAP, the sale of New Guoxin to Unicom Group is considered atransfer of business between entities under common control and accounted for athistorical cost of the net assets transferred, after reduction, if appropriate,for an indicated impairment of value. Any difference between the sale proceedsand the new carrying values of assets and liabilities of the business is treatedas contribution by (or distribution to) the owner, as appropriate. After theimpairment assessment under SFAS 144, an additional provision of impairmentloss of the Paging assets amounting to approximately RMB608 million wasrecorded under US GAAP as at the effective date of the sale of New Guoxin. Therewas no adjustment to the shareholders’ equity since the sale proceedsapproximated the new carrying values of the net assets of New Guoxin, aftertaking into consideration the additional impairment provision described above.In addition, under US GAAP, the results of operations of a component, includinga segment of an entity that has been disposed of should be reported underdiscontinued operations as a separate component of income, separately fromcontinuing operations, in the period in which the disposal occurred as well as in prior periods.Accordingly, the operating result of New Guoxin has been grouped into andreported in the statements ofincome for the year ended December 31,2003 as “Discontinuedoperation-Loss from discontinued operation” under US GAAP.

**(C) Consolidation of variable interestentities**

Under HKFRS, consolidation of business enterprisesis based on voting control. In addition, special purposes entities (“SPE”) areconsolidated where the substance of the relationship indicates that an entitycontrols the SPE. Indicators of control mainly arise where: (i) the SPEconducts its activities on behalf of the entity; (ii) the entity has thedecision-making power to obtain the majority of the benefits of the SPE; (iii) theentity has other rights to obtain the majority of the benefits of the SPE; or (iv) theentity has the majority of the residual or ownership risks of the SPE or itsassets.

Under US GAAP, pursuant to Financial AccountingStandard Board (“FASB”) Interpretation No. 46 (revised in December 2003),“Consolidation of Variable Interest Entities” (“FIN 46R”), consolidation bybusiness enterprises is based on an economic risks and rewards model ratherthan a traditional voting interest model. Entities subject to consolidationunder the economic risks and rewards model is called a Variable Interest Entity(“VIE”). In accordance with the provision of FIN 46R, the Group has identifiedone VIE, Unicom New Horizon, in which it holds a variable interest in the formof lease renewal options. Unicom New Horizon is a 100% owned subsidiary of the Group’sultimate holding company, from which the Group leases its CDMA assets underoperating leases subject to indefinite renewal options. Lease fees arecalculated based on a percentage of CUCL’s service revenues. The Group hasconcluded that its controlling shareholder is the primary beneficiary of UnicomNew Horizon, since it absorbs all of Unicom New Horizon’s expected losses(through its ownership of 100% of Unicom New Horizon’s equity and anunconditional guarantee of 100% of Unicom New Horizon debt) and is indirectlyassociated with the operations of the leased CDMA assets through its majorityownership of the Group. As such, the adoption of FIN 46R did not result in anydifferences from the Group’s HKFRS consolidated financial statements.

 

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**(****D****)  Employeehousing schemes**

Prior to theestablishment of New Guoxinand CUCL, bothChina Telecom (the previous owner of New Guoxin prior to its restructuring intothe Group) and Unicom Group provided housing benefits to qualified employees ofthe Group to enable them to purchase living quarters at a discount. Under HKFRS, housing benefits incurredand borne by China Telecom and Unicom Group for these employees were notrecognized by the Group. Under US GAAP, the amount of such housing benefits isbeing recognized as part of the Group’s operatingexpenses over the estimated average service life of the participatingemployees. The corresponding credits are being accounted for as capitalcontributions.****Upon the completion of sale of New Guoxin on December 31, 2003, therelated housing benefits have been correspondingly accounted for with the netassets transferred.

**(****E****)   Deferredtaxation**

The adjustment relatedto deferred taxation represents the deferred tax effects of other US GAAPadjustments.

**(****F****)   Revaluationof property, plant and equipment**

Under HKFRS, revaluationsurplus in relation to buildings is recorded by the Group as part of theproperty, plant and equipment. Thereafter, depreciation is provided based onthe revalued amounts.

Under US GAAP, allproperty, plant and equipment are stated at historical cost less accumulateddepreciation.

 

F-90

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**(****G****)  Share option scheme**

Under HKFRS,the fair value of the employee services received in exchange for share options is recognized as anexpense. The total amount to be expensed over the vesting period is determinedby reference to the fair value of the options granted. The proceeds received net ofany directly attributable transaction costs are credited to share capital(nominal value) and share premium when the options are exercised. Upon the adoption of HKFRS 2 effective on January 1,2005, the Group expenses the cost of share options in the statements of income.As a transitional provision, the cost of share options granted after November 7,2002 and not yet vested on January 1, 2005 was expensed retrospectively inthe statements of income of the respective periods. Refer to Note (2.2(b)) and Note(28) for details of share option schemes adopted by the Company.

Under USGAAP, the Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”) to account for its fixed award stock options issued to employees.Under APB 25, compensation expense is recorded in the amount of the excess, ifany, of the quoted market price of the shares on the date of grant over theexercise price of the options, which is amortized over the vesting period ofthe option. Since the market price of the underlying stock on the date of grantdid not exceed the exercise price of the options granted, no compensation costfor options has been recognized in the reconciliation of net income to US GAAP.In accordance with Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”)as further amended by Statement of Financial Accounting Standards, No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure”(“SFAS 148”),the required pro forma informationis set forth below:
| ** **                                                                                                                     | ** ** | **2003**  | ** ** | **2004**  | ** ** | **2005**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                                           |       |      |       |      |       |      |       |
| Net income  under US GAAP:                                                                                                     |       |      |       |      |       |      |       |
| As  reported                                                                                                                   |       | 4,736,121 |       | 4,712,687 |       | 5,012,812 |       |
| Less:  Total stock-based employee compensation expense determined under fair-      value based method |       | (86,855   | )          | (146,541  | )          | (108,950  | )          |
|                                                                                                                           |       |      |       |      |       |      |       |
| Pro  forma                                                                                                                     |       | 4,649,266 |       | 4,566,146 |       | 4,903,862 |       |
|                                                                                                                           |       |      |       |      |       |      |       |
| Basic  earnings per share:                                                                                                     |       |      |       |      |       |      |       |
| As  reported (RMB)                                                                                                             |       | 0.38      |       | 0.38      |       | 0.40      |       |
| Pro  forma (RMB)                                                                                                               |       | 0.37      |       | 0.36      |       | 0.39      |       |
|                                                                                                                           |       |      |       |      |       |      |       |
| Diluted  earnings per share:                                                                                                   |       |      |       |      |       |      |       |
| As  reported (RMB)                                                                                                             |       | 0.38      |       | 0.37      |       | 0.40      |       |
| Pro  forma (RMB)                                                                                                               |       | 0.37      |       | 0.36      |       | 0.39      |       |
|                                                                                                                           |       |      |       |      |       |      |       |
| Basic earnings  per ADS:                                                                                                       |       |      |       |      |       |      |       |
| As  reported (RMB)                                                                                                             |       | 3.77      |       | 3.75      |       | 3.99      |       |
| Pro  forma (RMB)                                                                                                               |       | 3.70      |       | 3.64      |       | 3.90      |       |
| ** **                                                                                                                     |       |      |       |      |       |      |       |
| Diluted earnings  per ADS:                                                                                                     |       |      |       |      |       |      |       |
| As  reported (RMB)                                                                                                             |       | 3.77      |       | 3.74      |       | 3.97      |       |
| Pro forma  (RMB)                                                                                                               |       | 3.70      |       | 3.62      |       | 3.89      |       |

 

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**(H)**** ****Capacity transaction**

Under HKFRS, sales of indefeasible right-of-use (“IRU”) arerecognized at the time of delivery and acceptancewhere the following conditionsare met: (i) the purchaser’s right of use is exclusive and irrevocable; (ii) theasset is specific and separable; (iii) the term of the contract is for themajor part of the asset’s useful economic life; (iv) the attributable costof carrying value can be measured reliably; and (v) no significant risksare retained by the Group.

Under USGAAP, sales of IRU are evaluated under the guidance inFASB Interpretations No. 43, “Real Estates Sales”, as the leased asset isconsidered as a real estate. The title of the leased assets must be transferredto the lessee in order to be classified and accounted for as a sales-type leasesuch that the sale can be recognized. Accordingly, sales of IRUs are notrecognized under US GAAP as the title to the asset is not transferred.

**(I)****   ****Recent accounting pronouncements**

The following are new accounting pronouncements not yet effective, butmay be applicable to the Group.

The Financial Accounting Standards Board (“FASB”) recently issuedStatement of Financial Accounting Standards No. 123(R) (revised2004), “Share-Based Payment” (“SFAS 123(R)”), Statement of Financial AccountingStandards No.153, “Exchanges of Nonmonetary Assets - An Amendment of APBOpinion No. 29, Accounting for Nonmonetary Transactions (“SFAS 153”) and FinancialAccounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS154”). The FASB ratified Emerging Issue Task Force (“EITF”) No. 05-06,“Determining the Amortization Period for Leasehold Improvements” (“EITF 05-06”).Also, EITF issued No. 04-13, “Accounting for Purchases and Sales ofInventory with the Same Counterparty” (“EITF 04-13”). Furthermore,the FASB issued FASB Staff Position FAS 13-1, “Accounting for RentalCosts Incurred during a Construction Period” (“FSP 13-1”).

(a)        In December 2004, the FASB issued SFAS123(R), which is a revision of SFAS 123 and supersedes APB 25. SFAS 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be valued at fair value on the date of grant, and to be expensedover the applicable vesting period. Under SFAS 123(R), the pro formadisclosures of the statements of income effects of share-based payments are nolonger an alternative. In March 2005, the SEC issued Staff AccountingBulletin No. 107 regarding the SEC’s interpretation of SFAS 123(R) andthe valuation of share-based payment for public companies. SFAS 123(R) iseffective for all stock-based awards granted on or after June 15, 2005. Inaddition, companies must also recognize compensation expense related to anyawards that are not fully vested as of June 15, 2005. Compensation expensefor the unvested awards will be measured based on the fair value of the awardspreviously calculated in developing the pro forma disclosures in accordancewith the provisions of SFAS 123 and will be amortized over the remainingvesting period.

The Group adopted SFAS 123(R) andrelevant implementation guidance on January 1, 2006 using the ModifiedProspective Application (“MPA”) method. By using the MPA method, the Group willnot restate its prior period financial statements. Instead, the Group appliesSFAS 123(R) for any unvested options as of and new options granted after June15, 2005. Based on unvested options as of June 15, 2005 and new options thathave been granted in 2006, the Group estimates the share option compensationexpense for the year ending December 31, 2006, due to the effect ofadoption of SFAS 123(R), to be within the range from RMB149 million to RMB165million.

 

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(b)      In December 2004,the FASB issued SFAS 153. SFAS 153 eliminates the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets in paragraph21(b) of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”(“APB 29),  and replaces it with anexception for exchanges that do not have commercial substance. SFAS 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,2005. The Group does not expect the adoption of SFAS 153 will have a materialeffect on the Group’s results of operations and financial condition.

(c)         In May 2005,the FASB issued SFAS 154, a replacement of APB Opinion No. 20, “AccountingChanges” and Statement of Financial Accounting Standards No. 3, “ReportingAccounting Changes in Interim Financial Statements”. The statement applies toall voluntary changes in accounting principle and changes the requirements forthe accounting for and reporting of a change in accounting principle.SFAS 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle unless it is impracticable.SFAS 154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005. The Group does notexpect the adoption of SFAS 154 will have a material impact of theconsolidated financial statements of the Group.

(d)      In June 2005,the FASB ratified EITF 05-06. This issue provided that the amortizationperiod used for leasehold improvements acquired in a business combination orpurchased after the inception of a lease be the shorter of (a) the usefullife of the assets or (b) a term that includes required lease periods andrenewals that are reasonably assured upon the acquisition or the purchase. Theprovisions of EITF 05-06 should be applied to leasehold improvements(within the scope of this issue) that are purchased or acquired in reportingperiods beginning after June 29, 2005. Adoption of EITF 05-06 is notexpected to have a material impact on the Group’s results of operations andfinancial position.

(e)  In September 2005, the EITF issued EITF 04-13.The issue provided guidance on the circumstances under which two or moreinventory transactions with the same counterparty should be viewed as a singlenon-monetary transaction within the scope of APB 29. EITF 04-13 alsoprovided guidance on circumstances under which non-monetary exchanges ofinventory within the same line of business should be recognized at fair value.EITF 04-13 will be effective for transactions completed in reportingperiods beginning after March 15, 2006. The Group believes the adoption ofEITF 04-13 will not have significant impact on its consolidated financialstatements.

(f)  In October 2005, the FASB issued FSP 13-1. FSP 13-1requires that rental costs associated with ground or building operating leasesthat are incurred during the construction period be recognized as rentalexpense. FSP 13-1 is applicable for the first reporting period after December 15,2005. The Group does not expect the adoption of FSP 13-1 to have amaterial impact on the Group’s results of operations and financial position.

 

F-93

----

 

Differences between HKFRS and US GAAP which affect netincome of the Group are summarized below:
| ** **                                                                                                                     | ** ** | **Note** | ** ** | **2003**  | ** ** | **2004**   | ** ** | **2005**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|------------|------------|-----------|------------|
|                                                                                                                           |       |     |       |      | ** ** | ** ** |       |      |       |
|                                                                                                                           |       |     |       |      |       |       |       |      |       |
| Net  income under HKFRS (Restated)                                                                                             |       | (1)      |       | 4,278,149 |       | 4,493,451  |       | 4,931,052 |       |
|                                                                                                                           |       |     |       |      |       |       |       |      |       |
| Impact  of US GAAP adjustments:                                                                                                |       | (2)      |       |      |       |       |       |      |       |
| - Reversal of goodwill amortization of Unicom New  Century                                                                     |       | (A)      |       | 114,237   |       | 114,237    |       | —    |       |
| - Recognition of depreciation  expenses based on historical cost of property, plant and equipment of Unicom  New Century       |       | (A)      |       | (25,443   | )          | (28,761    | )          | (28,761   | )          |
| - Effect of acquisition of Unicom New World                                                                                    |       | (A)      |       | 350,947   |       | —     |       | —    |       |
| - Transaction costs for the acquisition of Unicom  New World                                                                   |       | (A)      |       | (49,378   | )          | —     |       | —    |       |
| - Reversal of goodwill amortization of Unicom New  World                                                                       |       | (A)      |       | —    |       | 57,247     |       | —    |       |
| - Recognition of depreciation  expenses based on historical cost of property, plant and equipment of Unicom  New World         |       | (A)      |       | —    |       | (20,740    | )          | (20,740   | )          |
| - Effect of acquisition of Unicom International                                                                                |       | (A)      |       | 7,698     |       | 6,106      |       | —    |       |
| - Transaction costs for the acquisition of Unicom  International                                                               |       | (A)      |       | —    |       | (325       | )          | —    |       |
| - Recognition of depreciation expenses based on  historical cost of property, plant and equipment of Unicom International      |       | (A)      |       | —    |       | 61         |       | 1,448     |       |
| - Upfront non-refundable revenue and direct  incremental costs  not recognized under purchase method of accounting under HKFRS |       | (A)      |       | 28,967    |       | 19,807     |       | 21,001    |       |
| - Reversal of employee housing benefits expenses                                                                               |       | (D)      |       | (18,532   | )          | (14,942    | )          | (14,942   | )          |
| - Reversal of depreciation for revalued property,  plant and equipment                                                         |       | (F)      |       | 7,485     |       | 4,127      |       | 4,127     |       |
| - Difference in provision for impairment and  disposal loss of New Guoxin                                                      |       | (B)      |       | 55,078    |       | —     |       | —    |       |
| - Reversal of differences in provision for  impairment loss of equipment upon depreciation and disposal                        |       | (B)      |       | (3,538    | )          | —     |       | —    |       |
| - Reversal of employee compensation costs for share  option scheme under HKFRS                                                 |       | (G)      |       | 21,707    |       | 88,957     |       | 108,417   |       |
|  - Income on sale of  indefeasible right-of-use                                                                           |       | (H)      |       | —    |       | —     |       | (3,747    | )          |
|  - Deferred tax  effects of US GAAP adjustments                                                                           |       | (E)      |       | (31,256   | )          | (6,538     | )          | 14,957    |       |
|                                                                                                                           |       |     |       |      |       |       |       |      |       |
| Net income under  US GAAP                                                                                                      |       | (2)      |       | 4,736,121 |       | 4,712,687  |       | 5,012,812 |       |

 

F-94

----

 

Differences between HKFRS and US GAAP which affectshareholders’equity of the Group are summarized below:
| ** **                                                                                                                                                       | ** ** | **Note** | ** ** | **2004**   | ** ** | **2005**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                                                                                                                                             |       |     | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                             |       |     |       |       |       |       |       |
| Shareholders’  equity under HKFRS (Restated)                                                                                                                |       | (1)      |       | 72,449,666 |       | 76,284,345 |       |
|                                                                                                                                                             |       |     |       |       |       |       |       |
| 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)      |       | 174,270    |       | 145,509    |       |
| - Effect of acquisition of Unicom New World                                                                                                                      |       | (A)      |       | (946,370   | )          | (946,370   | )          |
| - Transaction costs for the acquisition of Unicom  New World                                                                                                     |       | (A)      |       | (49,378    | )          | (49,378    | )          |
| - Reversal of goodwill amortization and recognition  of depreciation expenses based on historical cost of property, plant and  equipment of Unicom New World     |       | (A)      |       | 36,507     |       | 15,767     |       |
| - Effect of acquisition of Unicom International                                                                                                                  |       | (A)      |       | 392        |       | 392        |       |
| - Transaction costs for the acquisition of Unicom  International                                                                                                 |       | (A)      |       | (325       | )          | (325       | )          |
| - Reversal of goodwill amortization and recognition  of depreciation expenses based on historical cost of property, plant and  equipment of Unicom International |       | (A)      |       | (7,425     | )          | (5,977     | )          |
| - Upfront non-refundable revenue and direct  incremental costs  not recognized under purchase method of accounting under HKFRS                                   |       | (A)      |       | 48,774     |       | 69,775     |       |
| - Reversal of revaluation surplus of property, plant  and equipment:                                                                                             |       |     |       |       |       |       |       |
| - Cost                                                                                                                                                           |       | (F)      |       | (82,531    | )          | (82,531    | )          |
| - Accumulated depreciation                                                                                                                                       |       | (F)      |       | 19,478     |       | 23,605     |       |
|  - Income difference on sale of indefeasible  right-of-use                                                                                                  |       | (H)      |       | —     |       | (3,747     | )          |
|  - Deferred tax  effects of US GAAP adjustments                                                                                                             |       | (E)      |       | (38,961    | )          | (24,004    | )          |
|                                                                                                                                                             |       |     |       |       |       |       |       |
| Shareholders’  equity under US GAAP                                                                                                                         |       | (2)      |       | 69,442,322 |       | 73,265,286 |       |

----

Notes

(1) The adoption of new/revised HKFRS in 2005 resultedin changes in certain accounting policies whichhave been reflected in the financial statements either in accordance with thetransitional provisions in the applicable accounting standards or, to theextent there are no transitional provisions, applied retrospectively so thatthe comparative figures presented have been restated, as applicable, to conformto the changed policies. Detailed information is set forth in Note 2.2 of these consolidated financialstatements.

(2)          In accordance with the US GAAP accountingas described in Note (A) above, the consolidated financial statementsunder US GAAP for prior periods presented have been retroactively restated toinclude Unicom New Century, Unicom New World and Unicom International since thebeginning of the earliest period presented.

 

F-95

----

 

Thefollowing are the condensed statements of income, changes in shareholders’equity and cash flow information for the years ended December 31, 2003,2004 and 2005, condensed balance sheets information for the Group as of December 31,2004 and 2005, and additional financial information as of and for the yearsended December 31, 2003, 2004 and 2005, restated to reflect the impact ofthe effects of the disposal of New Guoxin as discontinued operation and acquisitionof entities under common control which is accounted for at historical cost withretroactive restatement under US GAAP.

***Condensed Statements of******I******ncome***

*** ***
| ** **                                                                                            | ** ** | **Note** | ** ** | **2003**    | ** ** | **2004**    | ** ** | **200**5    | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                                                  |       |     | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Revenue  (Turnover):                                                                                  |       | (a)      |       | 71,980,310  |       | 79,388,314  |       | 87,254,524  |       |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Operating expenses:                                                                                   |       |     |       |        |       |        |       |        |       |
| Leased lines and  network capacities                                                                  |       | (a)      |       | (4,729,159  | )          | (7,398,429  | )          | (8,747,317  | )          |
| Interconnection  charges                                                                              |       | (a)      |       | (6,111,437  | )          | (7,508,866  | )          | (8,372,370  | )          |
| Depreciation and  amortization                                                                        |       |     |       | (16,757,294 | )          | (18,944,473 | )          | (20,412,108 | )          |
| Employee benefit  expenses                                                                            |       |     |       | (4,654,670  | )          | (4,547,892  | )          | (5,522,837  | )          |
| Selling and  marketing                                                                                |       | (a)      |       | (16,689,275 | )          | (18,989,186 | )          | (20,721,974 | )          |
| General,  administrative and other expenses                                                           |       | (a)      |       | (9,204,349  | )          | (10,471,208 | )          | (11,741,560 | )          |
| Cost of  telecommunications products sold                                                             |       | (a)      |       | (3,124,558  | )          | (3,342,797  | )          | (3,594,844  | )          |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Total operating expenses                                                                              |       |     |       | (61,270,742 | )          | (71,202,851 | )          | (79,113,010 | )          |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Operating income from  continuing operations                                                          |       |     |       | 10,709,568  |       | 8,185,463   |       | 8,141,514   |       |
| Interest income                                                                                       |       |     |       | 170,486     |       | 103,441     |       | 96,196      |       |
| Finance costs                                                                                         |       |     |       | (2,319,096  | )          | (1,688,418  | )          | (1,099,321  | )          |
| Other gains - net                                                                                     |       |     |       | (29,837     | )          | 95,932      |       | 30,111      |       |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Net income from  continuing operations before taxation, minority interests and discontinued operation |       |     |       | 8,531,121   |       | 6,696,418   |       | 7,168,500   |       |
| Taxation                                                                                              |       |     |       | (2,453,160  | )          | (1,983,731  | )          | (2,155,454  | )          |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Net income from continuing operations before  minority interests and discontinued operation           |       |     |       | 6,077,961   |       | 4,712,687   |       | 5,013,046   |       |
| Minority interests                                                                                    |       |     |       | —      |       | —      |       | (234        | )          |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Net income before  discontinued operation                                                             |       |     |       | 6,077,961   |       | 4,712,687   |       | 5,012,812   |       |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Discontinued operation                                                                                |       |     |       |        |       |        |       |        |       |
| - Loss from  discontinued operation                                                                   |       |     |       | (1,762,222  | )          | —      |       | —      |       |
| - Add: related  tax impact                                                                            |       |     |       | 420,382     |       | —      |       | —      |       |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Loss from discontinued operation, net of tax                                                          |       |     |       | (1,341,840  | )          | —      |       | —      |       |
|                                                                                                  |       |     |       |        |       |        |       |        |       |
| Net income                                                                                            |       |     |       | 4,736,121   |       | 4,712,687   |       | 5,012,812   |       |

 

F-96

----

** **
| ** **                                        | ** ** | **Note** | ** ** | **2003** | ** ** | **2004** | ** ** | **200**5 | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |     |       |     |       |
| **Basic earnings per share (RMB):**               |       |     |       |     |       |     |       |     |       |
| Earnings  per share before discontinued operation |       | (1)      |       | 0.48     |       | 0.38     |       | 0.40     |       |
| Loss from  discontinued operation, net of tax     |       |     |       | (0.11    | )          | —   |       | —   |       |
| Net  income                                       |       | (1)      |       | 0.37     |       | 0.38     |       | 0.40     |       |
|                                              |       |     |       |     |       |     |       |     |       |
| **Diluted earnings per share  (RMB):**            |       |     |       |     |       |     |       |     |       |
| Earnings  per share before discontinued operation |       | (2)      |       | 0.48     |       | 0.37     |       | 0.40     |       |
| Loss from  discontinued operation, net of tax     |       |     |       | (0.11    | )          | —   |       | —   |       |
| Net  income                                       |       | (2)      |       | 0.37     |       | 0.37     |       | 0.40     |       |
|                                              |       |     |       |     |       |     |       |     |       |
| **Basic earnings per ADS (RMB):**                 |       |     |       |     |       |     |       |     |       |
| Earnings  per share before discontinued operation |       | (1)      |       | 4.84     |       | 3.75     |       | 3.99     |       |
| Loss from  discontinued operation, net of tax     |       |     |       | (1.07    | )          | —   |       | —   |       |
| Net  income                                       |       | (1)      |       | 3.77     |       | 3.75     |       | 3.99     |       |
|                                              |       |     |       |     |       |     |       |     |       |
| **Diluted earnings per ADS (RMB):**               |       |     |       |     |       |     |       |     |       |
| Earnings  per share before discontinued operation |       | (2)      |       | 4.84     |       | 3.74     |       | 3.97     |       |
| Loss from  discontinued operation, net of tax     |       |     |       | (1.07    | )          | —   |       | —   |       |
| Net income                                        |       | (2)      |       | 3.77     |       | 3.74     |       | 3.97     |       |

----

Notes

(1)                Basic earnings pershare before or afterdiscontinued operation for the years ended December 31, 2003,2004 and 2005 were computed by dividing the net income before or after discontinued operation for thefinancial years under US GAAP by the weighted average number of ordinaryshares in issue during the years.

(2)                Diluted earningsper share before or after discontinued operation for the years ended December 31,2003, 2004 and 2005 were computed by dividing the net income before or afterdiscontinued operation for the financial years under US GAAP by the weightedaverage number of ordinary shares in issue during the years, after adjustingfor the cumulative effects of the dilutive potential ordinary shares. All dilutivepotential shares arose from share options granted (i) under the amended Pre-GlobalOffering Share Option Scheme; and (ii) under the amended Share OptionScheme as described in Note 28. For 2005, all dilutive potential ordinaryshares arose from additional share options granted in 2002, 2003 and 2004 underthe amended Share Option Scheme (see Note 28), which if converted to ordinaryshares would decrease earnings per share.

 

F-97

----

 

***Condensed Balance Sheet******s***
| ** **                                           | ** ** | **2004**    | ** ** | **200**5    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **Assets**                                           | ** ** | ** **  | ** ** | ** **  | ** ** |
| **Current assets:**                                  |       |        |       |        |       |
| Current portion  of deferred tax assets              |       | 606,009     |       | 447,556     |       |
| Inventories                                          |       | 3,114,632   |       | 2,107,812   |       |
| Accounts receivable                                  |       | 9,163,487   |       | 7,636,980   |       |
| Less: Provision  for doubtful debts                  |       | (3,933,507  | )          | (3,088,551  | )          |
| Accounts  receivable, net                            |       | 5,229,980   |       | 4,548,429   |       |
| Prepayments and  other current assets                |       | 3,059,714   |       | 2,342,467   |       |
| Amounts due from  Domestic Carriers                  |       | 269,919     |       | 138,485     |       |
| Amounts due from  Unicom Group                       |       | 61,401      |       | —      |       |
| Amounts due from  related parties                    |       | 193,048     |       | 384,531     |       |
| Short-term bank  deposits                            |       | 662,025     |       | 282,457     |       |
| Bank balances  and cash                              |       | 4,655,464   |       | 5,471,576   |       |
|                                                 |       |        |       |        |       |
| Total current  assets                                |       | 17,852,192  |       | 15,723,313  |       |
| ** **                                           |       |        |       |        |       |
| **Non-current assets:**                              |       |        |       |        |       |
| Property, plant  and equipment                       |       | 118,700,674 |       | 116,232,246 |       |
| Other assets                                         |       | 10,062,008  |       | 8,002,207   |       |
|                                                 |       |        |       |        |       |
| **Total assets**                                     |       | 146,614,874 |       | 139,957,766 |       |
|                                                 |       |        |       |        |       |
| **L****iabilities ****and equity**              |       |        |       |        |       |
| **Current liabilities:**                             |       |        |       |        |       |
| Payables and  accrued liabilities                    |       | 16,785,749  |       | 18,526,628  |       |
| Taxes payable                                        |       | 395,688     |       | 1,016,128   |       |
| Amounts due to  Domestic Carriers                    |       | 948,574     |       | 822,006     |       |
| Amounts due to  Unicom Group                         |       | —      |       | 38,094      |       |
| Amounts due to  related parties                      |       | 5,760       |       | 116,621     |       |
| Short-term bonds                                     |       | —      |       | 9,865,900   |       |
| Short-term bank  loans                               |       | 8,928,417   |       | 7,024,358   |       |
| Current portion  of long-term bank loans             |       | 11,086,305  |       | 5,145,190   |       |
| Current portion  of obligations under finance leases |       | 938,189     |       | 420,631     |       |
| Advances from  customers                             |       | 7,034,995   |       | 7,886,624   |       |
|                                                 |       |        |       |        |       |
| Total current  liabilities                           |       | 46,123,677  |       | 50,862,180  |       |
|                                                 |       |        |       |        |       |
| **Non-current liabilities:**                         |       |        |       |        |       |
| Long-term bank  loans                                |       | 26,137,188  |       | 11,981,518  |       |
| Obligations  under finance leases                    |       | 488,956     |       | 145,367     |       |
| Deferred tax  liabilities                            |       | 170,420     |       | 132,892     |       |
| Deferred revenue                                     |       | 4,249,733   |       | 3,567,789   |       |
| Other long-term  liabilities                         |       | 2,578       |       | —      |       |
|                                                 |       |        |       |        |       |
| Total  non-current liabilities                       |       | 31,048,875  |       | 15,827,566  |       |
| ** **                                           |       |        |       |        |       |
| **Minority interests**                               |       | —      |       | 2,734       |       |
| ** **                                           |       |        |       |        |       |
| **Shareholders’****equity**                     |       | 69,442,322  |       | 73,265,286  |       |
|                                                 |       |        |       |        |       |
| **Total liabilities and shareholders’ equity**  |       | 146,614,874 |       | 139,957,766 |       |

 

F-98

----

 

***Condensed Statement******s******of Changes in Shareholders’ Equity***
| Balance of  shareholders’ equity as of December 31, 2002                                             |   | 64,258,882 |   |
|----------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| Net income for  the year ended December 31, 2003                                                          |   | 4,736,121  |   |
| 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                                                                                         |   | (286,942   | )      |
| Dividend paid                                                                                                  |   | (1,255,300 | )      |
| Exercise of  share options                                                                                     |   | 1,158      |   |
|                                                                                                           |   |       |   |
| Balance of  shareholders’ equity as of December 31, 2003                                             |   | 65,946,144 |   |
| Net income for  the year ended December 31, 2004                                                          |   | 4,712,687  |   |
| Deemed capital  contribution from owner for employee housing benefits                                          |   | 14,942     |   |
| Deemed capital  distribution relating to the payment to Unicom Group for the transfer of Unicom  International |   | (39,416    | )      |
| Dividend paid                                                                                                  |   | (1,256,160 | )      |
| Exercise of  share options                                                                                     |   | 64,125     |   |
|                                                                                                           |   |       |   |
| Balance of shareholders’ equity as of  December 31, 2004                                             |   | 69,442,322 |   |
| Net income for the year ended December 31, 2005                                                           |   | 5,012,812  |   |
| Deemed capital contribution from owner for employee  housing benefits                                          |   | 14,942     |   |
| Dividend paid                                                                                                  |   | (1,256,924 | )      |
| Exercise of share options                                                                                      |   | 52,134     |   |
|                                                                                                           |   |       |   |
| Balance of  shareholders’ equity as of December 31, 2005                                             |   | 73,265,286 |   |

 

***Condensed Cash Flow Statement******s***
| ** **                                           | ** ** | **2003**    | ** ** | **2004**    | ** ** | **200**5    | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Net cash inflows  (outflows) from:                   |       |        |       |        |       |        |       |
| Operating activities                                 |       | 25,992,889  |       | 24,510,430  |       | 31,486,278  |       |
| Investing activities                                 |       | (20,295,426 | )          | (19,668,070 | )          | (17,430,931 | )          |
| Financing activities                                 |       | (11,397,136 | )          | (9,440,491  | )          | (13,213,324 | )          |
|                                                 |       |        |       |        |       |        |       |
| Net (decrease) increase in cash and cash equivalents |       | (5,699,673  | )          | (4,598,131  | )          | 842,023     |       |
| Cash and cash  equivalents, beginning of year        |       | 14,927,357  |       | 9,227,684   |       | 4,629,553   |       |
|                                                 |       |        |       |        |       |        |       |
| Cash and cash  equivalents, end of year              |       | 9,227,684   |       | 4,629,553   |       | 5,471,576   |       |
|                                                 |       |        |       |        |       |        |       |
| Interest paid (net of  amount capitalized)           |       | (2,322,892  | )          | (1,662,419  | )          | (1,109,808  | )          |

 

F-99

----

 

**Supplemental information**

***(******a******)   Related Party Transactions***
| ** **                                                                       | ** ** | **2003**   | ** ** | **2004**   | ** ** | **200**5   | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Transactions  with Unicom Group and its subsidiaries:**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interconnection and roaming revenues                                             |       | 155,464    |       | 212,292    |       | 207,526    |       |
| Interconnection and roaming charges                                              |       | 47,615     |       | 56,171     |       | 57,902     |       |
| Charge for cellular subscriber value-added service  by New Guoxin                |       | —     |       | 858,778    |       | 412,549    |       |
| Charge for customer services                                                     |       | —     |       | 524,718    |       | 562,003    |       |
| Charge for cellular subscriber value-added service  by UNISK and Unicom NewSpace |       | —     |       | 4,228      |       | 28,418     |       |
| Rental charges for premises, equipment and  facilities                           |       | 17,936     |       | 25,528     |       | 21,059     |       |
| Rental income for premises and facilities                                        |       | —     |       | 19,475     |       | 18,662     |       |
| Constructed capacity related cost of CDMA network                                |       | —     |       | 305,903    |       | 176,130    |       |
| Revenue for leasing of transmission line capacity                                |       | 10,717     |       | 24,822     |       | 25,841     |       |
| Charges for the international gateway services                                   |       | 8,631      |       | 17,062     |       | 19,797     |       |
| Leasing of satellite transmission capacity                                       |       | 26,400     |       | 14,152     |       | 11,794     |       |
| CDMA network capacity lease rental                                               |       | 3,909,148  |       | 6,588,926  |       | 7,924,644  |       |
| Sales of CDMA handsets                                                           |       | 23,484     |       | —     |       | —     |       |
| Purchase of CDMA handsets                                                        |       | —     |       | 14,655     |       | —     |       |
| Purchase of telecom cards                                                        |       | 1,326,641  |       | 1,087,498  |       | 671,715    |       |
| Agency fee incurred for procurement of  telecommunications equipment             |       | 20,705     |       | 17,759     |       | 15,791     |       |
| Commission fees  to New Guoxin                                                   |       | —     |       | 9,054      |       | 15,312     |       |

 

Detaileddescription of the nature and terms of the related party transactions are setforth in Note 32 of theconsolidated financial statement.

**Movementof significant provisions**

(a)   Provision for doubtful debts was analyzed asfollows:
| ** **                  | ** ** | **2003**  | ** ** | **2004**   | ** ** | **200**5   | ** ** |
|-----------------------------|------------|-----------|------------|------------|------------|------------|------------|
|                        |       |      |       |       |       |       |       |
| Balance, beginning  of year |       | 1,901,752 |       | 3,498,305  |       | 3,933,507  |       |
| Provision for  the year     |       | 2,019,470 |       | 2,191,820  |       | 1,498,510  |       |
| Written-off for  the year   |       | (358,253  | )          | (1,756,618 | )          | (2,343,466 | )          |
| Disposal of New Guoxin      |       | (64,664   | )          | —     |       | —     |       |
|                        |       |      |       |       |       |       |       |
| Balance, end of year        |       | 3,498,305 |       | 3,933,507  |       | 3,088,551  |       |

 

(b)          Other thanthose described in the above notes, there was no other significant movement ofprovisions for the years ended December 31, 2003, 2004 and 2005.

 

F-100

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