** **

**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**     |
|       |       |                                                                                                                                                                                                                                                                          |
| **ý** | ** ** | **ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                          |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
|       |       | **For  the fiscal year ended December 31, 2004**                                                                                                                                                                                                                         |
|       |       | ** **                                                                                                                                                                                                                                                                    |
| **OR**     |
|       |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                      |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                    |
|       |       | **For  the transition period from                      to                    ** |

** **

**Commission file** number 1-15028

** **

**CHINA UNICOM LIMITED**

(Exact Name of Registrant as Specified in Its Charter)

 
| **N/A**                                                                                                       | ** ** | **Hong  Kong**                                   |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|
| (Translation of  Registrant’s Name Into English)                                                         |       | (Jurisdiction of  Incorporation or Organization) |
|                                                                                                          |       |                                             |
| **75th  Floor, The Center  99 Queen’s Road Central  Hong Kong**(Address of  Principal Executive Offices) |

 

Securitiesregistered 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.

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act:

 

**None******(Title of class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) ofthe Act:

 

**None**(Title of Class)

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

 

12,607,241,000Ordinary Shares as of December 31, 2004.

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes   ý        No   o

 

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

 

Item17    o  Item 18    ý

 

 

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

 

i

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

 

ii

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**NOTEREGARDING FORWARD-LOOKING STATEMENTS**

** **

Thisannual report for the year ended December 31, 2004 contains forward-lookingstatements that are, by their nature, subject to significant risks anduncertainties.  Such forward-lookingstatements include, without limitation, our strategy and future plan, ourcapital expenditure plan, our future business condition and financial results,our abilities to expand network capacity and increase network efficiency, ourability to develop new technology applications and offer new services, ourability to realize the advantages of code division multiple access, or CDMA,technology and successfully execute our CDMA-related strategy, our ability toleverage our position as an integrated telecommunications operator and expandinto new businesses and new markets, future growth of market demand for ourservices, the future prospects of and our ability to integrate the acquiredbusiness, and future regulatory and other developments in the Chinesetelecommunications industry.

 

Suchforward-looking statements reflect our current views with respect to futureevents.  Actual results may differmaterially from information contained in the forward-looking statements as aresult of a number of factors, including, without limitation, any changes inthe regulatory policies of the Ministry of Information Industry, or MII, theState-owned Assets Supervision and Administration Commission, or SASAC, andother relevant government authorities in China, the effects of competition onthe demand and price of our telecommunications services, any changes intelecommunications and related technology and applications based on suchtechnology, and changes in political, economic, legal and social conditions inChina including the Chinese government’s policies with respect to economicgrowth, consolidations of and other structural changes in the telecommunicationsindustry, foreign exchange, foreign investment and entry by foreign companiesinto China’s telecommunications market. In addition, our future network expansion and other capital expenditureand development plans are dependent on numerous factors, including theavailability of adequate financing on acceptable terms, the adequacy ofcurrently available spectrum or availability of additional spectrum and theadequate and timely supply of equipment when required.  Please also see the “D. Risk Factors” section underItem 3.

 

**CERTAIN DEFINITIONS**

** **

Asused in this annual report, references to “us”, “we”, “our,” the “Company” and “Unicom”are to China Unicom Limited.  Unless thecontext otherwise requires, these references include all of oursubsidiaries.  In respect of any timeprior to our incorporation, references to “us”, “we”, “our” and “Unicom” are tothe telecommunications businesses in which our predecessors were engaged andwhich were subsequently assumed by us. All references to “Unicom Group” are to China United TelecommunicationsCorporation, our indirect controlling shareholder.  Unless the context otherwise requires, thesereferences include all of Unicom Group’s subsidiaries, including us and oursubsidiaries.  Please also see “A.History and Development of the Company” under Item 4 for our currentshareholding structure.

 

iii

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# **PART I**

# ** **

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

## ** **

NotApplicable.

 

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

## ** **

NotApplicable.

 

## **Item 3.**  KeyInformation

## ** **

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

### *** ***

The following table presents our selected consolidatedincome statement data for the years ended December 31, 2000, 2001, 2002,2003 and 2004 and our selected consolidated balance sheet data as of December 31,2000, 2001, 2002, 2003 and 2004.  The selected consolidated balance sheet dataas of December 31, 2003 and 2004 and income statement and cash flow datafor the years ended December 31, 2002, 2003 and 2004 have been derivedfrom our audited consolidated financial statements included in this annualreport.  The selected consolidatedbalance sheet data as of December 31, 2000, 2001 and 2002 and incomestatement and cash flow data for the years ended December 31, 2000 and 2001have been derived from our audited consolidated financial statements that arenot included in this annual report.  Thefinancial statements for periods prior to our restructuring and initial publicoffering in 2000 reflect historical results of operations and financialpositions of the businesses that were transferred to us from Unicom Group in2000 in preparation of our initial public offering.

 

Ourfinancial statements are prepared in accordance with generally acceptedaccounting principles in Hong Kong, or HK GAAP. Under HK GAAP, prior to 2003, deferred taxation was accounted for at thecurrent taxation rate in respect of timing differences between net income ascomputed for taxation purposes and net income as stated in the income statement.A deferred tax asset was not recognized unless the related benefits areexpected to crystallize in the foreseeable future. Upon the adoption of SSAP 12in 2003, deferred taxation is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the financial statements. Taxation rates enactedor substantively enacted at the balance sheet date are used to determinedeferred taxation. Deferred tax assets are recognized to the extent that it isprobable that future taxable income will be available against which thetemporary differences can be utilized. Under HK GAAP, the adoption of SSAP 12 in2003 represents a change in accounting policy which has been appliedretrospectively so that the comparative data presented have been restated toconform to the changed policy. A detailed description is set forth in Note 3 tothe financial statements.

 

1

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Inaddition, financial statements prepared in accordance with HK GAAP vary incertain material respects from generally accepted accounting principles in theUnited States, or US GAAP.  In accordancewith HK GAAP, we adopted the purchase 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.  Theacquisitions of Unicom NewCentury, Unicom New 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, our consolidated incomestatement and, except as otherwise noted, all other HK GAAP financialinformation for the year 2004 presentedin this annual report include the operating results of Unicom New Century andUnicom New World for the year ended December 31, 2004 and theoperating results of Unicom International from the effective date of theacquisition to December 31, 2004, but our consolidated income statement and all other HK GAAP financialinformation for the year 2003 presented in this annual report do notinclude the operating results of Unicom New World for the year ended December 31,2003.  Under the purchase method, ourconsolidated balance sheet as of December 31, 2003 includes the financialposition of Unicom New Century and Unicom New World and our consolidatedbalance sheet as of December 31, 2004 also includes the financial position of Unicom International.  In contrast, under US GAAP, theseacquisitions would be accounted for as transfers of entities under commoncontrol.  The financial statementsprepared under US GAAP would retroactively be restated for all periodspresented on a combined basis as if the acquisitions had been in effect sinceinception, whereby related assets and liabilities of the acquired businesseswould be accounted for at historical cost and the results of operations of theacquired businesses would be included in the consolidated financial statementsfor the earliest period presented.

 

UnderHK GAAP, the sale of Guoxin Paging Corporation Ltd., or Guoxin Paging, on December 31,2003 by us to Unicom Group has been accounted for as a sale of discontinuedoperation. The difference between the sale proceeds and the carrying amount ofnet assets of Guoxin Paging as of December 31, 2003 was recorded as theloss on sale of discontinued operation in our consolidated income statement forthe year ended December 31, 2003. The operating results of Guoxin Pagingfrom January 1, 2003 to the effective date of the sale of Guoxin Pagingwere included in our consolidated income statement for the year ended December 31,2003.  Under US GAAP, the sale of GuoxinPaging to Unicom Group 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, 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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SeeNote 40 to the consolidated financial statements included in this annualreport for a summary of the principal differences between HK GAAP and US GAAPthat have a significant effect on our financial statements.

 
| ** **                                                                        | ** ** | **As of or for the year ended December 31**              | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2000**                                                      | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **RMB**                                                       | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$(1)** | ** ** |
| ** **                                                                        | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| **Income Statement Data:**                                                        | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Hong  Kong GAAP (As restated)(2)                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Operating  revenue (Turnover):                                                    |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Cellular  Business                                                                |       | 12,188                                                        |       | 20,505 |   | 30,613 |   | 56,927 |   | 70,799 |   | 8,554 |   |
| -GSM  Business                                                                    |       | 12,188                                                        |       | 20,505 |   | 27,388 |   | 40,304 |   | 46,579 |   | 5,628 |   |
| -CDMA  Business                                                                   |       | —                                                        |       | — |   | 3,225 |   | 16,623 |   | 24,220 |   | 2,926 |   |
| Paging  Business                                                                  |       | 8,483                                                         |       | 4,342 |   | 2,161 |   | 1,403 |   | — |   | — |   |
| Long  Distance Business                                                           |       | 556                                                           |       | 1,489 |   | 2,766 |   | 2,273 |   | 1,848 |   | 223 |   |
| Data  and Internet Business                                                       |       | 540                                                           |       | 1,820 |   | 2,793 |   | 3,437 |   | 3,663 |   | 443 |   |
| Total  service revenue                                                            |       | 21,767                                                        |       | 28,156 |   | 38,333 |   | 64,040 |   | 76,310 |   | 9,220 |   |
| Sales  of telecommunications products                                             |       | 1,925                                                         |       | 1,237 |   | 2,244 |   | 3,596 |   | 3,022 |   | 365 |   |
| Total  operating revenue                                                          |       | 23,692                                                        |       | 29,393 |   | 40,577 |   | 67,636 |   | 79,332 |   | 9,585 |   |
| Operating  expenses                                                               |       | (18,470                                                       | )          | (24,129 | ) | (33,253 | ) | (59,122 | ) | (71,376 | ) | (8,624 | ) |
| Operating  income                                                                 |       | 5,222                                                         |       | 5,264 |   | 7,324 |   | 8,514 |   | 7,956 |   | 961 |   |
| Loss  on sale of discontinued operation (Guoxin Paging)                           |       | —                                                        |       | — |   | — |   | 663 |   | — |   | — |   |
| Income  before taxation                                                           |       | 4,482                                                         |       | 5,463 |   | 6,303 |   | 6,096 |   | 6,467 |   | 781 |   |
| Net  income                                                                       |       | 3,324                                                         |       | 4,602 |   | 4,598 |   | 4,217 |   | 4,387 |   | 530 |   |
| -Basic  net income per share(3)                                                   |       | 0.297                                                         |       | 0.367 |   | 0.366 |   | 0.336 |   | 0.349 |   | 0.042 |   |
| -Number  of shares outstanding for basic net income per share (in thousands)(3)   |       | 11,208,224                                                    |       | 12,552,996 |   | 12,552,996 |   | 12,553,010 |   | 12,561,242 |   | 12,561,242 |   |
| -Diluted  net income per share(3)                                                 |       | 0.297                                                         |       | 0.367 |   | 0.366 |   | 0.336 |   | 0.348 |   | 0.042 |   |
| -Number  of shares outstanding for diluted net income per share (in thousands)(3) |       | 11,208,224                                                    |       | 12,552,996 |   | 12,552,996 |   | 12,568,683 |   | 12,607,241 |   | 12,607,241 |   |
| -Basic  net income per ADS(4)                                                     |       | 2.966                                                         |       | 3.666 |   | 3.663 |   | 3.359 |   | 3.492 |   | 0.422 |   |
| -Number  of ADS outstanding for basic net income per share (in thousands)(3)      |       | 1,120,822                                                     |       | 1,255,300 |   | 1,255,300 |   | 1,255,301 |   | 1,256,124 |   | 1,256,124 |   |
| -Diluted  net income per ADS(4)                                                   |       | 2.966                                                         |       | 3.666 |   | 3.663 |   | 3.355 |   | 3.480 |   | 0.420 |   |
| -Number  of ADS outstanding for diluted net income per share (in thousands)(3)    |       | 1,121,968                                                     |       | 1,255,300 |   | 1,255,300 |   | 1,256,869 |   | 1,260,724 |   | 1,260,724 |   |

 

3

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| ** **                                                                                                                        | ** ** | **As of or for the year ended December 31**              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2000**                                                      | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                                                                                                        | ** ** | **RMB**                                                       | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$(1)** | ** ** |
| ** **                                                                                                                        | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| US  GAAP (As restated)(2)&(5)                                                                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Operating revenue                                                                                                                 |       | —                                                        |       | 32,501 |   | 50,421 |   | 71,980 |   | 79,388 |   | 9,592 |   |
| Operating  income from continuing operations                                                                                      |       | —                                                        |       | 7,921 |   | 9,759 |   | 10,710 |   | 8,185 |   | 989 |   |
| Net  income before discontinued operation, and cumulative effect of change in  accounting policy                                  |       | —                                                        |       | 5,866 |   | 5,500 |   | 6,078 |   | 4,713 |   | 569 |   |
| 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 |   | 569 |   |
| -Basic  net income per share before discontinued operation and cumulative effect of  change in accounting policy(3)               |       | —                                                        |       | 0.467 |   | 0.438 |   | 0.484 |   | 0.375 |   | 0.045 |   |
| -Basic  net income per ADS before discontinued operation and cumulative effect of  change in accounting policy(4)                 |       | —                                                        |       | 4.673 |   | 4.382 |   | 4.842 |   | 3.752 |   | 0.453 |   |
| -Basic  net income per share after discontinued operation and cumulative effect of  change in accounting policy(3)                |       | —                                                        |       | 0.411 |   | 0.401 |   | 0.377 |   | 0.375 |   | 0.045 |   |
| -Basic  net income per ADS after discontinued operation and cumulative effect of  change in accounting policy(4)                  |       | —                                                        |       | 4.107 |   | 4.012 |   | 3.773 |   | 3.752 |   | 0.453 |   |
|                                                                                                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Balance sheet Data:**                                                                                                           |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                              |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Hong Kong GAAP (As restated)(2)                                                                                                   |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Bank  balances and cash                                                                                                           |       | 44,717                                                        |       | 18,413 |   | 14,433 |   | 9,220 |   | 4,655 |   | 562 |   |
| Property,  plant and equipment, net                                                                                               |       | 52,864                                                        |       | 75,748 |   | 107,487 |   | 118,105 |   | 118,904 |   | 14,366 |   |
| Total  assets                                                                                                                     |       | 113,057                                                       |       | 128,278 |   | 149,628 |   | 149,838 |   | 145,629 |   | 17,595 |   |
| Net  assets                                                                                                                       |       | 58,336                                                        |       | 62,884 |   | 67,219 |   | 69,615 |   | 72,810 |   | 8,797 |   |
| Short-term  debt and current portion of other long-term debt                                                                      |       | 8,501                                                         |       | 7,933 |   | 15,330 |   | 18,173 |   | 20,015 |   | 2,418 |   |
| Obligations  under finance lease-current portion                                                                                  |       | —                                                        |       | 8 |   | 17 |   | 25 |   | 938 |   | 113 |   |
| Obligations  under finance lease-non current portion                                                                              |       | —                                                        |       | 101 |   | 101 |   | 100 |   | 489 |   | 59 |   |
| Other  long-term debt                                                                                                             |       | 27,151                                                        |       | 36,337 |   | 37,686 |   | 36,213 |   | 26,137 |   | 3,158 |   |
| Shareholders’  equity                                                                                                        |       | 57,452                                                        |       | 62,054 |   | 66,653 |   | 69,615 |   | 72,810 |   | 8,797 |   |

 

4

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| ** **                                           | ** ** | **As of or for the year ended December 31**              | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2000**                                                      | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **RMB**                                                       | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **RMB** | ** ** | **US$(1)** | ** ** |
| ** **                                           | ** ** | **(in millions, except number of shares and per share data)** | ** ** |
| US  GAAP (As restated)(2)&(5)                    |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Property,  plant and equipment, net                  |       | —                                                        |       | — |   | 118,787 |   | 118,171 |   | 118,701 |   | 14,342 |   |
| Total  assets                                        |       | —                                                        |       | — |   | 164,636 |   | 150,477 |   | 146,615 |   | 17,715 |   |
| Obligations  under finance lease-current portion     |       | —                                                        |       | — |   | 17 |   | 25 |   | 938 |   | 113 |   |
| Obligations  under finance lease-non current portion |       | —                                                        |       | — |   | 101 |   | 100 |   | 489 |   | 59 |   |
| Other  long-term debt                                |       | —                                                        |       | — |   | 45,520 |   | 36,213 |   | 26,137 |   | 3,158 |   |
| Shareholders’  equity                           |       | —                                                        |       | — |   | 64,215 |   | 65,946 |   | 69,442 |   | 8,390 |   |
|                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                            |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
|                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Hong  Kong GAAP:                                     |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net  cash provided by operating activities           |       | 9,344                                                         |       | 11,078 |   | 13,054 |   | 22,565 |   | 23,819 |   | 2,878 |   |
| Net  cash used in investing activities               |       | (30,551                                                       | )          | (46,125 | ) | (5,166 | ) | (19,051 | ) | (18,958 | ) | (2,291 | ) |
| Net  cash provided by (used in) financing activities |       | 59,921                                                        |       | 8,743 |   | (11,868 | ) | (8,778 | ) | (9,401 | ) | (1,136 | ) |
|                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| US  GAAP (As restated)(5):                           |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Net  cash provided by operating activities           |       | —                                                        |       | 15,320 |   | 18,235 |   | 25,993 |   | 24,510 |   | 2,961 |   |
| Net  cash used in investing activities               |       | —                                                        |       | (62,971 | ) | (10,261 | ) | (20,295 | ) | (19,668 | ) | (2,376 | ) |
| Net  cash provided by (used in) financing activities |       | —                                                        |       | 21,015 |   | (12,773 | ) | (11,397 | ) | (9,440 | ) | (1,141 | ) |
|                                                 |       |                                                          |       |   |   |   |   |   |   |   |   |   |   |

 

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(1)          The translation of RMB into US dollars hasbeen made at the rate of RMB8.2765 to US$1.00, the noon buying rate in New YorkCity for cable transfer in RMB as certified for customs purposes by the FederalReserve Bank of New York on December 31, 2004. The translations are solelyfor the convenience of the reader.

 

(2)          The adoption of HK SSAP12 “Income Tax”(revised) in 2003 represents a change in accounting policy which has beenapplied retrospectively so that the comparative data presented have beenrestated to conform to the changed policy.

 

(3)            See Notes 16 and 40 to the financialstatements included in this Form 20-F on how basic and diluted net incomeper share are calculated under HK GAAP and US GAAP, respectively.

 

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

 

(5)            The US GAAP amounts as of December 31,2004 and 2003 and for each of the years in the three-year period ended December 31,2004 are presented as if the acquisitions of Unicom New Century, Unicom NewWorld and Unicom International had been in existence since the beginning of theearliest period presented.

 

5

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**HistoricalExchange Rates Information**

** **

Wepublish our financial statements in Renminbi, or RMB, the legal tender currencyin the People’s Republic of China, or PRC. In this annual report, references to “US dollars” or “US$” are to UnitedStates dollars and references to “Hong Kong dollars”, “HK dollars” or “HK$” areto 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 translationsshould not be construed as representations that the RMB or Hong Kong dollaramounts actually represent such US dollar amounts or could be converted into USdollar amounts at the rates indicated or at all.  Unless otherwise stated, the translations ofRMB and Hong Kong dollars into US dollars and vice versa have been made at therate of RMB8.2765 to US$1.00 and HK$7.7723 to US$1.00, the noon buying rates inNew York City for cable transfers payable in RMB or Hong Kong dollars ascertified for customs purposes by the Federal Reserve Bank of New York on December 31,2004.

 

Thenoon buying rates on June 24, 2005 were RMB8.2765 to US$1.00 and HK$7.7719****to US$1.00, respectively.  The average noon buying rates for 2000, 2001,2002, 2003 and 2004 were RMB8.2784, RMB8.2772, RMB8.2771,RMB8.2772 and RMB8.2768, respectively, to US$1.00, and HK$7.7936, HK$7.7996,HK$7.7996, HK$7.7864 and HK$7.7899,respectively, to US$1.00, calculated as the average of the noon buying rates onthe last day of each month during each applicable year.  The following table sets forth the high andlow noon buying rates between RMB and the US dollar (in RMB per US dollar) andHong Kong dollar and the US dollar (in Hong Kong dollar per US dollar) for eachmonth during the previous six months:

 
| **Period**         | ** ** | **High**               | ** ** | **Low**                     | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------|------------|------------------------|------------|-----------------------------|------------|----------|------------|---------|------------|
| ** **         | ** ** | **(RMB per  US$1.00)** | ** ** | **(HK$ per  US$1.00)** | ** ** |
| December 2004 |       | 8.2767                 |       | 8.2765                      |       | 7.7821   |       | 7.7698  |       |
| January 2005  |       | 8.2765                 |       | 8.2765                      |       | 7.7994   |       | 7.7775  |       |
| February 2005 |       | 8.2765                 |       | 8.2765                      |       | 7.7999   |       | 7.7984  |       |
| March 2005    |       | 8.2765                 |       | 8.2765                      |       | 7.7998   |       | 7.7987  |       |
| April 2005    |       | 8.2765                 |       | 8.2765                      |       | 7.7995   |       | 7.7946  |       |
| May 2005      |       | 8.2765                 |       | 8.2765                      |       | 7.7995   |       | 7.7767  |       |

 

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

### *** ***

Not applicable.

 

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

### *** ***

Not applicable.

 

6

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

### *** ***

**Risks Relating toOur 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.  Suchcompetition may result in slower subscriber growth, lower tariffs and highercustomer acquisition costs for us, which would adversely affect our results ofoperations, financial condition and growth prospects.***

*** ***

Ourcellular businesses face intense competition from China Mobile.  China Mobile is the largest cellular operatorin China and in our cellular service areas and has competitive advantages overus in customer base, overall network coverage and quality, financial resources,network management, technical expertise and brand recognition.  We are experiencing intense competition fromChina Mobile in many of our cellular service areas, and such competition maycontinue and further intensify.  Inparticular, continued price competition between China Mobile and us in manyservice areas has accelerated the decline of the average revenue per user permonth, or ARPU, of our cellular services, and adversely affected ourprofitability.

 

Ourcellular services also compete with the local wireless telecommunicationsservices of China Telecom and China Netcom, known as “Little Smart” services, that are based on their fixed line networks andprimarily utilize the personal handyphone system, or PHS, technology.  They are offered as extensions of fixed lineservices and, with such features as calling-party-pays arrangements, carry significantlylower tariffs than cellular services. The “Little Smart” services were previously offered primarily in small-to medium-sized cities, but have been introduced in most major citiesnationwide since 2003.  According topublic reports, currently these services have attracted over 70 million usersin China and their subscriber base is continuing to grow.  In addition, both China Telecom and ChinaNetcom have indicated their interests in developing 3G wirelesstelecommunications services in the future, which could impose directcompetition with our cellular business.

 

Increasedcompetition from the cellular services of China Mobile and the “Little Smart”services of China Telecom and China Netcom may lead to slower subscribergrowth, lower usage of our services, continued price pressure and higher costsof customer acquisition, which would adversely affect our results ofoperations, financial condition and growth prospects.

 

***Our CDMA services have yet to gain a broad marketacceptance in China and there is uncertainty over whether our CDMA serviceswill succeed in gaining a broader market acceptance.***

*** ***

Welaunched our CDMA services in January 2002 and introduced CDMA 1X wireless dataservices in March 2003.  Prior to theintroduction of our CDMA services, digital cellular services in China weremostly based on the global system for mobile communications, or GSM,technology.  The majority of cellularsubscribers in China today continues to be GSMsubscribers.  CDMA cellular servicescompete with GSM services for cellular subscribers, who may be reluctant toswitch to CDMA cellular services because of the need to obtain a new CDMAhandset and phone number.  CDMA servicesare also perceived to have limitations in international roaming due to the lackof CDMA networks in many countries.  Asof March 31, 2005, the total number of our CDMA subscribers has reached29.43 million in our service areas. Nevertheless, CDMA technology andservices have yet to gain broader market acceptance in China.

 

7

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Whetherour CDMA services can gain broader market acceptance will continue to besubject to a number of uncertainties, including:

 

•                                          whetherwe can effectively retain our existing subscribers and attract sufficient new CDMAcellular subscribers;

 

•                                          whetherwe can effectively reduce the cost of CDMA handsets and marketing expenses andstrengthen the management of the purchase and distribution processes of theCDMA handsets;

 

•                                          whetherwe can effectively promote our CDMA services and successfully execute ourstrategy of expanding market share among industry-specific customers and theyoung population; and

 

•                                          whether we can optimizethe CDMA network utilization rates and generate more revenues from value-addedservices by capitalizing the technological advantages of CDMA 1X.

 

Any ofthese uncertainties may adversely affect the growth and profitability of ourCDMA cellular services and our overall business results of operation andfinancial condition.

 

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

*** ***

Althoughwe are committed to coordinating the development of our CDMA and GSM businesses,  these twobusinesses may compete with each other for our financial, management, human andother resources as well as cellular subscribers.  For example, while we have focused on thedevelopment of our CDMA business in recent years, our investments on our GSMnetwork has been relatively limited, which has hindered us from improving ourGSM network in certain of our services areas. In addition, since we have started expanding our CDMA services to themass market, our CDMA business may compete with our GSM business for cellularsubscribers, especially mid- and low-end cellular subscribers.  A portion of our CDMA subscribers were former subscribers of our GSMservices.  If the development of our CDMAand GSM services is not coordinated effectively or we cannot obtain adequateresources for both our GSM and CDMA cellular services, the growth andprofitability of these businesses and our results of operations, financialcondition and growth prospects may be adversely affected.

 

***Our churn rates may increase.***

*** ***

In2004, the monthly average churn rate of our CDMA cellular services increased to1.5% from 1.0% in 2003.  The increase in the churn rate of ourCDMA cellular services was primarily due to the following factors:

 

•                                          intense competition from the GSM servicesof our main competitor and the “Little Smart” services;

 

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

 

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

 

8

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•                                          an increase in the proportion of subscribers to our pre-paidCDMA services which are characterized by a higher churn rate than post-paidservices.

 

Whilethe monthly average churn rate of our GSM cellular services slightly decreasedto 2.3% in 2004 from 2.4% in 2003, there is no assurance that it will notincrease in the future due to increased competition.  Increased churn rate may adversely affect ourmarket share and increase our costs of additional customer acquisitions and baddebt, which would adversely affect our results of operations, financialcondition and growth prospects.

 

***Failure or inability to continue to expand and upgradeour networks timely and effectively and changes in telecommunicationstechnology and technological standards could hinder our growth.***

*** ***

Thegrowth of our businesses depends on whether we are able to continue to expandthe coverage and capacity of our networks, to upgrade the technology and toimprove the quality of our networks in a timely and effective manner.  We also need to continue to improve thequality of our existing networks in order to enhance the quality of our telecommunications services.

 

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 migration from second generation mobile telecommunicationsto third generation mobile telecommunication, or 3G, and the development ofvoice-over-internet protocol technology, or VOIP.  Suchchanges may render our networks and systems obsolete or inadequate.  As a result of such changes, we mayneed to make significant changes and upgrades to existing networks andinfrastructure or build new networks, which may require substantial capitalexpenditures and other resources.

 

Ourability to expand and upgrade our networks is subject to a number of uncertainties,including our ability to achieve the following on a timely basis and onacceptable terms:

 

•                                          obtainadequate financing;

 

•                                          retainexperienced management and technical personnel;

 

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

 

•                                          enterinto interconnection and other arrangements with other operators;

 

•                                          obtainadequate network equipment and software; and

 

•                                          managethe technology migration in an effective manner.

 

Difficultieswe may encounter in expanding and upgrading our networks, if not adequatelyresolved on a timely basis, could adversely affect our competitive position, resultsof operations, financial condition and growth prospects.

 

9

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***Our long distance, data and Internet businesses remainrelatively small*** comparing to the fixed line operators,and competition from China Telecom, China Netcom and other cellular serviceproviders may adversely affect our growth and profitability in thesebusinesses.

*** ***

The fixed line operators of China Telecom and ChinaNetcom currently hold a dominant market position in the public switched longdistance telephony and data services markets in China in their respectiveservice areas.  They are also thedominant providers of Internet protocol telephony, or IP telephony, andInternet access services in China.  ChinaTelecom and China Netcom have competitive advantages over us in customer base,financial resources, network coverage and “last-mile” access.  Our IP telephony services compete with otherservice providers including China Satellite Communication, or China SatCom andChina Railway Communications Co. Ltd., or China Railcom.  In 2004, the increasingly intense competitionhas contributed to the decrease in average realised tariff rates for longdistance services and a 19.1% decrease in our operating revenue from longdistance business.  The growth of ourlong distance, data and Internet businesses has been further hindered by ourlack of licenses to operate local telephony networks as well as our lack ofsufficient network number resources. Competition from China Telecom, China Netcom and other service providersmay continue to adversely affect the growth and profitability of our longdistance, data and Internet businesses and consequently our overall results ofoperations, financial condition and growth prospects.

 

***In order to accelerate the growth of our CDMAbusiness, we offered CDMA handset promotional packages, which increased ouroperating expenses in the short-term and may adversely affect ourprofitability.***

*** ***

In order to accelerate the development of the CDMAbusiness and subscriber growth during the product introduction period, we beganto offer certain CDMA handset promotional packages in the second half of2002.  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 contractperiod.  The cost of the handsetsprovided to subscribers under these contractual arrangements, treated asdeferred customer acquisition costs, were deferred, to the extent recoverable,and amortized over the contractual periods to match with minimum contractrevenue.  As of December 31, 2004,amortization of such deferred customer acquisition costs amounted toapproximately RMB6,121 million and the carrying amount of such costsamounted to RMB4,745 millionfor our wholly-owned operating subsidiaries, China Unicom Corporation Limited,or CUCL, and Unicom New World.  Thesepromotional packages tend to increase our operating expenses. In addition, someof those subscribers terminated our CDMA services at the end of theircontractual periods and therefore increased our churn rate.  While we substantially reduced the use ofsuch arrangements since 2003, the carrying amount of the deferred customeracquisition costs remain significant.  Asof March 31, 2005, the carrying amount of such costs amounted to RMB4,408 million for us.  As a result, althoughthe use of these CDMA promotional packages has accelerated the growth of ourCDMA business, they may adversely affect the profitability of our CDMA businessand our overall results of operations.

 

In order to control the costs of our CDMA promotionalpackages, we have adopted the policy to centralize the purchases of CDMAhandsets.  As a result, we usuallymaintain a significant level of inventory of CDMA handsets, which is subject tothe risk of inventory obsolescence.  Asof December 31, 2004, we maintained an inventory of CDMA handsets ofRMB1,881 million.

 

10

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

*** ***

Theeffective provision of our cellular, long distance telephony and other servicesrequires the interconnection between our networks and the networks of ChinaTelecom, China Netcom, China Mobile and other 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 growth andprofitability.  Difficulties in theexecution of new interconnection arrangements on a timely basis and onacceptable terms, including the inability to promptly establish additionalinterconnection links or increase interconnection bandwidths as required, couldalso adversely affect our operations, growth and profitability.

 

***Unicom Group, as our controlling shareholder, canexert influence on us and cause us to make decisions that may not always be inthe best interests of our other shareholders.***

*** ***

UnicomGroup indirectly controls an aggregate of 77.37% of our issued share capital asof May 31, 2005.  As ourcontrolling shareholder, it is able to influence our major business decisionsthrough its control of our board of directors. Some of our executive directors and executive officers also serve asdirectors or executive officers of Unicom Group.  In addition, our operations depend on anumber of services provided by Unicom Group. It leases to us, on an exclusive basis, capacity on the CDMA networklocated in our cellular service areas, provides us with access to internationalgateways, supplies us with SIM cards and calling cards and provides equipmentprocurement services, customer services, and certain value-added services tous.  Unicom Group and we also provide anumber of services to each other, including interconnection and roamingservices, sales agency and collection services andprovision of premises.  See “A. History and Development of the Company -Our Relationship with Unicom Group” under Item 4 of this annual report.  The interests of Unicom Group and ourinterests in these transactions may differ and Unicom Group may cause us tomake decisions that conflict with the interests of our other shareholders.

 

***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 Share Companyfor significant connected transactions between us and Unicom Group.***

*** ***

InOctober 2002, Unicom Group completed an internal reorganization of itsshareholding in our company and the initial public offering in China of theordinary shares, or A Shares, of its newly established subsidiary, China UnitedTelecommunications Corporation Limited, or A Share Company.  As part of this restructuring, a portion ofUnicom Group’s indirect shareholding in our company was transferred to the AShare Company, whose business is limited to indirectly holding the equityinterest of our company without any other direct business operations.  A voting mechanism was established to allowpublic shareholders of the A Share Company to indirectly participate in ourshareholders’ meetings and a two-step voting mechanism was established for theapproval of connected transactions.  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 connected transactions between us or oursubsidiaries and Unicom Group or its subsidiaries will require the separateapproval of the independent minority shareholders both of our company 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.  This adds another necessary step of approvalprocess for those transactions.

 

11

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***Our inability to fund our capital expenditurerequirements may adversely affect our growth and profitability.***

*** ***

Although we have graduallyreduced our capital expenditure in recent years, we continue to have areasonable level of capital expenditure requirements. We expect torequire approximately RMB18.23****billionfor capital expenditure in 2005.  Asof December 31, 2004, the sum of our long-term and short-term interestbearing debt exceeded the amount of our cash, cash equivalents and short-termbank deposits by RMB40.83 billion.  See “Liquidity and Capital Resources -Capital Expenditures” under Item 5. In the future we may be unable to obtain the necessary financing on atimely basis and on acceptable terms, and our failure to do so may adverselyaffect our financial position, competitive position, growth andprofitability.  Our ability to obtainacceptable financing at any time may depend on a number of factors, including:

 

•                                          our financial condition and results of operations,

•                                          the condition of the economy and the telecommunicationsindustry in China,

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

•                                          our ability to obtain any required government approvals forour market financings.

 

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

*** ***

***Substantially all of our revenues and operating expensesare denominated in Renminbi, while a portion of our***borrowings, equipment purchases and other capital expendituresare denominated in foreign currencies. Although the exchange rate between Renminbi and US dollars has beenstable, the exchange rate of the Renminbi may become volatile against the USdollar or other currencies in the future. Fluctuations of the Renminbi could adversely affect the value in foreigncurrency terms of cash flow generated from our operations or any dividendspayable on our shares and ADSs, and therefore the price of our shares andADSs.  Any future Renminbi devaluationscould also increase our equipment acquisition costs and operating expenses orlead to significant fluctuations in the exposure of our foreign-currency-denominatedliabilities, thereby adversely affecting our profitability.

*** ***

***Most of our bank loans are borrowed from domesticbanks at interest rates that vary in accordance with the standard guidanceinterest rates announced by relevant Chinese government authorities.  In addition, we entered into a US$700 millionterm loan facility in September 2003 and a US$500 million term loanfacility in February 2004, both carrying variable interest rates based on theUS$ LIBOR.  As a result, a significantincrease in interest rates would increase our cost of new debt and the interestcost of our outstanding borrowings, which could have a material adverse effecton our financial position.***

*** ***

***Our doubtful debt ratio may increase.***

*** ***

China has yet todevelop an effective credit control system, and with more intense competitionin the market, our doubtful debt ratio for cellular services in ourservice areas, calculated as the amount of provision for doubtful debt dividedby revenue from cellular services may increase. As of December 31, 2004, such ratio is 2.9%, compared to 2.9%in 2003 and 2.7% in 2002.  If the ratiofurther increases, our results of operations and financial condition could beadversely affected.

 

12

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***Investor confidence and the market prices of ourshares and ADSs may be adversely impacted if we or our independent registeredpublic accounting firm is unable to conclude that our internal control overfinancial reporting is effective as of December 31, 2006 as required by Section404 of the Sarbanes-Oxley Act of 2002.***

*** ***

We aresubject to the SEC’s reporting obligations. The SEC, as directed by Section 404of the Sarbanes-Oxley Act of 2002, adopted rules requiring each public companyto include a report of management on the company’s internal control overfinancial reporting in its Annual Report on Form 10-K or Form 20-F, as the casemay be, that contains an assessment by management of the effectiveness of thecompany’s internal control over financial reporting. In addition, the company’sindependent registered public accounting firm must attest to and report onmanagement’s assessment of the effectiveness of the company’s internal controlover financial reporting. These requirements will first apply to our AnnualReport on Form 20-F for the fiscal year ending December 31, 2006. Ourmanagement may not conclude that our internal control over financial reportingis effective. Moreover, even if our management concludes that our internalcontrol is effective, our independent registeredpublic accounting firm may disagree. If our independent registered publicaccounting firm is not satisfied with our internal control over our financialreporting or the level at which our controls are documented, designed, operatedor reviewed, or if the independent registered public accounting firm does notagree with our interpretation or understanding of the relevant requirements,rules or regulations, 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 ultimately could negatively impact the market prices of ourshares and ADSs.

 

**Risks Relating tothe Overall Telecommunications Industry in China**

** **

***Regulatory or policy changes relating totelecommunications industry may adversely affect our results of operations,financial condition and business prospects.***

*** ***

TheChinese government currently regulates many aspects of the telecommunicationsindustry in China.  Potentialderegulation or restructuring of the telecommunications industry or changes inregulations and policies and their implementation could lead to changes in theoverall industry environment.  Thesechanges may include, among others, new regulatory measures relating to issuanceof licenses for cellular business, calling-party-pays arrangements or othertariff adjustments, fulfillment of telecommunications service providers’universal service obligations and the associated expenses, usage of numbersor frequency resources and the associated fees, or standards and mechanisms ofinterconnection settlement, and could significantly affect our results ofoperations, financial condition and business prospects.  For example, if the Chinese governmentderegulates or reduces state tariff rates applicable to some of our services ormodifies other regulations of the telecommunications industry in China, ourresults of operations and financial condition may be adversely affected.

 

TheChinese government has restructured the telecommunications industry through anumber of initiatives that were rolled out in stages in the past and mayinitiate further industry restructuring in the future.  Potential restructuring of the PRCtelecommunications industry, if any, may affect the overall businessenvironment and the operations of telecommunications operators in China,including us.  We cannot predict thetiming for, and any implications and effect of, anyfuture restructuring of the PRC telecommunications industry, or give anyassurance that we will not be adversely affected by any such industryrestructuring.

 

13

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***Newentrants in the telecommunications industry in China, including potential 3Goperators, may further intensify industry competition and adversely affect ourresults of operations.***

 

Since mid-1990s, the Chinese government has takenvarious measures, including licensing more providers of telecommunicationsservices, to encourage competition in the telecommunications industry.  Currently, the Chinese telecommunications markethas six basic telecommunications service providers — China Telecom, ChinaMobile, China Netcom, China Satcom, China Railcom, and our company — andthousands of value-added service providers. In addition, the government may grant additional telecommunicationsservice licenses in the future, including additional licenses to providecellular services.

 

The Chinesegovernment has not publicly announced its decisions on whether it will grantany 3G licenses, and if so, the timing of the grant of the 3G licenses, thenumber of 3G licenses to be granted, any technical requirements, or theselection of preferred technologies.  Theissuance of 3G licenses to cellular service providers may significantly changethe overall competition environment of the wireless telecommunicationsindustry.  While we have been preparing for developing 3Gbusiness, we cannot assure youthat we will be granted the requisite approvals and licenses by the Chinesegovernment in a timely manner, or at all. Even if we are granted a 3G license, we cannot assure you that wewill successfully operate the 3G business and effectively compete with other 3Gor other cellular services providers.

 

Afterits accession to the World Trade Organization, or WTO, in December 2001, Chinapromulgated the Administrative Regulations on Telecommunications Companies withForeign Investment, 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 to foreignoperators.  When the government licensesadditional telecommunications service providers in the future, licensees mayinclude operators with foreign investment. Foreign-invested operators entering into China’s telecommunicationsmarket may have competitive advantages over us in financial resources, networkmanagement and technical expertise.

 

Increasedcompetition from new entrants in China’s telecommunications services industrycould impede the growth of our businesses, further increase competition forskilled and experienced employees, result in or exacerbate price competitionand increase our customer acquisition costs and other operating expenses, andthereby adversely affect our results of operations, financial condition andgrowth prospects.

 

***The***telecommunications sector in Chinamay not sustain its pace of rapid growth, which may adversely affect the growthand profitability of our business.

*** ***

Thetelecommunications industry in China has experienced rapid growth in the lastseveral years, especially in the cellular communications sector.  The total number of cellular subscribers inChina increased from 43.2 million at the end of 1999 to 334.8 million byDecember 31, 2004.  Cellular penetrationincreased from 3.0% to 25.9% nationwide during the same period.  The growth in cellular subscribers may slowdown as cellular penetration continues to increase in our cellular serviceareas.  In addition, ARPU for thecellular communications market in China continues to decline.  For example, ARPU of our GSM subscribersdeclined from RMB56.7 in 2003 to RMB49.4 in 2004.  Any slow-down in the growth in China’stelecommunicationssector may adversely affect the growth and profitability of our business.

 

14

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***The Chinese 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.***

*** ***

Underthe Telecommunications Regulations promulgated by the State Council, telecommunicationsservice providers in China are required to fulfill universal serviceobligations in accordance with relevant regulations to be promulgated by theChinese government, and the MII has the authority to delineate the scope ofuniversal service obligations. The MII may also select universal serviceproviders through a tendering process. The MII, together with governmentfinance and pricing authorities, is also responsible for formulatingadministrative rules relating to the establishment of a universal service fundand compensation schemes for universal services.

 

Whilethe scope of specific universal services obligations is not yet clear, webelieve that such services may include mandatory provision of basictelecommunications services in less economically developed areas in China andmandatory contribution to a universal service fund. In addition, as part of thetransitional measures prior to the formalization of a universal serviceobligation framework, the MII has recently required major telecommunicationservice providers in China, including Unicom Group, to participate in a projectto provide telephone services in a number of remote villages in China. However,it is currently uncertain as to whether we will be required by the MII tomaintain and expand network facilities and provide telephone services as partof such transitional measures. Furthermore, to the extent we are required to doso, it is currently uncertain whether we will be adequately compensated by thegovernment or be able to realize an adequate return on investments forexpanding networks to, and providing telecommunications services in, those lesseconomically developed areas due to potentially higher capital expenditurerequirements, lower usage by customers and lack of flexibility in setting ourtariffs.  We also cannot predict whetherwe will be required to make contribution to the universal service fund.  Either of these events may adversely affectour financial condition and and results of operations.

 

***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.***

*** ***

Concernshave been expressed in some countries that the electromagnetic signals emittedby wireless telephone handsets and base stations may pose health risks atexposure levels below existing guideline levels, and interfere with theoperation of electronic equipment.  Inaddition, cellular operators have been subject to lawsuits alleging varioushealth consequences as a result of cellular handset usage or proximity to basestations or seeking protective or remedial measures.  While we are not aware that such health riskshave been substantiated, there can be no assurance that the actual, or perceived,risks associated with the transmission of electromagnetic signals will notimpair our ability to retain customers and attract new customers, reducecellular service usage or result in litigation.

 

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**Risks Relating toChina**

** **

***If the Chinese government revises the currentregulations that allow a foreign investment enterprise to pay foreign exchangein current account transactions, our subsidiaries’ ability to satisfy theirforeign exchange obligations and to pay dividends to us in foreign currenciesmay be restricted.***

*** ***

Theability of our wholly-owned operating subsidiaries, CUCL and Unicom New World,to satisfy their foreign exchange obligations and to pay dividends to usdepends on existing and future foreign exchange regulations in China.  The Renminbi is currently convertible byforeign investment enterprises in China to settle transactions under thecurrent account, which include trade and service related foreign exchangetransactions and payments of dividends and interest on foreign loans.  Renminbi currently cannot be freely convertedwithout regulatory approval for transactions under the capital account, whichinclude outbound foreign investment and principal payments on foreignloans.  CUCL and Unicom New World, whichhold substantially all of our assets and through which we conduct substantiallyall of our business, are foreign investment enterprises in China.  This status allows them to purchase foreign exchangeat designated foreign exchange banks for settlement of current accounttransactions without the approval of the State Administration for ForeignExchange.  However, the relevant Chinesegovernment authorities may in the future impose limitation on the ability offoreign investment enterprises to purchase foreign exchange to satisfy theirforeign exchange obligations or to pay dividends in the future.  In that event, our subsidiaries’ ability tosatisfy their foreign exchange obligations and to pay dividends to us inforeign currencies may be restricted.

 

***Uncertainties in the Chinese legal system could limitthe legal protections available to us and to foreign investors.***

*** ***

Ourwholly-owned operating subsidiaries, CUCL and Unicom New World, are organizedunder the laws of China and are generally subject to laws and regulationsapplicable to foreign investment enterprises in China.  The Chinese legal system is a civil lawsystem 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 Chinese government haspromulgated laws and regulations dealing with economic matters such as foreigninvestment, corporate organization and governance, commerce, taxation and trade.  However, because these laws and regulationsare relatively new, and because of the limited volume of published cases andtheir non-binding nature, interpretation and/or enforcement of these laws andregulations involves uncertainties. Therefore, the Chinese legal system may not afford the same legalprotection available to investors in the United States or elsewhere.

 

## **Item 4.** Information on the Company

## ** **

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

### *** ***

**IndustryRestructuring and Grant of New Licenses**

** **

Since1993, the Chinese government has implemented a number of measures torestructure and introduce competition in the telecommunications industry.  Prior to June 1994, China Telecom was thesole provider of telecommunications services in China.  In June 1994, Unicom Group was established inaccordance with the State Council’s approval to introduce competition in thetelecommunications industry.  Since then,the Chinese government has approved Jitong Network Communications CompanyLimited, or Jitong, and China Netcom Corporation Ltd., or CNCL, to provide IPtelephony, Internet and data services. It has also approved China Railcom to provide most telecommunicationsservices other than cellular services.

 

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In1999, the State Council approved a plan to restructure the former China Telecomalong four business lines: fixed line, cellular, paging and satellitecommunications.  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, theChinese government further separated China Telecom into two companies, with thesouthern company retaining the name of China Telecom and assets and businessesin 21 provinces in southern and western China and the northern companyretaining assets and businesses in 10 provinces in northern China and mergingwith CNCL and Jitong to form China Netcom. As a result of the Chinese government’s efforts to introduce competitionin the telecommunications industry, there is currently more than one serviceprovider in most of the sectors within the telecommunications industry.  See “B. Business Overview - Competition”below.

 

**History of UnicomGroup**

** **

Aspart of its efforts to introduce orderly competition to the telecommunicationssector in China, the State Council approved the establishment of Unicom Groupin December 1993 and authorized it to build and operate cellular networks andlocal and long distance networks.  UnicomGroup first developed a nationwide cellular network using GSM technology and anationwide long distance telephony network.

 

In May1997, the State Council granted approval to Unicom Group to provide dataservices.  The MII licensed Unicom Groupto begin to provide Internet services in July 1999 and IP telephony services ona trial basis in 12 cities in April 1999 and on a nationwide basis in March2000.  Unicom Group also offers localtelephony services in the municipalities of Chengdu, Chongqing and Tianjin.  It offers satellite transmission servicesthrough its subsidiary, China United Telecommunications Satellite CommunicationCo. Ltd., or Unisat.

 

**The Restructuringof Unicom Group and Our Initial Public Offering in 2000**

** **

We area company limited by shares incorporated under the Companies Ordinance of HongKong 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 a reorganization agreement, dated April 21, 2000, betweenUnicom Group and CUCL, Unicom Group transferred to CUCL certain of its assets,rights and liabilities in preparation for our initial public offering, or IPO.

 

Underan equity transfer agreement, dated April 21, 2000, among us, Unicom Group,China Unicom (Hong Kong) Group Limited and China Unicom (BVI) Limited, orUnicom BVI, Unicom Group transferred to us its 100% equity interest in CUCL,which became our wholly-owned operating subsidiary in China.  In return, we issued 9,725 million shares toUnicom BVI, then an indirect wholly-owned subsidiary of Unicom Group.

 

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

 

17

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

** **

Afterour IPO, Unicom BVI, which was a wholly-owned subsidiary of China Unicom (HongKong) Group Limited, or Unicom HK, a wholly-owned subsidiary of Unicom Group,directly held 77.47% of our outstanding shares. In October 2002, Unicom Group completed an internal restructuring of itsshareholding in our company.  Unicom HKtransferred the total issued capital of Unicom BVI held by it to Unicom Groupand Unicom BVI became a direct wholly-owned subsidiary of Unicom Group.   Unicom Group then transferred 51% of itsequity interest in Unicom BVI to the A Share Company, a newly establishedholding company and subsidiary of Unicom Group. The A Share Company’s business is limited to indirectly holding theequity interest of our company without any other direct business operations.

 

Followingthe restructuring, Unicom Group successfully completed the IPO of the A Sharesof the A Share Company in mainland China and the listing of the A Shares on theShanghai Stock Exchange.  After the IPO ofthe A Share Company, the A Share Company transferred all of its net offeringproceeds to Unicom Group in return for an additional 22.84% equity interest inUnicom BVI.  As of May 31, 2005,  Unicom Group holds a 69.32% equityinterest in the A Share Company.  The AShare Company in turn holds 82.09% of the total equityinterest in Unicom BVI, with the remaining 17.91% held directly by UnicomGroup.  Unicom BVI continues to hold77.37% of our outstanding shares and Unicom Group remains our ultimate controllingshareholder.  See also the chart on page19 below for the current shareholding structure of our company.

 

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 the voting in respect of its directequity interest in Unicom BVI.  Thismechanism for voting is designed to allow public shareholders of the A ShareCompany to indirectly participate in our shareholders’ meeting.

 

The voting mechanismdescribed above, however, will not apply to the approval process for anyconnected transactions between us or our subsidiaries and Unicom Group or itssubsidiaries, on which Unicom BVI will not be permitted to vote under theListing Rules of the Hong Kong Stock Exchange. Instead, our significant connected transactions would require theseparate approvals of the public shareholders both of our company and of the AShare Company.  According to the two-stepvoting arrangements we and the A Share Company have established, each connectedtransaction between us or our subsidiaries and Unicom Group or its subsidiarieswill consist of an initial agreement and a further agreement.  The initial agreement would be entered intoby Unicom Group or its subsidiaries (excluding the A Share Company and itssubsidiaries) on the one hand and the A Share Company or Unicom BVI on theother hand.  This agreement would containthe following terms:

 

•                                          the closing of the initialagreement would be subject to the (i) successful transfer of all rights andobligations of the A Share Company or Unicom BVI under the initial agreement tous or our subsidiaries, and (ii) the approval of the further agreement by ourindependent shareholders, and

 

•                                          Unicom Group or itssubsidiaries (excluding the A Share Company and its subsidiaries) would agreeand acknowledge that all rights and obligations under the initial agreement canbe transferred to us or our subsidiaries without any further consentrequirements.

 

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The initialagreement will constitute a connected transaction of the A Share Company and,if certain thresholds are met, will require the approval of the public orindependent shareholders of the A Share Company under the rules of the ShanghaiStock Exchange.  The further agreementwould be entered into by the A Share Company or Unicom BVI on the one hand andus or our subsidiaries on the other hand, and would provide for the transfer ofall rights and obligations of the A Share Company or Unicom BVI on the one handunder the initial agreement to us or our subsidiaries on the other hand.  The further agreement will constitute aconnected transaction of our company and, if certain thresholds are met, willrequire the approval of our public or independent shareholders under theListing Rules of the Hong Kong Stock Exchange. We expect, to the extent the nature ofa particular connected transaction allows, the two-step votingarrangements to apply as described above. However, there may be circumstanceswhere the nature of the connected transaction requires the application of thetwo-step voting arrangements to be adjusted. This may arise where we orour subsidiaries are the providers, rather than recipients, of certainservices. In this event, the two-step voting arrangements will need to beadjusted so that the process as described above is effectively reversed, suchthat 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 structure will beused in all future connected transactions between us and Unicom Group and willeffectively require the separate approvals of the public or independentshareholders both of our company and of the A Share Company for such connectedtransactions.

 

**Restructuring andAcquisition of Unicom New Century**

** **

On December 31,2002, in accordance with the two-step approach outlined above, we successfullycompleted the acquisition from Unicom Group of Unicom New Century, which holdscellular telecommunications businesses (including GSM assets and businesses andCDMA businesses) in the following nine provinces, autonomous regions andmunicipalities in China:  Jilin,Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces, Guangxi ZhuangAutonomous Region, Xinjiang Uygur Autonomous Region and Chongqingmunicipality.  The total purchase pricewas HK$4,523,181,304 (approximately RMB4.8 billion), payable in cash.

 

**Acquisition ofUnicom New World and the Sale of Guoxin Paging**

** **

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

 

**Merger betweenCUCL and Unicom New Century**

** **

OnJuly 30, 2004, Unicom New Century was merged into CUCL and legally dissolvedupon the completion of such merger.  As aresult, CUCL extended its cellular businesses to 21 provinces, autonomousregions and municipalities in China.

 

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**Acquisition ofChina Unicom International Limited**

** **

InSeptember 2004, we acquired from Unicom Group of Unicom International, alimited liability company established in Hong Kong engaging in voice wholesalebusiness, telephone cards business, line leasing services, managed bandwidthservices and mobile virtual network services. Unicom’s wholly-owned US subsidiary, China Unicom USA Corporation, orUnicom USA, carries wholesale business of voice traffic between the UnitedStates and mainland China.  The totalpurchase price was HK$37,465,996 (approximately RMB39.74 million), payable incash.

 

**Establishment ofChina Unicom (Macau) Company Limited**

** **

On October 15, 2004, we set up China Unicom (Macau)Company Limited, or Unicom Macau, in Macau Special Administrative Region of thePRC, or Macau.  In March 2005, the Macaugovernment granted Unicom Macau a CDMA license, which will allow Unicom Macauto provide roaming services to our CDMA subscribers as well as CDMA users ofother service providers who visit Macau during the first year of itsoperation.  After the first year of itsoperation, Unicom Macau will be eligible to provide cellular services to localresidents upon receiving approval from local telecommunications regulatoryauthority.

 

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Set forth below is our shareholding structureand subsidiaries as of December 31, 2004.

 

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**Our Relationship with UnicomGroup**

 

UnicomGroup continues to own and manage the international gateways that provideinternational connections to our long distance network.  Unicom Group also continues to operate thefollowing telecommunications networks:

 

•                                          itscellular networks in Guizhou province,

 

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

 

•                                          thesatellite transmission networks operated through Unisat, and

 

•                                          thepaging networks operated through Unicom Paging and Guoxin Paging.

 

UnicomGroup holds the licenses required for our telecommunications businesses and wederive our rights to operate our businesses from our status as a majority ownedsubsidiary 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, UnicomGroup undertook to take all actions necessary to obtain and maintain for ourbenefit such governmental licenses or approvals as we shall require to continueto operate our businesses.  Unicom Groupalso agreed not to engage in any business which competes with our businessesexcept for the then-existing competing businesses of Unicom Group and to grantus a right of first refusal in relation to any government authorization,license or permit, or other business opportunity to develop any newtelecommunications technology, product or service.  Finally, Unicom Group also gave us 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.

 

Inconnection with the restructuring of Unicom Group and the acquisitions ofUnicom New Century, Unicom New World and Unicom International, we entered intoa number of agreements with Unicom Group pursuant to the two-step processdescribed in “Further Restructuring of Unicom Group and the Initial PublicOffering of A Shares” above.  Theseinclude arrangements 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 alsoretains its interests in its other subsidiaries that provide ancillary servicesto us, including the procurement of telecommunications equipment and the supplyof SIM cards and calling cards.  In March 2005,we entered into several new agreements with Unicom Group to replace theexisting arrangements.  See “B. RelatedParty Transactions” under Item 7.

 

UnicomGroup has constructed nationwide cellular networks based on CDMA technology.The first phase of the construction was completed at the end of 2001.  We entered into lease agreements with UnicomGroup to lease a portion of the network capacity and began to offer CDMAcellular services on an exclusive basis in our cellular service areas in early2002.  In 2003, Unicom Group completedthe second phase of the CDMA network construction, which included the upgradeof the network to CDMA 1X technology. Wireless data services that utilize CDMA 1X technology have beenintroduced throughout our service areas. In 2004, Unicom Group substantially completed the construction of thethird phase of the CDMA network, which increased the total network capacity toapproximately 72 million subscribers.  InMarch 2005, we entered into a new CDMA lease agreement with Unicom Groupto replace the then existing CDMA lease agreement.  Unicom Group operates its CDMA networksoutside of our cellular service areas, in Guizhou province.  We also have an option to acquire the CDMAnetworks from Unicom Group.  See “B. RelatedParty Transactions - Leasing of CDMA Network Capacity” underItem 7.

 

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**Capital Expenditures and Divestitures**

 

See “Liquidityand Capital Resources - CapitalExpenditures” under Item 5 for information concerning our principal capitalexpenditures for the previous three years and those planned for 2005.  We have not undertaken any significantdivestitures.

 

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

### *** ***

**General**

** **

We arean integrated telecommunications operator in China, offering a widerange of telecommunications services, including cellular,international and domestic long distance, data and Internet servicesbased on our advanced, uniform nationwide network system.

 

Prior to theacquisition of Unicom New World on December 31, 2003, we offeredcellular communications services based on both GSM and CDMA technologies in 21 provinces,autonomous regions and municipalities in China.  Afterthe acquisition of Unicom New World, our cellular service area encompassed atotal of 30 provinces, autonomous regions and municipalities (i.e., allprovinces, autonomous regions and municipalities in China except for Guizhouprovince).  See “A.  History and Development of the Company –Acquisition of Unicom New World and the Sale of Guoxin Paging” above under thisItem 4.  As a result, ouroperating results for the year ended December 31, 2004, which include theoperating results of Unicom New World, are not necessarily comparable to ouroperating results for the year ended December 31, 2003, which does notinclude the operating results of Unicom New World.

 

We andChina Mobile are the two cellular service providers in our cellular serviceareas.  We had a total of 84.27 millionGSM cellular subscribers in our cellular service areas at the end of 2004,representing a 31.8% increase from 63.92 million subscribers at the endof 2003.  Our GSM cellular business is our largestbusiness, which accounted for 59.8% of our total operating revenue in the yearended December 31, 2004.  Wehad approximately 27.81 million CDMA cellular subscribers in our cellularservice areas as of December 31, 2004, representing a 64.5% increasefrom 16.91 million subscribers as of December 31, 2003.  At the end of 2004, our market sharewas 35.6% in our cellular service areas, relatively stable compared to the marketshare at the end of 2003.

 

Weprovide traditional public switched and IP telephony international and domesticlong distance, data and Internet services nationwide in China.  All of these services were launched in 2000,with the exception of our IP telephony long distance service, which waslaunched in 1999.  These businessescurrently represent a relatively small portion of our overall business, but aregrowing in absolute terms.  Our longdistance, data and Internet businesses accounted for 6.9% of our totaloperating revenue in 2004, compared to 8.4% in 2003.

 

Outgoingpublic switched and IP telephony long distance calls totaled 10.10 billion and 13.95 billionminutes, respectively, in 2004, compared to 8.44 billion and 11.39 billionminutes, respectively, in 2003.  Our market share slightly decreased fromapproximately 14.0% in 2003 to 12.7% in terms of total outgoing long distance callminutes in 2004.  Our incominginternational long distance calls (including incoming calls from Hong Kong,Macau and Taiwan) totaled 2.75 billion minutes in 2004, up from 1.91billion minutes in 2003.

 

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Our data and Internetbusiness maintained steady growth in 2004. Our broadband data and Internet services currently cover over 300 citiesnationwide.  As of December 31,2004, the bandwidth of our data network, international interconnection bandwidthand domestic interconnection bandwidth had reached 136Gbps, 3.34Gbps and14.88Gbps, respectively.  Our Internetsubscribers grew to 13.63 million by the end of 2004 from 12.43 million in 2003.

 

Ourfiber optic transmission network continued to expand in 2004.  As of December 31, 2004, the total cablelength of our transmission network reached 712,000 km, including 120,000km for our backbone transmission network, representing an increase of 25.0%and 4.7%, respectively, from the end of 2003.

 

**Recent Developments**

 

As of March 31, 2005,the total number of our GSM subscribers in all of our cellular service areas hasincreased to 86.98 million, including 44.05 million post-paid subscribers and 42.93million pre-paid subscribers.  As of March 31,2005, we also had a total of 29.43 million subscribers to our CDMAservices.  Average minutes of usage, orMOU, per subscriber per month for GSM services in our combined service areas were186.5 minutes for the three months ended March 31, 2005.  Average MOU per subscriber per month for CDMAservices in combined service areas were 275.5 minutes for the three monthsended March 31, 2005.  ARPU for GSMservices in our combined service areas was RMB46.9 for the three months ended March 31,2005.  ARPU for CDMA services in our combinedservice areas was RMB77.5 for the three months ended March 31, 2005.

 

Forthe three months ended March 31, 2005, outgoing public switched longdistance calls totaled 2.63 billion minutes, including 2.59 billionminutes of domestic long distance calls and 0.04 billion minutes ofinternational long distance calls (including calls to Hong Kong, Macau andTaiwan).  Outgoing IP telephony longdistance calls totaled 3.51 billion minutes for the first three months of 2005,including 3.48** **billion minutesof domestic long distance calls and 0.03 billion minutes of international longdistance calls (including calls to Hong Kong, Macau and Taiwan).  As of March 31, 2005, our Internetsubscribers reached 10.03 million.

 

**Cellular Services**

** **

Ourcellular business is our largest business, with our GSM and CDMA businessestogether having contributed 93.0% of our total operating revenue in 2004.  We offer cellular services in 30 provinces,autonomous regions and municipalities in China.

 

Weoffer both GSM and CDMA cellular services in our service areas.  We began to offer GSM cellular services in1995 and currently a majority of our existing cellular users subscribe to ourGSM cellular services.  We began to offerCDMA cellular services in 2002.  In 2003,we introduced wireless data services that utilize CDMA 1X technology.  We also offer GSM international roamingservices in conjunction with 211 operators in 101 countries and regions andCDMA international roaming services in conjunction with 15 operators in 12countries and regions.  In August 2004,we launched dual mode cellular service under the brand name “Worldwind,”leveraging our existing GSM and CDMA networks to achieve seamless roamingworldwide.

 

Wealso offer short message services, or SMS, and a number of other value-addedservices to our cellular subscribers, including CDMA 1X wireless data services andGSM wireless data services, under the integrated service brand of “uni” andsub-brands of “uni-Info”, “uni-Mail”, “uni-Magic”, “uni-Map”, “uni-Wap” and “Uni-Web”,and “U-Net”, which represents various wireless internet access services forlaptop or mobile handset.

 

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In 2004,our market share in our cellular service areas grew slightly, from 34.6% in 2003to 35.6% in 2004.

 

***GSM Cellular Services***

*** ***

Wecentrally plan and oversee our provincial GSM cellular businesses, which areoperated by provincial branches of our operating subsidiaries, CUCL and Unicom New World.  We centrally manage the key aspects of networkconstruction such as network planning and design and selection of majorequipment.  We also centrally devise theoverall business strategies to be carried out by the provincial operatingbranches.

 

OurGSM cellular networks reach all cities, county centers, major towns, majorhighways and railways in our cellular service areas.  We continue to selectively deploy GSM systemsthat operate in the 1800 MHz frequency band in high-density population and highcall volume centers to supplement our GSM networks operating in the 900 MHzfrequency band.  In 2004, we focused on optimizingthe operational efficiency and stability of our GSM networks, and will continueto manage our GSM networks to support the development of our various cellularservices.

 

*Post-paid Services and Pre-paid Services*

* *

Weoffer two main categories of GSM cellular services:  post-paid and pre-paid services that targetdifferent consumer segments.  Generally,we promote our pre-paid services to migrant population and temporary residentsas well as lower-usage subscribers and target our post-paid services atlong-term residents in our GSM cellular service areas.

 

Tosubscribe for our post-paid services, a customer generally needs to produceproof of local residency or a guarantee from a local resident and sign aservice contract.  A post-paid subscriberpays a monthly fee and per-minute usage and roaming charges.  In many of our cellular service areas, werequire most post-paid subscribers to pay a deposit directly to us or to give adirect debit authorization to one of the commercial banks that collect servicecharges for us.

 

Tosubscribe for our pre-paid services, a customer simply purchases a SIM cardwith a pre-paid amount of service charges. The customer can add to the pre-paid balance by purchasing rechargeablecards.  A customer of pre-paid servicesdoes not need to register with us.  Inaddition, pre-paid services do not have monthly fees, but carry higherper-minute usage and roaming charges. This fee structure is generally more attractive to lower-usagesubscribers.

 

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

 

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*Subscribers and Usage*

* *

Thefollowing table sets forth selected historical information about our GSMcellular operations and our subscriber base for the periods indicated.

 
| ** **                                            | ** ** | **CUCL and  Unicom New  Century only,  as of or for the  year ended  December 31,** | ** ** | **Unicom New  World only,  as of or for the  year ended  December 31,** | ** ** | **CUCL(5) and  Unicom New  World,  as of or for the  year ended  December 31** | ** ** | **CUCL(5) and  Unicom New  World,  as of or for the  three months  ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2002**                                                                                 | ** ** | **2003**                                                                     | ** ** | **2003**                                                                                 | ** ** | **2004**                                                                                       | ** ** | **2005** | ** ** |
| Number  of subscribers (in thousands)                 |       | 53,465                                                                                   |       | 63,923                                                                       |       | 8,647                                                                                    |       | 84,267                                                                                         |       | 86,982 |   |
| Post-paid                                             |       | 29,718                                                                                   |       | 32,458                                                                       |       | 7,105                                                                                    |       | 42,844                                                                                         |       | 44,048 |   |
| Pre-paid                                              |       | 23,747                                                                                   |       | 31,465                                                                       |       | 1,542                                                                                    |       | 41,423                                                                                         |       | 42,934 |   |
| Estimated  market share in our service areas(1)       |       | 29.8                                                                                     | %          | 27.4                                                                         | %          | 27.1                                                                                     | %          | 26.8                                                                                           | %          | 26.2 | % |
| Average  churn rate(2)                                |       | 15.5                                                                                     | %          | 29.1                                                                         | %          | 46.9                                                                                     | %          | 27.6                                                                                           | %          | 6.5 | % |
| Average  minutes of usage per subscriber per month(3) |       | 165.49                                                                                   |       | 173.70                                                                       |       | 204.55                                                                                   |       | 188.9                                                                                          |       | 186.5 |   |
| Average  revenue per subscriber per month (in RMB)(4) |       | 67.34                                                                                    |       | 56.74                                                                        |       | 58.34                                                                                    |       | 49.4                                                                                           |       | 46.9 |   |
| SMS  Volume (in billions)                             |       | 8.495                                                                                    |       | 25.034                                                                       |       | 2.959                                                                                    |       | 32.39                                                                                          |       | 8.72 |   |

 

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

 

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

 

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

 

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

 

(5)                  Includes Unicom New Century, which mergedinto CUCL on July 30, 2004.

 

*Subscriber Increase:*  Our subscriber count continued to growrapidly.  As of December 31, 2004,the total number of GSM subscribers in our cellular service areas increased to 84.27million, including 42.84 million post-paid subscribers and 41.42 millionpre-paid subscribers.  Our share of thecellular market in terms of total cellular subscribers in our GSM cellularservice areas was 26.8% as of December 31, 2004.  We attracted 35.5% of the net cellularsubscriber additions in those service areas during 2004.  We believe that this growth was attributableto a number of factors, including, among others, (i) continued growth ofthe Chinese cellular telecommunications market, driven by economic growth andreduction in the cost of cellular handsets and services, (ii) relatively flexiblemarketing, sales and distribution, (iii) relatively competitive pricing ofour services and (iv) our continuing focus on customer service.

 

*Pre-paid Subscribers:*  The rate of increase in our pre-paidsubscribers has generally exceeded the rate of increase in our post-paidsubscribers in recently years.  As of December 31,2004, we had 41.42 million pre-paid subscribers in our cellular serviceareas, representing 49.2% of our total subscriber base, the same percentage asat the end of 2003.  Pre-paid subscribersrepresented 71.9% of our net subscriber additions in our cellular service areasduring 2004.

 

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*MOU and ARPU:*  Our total minutes of usage, or MOU, andaverage revenue per subscriber per month, or ARPU, were 178.16 billionminutes and RMB49.4, respectively, in 2004. The average MOU per subscriber per month was 188.9 minutes in 2004, anincrease of 15.2 minutes from 173.7 minutes in 2003.  The increase in MOU was attributable toincreased tariff competition with our competitor, which resulted in theprovision of more free minutes to subscribers. The decreasing tariffs as a result of such competition also encouragedhigher usage among subscribers.  Our ARPUcontinued to decline from RMB56.7 in 2003 to RMB49.4 in 2004.  The decline in ARPU was attributable tointensified market competition and regional promotional activities that led toa decline in effective tariffs.  Ourpre-paid subscribers in general have lower MOUs and ARPUs compared to ourpost-paid subscribers.  For the yearended December 31, 2004, the average MOU per subscriber per month and ARPUwere 125.3 minutes and RMB40.0 respectively, for our pre-paid subscribers,compared to 247.5 minutes and RMB58.1, respectively, for our post-paidsubscribers.

 

*Churn Rate:*  For the year ended December 31, 2004,the churn rate for GSM services in our cellular service areas decreased from 29.1%in 2003 to 27.6% as a result of our emphasis on customer retention.  Our calculation of churn rate reflects thosesubscribers who switch to services of other operators and those whose serviceswe disconnect as a result of account inactivity or payment delinquency.

 

TheChinese government eliminated connection fees in 2001 and, as competitioncontinues to intensify, our churn rate from subscribers voluntarilydiscontinuing our services may increase in the future.  The churn rate for our pre-paid services isgenerally higher than that for our post-paid services because of the migrantand temporary nature of most pre-paid subscribers.  It is also difficult for us to develop andmaintain customer relationships with pre-paid subscribers from whom we do notrequire registration.

 

*Payment Delinquency:*  Payment delinquency stabilized in 2004.  As of December 31, 2004, the doubtfuldebt ratio for GSM cellular services in our cellular service areas, calculatedas the amount of provision for doubtful debt divided by revenue from GSMcellular services, is 2.8%, same as the ratio at the end of 2003 for CUCL andUnicom New Century.  In some of ourcellular service areas we require our post-paid subscribers to deposit servicecharges and maintain a certain level of account balances with us or withcommercial banks that collect service fees for us.  We classify the creditworthiness of oursubscribers into various levels and have adopted other credit controlmeasures.  We also closely manage paymentdelinquencies through confirmation of customer address and other registrationinformation, expansion of collection channels, advance notification ofinadequate deposits, close monitoring of call patterns and account balances andprompt termination of services.

 

*Tariffs*

* *

Generallywe charge our post-paid cellular subscribers the following categories oftariffs:  basic monthly fees, usagecharges for both incoming and outgoing calls, roaming charges, long-distancecall charges and charges for value-added services.  Pre-paid subscribers do not pay monthly feesbut pay higher per-minute usage and roaming charges.

 

27

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Thecellular tariffs are subject to regulation by various government authorities,including the MII, the National Development and Reform Commission andprovincial price regulatory authorities. The following table summarizes the present State guidance tariff ratesfor post-paid and pre-paid cellular services:

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

 

----

*Source:*  MII.

 

Intensecompetition in our cellular service areas has resulted in tariff discounts andservice promotions offered by both us and our main competitor from time totime, which may lower effective tariffs. These discounts and promotions have taken many forms, includingpromotional tariff rates, free call minutes, off-peak discounts or discountsfor high-usage subscribers and package service plans with fixed monthlyfees.  While various features of ourpackage service plans are coordinated on a nationwide basis, the tariffstructure of the various plans are determined by us based on the localcompetitive environment.  See “D. RiskFactors – Risks Relating to the Overall Telecommunications Industry inChina – regulatory or policy changes relating to telecommunications industrymay adversely affect our results of operations, financial condition andbusiness prospects” under Item 3.

 

Wehave introduced a number of package service plans in our cellular serviceareas.  Under these plans, subscriberspay a fixed monthly fee for a specified number of call minutes.  The plans vary in the level of the fixedmonthly fee, the number of specified call minutes and the tariff rates for callminutes in excess of the specified call minutes.  The terms of these plans also vary dependingon the local markets and generally offer some price discounts to similar plansof 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.

 

In1997, the Chinese government granted us preferential treatment by allowing usto reduce our tariffs by up to 10% below the State guidance tariff rates.  In the past, this preferential treatment hashelped us capture a significant number of cellular subscribers by allowing usto market our cellular services at discounted rates.  As we and our main competitor, introducedvarious package service plans and other promotional programs, the tariffstructure has become more complex.  Whilewe continue to maintain tariff levels that are generally lower than those ofour main competitor, the more complex tariff structure has, to some extent,made our price advantages less obvious to subscribers compared to previoustariff schemes that were largely based on simple per-minute charges.  In 2004, 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.

 

28

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***CDMA Cellular Services***

*** ***

Ourcontrolling shareholder, Unicom Group, currently has the exclusive license tooffer CDMA cellular services in China. It has constructed CDMA networks nationwide through its wholly-ownedsubsidiary Unicom Horizon.  We haveleased capacity on the network and operate the CDMA network in our cellularservice areas.  After a trial period ofthree months, we formally launched our CDMA services in April 2002.  In 2003, Unicom Group completed the second phaseof the CDMA network construction, which included the upgrade of the network toCDMA 1X technology, and we introduced wireless data services that utilize CDMA1X technology.  In August 2003, weintroduced pre-paid CDMA services.  In2004, Unicom Group substantially completed the third phase of the CDMA networkconstruction.  In August 2004, welaunched the “Worldwind” CDMA and GSM dual-mode handset cellular services.

 

*Unicom Group’s Construction of CDMA Networks*

* *

In May 2001,Unicom Group began to build CDMA networks nationwide.  The networks are expected to be expanded inphases.  The number and size of eachphase will depend upon actual and forecast CDMA subscriber growth and anticipatedcapacity requirements.  In the firstphase of the construction, which was completed by the end of 2001, thenetworks achieved a nationwide coverage of approximately 330 cities inChina, with a total capacity of 15.81 million subscribers.  The portion of this network within ourcellular service areas has a total capacity of approximately 15.62 millionsubscribers.

 

Througha competitive bidding process, Unicom Group was able to obtain highlyattractive terms for its CDMA equipment supply contracts.  The construction of the first phase of itsCDMA networks utilized to a significant extent the existing GSM infrastructure,such as base stations and related equipments, switching centers and relatedequipments, transmission capacity and relevant equipments.

 

In2003, Unicom Group completed the second phase of the CDMA network construction,which included the upgrade of the network to CDMA 1X technology.  The second phase of the construction alsoadded capacity for 20.69 million additional subscribers, bringing the totalcapacity of the nationwide CDMA networks to approximately 36.50 millionsubscribers.  The portion of the CDMAnetworks within our cellular service areas has a capacity of approximately20.38 million subscribers.  Inaddition, the second phase of the construction focused on improving the breadthand depth of network coverage, by deepening coverage to the level of almost allof the county-level towns and cities and increasing indoor coverage.

 

In2004, Unicom Group substantially completed the third phase of the CDMA networkconstruction, which increased the total CDMA network capacity to approximately72.74 million subscribers, with approximately 71.81 million of capacity withinour service areas.  Such level ofcapacity improved our CDMA nationwide network coverage and telecommunicationsquality, including both outdoor and indoor coverage, as well as the data-processingcapacity of our CDMA 1X services. After the substantial completion of the thirdphase of network construction, Unicom Group has built a CDMA network with relativelycomprehensive nationwide coverage.

 

29

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*Our Lease of CDMA Networks from Unicom Group*

* *

Ourwholly-owned operating subsidiary, CUCL, entered into a lease agreement withUnicom Group and its subsidiary Unicom Horizon, dated November 22, 2001,which sets forth the principal terms of the network capacity leasingarrangement between us and Unicom Group. Unicom New Century and Unicom New World have also entered into leaseagreements, dated November 20, 2002 and November 20, 2003,respectively, with Unicom Group and Unicom Horizon on similar terms andconditions.  We entered into a new,consolidated lease agreement, or the New CDMA Lease, with Unicom Group andUnicom Horizon on March 24, 2005 to replace the three lease agreements, orthe Old CDMA Leases, entered into in the past individually by CUCL,Unicom New Century and Unicom New World. We lease network capacity from Unicom Group and operate these CDMAnetworks in our cellular service areas on an exclusive basis and receive allrevenue generated from the operation.  Wemay terminate the lease arrangements upon giving at least six months’ priornotice to Unicom Group.

 

Underthe Old CDMA Leases, the term of each lease was for an initial period of oneyear and could be renewed for further one-year terms at our option.  We leased network capacity in our cellularservice areas on a quarterly basis during the first year and, thereafter, wouldlease network capacity on an annual basis, with the ability to request to adjustlease capacity pursuant to the Old CDMA Leases. See “B. Related Party Transactions -Leasing of CDMA Network Capacity” under Item 7. We have leased capacity for 31 millionsubscribers in our cellular service areas in 2004.

 

Underthe OLD CDMA Leases, we were required to make quarterly lease payments toUnicom Group for the actual amount of network capacity we leased.  The lease fee was charged on a per line basisand determined so as to enable Unicom Group to recover its total investment inconstructing the network in seven years together with a rate of return on itsinvestment of 8%.  To the extent that wehad not leased the full capacity of the CDMA network in the particular period,we did not have to compensate Unicom Group for unused capacities not leased byus.  The quarterly lease fee for thefirst two phases of the CDMA network in our cellular service areas was RMB56.4and RMB61.5 per subscriber line leased in 2004, respectively.

 

TheNew CDMA Lease has an initial term of two years commencing from January 1,2005, during which (i) the lease fee for the first year will be 29% of theaudited service revenue generated by our CDMA cellular business and (ii) thelease fee for the second year will be 30% of the audited service revenuegenerated by our CDMA business.  We leaseall constructed network capacity from Unicom Group under the New CDMA Lease.  The term of the New CDMA Lease may be renewedat our option, with the length of the renewed term to be agreed upon.

 

Inaddition to leasing network capacity, we also have the option, exercisable atany time during the lease period and for an additional year thereafter, topurchase the CDMA network in our cellular service areas.  The acquisition price will be negotiatedbetween Unicom Horizon and us.  It willbe based on the appraisal value of the CDMA network determined in accordancewith applicable PRC laws and regulations and take into account the thenprevailing market conditions and other factors. However, the purchase price will not exceed an amount which will, takinginto account all lease fee payments made by us to Unicom Horizon and lease feediscounts as a result of delay of delivery, enable Unicom Horizon to recoverits total network construction costs, together with an internal rate of returnof 8%.  The exercise of the purchaseoption will be subject to the relevant laws, regulations and listing rules inHong Kong and the PRC, particularly those governing connected transactions,including approvals of our minority shareholders.  See “B. Related Party Transactions – Leasingof CDMA Network Capacity” under Item 7 for a more detailed description of the NewCDMA Lease.

 

30

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*Services*

* *

TheCDMA services we offer in our cellular service areas include basic voice andvalue added services such as call forwarding and voicemail, caller identitydisplay, SMS services and CDMA 1X data services.  In addition to post-paid CDMA services, we offerpre-paid CDMA services under the service brand of “Ruyi133” in our cellularservice areas.  The features of our pre-paidand post-paid CDMA services are similar to pre-paid and post-paid GSMservices.  See “B. Business Overview –Cellular Services – GSM Cellular Services – Post-paid Services and Pre-paidServices” under this Item 4.  We havebegun operations of the CDMA 1X networks in all of the cities in our cellularservice areas.

 

In August 2004,we launched CDMA and GSM dual-mode cellular services under the brand name “Worldwind”,leveraging our existing GSM and CDMA networks to achieve seamless roamingworldwide.  As of December 31, 2004,we sold approximately 200,000 “Worldwind” dual-mode handsets and had approximately160,000 subscribers of the dual-mode cellular services.  “Worldwind” services, which are available toour subscribers who use either a dual-mode handset or a dual-mode user card,have the following features:

 

•                                          Userscan switch between our GSM and CDMA networks in China, thereby offeringwireless coverage in areas of the country covered by any one of these networks;

 

•                                          Whenroaming in areas outside of China, users can use the cellular services of localoperators, whether they are GSM or CDMA, who signed roaming agreements with us;and

 

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

 

*Subscriber Base*

* *

Thefollowing table sets forth selected historical information about our CDMAcellular operations and our subscriber base for the periods indicated.

** **
| ** **                                            | ** ** | **CUCL and Unicom New  Century only,  as of or for the  year ended December 31,** | ** ** | **Unicom New  World only,  as of or for  the year  ended  December 31,** | ** ** | **CUCL(5) and  Unicom New  World,  as of or for  the year  ended  December 31,** | ** ** | **CUCL(5) and  Unicom New  World,  as of or for  the three  months ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2002**                                                                               | ** ** | **2003**                                                                      | ** ** | **2003**                                                                                   | ** ** | **2004**                                                                                        | ** ** | **2005** | ** ** |
| Number  of subscribers (in thousands)                 |       | 6,245                                                                                  |       | 16,910                                                                        |       | 2,036                                                                                      |       | 27,814                                                                                          |       | 29,432 |   |
| Post-paid                                             |       | 6,245                                                                                  |       | 16,046                                                                        |       | 1,934                                                                                      |       | 25,824                                                                                          |       | 27,227 |   |
| Pre-paid                                              |       | —                                                                                 |       | 864                                                                           |       | 102                                                                                        |       | 1,991                                                                                           |       | 2,205 |   |
| Estimated  market share in our service areas(1)       |       | 3.5                                                                                    | %          | 7.2                                                                           | %          | 6.4                                                                                        | %          | 8.8                                                                                             | %          | 8.9 | % |
| Average  churn rate(2)                                |       | 0.8                                                                                    | %          | 11.5                                                                          | %          | 25.9                                                                                       | %          | 17.9                                                                                            | %          | 4.1 | % |
| Average  minutes of usage per subscriber per month(3) |       | 328.1                                                                                  |       | 337.5                                                                         |       | 335.4                                                                                      |       | 292.3                                                                                           |       | 275.5 |   |
| Average  revenue per subscriber per month (in RMB)(4) |       | 172.2                                                                                  |       | 128.4                                                                         |       | 123.4                                                                                      |       | 85.3                                                                                            |       | 77.5 |   |
| SMS  Volume (in billions)                             |       | 0.516                                                                                  |       | 6.231                                                                         |       | 0.623                                                                                      |       | 11.83                                                                                           |       | 3.41 |   |

 

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

 

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

 

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

 

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

 

(5)                  Includes Unicom New Century, which mergedinto CUCL on July 30, 2004.

 

As of December 31,2004, our total CDMA subscriber base in our cellular service areas reached 27.81 million,representing an increase of 64.5% from 16.91 million subscribers at December 31,2003.  Among the total CDMA subscribers,post-paid subscribers increased by 60.9% from 16.05 million as of December 31,2003 to 25.82 million as of December 31, 2004, while prepaid subscribersincreased by 130.4% from 0.86 million as of December 31, 2003 to 1.99million as of December 31, 2004. Pre-paid subscribers represented 7.2% ofthe total number of CDMA subscribers in 2004. We believe the rapid growth in our CDMA subscriber base was primarilyattributable to:

 

•                                          expansionof our CDMA cellular services areas as a result of the acquisition of UnicomNew World,

 

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

 

•                                          improvednetwork coverage and quality, and

 

•                                          increasedbrand awareness and our promotions and marketing efforts.

 

*MOU, ARPU and Churn Rate*

* *

In 2004, total MOUfor our CDMA services was 82.96 billion minutes, an increase of 89.8% from 43.70billion minutes in 2003, and ARPU for our CDMA services was RMB85.3, a decreasefrom RMB128.4 in 2003.  Average MOU persubscriber per month for our CDMA services was 292.3 minutes, 54.7% higher thanthe average MOU of 188.9 minutes for GSM services, while our CDMA ARPU was 72.7%higher than the ARPU of RMB49.4 for our GSM subscribers.  The reasons for the increase in MOU and thedecrease in ARPU for our CDMA services in 2004 are similar to the reasons forsimilar trends in GSM services.  See “B.Business Overview – Cellular Services – GSM Cellular Services – MOU and ARPU”under this Item 4.

 

The churn rate forour CDMA services is calculated in the same way as the churn rate for our GSMservices and was 17.9% in 2004, higher than the 11.5% in 2003, butsignificantly lower than the 27.6% churn rate for our GSM services.  Loss of CDMA subscribers was primarilyattributable to the following reasons:

 

(i)                                    thetermination of some CDMA subscribers at the end of their contract periods underthe CDMA handset promotional packages we began to offer in 2002;

 

(ii)                                 increasedcompetition as the focus of growth gradually shifts from new subscribers toincreased usage; and

 

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(iii)                              anincreasing percentage of our CDMA subscribers are subscribing to pre-paid CDMAservices, which are characterized by a higher churn rate than post-paidservices and led to some subscribers switching from post-paid services topre-paid services.

 

*Payment Delinquency*

* *

As of December 31,2004, the doubtful debt ratio for CDMA cellular services in our cellularservice areas, calculated as the amount of provision for doubtful debt dividedby revenue from CDMA cellular services, is 2.7%, compared to 2.4% in 2003 for CDMAcellular services in the service areas of CUCL and Unicom New Century.  We have taken various measures to controlpayment delinquency for our CDMA services, which measures are similar to theones taken to control payment delinquency for our GSM services.  See “B. Business Overview – Cellular Services– GSM Cellular Services – Payment Delinquency” under this Item 4.

 

*Tariffs and Promotion*

* *

Thetariff rates for our CDMA services are generally the State guidance rates forcellular services without the 10% discount we are permitted to adopt for GSMservices.  However, we have adopted otherpromotional programs.  Generally wecharge our post-paid cellular subscribers the following categories oftariffs:  basic monthly fees, usagecharges for both incoming and outgoing calls, roaming charges, long-distancecall charges and charges for value-added services.  Pre-paid subscribers do not pay monthly feesbut pay higher per-minute usage and roaming charges.

 

Toaccelerate the growth in our CDMA subscriber base, we began offering special handsetpromotional packages in the second half of 2002.  Under the handset promotional packages, CDMAmobile handsets purchased by us from handset suppliers were given to certainCDMA subscribers for their use at no additional cost during specified contractperiods, ranging from 6 monthsto 2 years. In return, subscribers were required to incur a minimum amount ofservice fees during the contract period. If the contractual subscribers canfulfill the minimum contract spending amounts, they will not need to repay theremaining costs of the CDMA handsets.

 

Due tothe high cost of the handset promotional packages, we have attempted to reduce theuse of such packages, and concentrated instead on alternative promotionalprograms to develop our CDMA services. We focused on expanding the sales and marketing channels for our CDMAservices by significantly increasing the number of sales agents.  We emphasize improving our customer servicesand introducing new value-added data services to our CDMA subscribers.  We also launched several marketing campaignsin 2004, which included increased advertising for our CDMA services, promotionof various customized package service plans that gave subscribers more choices,promotion of our CDMA 1X value-added services and promotion of our “Worldwind” CDMAand GSM dual-mode services.  In addition,we have adopted the policy to centralize the purchases of CDMA handsets to controlthe costs of our CDMA promotional packages.

 

***See “D.Risk Factors***- Risks Relating to Our Business - Our CDMA services have yet togain a broad market acceptance in China and there is uncertainty over whetherour CDMA services will succeed in gaining a broader market acceptance.” under Item 3.

*** ***

***33***

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*** ***

***SMS Services and Other Value-added Services***

*** ***

Webegan to offer SMS services in 2000.  SMSvolume has been increasing rapidly.  Atotal number of 32.39 billion short messages were transmitted by GSMsubscribers and 11.83 billion short messages by our CDMA subscribers in ourcellular service areas in 2004.  Our SMSservices are offered under a uniform service brand of “uni-Info” and mainlyinclude the following services: SMS transmission and receipt through handsets, contentprovider-assisted SMS, business SMS platform, voice SMS and other informationservices.  We continue to promote the useof SMS as a convenient and cost effective method of business and personalcommunication.  The SMS platforms of ourGSM and CDMA networks are interconnected with each other.  Our SMS platforms are also interconnectedwith the SMS platforms of China Mobile’s GSM network, China Telecom’s “LittleSmart” network, and China Netcom’s “Little Smart” network.

 

On August 1,2001, Unicom Group and we launched our nationwide GSM wireless data servicesunder the service brand of “uni-Info”. The Uni-Info services are presently based on a nationwide wirelessinformation services platform.  Uni-Infooffers a variety of services in the categories of games, downloads and otherentertainment services, information and notification services, personalinformation management and transactions services.  We and Unicom Group cooperate with a numberof national and regional content providers that supply our subscribers withUni-Info services.

 

In March 2003,we launched CDMA 1X wireless data services under the uniform service brand of “uni”,with individual services offered under various sub-brands, including “uni-Info”,“uni-Wap”, “uni-Mail”, “uni-Magic”, “uni-Map” and “uni-Web”.  “uni-Info” services are similar to the GSMservices offered under the same brand described above.  “uni-Wap” services allow users to connect toand browse the Internet on their CDMA handsets. “uni-Mail” services allow users to (i) send and receive e-mails,either from other e-mail accounts or from the Internet and (ii) downloadand read attachments to the e-mail sent to the user’s handset.  “uni-Magic” services allow users to downloadpictures, games, entertainment services, business information and other formsof image.  “uni-Map” services providelocation-based information to users’ handsets. Retail users can find locations and research information with respect toa particular location.  This service alsooffers industrial applications, such as the logistics industry and sea rescueservices.  “uni-Web” services offerwireless data transmissions with higher transmission rate and more stableconnectivity than the GPRS services offered by our main competitor.  In addition to the “uni” brand value-addedservices, we also offer the “U-Net” wireless internet services, which providewireless internet access to laptop computers and mobile handheld devicesequipped with a wireless internet card.

 

In late2003, we began to provide personalized ring tone service under the brand name “CoolRing Tong”, which allows a cellular subscriber to select personalized ringtones that his or her callers will hear after dialing his or her cell phone number.  This new value-added service has grownrapidly since its introduction.  Also in2004, we introduced “Music Street”, a value-added service that allows ourcellular subscribers to send music and other types of voice messages, recordvoice messages and listen to music by dialing designated service numbers.

 

In 2004,in order to develop our CDMA 1X value added services, we took the followingmeasures:

 

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

 

•                                          Weimproved the content of our CDMA 1X services, through strengthening servicesupport of and cooperation with content providers and service providers, inorder to increase the appeal of these services;

 

34

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•                                          Throughcooperation with partners in specific industries, we launched new applicationssuch as “Unicom Police Applications”, “Unicom Horizon Maritime Applications”and “Stock-in-Palm”;

 

•                                          Throughpromotional packages and the establishment of free trial zones in our retailstores, we sought to reduce the obstacles for subscriber usage of our CDMA 1Xservices;

 

•                                          Weintroduced CDMA 1X services specifically catering to the youth to support thelaunch of the “Up New Power” service brand that is designed for the youthmarket; and

 

•                                          Weintroduced more information services in order to increase the usage of our CDMA1X services.

 

Wehave designed a fee structure under which we earn transmission fees from theuse of our GSM and CDMA value added services and retain a certain percentage ofapplication fees charged by content providers that we collect for them.

 

**Long Distance,Data and Internet Services**

** **

Weoffer international and domestic long distance services in China based on boththe traditional public switched telephony standard and the IP telephonystandard.  Our long distance services arebased on our advanced, uniform nationwide network system.  We leverage our ability to integrate our longdistance services with a broad range of services to target different customersegments.  We have also developed anationwide video-conferencing network that reaches over 300 cities.  We launched our data and Internet servicesthroughout China in 2000.  Similar to ourlong distance services, our data and Internet services are supported by ouradvanced, unified nationwide network system.

 

The following table sets forth the total number ofoutgoing call minutes for our long distance services and our data and Internetservices for the periods indicated.

** **
| ** **                                           | ** ** | **As of or for the year ended December 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2002**                                          | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | ** **                                        | ** ** |
| Public  switched telephony (in billions of minutes): |       |                                              |       |   |   |   |   |
| Domestic                                             |       | 6.23                                              |       | 8.31 |   | 9.94 |   |
| International                                        |       | 0.14                                              |       | 0.13 |   | 0.16 |   |
| Total                                                |       | 6.37                                              |       | 8.44 |   | 10.10 |   |
| IP  telephony (in billions of minutes):              |       |                                              |       |   |   |   |   |
| Domestic                                             |       | 6.75                                              |       | 11.25 |   | 13.81 |   |
| International                                        |       | 0.13                                              |       | 0.14 |   | 0.14 |   |
| Total                                                |       | 6.88                                              |       | 11.39 |   | 13.95 |   |
| Data  Services                                       |       |                                              |       |   |   |   |   |
| Bandwidth  leased to customers (2Mbps)               |       | 1,466                                             |       | 7,194 |   | 9,007 |   |
| Internet  Services                                   |       |                                              |       |   |   |   |   |
| Dial-up  subscribers (in thousands)                  |       | 7,270                                             |       | 12,385 |   | 13,563 |   |
| Dedicated  access subscribers                        |       | 22,596                                            |       | 47,750 |   | 61,569 |   |

 

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***Public Switched Telephony Services***

*** ***

Weoffer public switched long distance, or PSTN, services to business andresidential customers who register their telephone numbers with us.  They can access our services by dialing aprefix of “193”.  We also distributepre-paid long distance calling cards that purchasers can use to access ourservices by dialing a prefix of “193300”. For some corporate and government customers, we also offer our publicswitched long distance services over dedicated lines, frequently as part of ourintegrated offerings of long distance and data services. We also offer longdistance services to our cellular subscribers.

 

The following table sets forth selected informationabout our public switched long distance telephony services for the periods indicated.

** **
| ** **                                               | ** ** | **As of or for the year ended on December 31,** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2003**                                             | ** ** | **2004** | ** ** |
| Number  of cities reached                                |       | 329                                                  |       | 332 |   |
| Minutes  of outgoing long distance calls (in billion)    |       | 8.44                                                 |       | 10.10 |   |
| Market  share of outgoing long distance call minutes (1) |       | 14.33                                                | %          | 13.6 | % |
| Minutes  of incoming international calls (in billion)    |       | 1.78                                                 |       | 2.47 |   |

 

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

 

Tariffrates for public switched long distance telephony services of incumbent fixedline operators are set by the Chinese government.  Other fixed line operators, including us, canadopt tariffs that are different from the State tariff rates upon approval bythe MII as long as they do not offer services at tariff rates below cost.  The following table sets forth our presenttariff rates (including rates applicable to domestic and international longdistance calls made by our cellular subscribers):

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

 

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

 

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

 

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

 

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

 

Settlementof outgoing and incoming international calls with international operators isconducted through negotiated contracts such individual international operators,which contracts must be approved by the MII.

 

Wehave adopted a number of measures to increase the number of our registered longdistance customers, including, among others, organizing sales agents to promoteour services in residential areas, and cross-selling our long distance serviceswith our cellular services at our service centers.

 

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***IP Telephony Services***

 

Weoffer domestic and international long distance IP telephony services throughinterconnection of our IP network with the Internet and othertelecommunications networks based on a manageable IP network configuration toenhance service quality. The following table sets forth selected informationabout our IP telephony services for the periods indicated.

 
| ** **                                            | ** ** | **As of or for the year ended  December 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                            | ** ** | **2002**                                           | ** ** | **2003** | ** ** | **2004** | ** ** |
| Number of cities  reached                             |       | 337                                                |       | 337 |   | 341 |   |
| Minutes of  outgoing IP telephony calls (in billion)  |       | 6.88                                               |       | 11.39 |   | 13.95 |   |
| Domestic                                              |       | 6.75                                               |       | 11.25 |   | 13.81 |   |
| International,  Hong Kong, Macau & Taiwan    |       | 0.13                                               |       | 0.14 |   | 0.14 |   |
| Market share of  outgoing IP calls minutes(1)         |       | 11.7                                               | %          | 13.8 | % | 12.1 | % |
| Minutes of  incoming international calls (in billion) |       | 0.16                                               |       | 0.13 |   | 0.28 |   |

 

----

(1) *Source:*MII.

 

Our IPtelephony services include the following services:

 

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

 

•                                          IPtelephony services using the “17911” access code, which allows users to diallong distance phone numbers as follows:  “17911+ long distance number”.  There are twotypes of such services:  (a) userscan register for our services at any of our offices or our designated agents’offices free of charge, or (b) users can purchase a pre-paid IP card fromus, input the card number and password the first time the IP card is used, andthereafter dial international or domestic long distance calls only with the17911 prefix.

 

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

 

•                                          DirectIP telephony services – Pursuant to authorization from the MII, we areproviding fixed long distance direct-dialing IP telephony servicesnationwide.  As of December 31, 2004,we have set up more than 20,000 “IP convenient stores” nationwide.  “IP convenient stores” are fixed-line longdistance call centers in locations with a high concentration of callers who donot otherwise have access to fixed or wireless telephony services.  These call centers provide long distance telephonyservices to customers on a pre-paid basis.

 

37

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In February 2001, the Chinese government ceasedregulatory control of tariffs for IP telephony long distance calls and allowedoperators to set their own rates.  Thefollowing table sets forth our present tariff rates for our IP telephonyservices (including rates applicable to IP long distance calls made by ourcellular 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             |       |

 

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

 

Werely primarily on our network of sales agents to sell IP telephony cards.  We also market registered IP telephonyservices and IP telephony services through dedicated lines.

 

***Data Services***

*** ***

Wepresently provide data services in over 300 cities in China.  We target high volume business or governmentusers of integrated voice, data and video communications and offer them dataservices as part of our integrated offerings of long distance, data andInternet services.  As of December 31, 2004,the total leased bandwidth of our ATM and FR data services was 9,007 x 2 Mbps.

 

Our data service offerings mainly consist ofbroadband, managed data services, including:

 

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

 

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

 

•                                          Broadbandvideo-conferencing and video-telephony services, which are provided under thebrand name of “Uni-Video”.  Theseservices currently include video-conferencing, video-telephony, videoconference room leasing and video public telephony services.  These services are based on our existingunified data network platform.  Two ormore users can use our services by connecting to the Internet or our videonetwork through video-conferencing terminals or computer terminals.

 

Thefollowing table sets forth selected information about our data services for theperiods indicated.

 
| ** **                     | ** ** | **As of or for the year ended December 31,** | ** ** |
|--------------------------------|------------|---------------------------------------------------|------------|
| ** **                     | ** ** | **2002**                                          | ** ** | **2003** | ** ** | **2004** | ** ** |
| Number of cities  reached      |       | 297                                               |       | 316 |   | 328 |   |
| Bandwidth leased  to customers |       | 1,466                                             |       | 7,194 |   | 9,007 |   |

 

38

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Weprovide data services through an advanced, unified nationwide network system,the backbone of which is our advanced nationwide fiber optic transmissionnetwork.  This network is the secondlargest fiber optic transmission network in China.  We have also built metropolitan area networksin many****cities throughoutChina.  These networks provide localtransmission capacity for our different services.  See “- Networks-Transmission Network” below.

 

Webelieve that our ability to offer integrated access to customers’ premises isimportant to the success of our data services. We continue to build integrated access networks linking major officebuildings to our networks in major cities. See “- Networks -Long Distance, Data and Internet Networks” below.

 

Ourcharges for ATM and FR services include one-time, up-front charges forinstallation materials (currently RMB500 per port for ATM services and RMB300per port for FR services) and testing (currently RMB500 per circuit or port forATM services and RMB300 per circuit or port for FR services), a monthly portfee and a monthly circuit fee.  Ourtariff charges are generally offered at a 10% discount from the State guidancetariffs.

 

Thefollowing table sets forth our tariff rates for monthly port fees for FR data servicesof 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 |   |

 

Thefollowing table sets forth our tariff rates for monthly permanent virtualcircuit (PVC) fees for FR data services of selected bandwidths and selecteddistance categories.

 
| ** **    | ** ** | **FR Services PVC Fee (RMB per month)** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| **Bandwidth** | ** ** | **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 |   |

 

39

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Thefollowing table sets forth our tariff rates for monthly port fees for ATMservices 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 |   |

 

Thefollowing table sets forth our tariff rates for monthly circuit fees for ATMdata services of selected bandwidths and selected distance 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 |   |

 

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

 

40

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

 

***Internet Services***

 

Weoffer the following Internet services:

 

•                                          DedicatedInternet Access.  We began to offerbusiness customers high speed Internet access through dedicated lines in2000.  As of December 31, 2004, wehad a total of 61,569 subscribers for dedicated Internet access.  We package this service with voice and dataservices to provide integrated communications solutions to our businesscustomers and cooperate with cable operators and real estate developers tooffer broadband access to residential customers.

 

•                                          Dial-upInternet Access.  We began to offerdial-up Internet access services to customers in 2000.  As of December 31, 2004, the totalnumber of our dial-up subscribers increased to 13.56 million from 12.38million in 2003.

 

•                                          “Ruyi Mailbox” Services.  This service allows our cellularsubscribers to use their cellular phone numbers as e-email address.  As of December 31, 2004, the number of “RuyiMailbox” subscribers increased to 14.69 million from 7.81 million in 2003.

 

•                                          IDCServices.  We have built Internet datacenters (or IDC) in 10 cities including Shanghai, Beijing, Guangzhou and certainprovincial capitals, and provide server hosting, server rental, virtual serversand other IDC services to commercial customers and virtual IDC operators.

 

•                                          Others.  Other Internet services we offer include achain of Internet cafes (Unicom’s Internet Plaza services), internationalInternet Protocol-Virtual Private Network (or IP-VPN), Virtual Private DataNetwork (or VPDN), Virtual Internet Service Provider (or VISP), Uninetinternational roaming and corporate e-mail services.

 

Thefollowing table sets forth selected historical information about our Internetservice operations and our subscriber base for the periods indicated.

 
| ** **                                                               | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                               | ** ** | **2002**                    | ** ** | **2003** | ** ** | **2004** | ** ** |
| Number of cities  reached by our dedicated Internet access services      |       | 317                         |       | 323 |   | 327 |   |
| Number of cities  reached by our dial-up Internet access services        |       | 305                         |       | 325 |   | 328 |   |
| Number of  subscribers of dedicated Internet access services             |       | 22,596                      |       | 47,750 |   | 61,569 |   |
| Number of  subscribers of dial-up Internet access services (in thousand) |       | 7,270                       |       | 12,385 |   | 13,563 |   |

 

41

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Ourtariff charges for registered dial-up access include a network usage fee and afixed telecommunications fee (charged to users of our PSTN long distanceservices only).  In addition, thoseregistered accounts that charge based on usage volume include an up-frontaccount set-up fee and those accounts that charge based on monthly usageinclude a monthly fee.  Our tariffcharges for dial-up access through pre-paid cards include only a network usagefee and a fixed telecommunications fee. The following table sets forth the various tariff charges for ourdial-up access services:

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

 

The network usage fee isdiscounted, at an amount equal to half of the amounts set forth above, on legalholidays and weekends and on weekdays from 11 p.m. to 8 a.m. of thefollowing day.

 

Ourtariff charges for dedicated Internet access include a network usage fee, anaccount set-up fee and a fixed telecommunications fee.  Network usage fee is calculated based onmonthly service plans.  The accountset-up fee is RMB100.  The fixedtelecommunications charge is based on the relevant tariff for the particulartype and bandwidth of leased lines****usedto access the Internet.  The followingtable summarizes the monthly network usage fees for selected bandwidths denotedas “R”.

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

 

Ourprovincial and local branches are permitted to make tariff decisions within therange set forth above.  For customers wholease a high number of dedicated access lines, we provide discounts of up to20% of the tariffs set forth in the table above.

 

Wecharge a monthly usage fee for our “Ruyi Mailbox” services, which is currentlyRMB6 per month.  We do not charge for SMSnotifications of e-mail receipt.  Othere-mail functions performed through SMS are charged based on the SMS tariffrates for our “uni-Info” services.

 

42

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Thenetwork code for our nationwide dial-up Internet services is “165”.  We distribute dial-up Internet accessservices through a variety of methods.  Acustomer can pre-register for our dial-up services or purchase dial-uppasswords with a pre-paid amount of on-line charges that can be used nationwideto access the Internet.  We also havearrangements with some commercial banks that allow the banks’ customers toaccess our dial-up services using their bank account numbers, with on-linecharges being automatically debited from their bank accounts.

 

***Leased Line Services***

 

Webegan to lease transmission lines to large business customers and othertelecommunications operators in April 2000.  Our leased line services provide customerswith dedicated digital links directly connecting customer sites.  As of December 31, 2004, we had a totalleased bandwidth of an equivalent of 51,598 x 2 Mbps circuits, representing a 95.1%increase from 26,449 x 2 Mbps circuits at the end of 2003.

 

Leasedline tariffs are primarily based on the bandwidths of the lines leased and thedistance 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.

 

Similarto public switched long distance telephony 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 line services at a 10% discount to the Statetariff rates and market these services to institutionalcustomers through our own dedicated teams and our sales agents.

 

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

 

Wehave substantially completed the construction of our nationwide transmissionnetwork.  See “-Networks - Transmission Network” below.  We have started to offer some networkelements such as optic fibers or fiber channels for lease to othertelecommunications operators or corporate customers.

 

**Interconnectionand Roaming Arrangements**

** **

***Interconnection***

*** ***

Interconnectionrefers to various arrangements that permit the connection of ourtelecommunications networks to other networks. Our cellular and long distance networks interconnect with Unicom Group’scellular networks.  Under currentarrangements, settlement between Unicom Group and us is based on an internalsettlement standard that takes into account either the internal costs of therelevant networks or the government standard applicable between third-partyoperators, whichever is the more favorable to us.

 

43

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UnicomGroup’s cellular networks, our cellular networks and our long distance networksinterconnect with the fixed telephone networks of China Telecom, China Netcomand China Railcom.  Unicom Group’scellular networks and our cellular networks also interconnect with China Mobile’scellular networks.  Our Internet networkinterconnects with the Internet networks of China Telecom and ChinaNetcom.  Although we continue toencounter some difficulties in the execution of our interconnectionarrangements with other operators in some service areas, the situation improvedin 2004 due to improved regulatory supervision by the Chinese government inthis area.

 

In October 2003,the MII issued regulations relating to settlement between telecommunicationsnetworks.  These new regulations containprovisions regarding revenue sharing methods and settlement mechanisms forinterconnection arrangements between us and other operators.  These interconnection arrangements under thenew regulations are described in “-Regulatory and Related Matters - InterconnectionArrangements” below.

 

Unicom Group entered into interconnectionarrangements with China Telecom, China Netcom and China Mobile with thefollowing agreements, which equally apply to us.

 

•                                          Frameworkinterconnection and settlement agreement between Unicom Group and the formerChina Telecom, dated September 30, 2001, the rights and obligations ofwhich were divided and continued after the former China Telecom was split intoChina Telecom and China Netcom pursuant to an agreement among Unicom Group,China Telecom and China Netcom, dated April 23, 2003.  These interconnection and settlementarrangements with China Telecom and China Netcom were superseded by theinterconnection and settlement agreement between Unicom Group and ChinaTelecom, dated March 29, 2004 and the interconnection and settlementagreement 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.

 

•                                          Agreementbetween Unicom Group, China Telecom and China Netcom, relating to thecontinuation and division of rights and obligations of the parties under UnicomGroup’s prior interconnection agreement with the former China Telecom, dated April 23,2003.

 

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

 

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

 

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

 

•                                          Agreementbetween Unicom Group and China Mobile regarding the mutual provision of openservice platforms, dated November 5, 2003.

 

44

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UnicomGroup has also entered into the following interconnection arrangements, whichequally apply to us.

 

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

 

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

 

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

 

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

 

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

 

•                                          Interconnectionand settlement agreement between Unicom Group and China Telecom relating to theprovision of point-to-point SMS services between Unicom Group’s and ChinaTelecom’s networks, dated October 10, 2004.

 

•                                          Interconnectionand settlement agreement between Unicom Group and China Netcom relating to theprovision of point-to-point SMS services between Unicom Group’s and ChinaNetcom’s networks, dated October 11, 2004.

 

See “B. Related PartyTransactions – Provision of Ongoing Telecommunications and Ancillary Servicesand Premises – CDMA Interconnection and Roaming Arrangements” under Item 7below for the interconnection and settlement arrangements between Unicom Groupand us.

 

***Roaming***

 

We have entered into roaming arrangements with UnicomGroup.  In addition, as of December 31, 2004,our cellular subscribers can roam on cellular networks in Europe, North Americaand other Asian countries and regions through Unicom Group’s internationalroaming agreements with 211 GSM operators in 101 countries and regions and15 CDMA operators in 12 countries and regions. Unicom Group has agreed to arrange for us to participate in its futureinternational roaming arrangements.

 

45

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A cellular subscriberusing roaming services is charged at our roaming usage rate for both incomingand outgoing calls, plus applicable 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 thistariff, retain RMB0.20 and pay the remaining 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:

 
| ** **                                                   | ** ** | **Roaming Tariff** | ** ** | **Paid to Unicom  Group** | ** ** | **Retained by Us** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------|------------|
| For our subscribers  roaming on Unicom Group’s networks |       |               |       |                      |       |               |       |
| 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               |       |

 
| ** **                                                   | ** ** | **Roaming Tariff** | ** ** | **Paid to Us** | ** ** | **Retained by  Unicom Group** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|----------------|------------|-------------------------------|------------|
| For Unicom Group’s subscribers roaming on  our networks |       |               |       |           |       |                          |       |
| 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 tointernational roaming, we settle roaming revenue with international operatorsthrough Unicom Group in accordance with roaming agreements between Unicom Groupand each of the international operators.

 

See“B. Related Party Transactions – Provision of Ongoing Telecommunications andAncillary Services and Premises – Roaming Arrangements” under Item 7 below forfurther information regarding the roaming arrangements between Unicom Group andus.

 

**Networks**

** **

We operate an advancednetwork system to support our integrated operations.  The backbone of the system is a nationwidefiber optic transmission network, which serves as the common platform for ourcellular, 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.  We generally utilize a centralized networkplanning and equipment selection process, which ensures uniform nationwidedesign and network compatibility.

 

***Transmission Network***

*** ***

We own and operate anadvanced nationwide fiber optic transmission network (except for the Tibetautonomous region, in which we lease capacity from other operators).  As of December 31, 2004, our fiber optictransmission network reached 326 cities with a total cable length ofapproximately 712,000 km, of which fiber optic backbone transmissionnetwork accounted for approximately 122,000 km.

 

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Ourfiber optic transmission network is designed for broadband capacity withsuperior security and reliability, which supports our integratedtelecommunications services and allows us to lease capacity to othertelecommunications operators and corporate customers.  The network deploys:

 

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

 

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

 

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

 

Our SDH fiber rings havetransmission bandwidths of 2.5 Gb/s in most routes and 10 Gb/s for the fiberring that covers the eastern and southern coastal areas of China.  We deploy mainly transmission equipment andtechnology supplied by Siemens, Nortel, Lucent, Alcatel, Huawei, ZTE and othervendors.

 

Concurrent with theconstruction and expansion of our domestic backbone transmission network, wealso seek to expand our international bandwidth.  Through our participation in the Asia PacificCable Network 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.  We also lease 3669 Mbps of internationalbroadband transmission capacity.  We havealso opened transmission lines on land with the main operators in Hong Kong andMacau, with 15 Gbps and 622 Mbps of transmission capacity.  As of the end of 2004, we have 20 Gbps ofinternational broadband transmission capacity. In addition, we have established fiber-optic interconnections amongChina, Mongolia and Russia, between China and North Korea and between China andRussia, with transmission capacity of 622Mbps, 622Mbps and 2.5Gbps,respectively.

 

As of March 31, 2005, ourmetropolitan area networks cover 341 cities throughout China, with a totallength of approximately 681,000 km. These networks provide a unified, high-speed local transmission platformfor our cellular, data and Internet services.

 

***Cellular Networks***

*** ***

A cellular networkconsists of:

 

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

 

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

 

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

 

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

 

We own most of the GSMcellular transmission network at the local and provincial level.  We lease a portion of our inter-provincialtransmission capacity for our cellular networks as well as the CDMA cellulartransmission network.  We also use ourown backbone fiber optic transmission network to provide transmission capacityfor our cellular networks.  We continueto focus on the management and operation of our cellular networks.

 

*GSMCellular Networks.* Thefollowing table sets forth selected information regarding our GSM cellularnetworks in our service areas as of the dates indicated.  

 
| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                 | ** ** | **2002**               | ** ** | **2003** | ** ** | **2004** | ** ** |
| Network subscriber capacity (in thousands  of subscribers) |       | 60,920                 |       | 68,050 |   | 84,552 |   |
| Base stations                                              |       | 48,111                 |       | 56,653 |   | 81,819 |   |
| Base station controllers                                   |       | 1,197                  |       | 1,345 |   | 1,653 |   |
| Mobile switching centers                                   |       | 405                    |       | 426 |   | 493 |   |

 

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

 

Our cellular networks aresupported by an advanced SS7 signaling system, which fosters efficient use ofnetwork capacity, reduces call set up time and enhances transmissioncapabilities.  We have also installedintelligent networks that enable us to provide pre-paid services and a widerange of call features and value-added services.

 

*CDMACellular Network. *UnicomGroup completed the construction of the first phase of its nationwide CDMAnetwork at the end of 2001.  The firstphase of the CDMA network has a total capacity of 15.62 million subscribers inour service areas.  In 2003, Unicom Groupcompleted the second phase of the CDMA network construction, which added anadditional capacity of 20.69 million subscribers nationwide and included theupgrade of the network to CDMA 1X technology. The CDMA networks constructed in the second phase did not share as muchinfrastructure with the GSM network. Wireless data services that utilize CDMA 1X technology were introducedin major cities in our cellular service areas in March 2003.  In 2004, Unicom Group substantially completedthe third phase of the CDMA network construction, adding an additional capacityof approximately 36.23 million subscribers nationwide and significantlyimproving the coverage and quality of the CDMA network.  We lease CDMA network capacity in ourcellular service areas and have the exclusive right to operate its network inthose areas.  We have the right to use10x2 MHz of spectrum in the 800 MHz frequency band for our CDMA services.

 

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

*** ***

By the end of 2004, ourpublic switched long distance network reached 332 cities, while the coverage ofour Internet networks, including our IP telephony networks, included approximately330 cities throughout China.

 

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*LongDistance Network.*  Ourlong distance network is supported by a nationwide billing system and an intelligentnetwork, which allows us to provide multiple services.  Our cellular subscribers can access theseservices directly through our cellular networks, but our other customerstypically access our long distance telephony, IP telephony and Internet servicesthrough the public switched telephone networks of China Telecom and ChinaNetcom.  As of December 31, 2004, thetotal network capacity for our IP telephony services reached 22,422E1, or avoice capacity of 20 billion minutes per year. E1 is the European format for digital transmission and carries signalsat 2Mbps.

 

*Dataand Internet Networks.* Our broadband data and Internet networks utilize a unified IP and ATMdesign, which is particularly suited for real-time, multimedia applicationssuch as video and voice.  ATM switchesperform high-speed switching of voice and data traffic and minimize time delayand congestion.  They can also prioritizeapplications that least tolerate time delay, such as telephony and video, overless time-sensitive applications such as e-mails and file transfer.  As of December 31, 2004, the internationaland domestic interconnection bandwidths have reached 3.34Gbps and 14.88Gbps,respectively.

 

*InternetNetwork.*  Our Internetnetwork, branded as “Uninet”, is also centrally designed and has a nationwideuniform architecture.  It is supported bya nationwide, advanced billing system that facilitates roaming access anddelivery of virtual ISP services and other value added services.

 

*Broadband Video Network*.  Our broadband video network utilizes theH.323 technological standard and two-tier network structure.  H.323 is a widely used multi-mediaconferencing protocol approved by the International Telecommunications Union.  As of December 31, 2004, it can provide videoconference and video telephone services and currently reaches 330 citiesnationwide as well as the United States and Hong Kong.

 

*Integrated Access Networks.*  Webelieve that the key to the success of our data services is our ability tooffer integrated access to customers’ premises. We are building integrated access networks in many cities throughoutChina.  We focus the construction of ouraccess networks on linking major office buildings to our metropolitan areatransmission networks.  We rely mainly onfiber optic cables to link office buildings to our networks and have offerednarrow-band wireless access at the 3.5 GHz frequency band in approximately 23provincial capitals and 14 provinces.

 

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

*** ***

We have developed variousmanagement and network support systems to support our various networks.  Our customer service, billing and settlementsystems are integrated into a single system. In addition, we are in the process of developing an integratedinformation and management system (UNI-IT), which includes management supportsystems (MSS), business support system (BSS) and enterprise resource planningsystems (ERP).

 

**Marketing, Sales and Distribution**

** **

We centrally plan ournationwide marketing and sales strategies, but the implementation of thesestrategies is carried out at the provincial level by operating branchestailored to their specific markets.  In2004, we focused on the concept of “effective growth” by pursuingearning-driven and cost-effective marketing and sales strategies.

 

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***Marketing***

*** ***

We focus on developing astrong brand image for our company that conveys our strengths in high qualityand comprehensive services, nationwide coverage, integrated offerings, advancedtechnology and customer focus.  We marketall of our services under the China Unicom brand name.  We emphasized brand management in 2004, bydeveloping a customer-oriented branding system based on our product profile soas to standardize our operations and ensure consistency in our promotionalactivities.

 

Our marketing strategyutilizes our image as an integrated telecommunications service provider andleverages on our integrated services and nationwide sales and distributionnetwork.  By using direct sales forcesand sale agents and active market analysis and through service centers, largedepartment stores and chain stores, our marketing strategy can be targeted atdifferent customer segments and tailored according the demands of differentmarkets, enabling us to timely adjust our services.  In addition, we also seek to enter intostrategic alliances in order to further expand the breath and depth of ourmarketing and sales efforts.  InSeptember 2004, we entered into a wireless Internet joint marketing agreementwith Intel, HP, IBM, Lenovo and Digital China to develop the industry valuechain for our “U-Net” services based on the CDMA 1X network.

 

We seek to formulateeffective marketing strategies through customer relations management andanalysis of customer segmentation, customer demand and consumption trends.

 

*Cellular services*:  We promote our CDMA services as cellularservices with such advantages as better voice quality, better security, lowerhandset radio transmitting power and, in the case of CDMA 1X services, highdata transmission rates and comprehensive value added wireless dataservices.  In 2004, we focused ondeveloping the CDMA industry value chain. Under the principle of “open, cooperate and win-win”, we strengthenedsupport for and streamlined our relationship with service and contentproviders.  We have also adopted thepolicy to centralize our purchasing of the “Cool Phone” handsets and certainother models of CDMA handsets in an attempt to lower the entry barrier of ourCDMA services caused by high handset price and make the CDMA services moreattractive and affordable to the mass market. In addition, our CDMA-1X services continued to develop.  By offering trial packages of the CDMA-1Xservices and requiring users of our promotional packages to have a minimummonthly spending on value-added services, we promoted usage of the CDMA-1Xwireless data service.

 

We also continued toexpand the subscriber base for our GSM services, which is mainly based on voiceand SMS services.  Our marketing strategiesfor GSM services focused on the continued development of the voice and SMSservices as well as promoting the “Cool Ring Tong” service and the “MusicStreet” service.

 

Recognizing theimportance and the needs of our institutional customers and utilizing ouradvantages of being an integrated telecommunications operator, we formulatedmarketing strategies for our cellular services that were specific to ourinstitutional customers.  In 2004, weemphasized the development of advanced and customized industrial applicationsfor our institutional customers.  Byoffering industrial solutions, our business extended from the provision ofbasic telecommunications services to comprehensive information services. Forexample, we launched several industry-specific applications based on theCDMA-1X network, including “Unicom Horizon Police Application”, “Unicom HorizonMaritime Application” and “Stock-in-Palm”.

 

In 2004, we consolidatedour brands of wireless data value-added services under one uniform brand, “uni”,and aimed to build it into a new media portal brand for content consumption,with emphases on “entertainment”, “life” and “commerce”.  Meanwhile, the “U-Net” brand was positionedto be a high-end brand for wireless Internet access for laptop users.

 

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In addition we havestarted promoting the following customer-oriented cellular services brands in2004: (i) “Ruyi Tong”, which is designed for the mass market and features voiceservices on either the GSM or the CDMA network, the “uni-Info” value-addedservices and SMS services, (ii) “New Horizon”, which targets mid- to high-endusers as well as institutional and business customers, offering CDMA-basedvoice services, the “uni” value-added services and industry-specificapplications, (iii) “Worldwind”, which features dual-mode voice services andthe “uni” services, and (iv) “UP New Power”, which is designed for the youthmarket, with either GSM- or CDMA-based voice services, SMS services as well asthe “uni-Wap” value-added services.  Webelieve that development of these customer oriented service brands will help usadapt to the changing market condition and improve customer loyalty.

 

*Long distance, data and Internetservices*:  In 2004, wefocused on institutional customers, including financial institutions, largecorporations, multi-national corporations, government entities and Internetservice providers and Internet content providers, in order to provide them “one-stop”solutions.  For example, we providedintegrated long-distance, Internet and data services under the “Uni-One” brandto institutional customers.  Ourmarketing efforts with respect to retail customers included the marketing ofco-branded long distance telephony cards. Under these arrangements, our institutional partners purchased suchcards from us and distributed the cards to their employees or customers,thereby facilitating the sale of our long distance telephony services.  We have also focused on the marketing of ourlong distance, Internet and data services to our existing cellular customers,as well as coordinating the marketing of these services with the marketingefforts of our cellular services.

 

*ServiceBundling and Cross-Marketing:* A key element of our sales and distribution strategy is to promote ourstrengths as a provider of a broad range of integrated services.  This strategy is implemented by our servicecenters, independent sales agents and direct sales forces, which distribute andsupport our various product offerings. For example, we cross-sell our long distance services to our cellularsubscribers.  In addition, based on thespecific demands of our industry and institution clients, we provide customizedcommunications solutions by bundling VPN, IP telephony, “Uni-Video” broadband video-telephonyand “Uninet” services.

 

***Sales and Distribution***

*** ***

*CustomerSegmentation:*  We havetwo main categories of customers – institutional customers, comprised of mainlycorporate and government customers, and individual customers.  We have set up dedicated direct sales andservice departments for institutional customers, both at our headquarters andat our provincial and local branches.  Wefocus on promoting our integrated solutions to these institutional customers.  For individual customers, we conduct oursales through our own service centers and the retail outlets of independentsales agents.

 

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*DistributionNetwork:* We have a diversified distribution networkcomprising self-owned sales outlets, agent/distributor sales outlets and directsales forces.  We distribute our servicesto our individual customers through our self-owned sales outlets as well asother retail outlets.  We distribute ourservices to large customers through our direct sales forces and agents.  We have developed a nationwide distributionnetwork of service centers and retail outlets, of which only a small portionare owned by us and the others are owned by independent agents or distributors.  As of December 31, 2004, we had a total ofapproximately 80,300 sales outlets, of which over 5,600 were self-owned.  These service centers and retail outletsdistribute our cellular, long distance, data and Internet services and provide post-sales services such ascustomer inquiry, customer complaint and collections.  We generally maintain a flat distributionstructure, but utilize a multi-level distribution system in some service areas,in which our top-level distributors further distribute to lower leveldistributors and sales agents.  In 2004,we have reduced the levels of such distribution system to control distributioncosts.  We have also established directsales and customer service teams at various levels to conduct one-on-one salesto high-usage institutional customers.  These direct sales and customer service teams’focus is to utilize our cellular, domestic and international long distance,data and Internet services as integrated telecommunications services in orderto provide differentiated and comprehensive solutions for our customers.  In 2004, we also expanded the use ofnew distribution channels such as Internet and telephone marketing.

 

*StrategicCooperation with China Post:* Our controlling shareholder, Unicom Group, entered into a strategiccooperation arrangement with China Post in 2001.  This arrangement allows us to supplement ourexisting distribution network with China Post’s extensive nationwidenetwork.  China Post also providesbilling, collection and other services to our customers.  The arrangement uses a revenue-basedcommission structure for most services. We and China Post have also agreed to use each other’s services andoffer each other preferential treatment. We have entered into provincial-level cooperation agreements with ChinaPost in our service areas.

 

**Customer Service**

 

We provide specialized,differentiated and “one-stop” services to our customers, based on the customerservice resources of Unicom Group.  Ourcustomer care and service centers in each service area can be accessed by ourcustomers by dialing a nationwide hotline number “10010”.  Our customer service system is a unifiedplatform providing customer services for all of our businesses.  This system is based on the paging centers,and also relies on other systems, including operations, billing, accountmanagement and network management.  Thisintegrated system allows us to provide personalized and diversified servicesthrough customer service representatives or automated systems, includingservice inquiry, billing inquiry, response to customer complaints andsuggestions, service initiation and termination, payment reminder services andemergency services, to different types of customers on a 24-hour basis.  Our customers can access our customerservices through various means, including telephone calls, faxes, e-mails andSMSs.  To better serve our customers, weprovide such value-added services as 10011 bill inquiry hotline, 10018 clubmember service hotline, 13010199999 international roaming service hotline, billpayment through commercial banks, free copies of detailed statements, Internetaccount inquiry, a single rechargeable card for all of our services and mobileservice centers in remote areas of China. To better meet market demand, we continue to seek innovation in ourcustomer services, in order to provide more pro-active, comprehensive andtargeted customer services.

 

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In addition, we alsoanalyze our customer segments in detail, and tailor our services to therequirements of different customer segments. While we are focused on retention of our retail customers, we payregular visits and provide one-on-one personalized services to ourinstitutional customers and VIP customers and, through “customer clubs”,provide high-quality and differentiated services for high-net-worth individualcustomers and important institutional customers.  For mass-market customers, we offerstandardized services that aim at enhancing customer experience.  In 2004, we launched the “Satisfaction atUnicom” campaign, which aimed at further improving customer satisfaction andpromoting our corporate image.

 

We emphasize customerservice and customer relations management and have taken various measures toimprove 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 ourcustomer service workflow using a consistent set of standards in order totimely resolve problems for our customers. We have also strengthened our analysis and research of customerconsumption behavior, consumption cycle and satisfaction levels in order tounderstand their consumption pattern and influence their consumption trend.

 

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**Billing and Collection**

** **

We are able to leverageour strengths as an integrated service provider to offer integrated billing andcollection services.  For example, weprovide our business customers a single bill covering multiple services forease of payment.  We also integrate thebilling systems for different services and distribute unified recharge cardsthat can be used to recharge various pre-paid services, including pre-paidcellular services, long distance telephony services and Internet dial-upservices.  Our billing system can distinguish betweencustomers based on the marketing method and service package plans applicable toeach customer.  These additionalfunctions would allow us to analyze customer data in more detail, therebyimproving our ability to analyze the age of our accounts and control baddebts.  The following table sets forthour billing and collection methods for each of our business segments:

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

 

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*Bad Debt Controls*

* *

*Cellular Services.*  Post-paid subscribers must register with usbefore they can begin using our cellular services.  Customer registration allows us to bettermanage customer credit.  If subscribersdo not pay their bills on time, we charge a late fee and will either call orsend SMSs to the delinquent subscribers 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 is terminated, we will seek otherremedies to collect the overdue payment, including personal visits to thesubscriber to collect payments or taking legal actions.  At the same time, we encourage oursubscribers to pre-deposit service charges with us, to be deducted againstcharges incurred in the future, or use our pre-paid services.  In 2004, we began developing a customer’scredit management system at the provincial branch level to enhance verificationof the personal information of new subscribers and tighten credit control fornew subscribers.  We believe thesemeasures will improve our bad debt control.

 

*Domestic and International LongDistance Services.*  Weactively encourage customers to use our pre-paid services.  In addition, we perform credit checks onpotential customers.  For high-volumeusers, we open telephone banking accounts at commercial banks, set creditlimits on such accounts and settle with such customers on a monthly basis.

 

*Internet services.*  We send e-mails to delinquent customers anduse other methods to collect payment from delinquent customers.  Accounts for individual customers which aredelinquent for 20 days are suspended, and such accounts will be terminated ifthey are delinquent for more than 40 days. For corporate customers, our actions are based on the credit history ofeach delinquent customer.

 

**Research and Development**

** **

We focus on technologyinnovation in coordination with the various business departments, in order toprovide technical support to the development of our various businesses.  In July 2004, our first technology inventionpatent, “the CDMA R-UIM technology for the CDMA cellular communication network”,was granted approval by the State Intellectual Properties Bureau of thePRC.  Major projects of our research anddevelopment efforts in 2004 include:

 

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

 

•                                          theinvestigation into coordinated development of the GSM and CDMA networks and thetransition to next-generation networks, including the development and testingof GSM and CDMA dual-mode handset, the testing of GSM and CDMA commercialnetworks, the testing of the enhanced CDMAIX network technology and other researchand development of new technologies; and

 

•                                          thedevelopment of new businesses, including CDMA 1X network mobile IP business,support for selected institutional users of our dedicated ATM line services andnew applications for institutional customers.

 

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**Competition**

** **

***The Chinesetelecommunications market has six basic telecommunications service providers –China Telecom, Unicom Group, China Mobile, China Netcom, China Satcom and ChinaRailcom – and thousands of value-added service providers.  As a relatively new entrant into thiscompetitive landscape, we believe we owe our recent development to thefollowing:***

*** ***

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

 

•                                          Advanced technologies – CDMA technologyoffers high bandwidth utilization, better voice quality, high data transmissioncapabilities, better security, lower handset radio transmitting power, and cancost-effectively and timely transition to 3G cellular telecommunications.  We are the only provider for CDMA services in30 provinces, municipalities and autonomous regions in China, and our CDMAnetwork has been upgraded to CDMA 1X technology, which has higher datatransmission capabilities.  Our GSMservices utilize 2G technology that is widely accepted internationally and webelieve our GSM network coverage and voice quality 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.

 

•                                          Unique service offerings – Through ouradvanced integrated network platform and the implementation of our innovativemarketing strategies, we introduced “Worldwind” CDMA and GSM dual-mode cellularservices and a series of value-added services such as CDMA 1X data services, “Uni-Video”services and “Ruyi Mailbox” services, in order to satisfy the differentiateddemand of our various customer segments.

 

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

 

However, the development of our business is also affected by certaincompetitive disadvantages, including:

 

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

 

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

 

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

 

***Cellular Competition***

*** ***

Our main competitor inthe cellular communications business is China Mobile.  China Mobile continues to have competitiveadvantages over us in brand name, market share, financial resources and networkmanagement experience.  To competeagainst China Mobile, we continue to improve our network coverage and voicequality, enhance network quality, develop value-added services (such as ourCDMA 1X wireless data services), improve customer service and customize ourpackage service plans to meet our various subscribers’ specific needs.  We also seek to leverage our position as afully integrated telecommunications operator to provide “one-stop”telecommunications solutions for our subscribers.  In addition, we seek to compete against ChinaMobile’s GPRS wireless data services by the development of our CDMA 1X wirelessdata services, which offers such advantages as better voice quality, bettersecurity, high data transmission rates and comprehensive value-added wirelessdata services.

 

Our cellular servicesalso compete with the wireless local communications services of China Telecomand China Netcom, known as “Little Smart”, which are based on their fixed linenetworks and primarily utilize PHS technology. These services were previously offered primarily in small- tomedium-sized cities, but have been introduced in most cities nationwide.  The “Little Smart” services reportedly haveattracted a substantial subscriber base in China and compete with us mostly inthe lower end of the cellular market. Although many cellular users use “Little Smart” services as asupplement, rather than an alternative, to their existing cellular services,the availability of “Little Smart” services has reduced the overall usagevolume of our cellular services.  Themain advantage of “Little Smart” services is their lower tariff rates.  However, they generally have limited networkcoverage and roaming capability.

 

Since the launch of ourCDMA cellular services in 2002, we have pursued a strategy of coordinateddevelopment of our GSM and CDMA cellular businesses.  While our GSM cellular business focuses onthe mass market, with customers who are more price-sensitive and require basicvoice and message services, our CDMA services primarily focuses on customerswho require voice and data services and place a premium on high-technology,high-speed and high-security services. Accordingly, usage fees and package service plans for our CDMA cellularservices are generally higher than those for our GSM cellular services. In2004, most of our CDMA new subscribers were users migrating from the GSMservices of our competitor, first-time cellular users, and users who previouslysubscribed to our CDMA services.

 

***Long Distance Telephony Competition***

*** ***

The Chinese governmentrestructured the fixed line incumbent China Telecom in 2002.  Pursuant to the restructuring, thetelecommunications assets of the former China Telecom in 10 northern provincesin China were split off in May 2002 and merged with CNCL and Jitong to formChina Netcom.  China Telecom retained thetelecommunications assets in the remaining 21 provinces and the brand name of “ChinaTelecom”.  Currently, both China Netcomand China Telecom provide fixed line telecommunications services.  In addition, China Railcom is also licensedto provide public switched long distance services in China and launched itslong distance services in China in 2001.

 

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China Telecom and ChinaNetcom are the dominant providers and our primary competitors in the publicswitched long distance business in their respective service areas.  They have advantages over us in theirrespective service areas in brand name, market share, financial resources,service area coverage, extensive access networks and experience in fixed linetelecommunications business.  However,the separation of China Telecom into two companies along geographic linesweakened the competitiveness of the resulting entities on a nationwide basis.

 

We started to providepublic switched long distance telephony services in 2000 and reached a marketshare of 12.7% in terms of total outgoing long distance call minutes in2004.  Since our network has beenconstructed recently and is equipped with the latest technology and advancedfeatures, it enables us to offer a variety of high-quality services.  Our long distance telephony services are alsosupported by a centralized billing system. Our services are hindered by our lack of fixed line telephone numberresources.

 

Our IP telephony servicescurrently face intense competition from China Telecom, China Netcom, ChinaMobile, China Railcom and China Satcom.  Currently,China Telecom and China Netcom are the market leaders in their respectiveservice areas.  Since the MII deregulatedthe tariffs of this market in 2001, competition in this market has beenintensifying.

 

***Data and Internet Competition***

*** ***

China Telecom, ChinaNetcom and China Railcom are our major competitors in the data servicesbusiness in their respective service areas. Other competitorsinclude China Satcom.  While ChinaTelecom, China Netcom, China Railcom, China Mobile, China Satcom and we are theonly Internet backbone operators in China, there are many retail Internetservice providers throughout 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 Internetnetworks have nationwide access, which offers convenience and flexibility toour institutional customers, whereas the respective networks of China Telecomand China Netcom only extend to their respective service areas.  We have obtained approval to operate andfranchise a nationwide chain of Internet cafes and, to date, have opened anumber of upscale Internet cafes in several cities.

 

The advanced features anddesign of our backbone network allow us to provide nationwide high qualityvirtual private network services, which are specifically tailored to thehigh-usage corporate customers and retail Internet service providers that wetarget.  We are also building advancedmetropolitan area networks and integrated access networks that allow us toconnect to key commercial buildings throughout China.  We also continue to cooperate with medium- tosmall-sized Internet service providers and other companies that have broadbandaccess to concentrated residential areas to expand our broadband services.

 

**Trademarks**

** **

We conduct ourbusinesses under the Unicom name and logo. Unicom Group is the registered proprietor in China of the “Unicom”trademark in English and the trademark bearing the Unicom logo.  Unicom Group has also applied and became theregistered proprietor of the trademark of the word “Unicom” in Chinese.  Unicom Group has granted us the right to usethese trademarks on a royalty-free basis, and to license to us any trademarkthat it registers in China in the future which incorporates the word Unicom.

 

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**Regulatory and Related Matters**

** **

The telecommunicationsindustry in China is subject to a high degree of government regulation.  The primary regulatory authority of theChinese telecommunications industry is the MII. The State Council, the National Development and Reform Commission (theformer State Development Planning Commission), the Ministry of Commerce (formerly,the Ministry of Foreign Trade and Economic Cooperation) and other governmentalauthorities also maintain regulatory responsibilities over certain aspects ofthe Chinese telecommunications industry.

 

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

 

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

**•**                                          grantingtelecommunications service licenses,

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

**•**                                          allocatingand administering telecommunications resources such as spectrum and numberresources,

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

**•**                                          formulatinginterconnection and settlement arrangements between telecommunicationsnetworks, and

**•**                                          maintainingfair and orderly market competition among service providers.

 

The MII has established aTelecommunications Administration Bureau in each province, which is mainlyresponsible for enforcement of telecommunications policies and regulations inthat province.

 

The MII is in the processof drafting a telecommunications law that, once adopted by the NationalPeople’s Congress, will become the basic telecommunications statute and providethe principal legal framework for telecommunications regulations in China.  It is currently uncertain when the law willbe adopted and become effective.

 

***Telecommunications Regulations***

*** ***

The State Councilpromulgated the Telecommunications Regulations, which became effective as ofSeptember 25, 2000.  TheTelecommunications Regulations are substantially consistent with, and areprimarily intended to streamline and clarify, the existing rules and policiesfor the telecommunications industry. They provide the current primary regulatory framework for China’stelecommunications industry in the interim period prior to the adoption of theproposed telecommunications law.

 

The TelecommunicationsRegulations are intended to develop a transparent and fair regulatoryenvironment to foster orderly competition and encourage development in thetelecommunications 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.

 

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***Entry into the Industry***

 

The TelecommunicationsRegulations adopt the existing regulatory distinction between basic and valueadded telecommunication services.  Anaddendum to the Telecommunications Regulations sub-categorizes basic and valueadded telecommunication services.  InFebruary 2003, the MII revised the addendum to the TelecommunicationsRegulations; and the revised addendum took 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 added telecommunications servicesinclude, among others, e-mail, voice mail, electronic data interchange,Internet access, Internet content and video conferencing services.  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 basictelecommunications services will be granted through a tendering process.

 

After its accession tothe WTO in December 2001, China promulgated the Administrative Regulations onTelecommunications Companies with Foreign Investment, effective on January 1,2002, implementing its commitments to the WTO. Those commitments include the gradual reduction of foreign ownershiprestrictions in the telecommunications industry and the step-by-step opening ofthe telecommunications market in China to foreign operators.  However, the presence or absence of foreigninvestments in an applicant for telecommunications licenses will presumablybear no direct relation to the decision on whether to issue licenses, in asmuch as the issuance of new licenses is governed by a separate set of rules andregulations.  The specific market-openingcommitments China made to the WTO regarding fixed line services, mobileservices and value-added telecommunication services are as follows.

 

**•**                                          Forfixed line services:

 

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

 

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

 

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

 

**•**                                          Formobile voice and data services:

 

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

 

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

 

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

 

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

 

•                                          Forvalue-added telecommunication services:

 

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

 

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

 

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

 

The MII promulgatedMeasures on the Administration of Telecommunication Business Licenses, whichtook effect on January 1, 2002.  Thoserules apply to the application for, examination and approval of,telecommunications business licenses in China.

 

***Spectrum and Network Number Resources***

*** ***

The MII allocates alltelecommunications-related frequencies, including those used in cellular,paging and microwave operations.  The 800MHZ, 900 MHZ and 1,800 MHZ frequency bands have been reserved for mobilecellular applications and parts of the 150 MHZ and 280 MHZ frequency bands havebeen reserved for paging applications. The frequency assigned to a licensee may not be leased or transferredwithout obtaining the approval of the MII.

 

Since July 1, 2002, thestandard spectrum usage fees for GSM networks and CDMA networks has beencharged at the annual rate of RMB15 million per MHz of frequency per year(upward and downward frequencies are charged separately) progressively over aperiod of three years and a period of five years, respectively.  The current allocation of spectrum usage feesbetween Unicom Group and us based on the number of subscribers remains unchanged.

** **

The MII is alsoresponsible for the administration of network number resources within China,including cellular network numbers and subscriber numbers.  In January 2003, it issued the AdministrativeRules for Telecommunications Network Numbers, which took effect on March 1,2003.  According to these rules, thetelecommunications network number resources are properties of the Chinesegovernment, and the use of number resources by any telecommunications operatoris subject to the approval of MII.  Users of number resources, including us, are required to pay a usage feeto the Chinese government.  The rules also provide for procedures forapplication for the use, upgrade and adjustment of number resources bytelecommunications operators.

 

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InDecember 2004, the MII, the Ministry of Finance and the National Developmentand Reform Commission jointly issued the Provisional Administrative Measureswith respect to the Collection of the Usage Fee of Telecommunications NetworkNumber Resources, under which telecommunications companies are required to paya usage fee to the PRC government by the 10th day of the first month of eachquarter starting from 2005.  Under theseprovisional measures, mobile telecommunications companies are required to pay anannual usage fee of RMB12 million for each network number. In addition, weare also required to pay usage fees for certain other network numbers totalingapproximately RMB6 million a year.  Weare required to start paying usage fees in 2005.

 

***Tariff Setting and Price Controls***

*** ***

The levels and categoriesof our current tariffs are subject to regulation by various governmentauthorities, including the MII, the National Development and Reform Commission(the former State Development and Planning Commission), and, at the locallevel, the relevant provincial Telecommunications Administration Bureaus andprice 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 tariffsfor cellular services, fixed line telephony services and leased lines servicesthat are set jointly by the MII and the National Development and ReformCommission.  Tariffs for telecommunicationsservices where adequate competition has already developed may be set by theservice providers as market-based tariffs. In 1997, the Chinese government granted us preferential treatment byallowing us to vary our cellular tariffs by up to 10% from the state-guidancerates.

 

The government isrequired to hold public hearings before setting or changing importantState-tariff rates, which are attended by telecommunication operators,consumers and others.  Operators arerequired to provide complete and adequate cost data and other materials forthose hearings.

 

In December 2000, theMII, the former State Development Planning Commission and the Ministry ofFinance jointly issued a tariff adjustment circular, which provides for tariffadjustments for a wide range of telecommunications services.  Effective from February 21, 2001, we haveadopted these government tariff adjustments.

 

In June 2003, theMinistry of Finance and the MII jointly issued a circular to revoke certainfees including one-time installation fees charged to the fixed line telephoneusers and one-time activation fees charged to the cellular subscribers.

 

In June 2004, the MII andthe National Development and Reform Commission jointly issued a notice aimed atfurther strengthening the regulatory oversight of telecommunicationstariffs.  The notice requirestelecommunications services providers to strengthen their internal control andmanagement of tariff setting activities. Specifically, the notice requires services providers to strictly complywith the relevant government regulation relating to the procedures for theapproval and registration of telecommunications tariffs.

 

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***Interconnection Arrangements***

 

In 1999, the MII issuedprovisional regulations on interconnection and settlement arrangements.  These regulations contain specific provisionsregarding, among other things, revenue sharing methods and settlementmechanisms and interconnection agreements among telecommunications serviceproviders.  The TelecommunicationRegulations reaffirmed the obligations of dominant telecommunications operatorsin China to provide interconnection with other operators.  The MII adjusted the interconnection revenuesharing and settlement arrangements, effective from March 21, 2001, and furtheradjusted them on October 28, 2003.  Wehave entered into interconnection and settlement agreements with China Telecom,China Netcom, China Mobile and China Railcom that implement the regulatoryrequirements.

 

The following table setsforth our interconnection revenue sharing and settlement arrangements withfixed line operators and China Mobile for local calls after the regulatoryadjustment 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 setsforth our interconnection revenue sharing and settlement arrangement with fixedline operators and China Mobile for domestic long distance calls after theregulatory adjustment in 2003.

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

 

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The following table setsforth our interconnection revenue sharing and settlement arrangement with fixedline operators for international long distance calls through theirinternational gateways after the regulatory adjustment in 2003.

 
| **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 setsforth our interconnection revenue sharing and settlement arrangements withother operators for IP telephony long distance calls through our network afterthe regulating adjustment 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 |

 

***Technical Standards***

 

The MII sets industrytechnical standards for the Chinese telecommunications industry.  Most of the standards set by the MII conformto the standards recommended by the International Telecommunications Union andother international telecommunications standards organizations.  In cases where the MII has not set certainindustry technical standards, we set our own enterprise technicalstandards.  The MII also requires allnetwork operators in China to purchase only telecommunications equipmentcertified by the MII, including cellular and paging equipment, radio equipmentand interconnection terminal equipment.

 

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***Universal Services***

 

Telecommunicationsservice providers in China are required to fulfill universal service obligationsin accordance with relevant regulations to be promulgated by the Chinesegovernment, and the MII has the authority to delineate the scope of itsuniversal service obligations.  The MIImay also select universal service providers through a tendering process.  The MII, together with the finance andpricing authorities, is also responsible for formulating administrative rulesrelating to the establishment of a universal service fund and compensationschemes for universal services.  These rules have not yet been promulgatedand there are currently no regulatory requirements relating to the provision ofuniversal services in China.

 

The MII has recently required major Chinese telecommunicationservice providers, including Unicom Group, to participate a project to providetelecommunications services in a number of remote villages in certaindesignated provinces in China as transitional measures prior to theformalization of a universal service obligation framework. The MII andother relevant government authorities are still in the process offinalizing the detailed regulations relating to the provision of such universalservices.  Such regulations, ifpromulgated, may require us to incur significant relevant expenses to fulfillour universal service obligations and therefore could materiallyadversely affect our financial condition and results of operations.

** **

See “D. Risk Factors — Risks Relating to the OverallTelecommunications Industry in China — The Chinese government may require us,along with other telecommunication service providers in China, to provideuniversal services with specified obligations, and we may not be compensatedadequately for providing such services.” Under Item 3.

 

***Capital Investment***

 

On July 16, 2004, theState Council promulgated, effective immediately, the Decision on Reform ofInvestment System, or the Investment Reform Decision, which significantlymodified the government approval process for major investment projects inChina.  The Investment Reform Decisioneliminated the government approval requirements for investment projects that donot involve direct government funding unless the investment projects are in therestricted sectors specified in the annually adjusted catalogue released by theState Council.  The 2004 catalogue, whichwas attached as an annex to the Investment Reform Decision, sets forth approvalrequirements for individual investment projects in restricted sectors.  Within the telecommunications sector, theinvestment projects that require the approval of the National Development andReform Commission include:

 

•                                          domestic backbone transmission networks(including broadcasting and television networks);

 

**•**                                          international telecommunicationstransmission circuits;

 

**•**                                          international gateways;

 

**•**                                          international telecommunications facilitiesfor dedicated telecommunications networks; and

 

**•**                                          other telecommunications infrastructureprojects involving information security.

 

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***Others***

 

As a company with substantially all of ouroperations in China, we, along with our controlling shareholder, Unicom Group,are subject to various regulations of the PRC government in addition to thoseregulating the telecommunications industry. 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 bythe relevant PRC laws and regulations, Unicom Group, as one of the key State-ownedenterprises under the direct supervision of the SASAC, is also subject to routineaudits by the National Audit Office, or the NAO, including the seniormanagement departure audit which involves a review by the NAO of the economicresponsibilities of a departing senior management member of Unicom Group.

 

In 2004, the NAOconducted a senior management departure audit of Unicom Group after theresignation of Mr. Yang Xian Zu, Unicom Group’s former Chairman, in 2003.  We understand that the results of that audithad no material adverse effect on our company.

 

As a result of theresignation of Mr. Wang Jianzhou, Unicom Group’s former Chairman, in 2004, theNAO is currently conducting another senior management departure audit of UnicomGroup.  As this NAO audit has not yetbeen completed, we cannot predict at this time the results of this audit or theextent of its possible effect on our company.

** **

In addition, as our controlling shareholder,Unicom Group under the direct supervision of SASAC, SASAC has an indirectinfluence over us.  In particular, SASACmay designate certain nominees and request Unicom Group to propose theappointment of such nominees as our directors and senior management; SASAC mayalso request Unicom Group to remove our directors and senior management inaccordance with relevant procedures provided by law and our articles ofassociation.

 

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

 

We are incorporated inHong Kong and are 77.37% indirectly owned by the Unicom Group and 22.63% ownedby public shareholders as of May 31, 2005. See “A. History and Development of the Company” under Item 4.  Set forth below are details of oursignificant subsidiaries:

 
| **Name of  Subsidiary**                                    | ** ** | **Country of Incorporation** | ** ** | **Ownership Interest** | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| China Unicom Corporation Limited                           |       | China                        |       | 100                    | %          |
| Unicom New World Telecommunications  Corporation Limited * |       | China                        |       | 100                    | %          |
| China Unicom International Limited                         |       | Hong Kong SAR                |       | 100                    | %          |
| China Unicom (Macau) Company Limited                       |       | Macau SAR                    |       | 100                    | %          |

 

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

 

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

### *** ***

Our principal executiveoffices are located in Hong Kong.  Wealso maintain executive offices in Beijing. We own and lease a large number of offices, retail outlets, equipmentrooms and base stations throughout China. For some of those properties we own or operate on, we have not obtainedland use rights certificates or building ownership certificates.  In some cases, we have not entered intoformal lease agreements with the lessors or the lessors do not possessrequisite title certificates.  We believethat it is unlikely that we would be denied our right to use a large number ofthese properties at any given time.  Ourcontrolling shareholder, Unicom Group, has agreed to indemnify us against anyloss or damages incurred by us that are caused by or arising from any challengeof, or interference with, our right to use these properties.

 

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

 

You should read thefollowing discussion and analysis together with the selected financial data setforth in Item 3 and the consolidated financial statements included in thisannual report.  The financial statementshave been prepared in accordance with HK GAAP, which differs in certainrespects from US GAAP.  Note 40 to theconsolidated financial statements summarizes the nature and effects ofsignificant differences between HK GAAP and US GAAP as they relate to ourfinancial statements and provides a reconciliation to US GAAP of our net incomeand shareholders’ equity.  In addition, Note 40 to our consolidatedfinancial statements includes our condensed consolidated financial informationprepared and presented in accordance with US GAAP for the relevantperiods.  Our consolidated financialstatements present, and the discussion and analysis under this Item 5 pertainto, our consolidated financial position and results of operations as of December31, 2003 and 2004 and for the years ended December 31, 2002, 2003 and2004.  On December 31, 2002 and 2003, wecompleted the acquisition of Unicom New Century from Unicom Group, and theacquisition of Unicom New World from Unicom Group and sale of Guoxin Paging toUnicom Group, respectively.

 

Our consolidatedfinancial statements as of and for the year ended December 31, 2004 reflect theresults of operations of both Unicom New Century (which was merged into CUCL inJuly 2004) and Unicom New World, but do not include the results of operationsof Guoxin Paging.  Our consolidated financial statements for theyear ended December 31, 2003 reflect the results of operations of Unicom NewCentury and Guoxin Paging but do not include the results of operations ofUnicom New World.  Our consolidated yearended December 31, 2002 do not include the results of operations of Unicom NewCentury.  In addition, in September2004, we completed the acquisition of Unicom International from UnicomGroup.  Accordingly, the operatingresults of Unicom International for the period from the effective date of theacquisition to December 31, 2004 have been included in our consolidatedstatement of income for the year ended December 31, 2004.  See “-Acquisitions of Unicom New Century,Unicom New World and Unicom International and the Sale of Guoxin Paging” below.

 

***Overview***

*** ***

We are an integratedprovider of telecommunications services in China and offer a wide range oftelecommunications services, including the following, which also constitute ourmajor operating segments:

 

**•**                                          GSMcellular service in 21 provinces, 5 autonomous regions and 4 municipalities;

 

**•**                                          CDMAcellular service in 21 provinces, 5 autonomous regions and 4 municipalities;

 

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

 

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

 

The table below setsforth operating revenue from our major businesses and the respective percentageof our total operating revenue in 2002, 2003 and 2004.

 
| ** **                             | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **2002**                            | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **RMB in  millions**                | ** ** | **% of Total  Operating  Revenue** | ** ** | **RMB in  millions** | ** ** | **% of Total  Operating  Revenue** | ** ** | **RMB in  millions** | ** ** | **% of Total  Operating  Revenue** | ** ** |
| Total operating revenue                |       | 40,577                              |       | 100.0 | % | 67,636 |   | 100.0 | % | 79,332 |   | 100.0 | % |
| Total service revenue                  |       | 38,333                              |       | 94.5 | % | 64,040 |   | 94.7 | % | 76,310 |   | 96.2 | % |
| GSM                                    |       | 27,388                              |       | 67.5 | % | 40,304 |   | 59.6 | % | 46,579 |   | 58.8 | % |
| CDMA                                   |       | 3,225                               |       | 7.9 | % | 16,623 |   | 24.6 | % | 24,220 |   | 30.5 | % |
| Long distance revenue                  |       | 2,766                               |       | 6.8 | % | 2,273 |   | 3.4 | % | 1,848 |   | 2.3 | % |
| Data and Internet revenue              |       | 2,793                               |       | 6.9 | % | 3,437 |   | 5.1 | % | 3,663 |   | 4.6 | % |
| Paging                                 |       | 2,161                               |       | 5.4 | % | 1,403 |   | 2.0 | % | — |   | — |   |
| Sales from telecommunications products |       | 2,244                               |       | 5.5 | % | 3,596 |   | 5.3 | % | 3,022 |   | 3.8 | % |

 

Our service revenue comesprimarily from the following:

 

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

 

**•**                                          Monthlyfees, of fixed amounts, charged to certain of our GSM, CDMA, data and Internetsubscribers for access to the relevant service. We recognize monthly fee revenue in the month during which the servicesare rendered.

 

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

** **

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

 

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

 

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

 

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Along with the rapidgrowth of China’s telecommunications industry, particularly in the cellularcommunications sector, our total operating revenue in 2004 increased by 17.3%from 2003.  This increase was primarilythe result of the continued growth in revenue of our cellular business, includingthe strong growth of our CDMA service since its introduction in 2002, aswell as the effect of including revenue attributable to Unicom New World, whichwe acquired effective December 31, 2003. We believe that the growth of our cellular businesses has resulted indevelopments in our revenue structure that reflect our strategy of targetinghigh growth, high margin areas of China’s telecommunications industry.  Service revenue from our cellular businessesas a percentage of total operating revenue increased from 84.2%****in 2003 to****89.3%****in 2004.  Servicerevenue from long distance, data and Internet businesses declined to 6.9% ofoperating revenue in 2004, from 8.5% of our total operating revenue in 2003.  We aim to further leverage our position as anintegrated telecommunications operator in order to continue to drive the growthof ourGSM and CDMA cellular businesses and long distance, data and Internetbusinesses.

 

The following table setsforth our major operating expense items and operating income,****both in terms of amount and as apercentage of total operating revenue in 2002, 2003 and 2004.

 
| ** **                                 | ** ** | **For the year ended December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | **2002**                            | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **RMB in  millions**                | ** ** | **% of Total  Operating  Revenue** | ** ** | **RMB in  millions** | ** ** | **% of Total  Operating  Revenue** | ** ** | **RMB in  millions** | ** ** | **% of Total  Operating  Revenue** | ** ** |
| Total Operating Revenue                    |       | 40,577                              |       | 100.0 | % | 67,636 |   | 100.0 | % | 79,332 |   | 100.0 | % |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Total Operating Expenses                   |       | 33,253                              |       | 82.0 | % | 59,122 |   | 87.4 | % | 71,376 |   | 90.0 | % |
|                                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Leased line and network capacities         |       | 1,583                               |       | 3.9 | % | 4,320 |   | 6.4 | % | 7,398 |   | 9.3 | % |
| Interconnection charges                    |       | 3,230                               |       | 8.0 | % | 5,921 |   | 8.8 | % | 7,517 |   | 9.5 | % |
| Depreciation and amortization              |       | 11,256                              |       | 27.7 | % | 16,385 |   | 24.2 | % | 19,063 |   | 24.0 | % |
| Personnel                                  |       | 3,335                               |       | 8.2 | % | 4,575 |   | 6.8 | % | 4,526 |   | 5.7 | % |
| Selling and marketing                      |       | 5,981                               |       | 14.7 | % | 15,157 |   | 22.4 | % | 18,945 |   | 23.9 | % |
| General, administrative and other expenses |       | 5,632                               |       | 13.9 | % | 9,112 |   | 13.5 | % | 10,448 |   | 13.2 | % |
| Cost of telecommunications products sold   |       | 2,236                               |       | 5.5 | % | 3,652 |   | 5.4 | % | 3,479 |   | 4.4 | % |
| Operating income                           |       | 7,324                               |       | 18.0 | % | 8,514 |   | 12.5 | % | 7,956 |   | 10.0 | % |

 

Our major operatingexpenses include the following:

 

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

 

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

 

**•**                                          Depreciationand amortization expenses, mainly relating to our property, plant and equipmentand other assets;

 

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

 

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

 

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•                                          General, administrative and otherexpenses, primarily including operating lease expenses, repair and maintenancecosts, provision for doubtful debts and provisions for impairment in the valueof property, plant and equipment.  Othercomponents of general, administrative and other expenses include utilities,general office expenses and travel expenses; and

 

•                                          Costs of telecommunications productssold.

 

Whilewe continue to aim to strengthen management, integrate our businesses andcontrol costs to achieve greater overall efficiency, as a percentage of totaloperating revenue, total operating expenses in 2004 were 90.0% compared to87.4% in 2003. ** **This percentage increase wasprimarily due to increases in expenses for leased line and network capacitiesas well as interconnection charges.

 

For the first three months of 2005, our unauditedtotal revenue was RMB20.86 billion, including RMB12.07 billion fromGSM cellular services, RMB6.65 billion from CDMA cellular services,RMB0.44 billion from long distance services, RMB0.83 billion fromdata and Internet services and RMB0.87 billion from the sale oftelecommunications products. The financial data disclosed above was prepared inaccordance with Hong Kong Financial Reporting Standards and Hong KongAccounting Standards (“HKFRSs”), which became effective from January 1, 2005.Note 3 “Principle accounting policy – (a) Basis of presentation – Recentlyissued accounting standards” to our consolidated financial statementssummarizes the significant differences between the HKFRSs adopted for the threemonths ended March 31, 2005 and HK GAAP for year ended December 31, 2002, 2003and 2004.

 

***Acquisitions of Unicom NewCentury, Unicom New World and Unicom International and the Sale of GuoxinPaging***

 

In September 2004,we completed the acquisition from Unicom Group of Unicom International, alimited liability company established in Hong Kong engaging in voice wholesalebusiness, telephone cards business, line leasing services, managed bandwidthservices and mobile virtual network services in Hong Kong and the UnitedStates.  The total purchase price wasHK$37,465,996 (approximately RMB39.74 million including direct costs ofacquisition), payable in cash.

 

In December 2003,we acquired from Unicom Group the GSM cellular assets and businesses and CDMAbusinesses of Unicom New World in the following 9 provinces and autonomousregions in China: Shanxi, Hunan, Hainan, Yunnan, Gansu and Qinghai provincesand Inner Mongolia, Ningxia Hui and Tibet autonomous regions.  The total purchase price was HK$3,014,886,000(approximately RMB3.2 billion), payable in cash.  On the same date, we also completed the saleof the entire equity interests of Guoxin Paging to Unicom Group for a totalsale price of HK$2,590,917,656 (approximately RMB2.75 billion), and suchproceeds were applied to our general working capital.

 

UnderHK GAAP, we have adopted the purchase method to account for our acquisitionsfrom Unicom Group of Unicom New World, which became effective on December 31,2003, and Unicom International, which became effective in September 2004.  Under the purchase method, in accordance withHK GAAP, our consolidated financial statements incorporate the results ofoperations of Unicom New World and Unicom International only from the effectivedates of the respective acquisitions. Accordingly, the results of operations of Unicom International for theperiod from the effective date of the acquisition to December 31, 2004have been included in our consolidated statement of income for the year ended December 31,2004.  Our consolidated balance sheet asof December 31, 2004 includes the financial position of UnicomInternational.  Since the effective dateof the Unicom New World acquisition was December 31, 2003, ourconsolidated financial statements of income for the years ended December 31,2003 and 2002 included in this annual report do not include the results ofoperations of Unicom New World.  Ourconsolidated balance sheet as of December 31, 2003 includes the financialposition of Unicom New World.  Thedifference between the cost of the acquisition and the fair value of theidentifiable assets and liabilities acquired was recognized as goodwill, whichis amortized on a straight line basis over its beneficial life.

 

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Under US GAAP, the acquisitionsof Unicom International and Unicom New World is accounted for as atransfer of businesses under common control. Under this method, the acquired assets and liabilities are accounted forat their historical cost under US GAAP and the consolidated financialstatements prepared under US GAAP for all periods presented are retroactivelyrestated as if Unicom International and Unicom New World had always been partof our company since inception.  This method is reflected in the significant differences between HK GAAP and US GAAP provided in Note 40 to our consolidatedfinancial statements.

 

UnderHK GAAP, the sale of Guoxin Paging by us to the Unicom Group, which becameeffective on December 31, 2003, has been accounted for as a sale ofdiscontinued operation. The difference between the sale proceeds and thecarrying amount of net assets of Guoxin Paging as of December 31, 2003 wasrecorded as the loss on sale of discontinued operation in our consolidated incomestatement for the year ended December 31, 2003. The operating results ofGuoxin Paging from January 1, 2003 to the effective date of the sale ofGuoxin Paging were included in our consolidated income statement for the yearended December 31, 2003.

 

UnderUS GAAP, the sale of Guoxin Paging to Unicom Group is considered a transfer ofbusiness between entities under common control and accounted for at historicalcost of the net assets transferred, after reduction, if appropriate, for anindicated impairment of value. In addition, under US GAAP, the results ofoperations of a component or segment of an entity that has been disposed ofshould be reported in discontinued operations as a separate component ofincome, separately from continuing operations, in the period in which thedisposal occurred and in prior periods. Accordingly, all the operating resultsof Guoxin Paging have been grouped into and reported in the income statement as“Discontinued operation – Loss from discontinued operation” under US GAAP.

 

On December 31,2002, we completed the acquisition of Unicom New Century from UnicomGroup.  Similar to the treatment of theacquisition of Unicom New World described above, we adopted the purchase methodunder HK GAAP, under which the results of operations of Unicom New Century wereincluded in our consolidated financial statements for the fiscal years ended December 31,2004 and 2003 only.  On July 30,2004, Unicom New Century was merged into CUCL and legally dissolved upon thecompletion of such merger.

 

The acquisitions of Unicom New Century and UnicomNew World and the sale of Guoxin Paging have had a material impact on ouroverall results of operations.  Inparticular, our financial results in 2004 were significantly affected by theinclusion of the results of operations for Unicom New World we acquiredeffective December 31, 2003.  Bycomparison, our financial results in 2003 did not include the results ofoperations of Unicom New World.  See “- Operating Results - Year Ended December 31, 2004 Compared toYear 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 operating revenue and operating expenses have alsoincreased significantly.

 

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The following are certain summaryconsolidated results of operation information for the years ended December 31,2002, 2003 and 2004 and financial position information as of December 31,2003 and 2004 for us and Unicom International, as separate entities and on acombined basis after the acquisition of each entity, prepared under USGAAP.  The financial information preparedunder US GAAP reflect retroactive restatement forthe acquisition and reconciliation for other differences from HK GAAP toUS GAAP.

 
| ** **                                           | ** ** | **The Group (before  the acquisition of  Unicom  International)** | ** ** | **Unicom  International** | ** ** | **Elimination**  | ** ** | **The Group (after  the acquisition of  Unicom  International)** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------|------------|------------------|------------|------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **RMB’000**                                                  | ** ** | **RMB’000**          | ** ** | **RMB’000** | ** ** | **RMB’000**                                                 | ** ** |
| **For the  year ended December 31, 2002**       |       |                                                              |       |                      |       |             |       |                                                             |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Results of operations:                               |       |                                                              |       |                      |       |             |       |                                                             |       |
| Operating revenue (Turnover)                         |       | 50,415,248                                                        |       | 24,322                    |       | (18,497          | )          | 50,421,073                                                       |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Net income from continuing operations                |       | 5,492,804                                                         |       | 7,351                     |       | —           |       | 5,500,155                                                        |       |
| Net loss from discontinued operation                 |       | (422,213                                                          | )          | —                    |       | —           |       | (422,213                                                         | )          |
| Cumulative Effect to change in accounting  policy    |       | (42,175                                                           | )          | —                    |       | —           |       | (42,175                                                          | )          |
| Net income                                           |       | 5,028,416                                                         |       | 7,351                     |       | —           |       | 5,035,767                                                        |       |
| Basic earnings per share (RMB)                       |       | 0.401                                                             |       | —                    |       | —           |       | 0.401                                                            |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| **As  of/for the year ended December 31, 2003** |       |                                                              |       |                      |       |             |       |                                                             |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Results of operations:                               |       |                                                              |       |                      |       |             |       |                                                             |       |
| Operating revenue (Turnover)                         |       | 71,958,253                                                        |       | 46,265                    |       | (24,208          | )          | 71,980,310                                                       |       |
| Net income from continuing operations                |       | 6,070,263                                                         |       | 7,698                     |       | —           |       | 6,077,961                                                        |       |
| Net loss from discontinued operation                 |       | (1,341,840                                                        | )          | —                    |       | —           |       | (1,341,840                                                       | )          |
| Net income                                           |       | 4,728,423                                                         |       | 7,698                     |       | —           |       | 4,736,121                                                        |       |
| Basic earnings per share (RMB)                       |       | 0.377                                                             |       | —                    |       | —           |       | 0.377                                                            |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Financial position:                                  |       |                                                              |       |                      |       |             |       |                                                             |       |
| Non-current assets                                   |       | 128,169,420                                                       |       | 60,621                    |       | —           |       | 128,230,041                                                      |       |
| Current assets                                       |       | 22,243,284                                                        |       | 97,186                    |       | (93,115          | )          | 22,247,355                                                       |       |
| Total assets                                         |       | 150,412,704                                                       |       | 157,807                   |       | (93,115          | )          | 150,477,396                                                      |       |
| Non-current liabilities                              |       | 40,593,548                                                        |       | —                    |       | —           |       | 40,593,548                                                       |       |
| Current liabilities                                  |       | 43,906,653                                                        |       | 124,166                   |       | (93,115          | )          | 43,937,704                                                       |       |
| Total liabilities                                    |       | 84,500,201                                                        |       | 124,166                   |       | (93,115          | )          | 84,531,252                                                       |       |
| Net assets                                           |       | 65,912,503                                                        |       | 33,641                    |       | —           |       | 65,946,144                                                       |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| **As  of/for the year ended December 31, 2004** |       |                                                              |       |                      |       |             |       |                                                             |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Results of operations:                               |       |                                                              |       |                      |       |             |       |                                                             |       |
| Operating revenue (Turnover)                         |       | 79,361,238                                                        |       | 135,688                   |       | (108,612         | )          | 79,388,314                                                       |       |
| Net income                                           |       | 4,703,312                                                         |       | 8,988                     |       | 387              |       | 4,712,687                                                        |       |
| Basic earnings per share (RMB)                       |       | 0.374                                                             |       | —                    |       | —           |       | 0.375                                                            |       |
|                                                 |       |                                                              |       |                      |       |             |       |                                                             |       |
| Financial position:                                  |       |                                                              |       |                      |       |             |       |                                                             |       |
| Non-current assets                                   |       | 128,697,817                                                       |       | 64,865                    |       | —           |       | 128,762,682                                                      |       |
| Current assets                                       |       | 17,865,977                                                        |       | 148,991                   |       | (162,776         | )          | 17,852,192                                                       |       |
| Total assets                                         |       | 146,563,794                                                       |       | 213,856                   |       | (162,776         | )          | 146,614,874                                                      |       |
| Non-current liabilities                              |       | 31,045,613                                                        |       | 3,262                     |       | —           |       | 31,048,875                                                       |       |
| Current liabilities                                  |       | 46,118,868                                                        |       | 167,972                   |       | (163,163         | )          | 46,123,677                                                       |       |
| Total liabilities                                    |       | 77,164,481                                                        |       | 171,234                   |       | (163,163         | )          | 77,172,552                                                       |       |
| Net assets                                           |       | 69,399,313                                                        |       | 42,622                    |       | 387              |       | 69,442,322                                                       |       |

 

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***Critical AccountingPolicies***

*** ***

Thepreparation of our financial statements and this annual report requires us tomake estimates and assumptions that affect the reported and disclosed amountsof assets and liabilities, including contingent assets and liabilities, as atthe relevant dates and revenue and expenses for the relevant periods.  We have identified the accounting policiesand estimates below as critical to our business operations and an understandingof our results of operations and financial position.  The impact and any associated risks relatedto these policies on our business operations are discussed throughout this Item5 where such policies affect our reported and expected financial results.  For a discussion of the application of theseand other accounting policies, see Notes 2 and 3 to our consolidated financialstatements included in this annual report. There can be no assurance that actual results will not differ from thoseestimates and assumptions.

 

**Deferral of CDMA Customer AcquisitionCosts**

 

Wehave been operating the CDMA business since the beginning of 2002.  In order to accelerate the development of theCDMA business and subscriber growth, we began to offer certain promotionalpackages in the second half of 2002.  Aspart of the contractual arrangements with certain CDMA contractual subscribersunder these special promotional packages, CDMA handsets were provided to thesubscribers for their use at no additional charge during the specified contractperiods, which range from 6 months to 2 years. In return, the subscribers are required to incur a minimum amount ofservice fees during the contract period. If the contractual subscribers can fulfill the minimum contract spendingamounts by the end of the contract period, they will not be obliged to repaythe remaining costs of the CDMA handsets given for their use.  In addition, to secure contract performance,these subscribers are required under their contracts to (1) prepay certainnon-refundable amounts of service fees or deposits, (2) maintain a bankdeposit in one of the designated commercial banks to secure their minimumcontract amounts, or (3) provide a guarantor who will compensate us forany loss in the event of the subscriber’s non-performance of relatedcontractual obligations.

 

Weconsider the costs of the CDMA handsets provided to contractual subscribersunder these promotional packages as part of the customer acquisition costs forthe development of these new CDMA contractual subscribers.  Such customer acquisition costs are deferred,to the extent recoverable, and amortized over the contractual periods to matchwith the minimum contract revenue.

 

Wedetermined our accounting policy of deferred customer acquisition costs ofcertain CDMA subscribers after a careful evaluation of our specific facts andcircumstances, and believe that the capitalization of such costs appropriatelymatches the future contractual revenues due to (1) the historically highARPUs and low churn, default or bad debt rates of these subscribers; (2) ourestablished procedures and the relative low cost of enforcement of contracts indefault; and (3) the existence of specified contract periods with minimumcontract spending amounts and built-in contractual safeguarding measures suchas non-refundable prepayments, bank deposits, and guarantees received, as wellas penalty clauses imposed on subscribers.

 

Therefore,we believe that the deferred customer acquisition costs are recoverable fromfuture revenue to be derived from these promotional packages, and thecapitalization and amortization of these customer acquisition costs to matchwith future revenue is an appropriate accounting policy.  Furthermore, we continuously assess andevaluate the recoverability of these deferred customer acquisition costs, basedon the detailed review of historical subscriber churn rates and the estimateddefault rate. Based on our current assessment and evaluation, we believe thatthere is no significant problem in recovering the carrying amounts of thedeferred customer acquisition costs as at December 31, 2004.

 

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Wehave made the above recoverability assessments based on the current legal andoperating environment relating to the subscribers’ contract performance andother information currently available to us. Actual results may differ significantly from the current situation andour current estimates.  If the situationchanges significantly in the future, we may need to expense off additionalnon-recoverable deferred customer acquisition costs based on conditions at thattime.

 

**Leaseof CDMA Network Capacity**

 

We hadentered into a CDMA network capacity lease agreement with Unicom Group andUnicom Horizon in December 2001.  Pursuant tothis CDMA lease agreement, Unicom Horizon agreed to lease the capacity of theCDMA network to us covering the nine provinces of Guangdong, Jiangsu, Zhejiang,Fujian, Liaoning, Shandong, Anhui, Hebei, Hubei and the three municipalities ofBeijing, Shanghai and Tianjin.  Thislease became effective on January 8, 2002.

 

Inaddition, on December 31, 2002 and 2003, we acquired all the equityinterests in Unicom New Century and Unicom New World, respectively, whichtogether operate GSM and CDMA cellular businesses in another 12 provinces, onemunicipality and five autonomous regions in China.  Each of Unicom New Century and Unicom NewWorld had also entered into a CDMA lease agreement with Unicom Group and UnicomHorizon on similar terms and conditions. These lease agreements and the lease agreement enteredin 2001 are collectively referred to as the “Old CDMA Leases.”

 

Accordingto the terms of the Old CDMA Leases, the initial lease period is one year,renewable for additional one-year terms at our own option. We have theexclusive right to lease and operate the CDMA network capacity in the aboveregions. Also, we have the option to add or reduce the capacity leased bygiving advance notice. The lease fee per unit of capacity is calculated on thebasis that if full capacity is leased, it would permit Unicom Horizon torecover its investment in constructing the CDMA network in 7 years, togetherwith an internal return of 8%. In January 2004, we renewed the Old CDMALeases, for an additional one-year term.

 

Subsequently, on March 24, 2005, we haveentered into the New CDMA Lease with Unicom Group and Unicom Horizon to replacethe Old CDMA Leases. The New CDMA Lease has been 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 and purchase option, are substantially similarto those contained in the Old CDMA Leases except that (i) the initiallease period is two years, with full CDMA constructed network capacity to beleased from Unicom Horizon, and (ii) the lease fee shall be determinedbased on the Company’s CDMA service revenue. For more detailed discussions of the terms of the New CDMA Lease, see “B.Related Party Transactions - Leasing of CDMA NetworkCapacity - Lease of CDMANetwork Capacity – New CDMA Lease” under Item 7.

 

Wehave assessed the appropriate lease classification at the inception of the Old CDMA Leases and New CDMA Lease. Factors and related implications wehave considered include whether we have taken the risks and rewards ofownership of the CDMA assets. Furthermore, we have considered whether the existence of the purchaseoption and the renewal options, combined with the related economic penalties,risks and benefits, have caused us to take on risks and rewards similar tothose that an owner of these assets would bear.

 

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UnicomHorizon has the legal ownership of the CDMA network, is directly responsiblefor the planning, financing and construction of the CDMA network, and directlyenters into all contracts with suppliers and constructors.  We believe we only bear the risks associatedwith the operation of our CDMA business during the relevant leasing periods andare free from any ownership risks of the CDMA network.  According to the terms of the Old CDMALeases, our initial lease period is only one year, with renewal for additionalone-year terms at our own option.  Similarly,according to the terms of the New CDMA Lease, our initial lease period isdetermined to be only two years.  Accordingly, there is no pre-determinedlease period and minimum network capacity to be leased in future periods.  We have the option to determine whether wewill renew and continue the leases and how much capacity to lease under the OldCDMA Leases and the New CDMA Lease.  We also have the option to decide whetherwe will exercise the purchase option of CDMA network based on marketenvironment and the future operating performance of the CDMA business subjectto approvals obtained from our independent minority shareholders.

 

Accordingly,if the CDMA business turns out to be unsuccessful, we do not have theobligation to continue the CDMA lease arrangement or to exercise the purchaseoption.  Or, we could continue to leasenominal capacity in order to ensure that no other operator takes possession ofthe assets to compete with us in our service areas.

 

Ingeneral, the classification of leases is dependent on whether the risks andrewards of ownership of the leased assets rest substantially with the lessor orthe lessee.  Leases that substantiallytransfer to the lessee all the risks and rewards of ownership of the leasedassets are accounted for as finance leases; and leases where substantially allthe risks and rewards of ownership of the leased assets remain with the lessorare accounted for as operating leases. When performing this assessment, we have considered the various factorsabove that required significant judgment.

 

Fromthe inception of the Old CDMA Leases and the New CDMA Lease, there has been, and continues to be, ahigh degree of uncertainty related to the market condition and existingoperating results of the CDMA business. It remains highly uncertain whether we will continue to lease thenetwork in the future.  We are alsounable to determine whether or not we will exercise the purchase option.  Given these uncertainties and due to the factthat the risks associated with the ownership of the CDMA assets substantiallyremain with Unicom Group and Unicom Horizon, we have accounted for the leasingof CDMA network capacity as operating leases under the Old CDMA Leasesand continue to do so under the New CDMA Lease, so as to reflect the respective rights and obligationsof the relevant parties to the lease agreements.  At the end of the effective lease term, or ifsignificant modifications are made to the lease agreement, we will reassess theappropriate classification based on the relevant facts and circumstances availableat that time.

 

Basedon the above assessment, only the operating lease expense has been recorded inour statements of income since the commencement of the Old CDMA Leases, whereasthe carrying value of the CDMA assets and the related liabilities are notreflected in our balance sheet.  For theyears ended December 31, 2003 and 2004, we recorded lease expenses ofapproximately RMB3.52 billion and RMB6.59 billion, respectively, under theOld CDMA Leases.

 

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**Impairmentof Assets**

 

As ofthe end of each year, we conduct a full review of variousinformation to identify indications that the carrying values of our property,plant and equipment, construction-in-progress and other long-term assets may beimpaired.  If such an indicationexists, we will also estimate the related asset’s recoverable amount.  To the extent that the estimated recoverableamount of an asset is lower than its carrying amount, an impairment loss isrecognized.  The information used to identifyindications of impairment might be subjective in nature and the interpretationand application of such information requires judgment, the result of whichdirectly affects our estimate of any impairment provision considered necessaryas at any given balance sheet date.  Tothe extent our assumptions and estimations differ significantly from actualevents and circumstances, we may need to make additional impairment provisionsin the future.

 

In2002, despite the fact that the revenue and subscriber number of the pagingbusiness continued to decline, it managed to maintain net cash inflows fromoperations.  Our paging business did notimprove significantly because the traditional paging business was still declining,whereas the new value-added paging businesses were at their initial developmentstage, and thus, the real value of the paging business was not yet fullyrealized.  At that time, we wereconfident about the future prospects of these new value-added pagingbusinesses, and we believed that they could generate sufficient future economicbenefits to recover the carrying values of the existing paging assets.  Consequently, we believed that it was notnecessary to make additional impairment provision for 2002.

 

Lateron, in the first half of 2003, we conducted a re-assessment of the recoverableamount of the paging assets based on the best estimates of the discounted netfuture cash flows expected to be generated from the paging business in theforeseeable future years.  Managementmade key assumptions and estimations on the appropriate discount rate adopted(8% per annum), the period covered by the cash flow forecast, the impact of thecontinuous decline of traditional paging business, the future loss ofsubscribers, the expected trend in average revenue per subscriber, as well asincremental cash flows arising from new paging businesses and the effects ofthe adoption of cost reduction plans. All these assumptions and estimations were made based on historical trendsadjusted for the current market situation (including the physical condition ofthese assets) and the forecast of the future development of the new value-addedpaging businesses.

 

In thefirst half of 2003, based on our updated analysis and the worsening decline ofthe traditional paging business, we expected that the related incrementalfuture cash inflows to be generated from the new value-added paging services,despite their continuous growth, were unlikely to offset the effects of therapid decline of the traditional paging business in the future.  Consequently, based on the latest estimate ofthe discounted future net cash flows expected to arise from the continuingoperations of the paging business, after considering the unexpected rapiddecline of the traditional paging business in the first half of 2003, weconcluded that the carrying amount of paging assets as at June 30, 2003had exceeded their expected recoverable amounts.  Accordingly, we recorded an additionalimpairment loss for property, plant and equipment of the paging businessamounting to approximately RMB528 million in the first half of 2003.  Subsequently, we sold the paging business toour ultimate parent company, Unicom Group, effective on December 31,2003.  The disposal loss of thisdiscontinued operation, representing the difference between the sales proceedsand the carrying amount of the net assets of the paging business as of theeffective date of the disposal which amounted to approximately RMB663 million,was recognized and charged to the statement of income in 2003.

 

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**Provisionfor Doubtful Debts**

 

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

 

Ourestimates described above are based on our historical experience, subscribers’credit worthiness and collection trends. If circumstances change (e.g. due to factors including developments inour business and the external market environment), we may need to re-evaluateour policies on doubtful debts, and make additional provisions in the future.

 

**IncomeTax and Deferred Taxation**

 

Incometax is provided for based on income before tax for statutory financialreporting purposes, adjusted for income and expense items that are notassessable or deductible for tax purposes and taking into consideration anypreferential tax treatment to which we are entitled.

 

Deferredtaxation is provided in full, using the liability method, on temporarydifferences arising between the tax basis of assets and liabilities and theircarrying amounts in the financial statements. Deferred tax assets are recognized to the extent that it is probablethat future taxable profit will be available against which the temporarydifferences can be utilized.

 

In thepreparation of our financial statements, we estimate our income tax provisionand deferred taxation in accordance with the prevailing tax rules andregulations, taking into account any special approvals obtained from relevanttax authorities and any preferential tax treatment to which we are entitled ineach location or jurisdiction in which we operate.  This process involves estimation made by usabout our current tax exposure together with an assessment of temporarydifferences resulting from different treatment of items for tax and accountingpurposes in order to determine the amount of tax provisions for theperiod.  We believe we have recordedadequate tax provisions based on our best estimates and assumptions.  For the evaluation of temporary differences,we have assessed the likelihood that our deferred taxes could be deferred andrecovered.  Major deferred tax componentsinclude interests on loans from China-China-Foreign, or CCF, joint ventures,loss arising from terminations of CCF arrangements, provisions for doubtfuldebts and write-down of inventory to net realizable value and additionaldepreciation deductible for tax purpose. Due to the effects of these temporary differences on income tax, we haverecorded deferred tax assets amounting to RMB1.20 billion and RMB0.54 billionas of December 31, 2003 and 2004, respectively.  Deferred tax assets are recognized based onour estimates and assumptions that they will be recovered from taxable incomefrom continuing operations in the foreseeable future.

 

Webelieve we have recorded adequate current and deferred taxes based onprevailing tax rules and regulations and our current best estimates andassumptions.  In the event that futuretax rules and regulations or related circumstances change, adjustments tocurrent and deferred taxes may be necessary.

 

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***Operating Results***

 

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

 

Ourresults of operations in 2004 were materially affected by our acquisitions ofUnicom New World effective December 31, 2003.  In particular, our operating revenue andoperating expenses increased significantly in 2004, which was primarily due tothe inclusion of the results of operations of Unicom New World.  By comparison, our results in 2003 did notinclude the results of operations of Unicom New World.  As a result, our results of operations in2004 are not directly comparable with those in prior years.  See “- Acquisitions of Unicom New Century,Unicom New World and Unicom International and Sale of Guoxin Paging”above.  See also “A. TheHistory and Development of the Company -Acquisition of Unicom New World and Sale of Guoxin Paging” under Item 4 above.

 

In 2004, our operating revenue continuedto increase, by 17.3% from RMB67.64billion in 2003 to RMB79.33 billion in 2004.  This growth wasprincipally due to the strong growth of our CDMA cellular business andcontinued growth of our GSM cellular business, as well as the inclusion ofrevenue attributable to Unicom New World, which we acquired effective December 31,2003.  Our cellular businesses continued to increase in their percentage contribution to our overallbusiness. Our long distance, data and Internet businesses decreased in terms ofoperating revenues and in their contribution to our business.

 

Due tofactors discussed below, in 2004 our operating expenses grew 20.7%.  As a result, our operating income decreased by 6.6% to RMB7.96billion, whileour operating margin decreased to 10.0%, ascompared with 12.5% in2003.  Operating margin in our GSMcellular business decreased from21.2% in 2003 to 17.4%in 2004.  While our CDMA cellularbusiness sustained rapid growth in 2004, its operating loss increased by102.6%.  In our long distance and data and Internet businesses,operating income decreased 67.3% in 2004 and operatingmargin decreased to 5.3% in 2004 from 17.2% in 2003.

 

Our net income in 2004 increased****by 4.0% to RMB4.39billion, for reasons discussed below.

 

***Operating Revenue***

*** ***

Operatingrevenue from our GSM cellular business grew steadily in 2004 and continued togenerate a majority of our total operating revenue, while operating revenuefrom our CDMA cellular business sustained fast growth in 2004, significantlyincreasing its share of our total operating revenue for the year.  Our CDMA cellular business, introduced in January 2002,generated RMB26.34 billion in operating revenue in 2004, contributing 66.3% ofour total operating revenue growth in that year. ** **Operating revenues fromour GSM and CDMA cellular businesses represented 93.0% of our total operatingrevenue in 2004, as compared with 88.3% in 2003.  The share of operating revenue from the CDMAcellular business in our total operating revenue increased from 27.5% in 2003to 33.2% in 2004, while the share of operating revenue from the GSM cellularbusiness in our total operating revenue decreased from 60.9% in 2003 to 59.8%in 2004.  Operating revenues from ourlong distance and data and Internet businesses slightly decreased from RMB5,732 million in 2003 to RMB5,527 million in2004.  Operating revenues from our longdistance business and our data and Internet businesses represented 2.3% and4.7%, respectively, of our total operating revenue in 2004, as compared with3.3% and 5.1%, respectively, in 2003. The growth in our total operating revenue, however, was partially offsetby the sale of our paging business, effective December 31, 2003.  We believe the changes in our operatingrevenue composition reflect our focus on the development of our cellularbusinesses.

 

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***Cellular Revenue***

 

Forthe reasons discussed below, operating revenues from our GSM and CDMA cellularbusinesses (including revenues from sales of telecommunications products)together increased by 23.5%, from RMB59.75 billion in 2003 to RMB73.80 billionin 2004.

 

*GSM Cellular Business *Operating revenue from our GSM cellular business increased by15.3%, from RMB41.17 billion in 2003 to RMB47.47 billion in 2004, primarily dueto the continued increase in the total number of our total GSM cellularsubscribers as a result of organic subscriber growth and the effect of ouracquisition of Unicom New World.  Thetotal number of our GSM cellular subscribers increased by 31.8%, from63.92 million as of December 31, 2003 to 84.27 million as of December 31,2004.  As a result of continuing cellularpenetration expansion, an increase in the proportion of low-usage subscribersamong new subscribers, an increased number of pre-paid subscribers, and increasingmarket competition negatively affecting effective pricing, ARPU from the GSMcellular business declined 12.9%, from RMB56.7 in 2003 to RMB49.4 in 2004.  Post-paid ARPU decreased by 12.2%, from RMB66.2 in 2003to RMB58.1 in 2004, while pre-paid ARPU decreased by 13.0%, from RMB46.0 in 2003to RMB40.0 in 2004.  The average MOU persubscriber per month increased 8.8%, from 173.7 minutesin 2003 to 188.9 minutes in 2004.

 

Revenue from pre-paid GSM cellular service wasRMB18.09 billion in 2004, a 18.0% increase from RMB15.33 billionin 2003.  Revenue from pre-paid servicesaccounted for 38.8% of the service revenue from our GSM cellular business in2004, an increase****from 37.2% of thetotal service revenue from the GSM cellular business in 2003.  Pre-paid subscribers accounted for 72.0% ofour new customers in 2004, compared to 73.8% in 2003primarily due to the lower percentage of pre-paid subscribers of Unicom NewWorld compared to the percentage of our pre-paid subscribers before theacquisition.

 

The tablebelow sets forth the revenue composition of our GSM cellular business and each revenue item’s respective share of total GSM operating revenue in the years ended December 31,2002, 2003 and 2004.

 
| ** **                             | ** ** | **2002**           | ** ** | **2003**                            | ** ** | **2004**           | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **RMB in million** | ** ** | **As****percentage****of****total** | ** ** | **RMB in million** | ** ** | **As****percentage****of****total** | ** ** | **RMB in million** | ** ** | **As percentage of  total** | ** ** |
| Operating  Revenue                     |       | 28,109             |       | 100.0                               | %          | 41,166             |       | 100.0 | % | 47,466 |   | 100.0 | % |
| Service  Revenue                       |       | 27,388             |       | 97.4                                | %          | 40,303             |       | 97.9 | % | 46,579 |   | 98.1 | % |
| Usage Fee                              |       | 20,275             |       | 72.1                                | %          | 29,072             |       | 70.6 | % | 31,997 |   | 67.4 | % |
| Monthly Fee                            |       | 4,169              |       | 14.8                                | %          | 7,042              |       | 17.1 | % | 6,922 |   | 14.6 | % |
| Interconnection Revenue                |       | 1,710              |       | 6.1                                 | %          | 1,927              |       | 4.7 | % | 2,614 |   | 5.5 | % |
| Others                                 |       | 1,234              |       | 4.4                                 | %          | 2,262              |       | 5.5 | % | 5,046 |   | 10.6 | % |
| Sales  of Telecommunications  Products |       | 721                |       | 2.6                                 | %          | 863                |       | 2.1 | % | 887 |   | 1.9 | % |

 

Due tothe growth in total usage of our GSM cellular services (including the effectsof our acquisition of Unicom New World) and the increasing proportion ofpre-paid cellular subscribers (who do not pay monthly fees), usage fees for GSMcellular services increased by 10.1% fromRMB29.07 billion in 2003 to RMB32.00 billion in 2004, and represented 68.7% of totalGSM service revenue as compared with 72.1% in 2003.  For the same reasons, monthly fees decreasedby 1.7%, from RMB7.04 billion in 2003 to RMB6.92 billion in2004, and represented 14.9% of total GSM service revenue ascompared with 17.5% in 2003. Interconnection revenue increased by 35.7% from RMB1.93 billion in 2003to RMB2.61 billion in 2004, and represented 5.6% of totalservice revenue as compared with 4.8% in 2003.

 

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Whilecontinuing to meet the diverse needs of our customers in the mass market, ourGSM cellular business aims to actively pursue mid- to high-end customersthrough the development and promotion of value-added services.  Revenue from our GSM value-added cellularservices increased 134.8%, from RMB2.07 billionin 2003 to RMB4.86 billion in 2004.  Itsshare of total GSM service revenue more than doubled from 5.0% in 2003to 10.4% in 2004.  Of the total revenuefrom GSM value-added cellular services, revenue from short messaging servicesincreased 103% from RMB1.37 billion in 2003 to RMB2.79billion in2004, and its share of total GSM service revenue grew from 3.4% in 2003to 6.0% in 2004.  Revenue fromvalue-added services contributed significantly to the increase of our total GSMcellular revenue and, we believe, will continue to enhance our competitivenessin this business.

 

*CDMA**C**ellular**B**usiness.** *Since we launched CDMAcellular services in 2002, our CDMA subscriber base has expanded rapidly as the market became morefamiliar with our CDMA services.  In2004, the growth in our CDMA subscriber base greatly boosted revenue from theCDMA cellular business.  Operatingrevenue from our CDMA cellular business reached RMB26.34 billion in 2004, a41.8% increase over RMB18.58 billion in 2003. This increase was primarily due to the rapid expansion of our CDMAcellular business as well as the effect of including revenue attributable toUnicom New World, which we acquired effective December 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 CDMAcellular business reached RMB85.3 in 2004, more than 72.7% higher than the ARPUof RMB49.4 for GSM cellular services.

 

Thetable below sets forth the revenue composition of our CDMA cellular businessand each revenue item’s respective share of total CDMA operatingrevenue for the years ended December 31, 2002, 2003 and 2004.

 
| ** **                           | ** ** | **2002**           | ** ** | **2003**                          | ** ** | **2004**           | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------------------|------------|--------------------|------------|
| ** **                           | ** ** | **RMB in million** | ** ** | **As percentage********of total** | ** ** | **RMB in million** | ** ** | **As percentage********of total** | ** ** | **RMB in million** | ** ** | **As percentage********of total** | ** ** |
| Operating Revenue                    |       | 3,648              |       | 100.0                             | %          | 18,580             |       | 100.0 | % | 26,338 |   | 100.0 | % |
| Service Revenue                      |       | 3,225              |       | 88.4                              | %          | 16,624             |       | 89.5 | % | 24,220 |   | 92.0 | % |
| Usage Fee                            |       | 2,231              |       | 61.2                              | %          | 11,672             |       | 62.8 | % | 16,165 |   | 61.4 | % |
| Monthly Fee                          |       | 713                |       | 19.5                              | %          | 3,488              |       | 18.8 | % | 4,638 |   | 17.6 | % |
| Interconnection Revenue              |       | 184                |       | 5.0                               | %          | 608                |       | 3.3 | % | 927 |   | 3.5 | % |
| Others                               |       | 97                 |       | 2.7                               | %          | 856                |       | 4.6 | % | 2,490 |   | 9.5 | % |
| Sales of Telecommunications Products |       | 423                |       | 11.6                              | %          | 1,956              |       | 10.5 | % | 2,118 |   | 8.0 | % |

 

CDMAusage fees increased by 38.5% from RMB11.67 billion in 2003 to RMB16.17 billionin 2004, and represented 66.7% of total CDMA service revenue as compared with70.2% in 2003.  Monthly fees increased by33.0%, from RMB3.49 billion in 2003 to RMB4.64 billion in 2004, and represented19.1% of total CDMA service revenue as compared with 21.0% in 2003.  Interconnection revenue increased by52.5% from RMB0.61 billion in 2003 to RMB0.93 billion in 2004, and represented3.8% of total service revenue as compared with 3.7% in 2003.

 

Withthe expansion of our CDMA 1X wireless data services in 2004, we have beenactively developing our CDMA wireless data business, by making efforts toconvert the competitive edge of the CDMA technology into a competitive edge inoperations in order to enhance competitiveness in the market and our appeal tosubscribers.  Revenue from value-addedCDMA cellular services reached RMB2.38 billion in 2004, an increase of205.1% from RMB0.78 billion in 2003, and accounted for 9.8%of total service revenue from the CDMA cellular business in 2004.  We expect revenue from value-added CDMAservices will continue to grow significantly, as we will continue to focus onthe development and marketing of such value-added services.

 

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***Long Distance and Data and Internet Revenue***

 

Operatingrevenue from our long distance and data and Internet businesses reachedRMB5.53 billion, a decrease of 3.6% from 2003.  We intend to continue to leverage on ourmulti-business integrated network platform and actively promote services withdistinctive features such as “Ruyi Mailbox”, “UNI-VIDEO” and “U-Net”.

 

*Long Distance Business.** *Operating revenue from our traditionalpublic switched long distance business decreased by 19.1%, fromRMB2.29 billion in 2003 to RMB1.85 billion in 2004.  Such decrease is primarily due to increasedcompetition and the decrease in interconnection revenue from Unicom New Worldcaused 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 effectively expandinginternational and domestic call volume for IP telephony services, we have beentargeting institutional subscribers and corporate subscribers in promotingservices with distinctive features such as “UNI-VIDEO” and “U-Net”, and we alsohave been targeting the mass market in promoting data and Internet servicessuch as “Ruyi Mailbox”.  At the sametime, we have been continuing to develop integrated data, voice and videoconnection services, and dedicated and dial-up connection services.  As a result of these efforts, revenue fromour data and Internet businesses rose by 6.8% from RMB3.44 billion in 2003 toRMB3.68 billion in 2004.

 

***Paging Revenue***

 

Wesold our paging business to Unicom Group, effective December 31, 2003, andtherefore did not have revenue from the paging business in 2004.  See “- Acquisitions of Unicom New Century, UnicomNew World and Unicom International and Sale of Guoxin Paging” above.  See also “A. The Historyand Development of the Company - Restructuring andAcquisition of Unicom New Century” under Item 4 above.

 

***OperatingExpenses***

 

Operatingexpenses in 2004 were RMB71.38 billion, representing an increase of 20.7% over2003, which was greater than the 17.3% growth in operating revenue for the sameperiod.  As discussed below, a 71.2%increase in leased lines and network capacities expenses, a 25.0% increase in sellingand marketing expenses, a 16.3% increase in depreciation and amortizationexpenses and a 27.0% increase in interconnection charges were the primaryfactors in the increase in operating expenses. Due to the rapid expansion of our CDMA business, selling and marketingexpenses (which include the amortized portion of deferred customer acquisitioncosts under special promotional packages with certain CDMA contractualsubscribers) and leased lines and network capacities expenses (which includethe expenses from the CDMA network leases) increased faster than our operatingrevenue in 2004.  As our various businesssegments continued to develop, interconnection charges also increased fasterthan our operating revenue in 2004 since the interconnection rates remainunchanged while our effective tariffs have been declining due to continued price competition.  In addition,depreciation and amortization expenses increased primarily due to the expansionof the scale of our fixed assets.  Ouroperating expenses as a percentage of total revenue increased to 90.0% in 2004,as compared with 87.4% in 2003.  Sincelate 2004, we have emphasized the business strategy of “effective growth”,i.e., profit-driven growth, and will continue to focus on cost control andoptimization of our expense structure in order to ensure continued growth inearnings.

 

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Thetable below illustrates the major expense items from 2002, 2003 and 2004 andtheir respective shares of total operating revenue.

 
| ** **                                                            | ** ** | **For the year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                            | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **RMB in****million**                     | ** ** | **%****of  Total Revenue** | ** ** | **RMB in****million** | ** ** | **%****of  Total Revenue** | ** ** | **RMB in million** | ** ** | **%****of********Total Revenue** | ** ** |
| Total  Operating Expenses                                             |       | 33,253                                    |       | 82.0 | % | 59,122 |   | 87.4 | % | 71,376 |   | 90.0 | % |
| Leased  lines and network capacities                                  |       | 1,583                                     |       | 3.9 | % | 4,320 |   | 6.4 | % | 7,398 |   | 9.3 | % |
| Interconnection  charges                                              |       | 3,230                                     |       | 8.0 | % | 5,921 |   | 8.7 | % | 7,517 |   | 9.5 | % |
| Depreciation  and amortization                                        |       | 11,256                                    |       | 27.7 | % | 16,385 |   | 24.2 | % | 19,063 |   | 24.0 | % |
| Personnel                                                             |       | 3,335                                     |       | 8.2 | % | 4,575 |   | 6.8 | % | 4,526 |   | 5.7 | % |
| Selling  and marketing                                                |       | 5,981                                     |       | 14.8 | % | 15,157 |   | 22.4 | % | 18,945 |   | 23.9 | % |
| General,  administrative and other expenses                           |       | 5,632                                     |       | 13.9 | % | 9,112 |   | 13.5 | % | 10,448 |   | 13.2 | % |
| Include:  Impairment loss and assets write-off of the Paging Business |       | 116                                       |       | 0.3 | % | 557 |   | 0.8 | % | — |   | — |   |
| Cost  of telecommunications products sold                             |       | 2,236                                     |       | 5.5 | % | 3,652 |   | 5.4 | % | 3,479 |   | 4.4 | % |

 

*Leased Lines and Network Capacities*. With the significant increase in our CDMAsubscribers, the lease expense for CDMA network capacities increased by 87.4%, fromRMB3.52 billion in 2003 to RMB6.59 billion in 2004.  In addition, the effect of including leasedline expenses for transmission lines used by Unicom New World we acquiredeffective December 31, 2003 also contributed to the increase in ourleased line expenses.  As result, theaggregate amount of our leased line expenses and network capacity leaseexpenses increased to RMB7.40 billion, representing an increase of 71.2% fromRMB4.32 billion in 2003.  Leasedlines and network capacities expenses as a percentage of total operatingrevenue rose from 6.4% in 2003 to 9.3% in 2004.

 

*Interconnection Charges.* Interconnection charges reached RMB7.52billion in 2004, representing an increase of 27.0% from 2003, 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 well as the effect of including interconnection expenses ofUnicom New World, which we acquired effective December 31, 2003.  Interconnection charges for our CDMA cellularbusiness increased by 65.9%. Interconnection charges increased by 17.8% for ourGSM 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 operating revenuealso increased from 8.7% in 2003 to 9.5% in 2004.

 

*Depreciation and Amortization.* Depreciation andamortization expenses increased by 16.3% to RMB19.06 billion in 2004, alower growth rate than the growth in operating revenue.  The increase in depreciation and amortizationexpenses resulted from expanded network capacity, the expansion of assets scaleand the effect of including depreciation expenses attributable to Unicom NewWorld, which we acquired on December 31, 2003.  Depreciation and amortization expenses as apercentage of total operating revenue decreased slightly from 24.2% in 2003to 24.0% in 2004.

 

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*Personnel.* As of the end of 2004, we had 39,589 employees, anincrease of 2.2% from 38,728 at the end of 2003 (including employees in thenine provinces, autonomous regions and municipalities we acquired throughUnicom New World at the end of 2003). Our personnel expenses slightly decreased from RMB4.58 billion in 2003to RMB4.53 billion in 2004.  Its share asa percentage of total operating revenue dropped from 6.8% in 2003to 5.7% in 2004. In order to align the interest of our employees with that ofour shareholders, we have set up an employee share option scheme and grantedoptions to qualified employees. During 2004, total share options involving113,322,000 shares in our company were granted under the share option scheme.

 

*Sellingand Marketing*.Our major selling and marketing expenses included commissions, promotion andadvertising expenses and amortization of customer acquisition costs ofcontractual CDMA subscribers.  Sellingand marketing expenses totaled RMB18.95 billion in 2004, an increase of 25.0%from 2003. Amortization of CDMA subscribers acquisition costs in 2004 wereRMB6.12 billion, an increase of 4.9% from2003.  The balance of unamortizeddeferred CDMA subscriber acquisition costs increased from RMB4.04 billion as ofthe end of 2003 to RMB4.75 billion as of the end of 2004 primarily due tocontinued offering of CDMA handset promotion packages as a result of intensecompetitive 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 wereRMB2.37 billion, an increase of 16.2%.  Selling and marketing expenses as apercentage of operating revenue increased from 22.4% in 2003to 23.9% in 2004.

 

*General, Administrative and Other Expenses*. Our general, administrative and other expenses wereRMB10.45 billion in 2004, representing an increase of 14.7% fromRMB9.11 billion in 2003.  General,administrative and other expenses as a percentage of total operating revenuedecreased slightly from 13.5% in 2003 to 13.2% in 2004.  In 2004, the provision for doubtful debts wasRMB2.19 billion, an increase of 25.1% from2003.  Provision for doubtful debts as apercentage of service revenue increased slightly from 2.7% in 2003to 2.9% in 2004. This has also contributed to the increase in our general,administrative and other expenses.

 

*Cost ofTelecommunications Products Sold.* The cost of telecommunication products sold decreasedby 4.7% from RMB3.65 billion in 2003 to RMB3.48 billion in 2004. The shareof cost of telecommunications products sold as a percentage of operatingrevenue decreased from 5.4% in 2003to 4.4% in 2004.

 

***OperatingIncome***

 

In2004, our operating revenue increased by 17.3%, while our operating expensesincreased by 20.7%.  As a result, ouroperating income reached RMB7.96 billion, an decreaseof 6.6% from 2003, and our operating margin decreased from 12.5% in 2003 to 10.0% in 2004.

 

*GSM Cellular Business.* In our GSM cellular business, operating income was RMB8.26 billion in2004, which is a decrease of 5.3% from 2003.  The decrease in the operating income of ourGSM cellular business mainly reflects the 13% decline in the ARPU for our GSMcellular business, which was partially offset by the 8.8% increase in theaverage monthly MOU per subscriber.  Thedecrease in ARPU resulted from intense competition with our main competitor aswell as the “Little Smart” services.  Inaddition, while there was a net addition of 20.35 million subscribers to ourGSM services in 2004, a sizable number of subscribers terminated their GSMservices with us, contributing to significant increase in our marketing cost.** **Our operating marginin the GSM cellular business decreased****from 21.2% in2003 to 17.4% in 2004.

 

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*CDMA Cellular Business.* We incurred a total operating loss of RMB0.59 billion in 2004 for ourCDMA business as compared with the operating loss of RMB0.29 billion in2003.  The increase of operating loss ofour CDMA cellular business was primarily due to the 33.6% decrease in ARPU as aresult of intense competition, the significant increase in lease expenses forour CDMA network capacities as a result of the growth of our customer base, thecontinued high level of marketing expenses and the significant increase ininterconnection charges.  After takinginto consideration of the improper accounting recordings and errors weidentified in our Jiangxi and Xinjiang branches as described in Item 15 “Controlsand procedures”, the operating losses of our CDMA business for 2004 and 2003would have been RMB0.45 billion and RMB0.42 billion, respectively.

 

*Long Distance Business.* In our long distance business, operating income decreased 24.4%, fromRMB0.70 billion in 2003 to RMB0.53 billion in 2004, primarily because ofreduced tariff level as a result of increased competition and a reduction inthe interconnection revenue after we acquired Unicom New World in December 2003.  As a result, the operating margin in our longdistance business decreased from 22.2% in 2003to 17.0% in 2004.

 

*Data and Internet Business.* In our data and Internet businesses, we had an operating loss of RMB0.06billion in 2004, compared with an operating income of RMB0.75 billion in2003.  This change primarily resultedfrom significantly higher sales cost associated with the promotion of newproducts such as “Uni-Video” than in 2003.

 

***NetIncome***

 

*Financial**I**ncome and**E**xpenses.* Our financial income decreased****from RMB0.17billion in 2003 to RMB0.10 billion in 2004, mainly due to a declinein interest income resulting from a reduction in our cash and overall reducedapplicable interest rates.  Our financialexpenses****decreased from RMB1.94 billion in 2003to RMB1.69 billion in 2004, primarily due to overallreduced applicable interest rates.  Theabove factors resulted in a net financial expense of RMB1.59 billion in 2004, adecrease of 10.1% from the net financial expense of RMB1.76 billionin 2003.

 

*Income**T**ax.* Our income tax increased to RMB2.08 billion in 2004, an increase of 10.1% from2003.  Our effective tax rates in 2003and 2004 were 31.0% and 32.2%, respectively. The higher effective tax rate in 2004, as compared with 2003, was mainlydue to the fact that a large percentage of our gross income in 2004 wasgenerated in areas that have higher tax rates than the rest of our serviceareas.

 

*Net**Income**.* For reasons analyzed in the above discussion, our net income was RMB4.39billion in 2004, representing an increase of 4.0% from2003.  Earnings per share increased 3.9%, from RMB0.336 in 2003to RMB0.349 in 2004.

 

***Impactof Differences between HK GAAP and US GAAP***

 

Inaddition to the above management discussion and analysis of our results of theoperation under HK GAAP between the years ended December 31, 2004 and2003, in connection with the preparation and reconciliation of our consolidatedfinancial statements in accordance with US GAAP, we believe the followingsignificant accounting differences between HK GAAP and US GAAP would have asignificant impact on our management discussion and analysis of the results ofour operation between the years ended December 31, 2004 and 2003 under USGAAP.  See also Note 40 to theconsolidated financial statements for a more detailed summary of allsignificant accounting differences between HK GAAP and US GAAP that arerelevant to us.

 

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UnderHK GAAP, the acquisitions of Unicom International in September 2004 and ofUnicom New World on December 31, 2003 have been accounted for under thepurchase method.  Accordingly, theacquired results of operations have been incorporated into our operatingresults only from the date of the acquisition. In contrast, under US GAAP, our acquisitions of Unicom International andUnicom New World have been accounted for as a transfer of businesses undercommon control.  Under this method, theacquired assets and liabilities have been accounted for at historical costunder US GAAP and the consolidated financial statements prepared under US GAAPfor all periods presented have been retroactively restated as if UnicomInternational and Unicom New World had always been part of our company.

 

UnderHK GAAP, the sale of Guoxin Paging to the Unicom Group is accounted for as asale of discontinued operation. The difference between the sale proceeds andthe carrying amount of net assets of Guoxin Paging as of December 31, 2003was recorded as a loss on sale of discontinued operation in our consolidatedincome statement for the year ended December 31, 2003.  The operating results of Guoxin Paging from January 1,2003 to the effective date of the sale of Guoxin Paging were included in ourconsolidated income statement for the year ended December 31, 2003.  Under US GAAP, the sale of Guoxin Paging isconsidered a transfer of business between entities under common control andaccounted for at historical cost of the net assets transferred, after reduction,if appropriate, for an indicated impairment of value. In addition, under USGAAP, the results of operations of a component or segment of an entity that hasbeen disposed of should be reported in discontinued operations as a separatecomponent of income, separately from continuing operations, in the period inwhich the disposal occurred and in prior periods. Accordingly, all theoperating results of Guoxin Paging have been grouped into and reported in theincome statement as “Discontinued operation – Loss from discontinued operation”under US GAAP.

 

Inaddition, under HK GAAP, we recognized upfront non-refundable revenue, such asconnection fee, when received upon completion of activation services.  Under US GAAP, this upfront non-refundablerevenue and the related direct incremental costs incurred are deferred andrecognized over the estimated customer service periods.

 

Otherthan the above, there are no major material differences between HK GAAP and USGAAP that would have a significant impact on the discussion and analysis of ourresults of operations between the years ended December 31, 2004 and 2003.  Taking into account the operating results ofthe acquired business and the disposed business, our combined operating revenueunder US GAAP increased from RMB71.98 billionin 2003, to RMB79.39 billion in 2004, representing anincrease of 10.3%. Our net income under US GAAP decreased from RMB4.74 billion in 2003 toRMB4.71 billion in 2004, representing a decrease of 0.5%.

 

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

 

Ourresults of operations in 2003 were materially affected by our acquisition ofUnicom New Century effective December 31, 2002.  In particular, our operating revenue andoperating expenses increased significantly in 2003. This was primarily due tothe inclusion of the results of operations of Unicom New Century.  By comparison, our results in 2002 did notinclude the results of operations of Unicom New Century.  As result, our results of operations in 2003are not directly comparable with those in prior years.  See “- Acquisitions of Unicom New Century,Unicom New World and Unicom International and the Sale of Guoxin Paging”above.  See also “A. TheHistory and Development of the Company -Restructuring and Acquisition of Unicom New Century” under Item 4 above.

 

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In 2003, our operating revenue continuedto increase, by 66.7% from RMB40.58billion in 2002 to RMB67.64 billion in 2003.  This growth wasprincipally due to the strong growth of our CDMA cellular business andcontinued growth of our GSM cellular business, as well as the inclusion ofrevenue attributable to Unicom New Century, which we acquired effectiveDecember 31, 2002. Our cellular businesses continued to increase in their percentage contribution to our overallbusiness.  Our long distance, data andInternet businesses also continued to grow in terms of operating revenues andin their contribution to our business.

 

Due tofactors discussed below, in 2003 our operating expenses grew 77.8%.  As a result, our operating income increased by 16.3% to RMB8.51billion, whileour operating margin decreased to 12.6%, ascompared with 18.0% in2002.  Operating margin in our GSMcellular business decreased from27.2% in 2002 to 21.2% in 2003.  Our CDMAbusiness continued to grow during the year. In our longdistance business, operating income decreased 31.6% in 2003and operating margin, at 30.6% in 2003, decreased from 36.8% in2002.  In our data and Internet businesses,operating income increased by 95.3% over2002.  Our traditional paging business continued to decline, and despite ourfocus on cost reduction and development of new value-added paging services, itstill experienced an operating loss in 2003.

 

Our net income in 2003 decreased****by 8.3% to RMB4.22billion, for reasons discussed below.

 

***Operating Revenue***

*** ***

Operatingrevenue from our GSM cellular business grew steadily in 2003 and continued tobe the major force behind our total operating revenue growth, contributingalmost half of such growth in 2003, while operating revenue from our CDMAcellular business grew rapidly in 2003, significantly increasing its share ofour total operating revenue for the year. Our CDMA cellular business, introduced in January 2002, reached RMB18.58billion in operating revenue in 2003, contributing 55.2% of our total operatingrevenue growth in that year. ** **Operating revenues from our GSM andCDMA cellular businesses represented 88.4% of our total operating revenue in2003, as compared with 78.3% in 2002. The growth of the CDMA cellular business can be seen in its share of ourtotal operating revenue, which increased from 9.0% in 2002 to 27.5% in 2003,while the share of operating revenue from the GSM cellular business in ourtotal operating revenue decreased from 69.3% in 2002 to 60.9% in 2003.  Operating revenues from our long distance anddata and Internet businesses increased steadily, contributing 0.5% of ourtotal operating revenue growth in 2003. Operating revenues from our long distance business and our data andInternet businesses represented 3.3% and 5.1%, respectively, of our totaloperating revenue in 2003, as compared with 6.8% and 6.9%, respectively, in2002.  The growth in our total operatingrevenue, however, was partially offset by the continued significant decline inoperating revenue from our paging business, which also declined as a percentageof our total operating revenue from 8.0% in 2002 to 3.2% in 2003.

 

***Cellular Revenue***

*** ***

Forthe reasons discussed below, operating revenues from our GSM and CDMA cellularbusinesses (including revenues from sales of telecommunications products)together increased by 88.1%, from RMB31.76 billion in 2002 to RMB59.75 billionin 2003.

 

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*GSM Cellular Business *Operating revenue from our GSM cellular business increased by46.5%, from RMB28.11 billion in 2002 to RMB41.17 billion in 2003, primarily dueto the continued increase in the total number of our total GSM cellular subscribersas a result of organic subscriber growth and the effect of our acquisition ofUnicom New Century.  As a result ofcontinuing cellular penetration expansion, an increase in the proportion oflow-usage subscribers among new subscribers, an increased number of pre-paidsubscribers, and increasing market competition negatively affecting effectivepricing, ARPU from this business declined 15.8%, fromRMB67.3 in 2002 to RMB56.7 in 2003.  Post-paid ARPU decreased by 19.5%, fromRMB82.2 in 2002 to RMB66.2 in 2003, while pre-paid ARPUdecreased by 15.0%, from RMB54.1 in 2002to RMB46.0 in 2003.  Theaverage MOU per subscriber per month increased 5.0%, from 165.5 minutesin 2002 to 173.7 minutes in 2003.  The foregoing operational statistics do notinclude the effects of the acquisition of Unicom New World.

 

Revenue from pre-paid GSM cellular service was RMB15.33 billionin 2003, a 52.1% increase from RMB10.08 billionin 2002.  Revenue from pre-paid servicesaccounted for 37.2% of the service revenue from our GSMcellular business in 2003, an increase****from 35.9% of the total service revenue from theGSM cellular business in 2002.  Pre-paidsubscribers accounted for 73.8% of our new customers in 2003, compared to 81.1% in 2002primarily due to the lower percentage of pre-paid subscribers of Unicom NewCentury, which was acquired by us on December 31, 2002, compared to thepercentage of our pre-paid subscribers before the acquisition.

 

Thetable below sets forth the revenue composition of our GSM cellular business andeach revenue item’s respective share of total GSM operatingrevenue in the years ended December 31, 2001, 2002 and 2003.

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

 

Due tothe growth in total usage of our GSM cellular services (including the effectsof our acquisition of Unicom New Century) and the increasing proportion ofpre-paid cellular subscribers (who do not pay monthly fees), usage fees for GSMcellular services increased by 43.3% from RMB20.28 billion in 2002 to RMB29.07billion in 2003, and represented 72.1% of total GSM service revenue as comparedwith 74.0% in 2002.  For the samereasons, monthly fees increased by 68.9%, from RMB4.17 billion in 2002 toRMB7.04 billion in 2003, and represented 17.5% of total GSM service revenue ascompared with 15.2% in 2002. Interconnection revenue increased by 12.9% from RMB1.71 billion in 2002to RMB1.93 billion in 2003, and represented 4.8% of total service revenue ascompared with 6.2% in 2002.

 

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Whilecontinuing to meet the diverse needs of our customers in the mass market, ourGSM cellular business aims to actively pursue mid- to high-end customersthrough the development and promotion of value-added services.  Revenue from our GSM value-added cellularservices increased 146.4%, from RMB0.84 billionin 2002 to RMB2.07 billion in 2003.  Itsshare of total GSM service revenue increased from 3.1% in 2002to 5.0% in 2003.  Of the total revenuefrom GSM value-added cellular services, revenue from short messaging servicesincreased 197.8% from RMB0.46 billionin 2002 to RMB1.37 billion in 2003, and its share of totalGSM service revenue grew from 1.7% in 2002to 3.4% in 2003. Revenue from value-added services contributed significantly to theincrease of our total GSM cellular revenue.

 

*CDMA**C**ellular**B**usiness.** *We began to provide CDMA cellular services on a trialbasis on January 8, 2002.  Since then,our CDMA subscriber base has expanded rapidly as the market became morefamiliar with our CDMA services.  In2003, the growth in our CDMA subscriber base greatly boosted revenue from theCDMA cellular business.  Operatingrevenue from our CDMA cellular business reached RMB18.58 billion in 2003, a409.3% increase over RMB3.65 billion in 2002. This increase was primarily due to the rapid expansion of our CDMAcellular business as well as the effect of including revenue attributable toUnicom New Century, which we acquired effective December 31, 2002.  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 CDMAcellular business reached RMB128.4 in 2003, RMB62.2higher than the ARPU of RMB66.2 for GSM post-paid cellular services.

 

Thetable below sets forth the revenue composition of our CDMA cellular businessand each revenue item’s respective share of total CDMA operatingrevenue for the years ended December 31, 2002 and 2003.

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

 

CDMAusage fees increased by 423.3% from RMB2.23 billion in 2002 to RMB11.67 billionin 2003, and represented 70.2% of total CDMA service revenue as compared with69.2% in 2002.  Monthly fees increased by391.5%, from RMB0.71 billion in 2002 to RMB3.49 billion in 2003, andrepresented 21.0% of total CDMA service revenue as compared with 22.1% in2002.  Interconnection revenue increasedby 238.9% from RMB0.18 billion in 2002 to RMB0.61 billion in 2003, andrepresented 3.7% of total service revenue as compared with 5.7% in 2002.

 

Withthe introduction of our CDMA 1X wireless data services in March 2003, we arealso actively developing our CDMA wireless data business, by making efforts toconvert the competitive edge of the CDMA technology into a competitive edge inoperations in order to enhance competitiveness in the market and our appeal tosubscribers.  Revenue from value-addedCDMA cellular services reached RMB0.78 billion in 2003, an increase of 875.0% fromRMB0.08 billion in 2002, and accounted for 4.7% of totalservice revenue from the CDMA cellular business, an increase of 2.2% from2002.

 

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***Long Distance and Data and Internet Revenue***

*** ***

Operatingrevenue from our long distance and data and Internet businesses reached RMB5.73billion, an increase of 2.8% from 2002.

 

*Long Distance Business.** *Operating revenue from our traditionalpublic switched long distance business decreased by 17.7%, from 2002to RMB2.29 billion in 2003.  Suchdecrease was primarily due to the decrease in interconnection revenue fromUnicom New Century caused by our acquisition of Unicom New Century.

 

*D**ata and Internet Business.** *We fully leveraged the technologicaladvantage of our multi-businesses integrated network platform.  Along with effectively expandinginternational and domestic call volume for IP telephony services, we targetedbusiness subscribers and corporate subscribers in promoting services withdistinctive features such as “UNI-VIDEO”, and we also targeted the mass marketin promoting new services, such as “Ruyi Mailbox”.  At the same time, we continued to developintegrated data, voice and video connection services, and dedicated and dial-upconnection services.  As a result ofthose efforts, revenue from our data and Internet businesses rose by 23.1% from2002 to RMB3.44 billion in 2003.

 

***Paging Revenue***

 

In2003, revenue from our paging business (including revenues from sales oftelecommunications products) was RMB2.16 billion.  Paging service revenue (i.e., excluding salesof paging-related telecommunications products) fell by 35.1% to RMB1.40 billionin 2003.  This decline is due to thecontinued decline in the traditional paging business.  Revenue from value-added and other servicesof the paging business reached RMB0.79 billion and accounted for 56.2% of theservice revenue from the paging business. We disposed of our paging business, effective December 31, 2003.

 

***OperatingExpenses***

*** ***

Operatingexpenses in 2003 were RMB59.12 billion, representing an increase of 77.8%,which was greater than the 66.7% growth in operating revenue for the sameperiod.  As discussed below, a 172.9%increase in leased lines and network capacities expenses, a 153.4% increase inselling and marketing expenses and a 83.3% increase inthe interconnection charges were the primary factors in the increase inoperating expenses. Due to the launch of our CDMA business, selling andmarketing expenses (which included the amortized portion of deferred customeracquisition costs under special promotional packages with certain CDMAcontractual subscribers) and leased lines and network capacities expenses(which included the expenses from the CDMA network leases) increased faster thanour operating revenue in 2003.  Inaddition, as our various business segments continued to develop,interconnection charges also increased faster than our operating revenue in2003 since the interconnection rates remain unchanged while our effective tariffshave been declining due to continuedprice competition.  Our operating expenses as a percentage oftotal revenue increased to 87.4% in 2003, as compared with 82.0% in 2002.

 

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Thetable below illustrates the major expense items from 2001, 2002 and 2003 andtheir respective shares of total operating revenue.

 
| ** **                                                            | ** ** | **For the year ended  December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **2001**                             | ** ** | **2002** | ** ** | **2003** | ** ** |
| ** **                                                            | ** ** | **RMB in****million**                | ** ** | **%****of  Total Revenue** | ** ** | **RMB in****million** | ** ** | **%****of  Total Revenue** | ** ** | **RMB in million** | ** ** | **%****of  Total Revenue** | ** ** |
| Total  Operating Expenses                                             |       | 24,129                               |       | 82.1 | % | 33,253 |   | 82.0 | % | 59,122 |   | 87.4 | % |
| Leased  lines and network capacities                                  |       | 853                                  |       | 2.9 | % | 1,583 |   | 3.9 | % | 4,320 |   | 6.4 | % |
| Interconnection  charges                                              |       | 2,073                                |       | 7.1 | % | 3,230 |   | 8.0 | % | 5,921 |   | 8.7 | % |
| Depreciation  and amortization                                        |       | 8,262                                |       | 28.1 | % | 11,256 |   | 27.7 | % | 16,385 |   | 24.2 | % |
| Personnel                                                             |       | 2,487                                |       | 8.5 | % | 3,335 |   | 8.2 | % | 4,575 |   | 6.8 | % |
| Selling  and marketing                                                |       | 3,613                                |       | 12.2 | % | 5,981 |   | 14.8 | % | 15,157 |   | 22.4 | % |
| General,  administrative and other expenses                           |       | 5,499                                |       | 18.7 | % | 5,632 |   | 13.9 | % | 9,112 |   | 13.5 | % |
| Include:  Impairment loss and assets write-off of the Paging Business |       | 665                                  |       | 2.3 | % | 116 |   | 0.3 | % | 557 |   | 0.8 | % |
| Cost  of telecommunications products sold                             |       | 1,342                                |       | 4.6 | % | 2,236 |   | 5.5 | % | 3,652 |   | 5.4 | % |

 

*Leased Lines and Network Capacities*. With the significant increase in our CDMAsubscribers, the lease expense for CDMA network capacities increased 295.5%, fromRMB0.89 billion in 2002 to RMB3.52 billion in 2003.  In addition, the effect of including leasedline expenses for transmission lines used by Unicom New Century we acquiredeffective December 31, 2002 also contributed to the increase in ourleased line expenses.  As a result, theaggregate amount of our leased line expenses and network capacity leaseexpenses increased to RMB4.32 billion, representing an increase of 173.4% from2002.  Leased lines and networkcapacities expenses as a percentage of total operating revenue rose from 3.9% to 6.4%in 2003.

 

*Interconnection Charges.* Interconnection charges reached RMB5.92billion in 2003, representing an increase of 83.3% from 2002, primarily due tothe increase in interconnection traffic volume as a result of the developmentof our GSM and CDMA cellular business and long distance business, as well asthe effect of including interconnection expenses of Unicom New Century, whichwe acquired effective December 31, 2002. Interconnection charges for our CDMA cellular business increased by 502.9%.  Interconnection charges increased by 61.8%for our GSM cellular business. Interconnection charges for long distance, data and Internet businessincreased by 54.0%. As our various business segmentscontinued to develop, interconnection charges as a percentage of totaloperating revenue also increased from 8.0% in 2002to 8.7% in 2003.

 

*Depreciation and Amortization.* Depreciation and amortization expensesincreased 45.6% to RMB16.39 billion in 2003, a lowergrowth rate than the growth in operating revenue.  The increase in depreciation and amortizationexpenses resulted from expanded network capacity, primarily in connection withthe development of the GSM cellular business, the expansion of assets scale,and the effect of including depreciation expenses attributable to Unicom NewCentury, which we acquired on December 31, 2002.  Depreciation and amortization expenses as apercentage of total operating revenue decreased from 27.7% in 2002to 24.2% in 2003.

 

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*Personnel.* As of the end of 2003, we had 38,728 employees, anincrease of 32.0% from 29,332 at the end of 2002 (excluding employees in thenine provinces, autonomous regions and municipalities we acquired throughUnicom New Century at the end of 2002). This increase was primarily due to the effect of including employees ofUnicom New Century, which we acquired on December 31, 2002.  Our personnel expenses were RMB4.57 billionin 2003, its share as a percentage of total operating revenue dropping from 8.2% in 2002to 6.8% in 2003. In order to align the interest of our employees with that ofour shareholders, we have set up an employee share option scheme and grantedoptions to qualified employees. During 2003, total share options involving105,956,000 shares in our company were granted under the share option scheme.

 

*Sellingand Marketing*.Our major selling and marketing expenses included commissions, promotion andadvertising expenses and amortization of customer acquisition costs ofcontractual CDMA subscribers. Selling and marketing expenses totaled RMB15.16billion in 2003, an increase of 153.4% from 2002. Amortization of CDMAsubscribers acquisition costs in 2003 were RMB5.84 billion, an increase of 320.1% from2002. The balance of unamortized deferred CDMA subscriber acquisition costsfell from RMB5.99 billion as of the end of 2002 to RMB4.04 billion as of theend of 2003. Due to the continued growth in the subscriber base of our variousbusiness segments (including the effect of our acquisition of Unicom NewCentury), the commissions to distributors and sales agents rose to RMB7.29billion, an increase of 99.2%. Promotion and advertising expenseswere RMB2.04 billion, an increase of 108.2%.Selling and marketing expenses as a percentage of operating revenue increasedfrom 14.8% in 2002 to 22.4% in 2003.

 

*General, Administrative and Other Expenses*. Our general, administrative and other expenses wereRMB9.11 billion in 2003, which includes an impairment loss and assets write-offof the paging business in the amount of RMB0.56 billion.  Total expenses in thiscategory increased by 61.8% from 2002. Excluding the impairment loss and assets write-off of the pagingbusiness, total expenses for this category increased by 51.9% from 2002.  General, administrative and other expenses asa percentage of total operating revenue decreased from 13.9% in 2002 to 13.5%in 2003.  In 2003, the provision fordoubtful debts was RMB1.75 billion, an increase of 80.4% from2002. Provision for doubtful debts as a percentage of service revenue increasedslightly from 2.5% in 2002 to 2.7% in 2003. This also gaverise to an increase in our general, administrative and other expenses.

 

*Cost ofTelecommunications Products Sold.* The cost of telecommunication products sold increasedto RMB3.65 billion in 2003, an increase of 62.9% from RMB2.24 billionin 2002. The share of cost of telecommunications products sold as a percentageof operating revenue decreased from 5.5% in 2002to 5.4% in 2003.

 

***OperatingIncome***

*** ***

In2003, our operating revenue increased by 66.7%, while our operating expensesincreased by 77.8%.  As a result, ouroperating income reached RMB8.51 billion, an increase of only 16.3% from 2002and our operating margin only decreased from 18.0% in 2002 to 12.6% in 2003.

 

*GSM Cellular Business.* In our GSM cellular business, operating income reached RMB8.72 billionin 2003, which was an increase of 14.2% from2002.  The growth in the operating incomeof our GSM cellular business was slower than the overall increase in ouroperating income, mainly reflecting the 15.8% declinein the ARPU for our GSM cellular business. Our operating margin in the GSM cellular business decreased****from 27.2% in 2002 to 21.2% in 2003.

 

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*CDMA Cellular Business.* We incurred a total operating loss of RMB0.29 billion in 2003 for ourCDMA business as compared with the operating loss of RMB0.99 billion in 2002reflecting improvement in performance as a result of continued subscribergrowth of our CDMA business which commenced operation since January 2002.  After taking into consideration of theimproper accounting recordings and errors we identified in our Jiangxi andXinjiang branches as described in Item 15 “Controls and procedures”, theoperating losses of our CDMA business for 2003 and 2002 would have been RMB0.42billion and RMB1.00 billion, respectively.

 

*Long Distance Business.* In our long distance business, operating income decreased 31.4%, fromRMB1.02 billion in 2002 to RMB0.70 billion in 2003, primarily because of areduction in the interconnection revenue after we acquired Unicom New Centuryin December 2002.  As a result, theoperating margin in our long distance business, at 22.2% in 2003,decreased from 29.5% in 2002.

 

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

 

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

 

***NetIncome***

*** ***

*Loss on Sale of DiscontinuedOperation (Guoxin Paging)*.  The sale of Guoxin Paging to Unicom Group in2003 resulted in a disposal loss in the amount of RMB0.66 billion.

 

*Financial**I**ncome and**E**xpenses.* Our financial income decreased****from RMB0.47billion in 2002 to RMB0.17 billion in 2003, mainly due to a declinein interest income resulting from a reduction in our cash and overall reducedapplicable interest rates.  Our financialexpenses****increased from RMB1.47 billion in 2002to RMB1.93 billion in 2003, primarily due to theacquisition of Unicom New Century.  Theabove factors resulted in a net financial expense of RMB1.76 billion in 2003,an increase of 76% from the net financial expense of RMB1.0 billion in2002.

 

*Income**T**ax.* Our income tax increased from to RMB1.89 billion in 2003, an increase of9.8% from 2002. Our effective tax rates in 2002 and 2003 were 27.3% and 31.0%,respectively.  The higher effective taxrate in 2003, as compared with 2002, was mainly due to the investment taxcredits we received in 2002 in connection with the acquisition of certaindomestic equipments.

 

*Net**Income**.* For reasons analyzed in the above discussion, our net income fell toRMB4.22 billion in 2003.  Excluding theRMB0.56 billion in impairment loss and assets write-off of the paging businessand the RMB0.66 billion loss on the sale of Guoxin Paging, our net income wouldhave been RMB5.08 billion, representing an increase of 10.5% from2002.  Earnings per share decreased 7.7%, from RMB0.366 in 2002to RMB0.336 in 2003.

 

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***Impactof Differences between HK GAAP and US GAAP***

*** ***

Inaddition to the above management discussion and analysis of our results of theoperation under HK GAAP between the years ended December 31, 2003 and 2002, inconnection with the preparation and reconciliation of our consolidatedfinancial statements in accordance with US GAAP, we believe the followingsignificant accounting differences between HK GAAP and US GAAP would have asignificant impact on our management discussion and analysis of the results ofour operation between the years ended December 31, 2003 and 2002 under USGAAP.  See also Note 40 to theconsolidated financial statements for a more detailed summary of allsignificant accounting differences between HK GAAP and US GAAP that arerelevant to us.

 

UnderHK GAAP, the acquisition of Unicom New World on December 31, 2003 has beenaccounted for under the purchase method. Accordingly, the acquired results ofoperations have been incorporated into our operating results only from the dateof the acquisition. In contrast, under US GAAP, our acquisition of Unicom New Worldhas been accounted for as a transfer of businesses under common control. Underthis method, the acquired assets and liabilities have been accounted for athistorical cost under US GAAP and the consolidated financial statementsprepared under US GAAP for all periods presented have been retroactivelyrestated as if Unicom New World had always been part of our company.

 

UnderHK GAAP, the sale of Guoxin Paging to the Unicom Group is accounted for as asale of discontinued operation. The difference between the sale proceeds andthe carrying amount of net assets of Guoxin Paging as of December 31, 2003 wasrecorded as a loss on sale of discontinued operation in our consolidated incomestatement for the year ended December 31, 2003. The operating results of GuoxinPaging from January 1, 2003 to the effective date of the sale of Guoxin Pagingwere included in our consolidated income statement for the year ended December31, 2003.  Under US GAAP, the sale ofGuoxin Paging is considered a transfer of business between entities undercommon 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.

 

Inaddition, under HK GAAP, we recognized upfront non-refundable revenue, such asconnection fee, when received upon completion of activation services. Under USGAAP, this upfront non-refundable revenue and the related direct incrementalcosts incurred are deferred and recognized over the estimated customer serviceperiods.

 

Otherthan the above, there are no major material differences between HK GAAP and USGAAP that would have a significant impact on the discussion and analysis of ourresults of operations between the years ended December 31, 2003 and 2002.Taking into account the operating results of the acquired business and thedisposed business, our combined operating revenue under US GAAP increased fromRMB50.42 billion in 2002, to RMB71.98 billion in 2003,representing an increase of 42.8%. Our net income under US GAAP decreased fromRMB5.04 billion in 2002 to RMB4.74 billion in 2003,representing a decrease of 6.0%.

 

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***Liquidity and Capital Resources***

 

***WorkingCapital and Cash Flows***

*** ***

As ofthe end of 2004, we had RMB4.66 billion of cash and cash equivalents andRMB0.66 billion of short-term bank deposits. As of the end of 2004, we had negative working capital (current assetsminus current liabilities) of RMB28.27 billion, compared to negative workingcapital of RMB21.66 billion at the end of 2003. The decrease in working capital resulted primarily from (i) the increasein short-term bank loans to replace long-term bank loans; (ii) the cash paymentfor the acquisitions of Unicom International and Unicom New World; and (iii)increased indebtedness as a result of the indebtedness of the newly-acquiredUnicom International and Unicom New World. We believe that we will have access to financing, in particular bankfinancing in the PRC and elsewhere, which together with net cash inflows fromoperations will be sufficient to fund our capital and liquidity needs.

 

Thefollowing table sets forth cash inflows and outflows in 2002, 2003 and 2004.

 
| ** **                                               | ** ** | **For the year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                               | ** ** | **2002**                            | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | **(RMB in millions)**               | ** ** |
| ** **                                               | ** ** | ** **                          | ** ** |
| Net cash inflows from operating activities               |       | 13,054                              |       | 22,565 |   | 23,819 |   |
| Net cash outflows from investing activities              |       | (5,166                              | )          | (19,051 | ) | (18,958 | ) |
| Net cash (outflows) inflows before  financing activities |       | 7,888                               |       | 3,514 |   | 4,861 |   |
| Net cash inflows (outflows) from financing  activities   |       | (11,868                             | )          | (8,778 | ) | (9,401 | ) |
| Net decrease in cash and cash equivalents                |       | (3,980                              | )          | (5,264 | ) | (4,540 | ) |

 

Net cash inflows from operating activities increasedby 5.6%, from RMB22.57****billion in2003 to RMB23.82 billion, mainly reflecting the growth in our business andreduction in our capital expenditure.

 

Netcash outflows from investing activities were RMB18.96 billion in 2004, comparedto RMB19.05 billion in 2003.  Thisdecrease in net cash outflows from investing activities in 2004 primarilyresulted from our effort to control capital investment and reduce investmentcost.

 

Netcash outflows from financing activities were RMB9.40 billion in 2004, anincrease of 7.1% from the outflow of RMB8.78 billion in 2003, resultingprimarily from an increase in repayment of short-term bank loans, from RMB10.28billion in 2003 to RMB12.27 billion in 2004, partially offset by a decrease inrepayment of long-term loans, from RMB18.50 billion in 2003 to RMB17.25 billionin 2004 as we attempted to further optimize our debt structure.

 

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***Indebtednessand Capital Structure***

 

Thefollowing table sets forth the amount of cash, assets, short-term and long-termdebt, equity as well as debt-to-assets and debt-to-equity ratios as of the endof 2002, 2003 and 2004.

 
| ** **                                             | ** ** | **As of December 31,**                    | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **2002**                                  | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(RMB in millions, except percentages)** | ** ** |
| Cash and cash equivalent and short-term  bank deposits |       | 19,259                                    |       | 10,133 |   | 5,317 |   |
| Total assets                                           |       | 149,628                                   |       | 149,838 |   | 145,629 |   |
| Short-term debt                                        |       | 15,330                                    |       | 18,173 |   | 20,015 |   |
| Long-term debt                                         |       | 37,686                                    |       | 36,213 |   | 26,137 |   |
| Minority interests                                     |       | 566                                       |       | — |   | — |   |
| Shareholders’ equity                              |       | 66,653                                    |       | 69,615 |   | 72,810 |   |
| Debt-to-assets ratio(1)                                |       | 44.6                                      | %          | 43.9 | % | 38.8 | % |
| Debt-to-equity ratio(2)                                |       | 80.4                                      | %          | 78.1 | % | 63.4 | % |

 

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

 

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

 

Ourdebt-to-assets ratio decreased****from 43.9% atthe end of 2003 to 38.8% at the end of 2004.  Our debt-to-equity ratio decreased****from 78.1% at the end of 2003 to 63.4% at the end of2004.  The sum of our long-term andshort-term interest bearing debt exceeded****the amount ofour cash and cash equivalents and short-term bank deposits by RMB40.83 billionas of December 31, 2004.  We continue toseek to optimize our capital structure, develop multiple financing sources andreduce overall financing costs.

 

Outstandingshort-term and long-term bank loans, denominated in RMB or the U.S. dollar,decreased from RMB54.39 billion at the end of 2003 to RMB46.15 billion at theend of 2004 reflecting our effort to optimize our debt structure by paying offbank loans that have become due.  Ourlong-term bank loans generally bear floating interest rates that ranged fromUS$ LIBOR plus 0.28% to 0.44% per annum in 2004 with maturity through2010.  The loan agreements do not includefinancial performance or other covenants which materially restrict ouroperations or those of CUCL or Unicom New World, our principal operatingsubsidiaries in China.  As of December31, 2004, short-term bank loans of approximately RMB3.40 billion andlong-term bank loans of approximately RMB6.78 billion were guaranteed by UnicomGroup.

 

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

 

InFebruary 2004, our operating entity, CUCL, entered into a US$500 million termloan facility with 12 financial institutions, which is repayable in three yearsat an interest rate of 0.40% over the US$ LIBOR per annum.

 

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***ContractualObligations and Commercial Commitments***

*** ***

Thefollowing tables set forth the amount of our outstanding contractual cashobligations as of December 31, 2004. 

 
| ** **                   | ** ** | **Payments Due by Period (RMB in millions)** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **Total**                                    | ** ** | **Due in  2004** | ** ** | **Due in  2005** | ** ** | **Due in  2006** | ** ** | **Due in  2007** | ** ** | **Due in  2008** | ** ** | **Due after  2008** | ** ** |
| Long-term bank Loans(1)      |       | 37,223                                       |       | 11,086 |   | 10,227 |   | 10,439 |   | 2,639 |   | 1,014 |   | 1,818 |   |
| Finance lease obligations(2) |       | 1,427                                        |       | 938 |   | 359 |   | 48 |   | 7 |   | 6 |   | 69 |   |
| Capital Commitments(3)       |       | 6,537                                        |       | 6,537 |   | — |   | — |   | — |   | — |   | — |   |
| Operating Leases(3)(4)       |       | 9,663                                        |       | 6,681 |   | 622 |   | 507 |   | 390 |   | 396 |   | 1,068 |   |
| Other Commitments(3)(5)      |       | 1,968                                        |       | 1,968 |   | — |   | — |   | — |   | — |   | — |   |
| Total obligations            |       | 56,818                                       |       | 27,210 |   | 11,208 |   | 10,994 |   | 3,036 |   | 1,416 |   | 2,955 |   |

 

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(1)          See consolidated financial statements,Note 27 “Long-term Bank Loans”.

 

(2)          See consolidated financial statements,Note 28 “Obligations Under Finance Leases”.

 

(3)          See consolidated financial statements,Note 36 “Contingencies and Commitments”.

 

(4)          The operating leases commitment asdisclosed above include the CDMA network capacity leasing arrangement enteredinto with Unicom Group and its subsidiary Unicom Horizon by our wholly-ownedsubsidiaries, CUCL (including Unicom New Century, which was merged into CUCL onJuly 20, 2004) and Unicom New World, in our cellular service areas.  See “Critical Accounting Policies – Lease ofCDMA Network Capacity” under Item 5; “B. Business Overview – CellularServices – CDMA Cellular Services - OurLease of CDMA Networks from Unicom Group” under Item 4, “B. Related PartyTransactions – Leasing of CDMA Network Capacity” underItem 7 and Note 36(b) “Contingencies and Commitments – OperatingLease Commitment” to the consolidated financial statements for details.

 

(5)          Other commitments represented ourcommitment to purchase CDMA handsets from vendors.  See Note 36(c) “Contingencies and Commitments– Commitment to purchase CDMA handsets” to theconsolidated financial statements for details.

 

***Off-balanceSheet Arrangements***

*** ***

As ofDecember 31, 2004, we did not have any off-balance sheet arrangements.

 

***CapitalExpenditures***

*** ***

Thefollowing table sets forth our historical and planned capital expenditurerequirements for the periods indicated. Actual future capital expenditures may differ from the amounts indicatedbelow.  

 
| ** **                       | ** ** | **For the years ended December 31,** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(RMB in billions)**                | ** ** |
| Cellular(1)                      |       | 8.91                                 |       | 6.40 |   | 7.59 |   |
| Long distance, data and Internet |       | 2.13                                 |       | 1.34 |   | 1.22 |   |
| Transmission network(2)          |       | 4.55                                 |       | 3.06 |   | 3.05 |   |
| Paging(3)                        |       | 0.04                                 |       | - |   | — |   |
| Others(4)                        |       | 4.13                                 |       | 7.59 |   | 6.37 |   |
| Total                            |       | 19.76                                |       | 18.39 |   | 18.23 |   |

 

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(1)          The capital expenditures for 2003 reflectcapital expenditures for our cellular business in 21 provinces, municipalitiesand autonomous regions; and capital expenditures for 2004 onwards represent 30provinces, municipalities and autonomous regions, including the 9 provinces andautonomous regions which we acquired at the end of 2003.

 

(2)          Expenditureson transmission network refers to investment in the inter-province andintra-province backbone transmission network, the local network and the accessnetwork.

 

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(3)          Wesold the paging business to Unicom Group on December 31, 2003.

 

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

 

Capitalexpenditures in 2004 totaled RMB18.39 billion. Capital expenditures attributable to the GSM cellular business, the longdistance, data and Internet businesses, the transmission network and otherprojects were RMB6.40 billion, RMB1.34 billion, RMB3.06 billion, and RMB7.59billion, respectively.  Expenditures forother projects were mainly related to the set-up of the billing, customerservice and information system, office building, construction of integratedaccess network and miscellaneous purchases.

 

Projectedcapital expenditures for 2005 is RMB18.23 billion, which will be used mostlyfor improving the GSM network and constructing network infrastructure.

 

Weexpect to primarily fund our capital expenditure needs with cash generated fromoperating activities.  See “D. RiskFactors – Risks Relating to Our Business – Our inability to fund our capitalexpenditure requirements may adversely affect our growth and profitability”under Item 3.

 

**US GAAP Reconciliation**

** **

Ourconsolidated financial statements are prepared in accordance with HK GAAP,which differs in certain material respects from US GAAP.  Significant differences relate primarily tothe effect of the acquisitions of Unicom New Century, Unicom New World andUnicom International and the sale of Guoxin Paging, treatments of the upfrontnon-refundable revenue and the related direct incremental costs, employees’housing benefits, revaluation of properties performed in connection with thereorganization, impairment of long-lived assets and goodwill, and additionaldisclosure requirements for share options scheme and measurement of costs ininvestment in equity securities. Reconciliation between HK GAAP and US GAAP which affect our net incomeand shareholders’ equity arising from the aforementioned differences areincluded in Note 40 to the consolidated financial statementsincluded in this annual report.  Inaddition, additional disclosures on the condensed financial information underUS GAAP, including condensed statements of income, changes in shareholders’equity and cash flows information, as well as condensed balance sheetsinformation and other additional financial information which have been restatedfor relevant periods presented to reflect the impact of the effects of theacquisitions of Unicom New Century, Unicom New World and Unicom Internationaland the sale of Guoxin Paging under common control are included in Note 40 tothe consolidated financial statements presented in this annual report.

 

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

## ** **

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

### *** ***

Thefollowing table sets forth certain information concerning our current directorsand executive officers.  

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                                     |
|------------------------|------------|---------|------------|----------------------------------------------------------------------------------|
| Chang Xiaobing         |       | 48      |       | Chairman of the Board of Directors; Executive Director; Chief  Executive Officer |
| Shang Bing             |       | 49      |       | Executive Director; President                                                    |
| Tong Jilu              |       | 47      |       | Executive Director; Chief Financial Officer                                      |
| Zhao Le                |       | 49      |       | Executive Director; Vice President                                               |
| William Lo Wing Yan    |       | 44      |       | Executive Director; Vice President                                               |
| Ye Fengping            |       | 41      |       | Executive Director; Vice President                                               |
| Liu Yunjie             |       | 62      |       | Non-Executive Director                                                           |
| Wu Jinglian            |       | 75      |       | Independent Non-Executive Director                                               |
| Shan Weijian           |       | 51      |       | Independent Non-Executive Director                                               |
| Linus  Cheung Wing Lam |       | 56      |       | Independent Non-Executive Director                                               |

 

Chang Xiaobing was appointed in December2004 as an Executive Director, Chairman of the Board of Directors and ChiefExecutive Officer of our company.  Mr.Chang, a professor level senior engineer, graduated in 1982 from the NanjingInstitute of Posts and Telecommunications with a B.S. degree intelecommunications engineering and received an MBA degree from TsinghuaUniversity in 2001.  From 1992 to 2000,Mr. Chang served as a Deputy Director of the Nanjing Municipal Posts andTelecommunications Bureau of Jiangsu PT, a Deputy Director General of theDirectorate General of Telecommunications, or DGT, of the MPT and a DeputyDirector General and Director General of the Department of TelecommunicationsAdministration of the MII.  From 2000 toOctober 2004, Mr. Chang served as Vice President of China Telecom Group and,since 2002, an executive director and President of China Telecom Corporation Limited.  Mr. Chang was appointed the Chairman ofUnicom Group in November 2004.  Mr. Chang also serves as the Chairman ofthe A Share Company and CUCL, respectively. Mr. Chang has 22 years of operational and managerial experience inthe telecommunications industry in China.

 

Shang Bing was appointed in November 2004as an Executive Director and President of our company responsible for ourday-to-day management and operations. Mr. Shang, a senior economist, graduated in 1982 from Shenyang ChemicalIndustry Institution with degree in Chemical Industry and received an MBAdegree from New York State University of USA. From 1986 to 1998, Mr. Shang served as a Director of IndustrialTechnology Development Centre in Liaoning Province, Deputy General Manager andGeneral Manager of Economic Technology Development Company in LiaoningProvince.  Mr. Shang joined Unicom Groupin August 1998.  From 1998 to 2001,Mr. Shang served as Deputy General Manager and General Manager of UnicomGroup Liaoning Branch.  Mr Shang wasappointed as Vice President of Unicom Group in March 2001 and subsequentlybecame a Director and Vice President of Unicom Group in September 2003.  Mr. Shang was appointed the President ofUnicom Group in November 2004.  Atpresent, Mr. Shang is also a Director of Unicom Group, a Director and President of the A ShareCompany and a Director and President of CUCL. Mr. Shang has extensive management experience and knowledge intelecommunications operations.

 

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TongJilu was appointed in February 2004 as an Executive Director and ChiefFinancial Officer of our company. He assists the President in handling issuesrelating to finance. Mr. Tong graduated in 1987 from the Department of EconomicManagement at the Beijing University of Posts and Telecommunications. He holdsa Master Degree in International Management from National University ofAustralia; and is an Executive Director of the Association of Chief Accountantsin China. From August 1989 to October 1998, he served as Chief Economist,Deputy Director and later Director of the Finance Bureau of the Posts andTelecommunications Administration of Liaoning Province. From November 1998 toJune 2000, Mr. Tong served as Deputy Director General of the Posts and TelecommunicationsAdministration and the Posts Office of Liaoning Province. Mr. Tong joinedUnicom Group in July 2000 and served as Chief Accountant of Unicom Group fromJuly 2000 to February 2001. Since March 2001, Mr. Tong has served as VicePresident of Unicom Group. He is now a Director and Chief Accountant of UnicomGroup, a Director of A Share company, and a Director and Vice President ofCUCL.  Mr. Tong has extensive experiencein telecommunications management and finance management of listed companies.

 

ZhaoLe was appointed in February 2004 as an Executive Director and Vice Presidentof our company. He assists the President in managing day-to-day operations. Mr.Zhao is a senior engineer, graduated in 1989 from the Schools of Economics& Management at Tsinghua University with Master Degree in IndustrialManagement. From 1990 to 1992, Mr. Zhao served as the Station-In-Charge of theEarth Station of Satellite Communication of Long Distance TelecommunicationBureau of Shanghai. From 1992 to 1994, Mr. Zhao served as Deputy ChiefEconomist of Long Distance Telecommunication Bureau of Shanghai. From 1995 to1998, Mr. Zhao served as Director of the Planning Department of the Posts andTelecommunications Administration of Shanghai. Mr. Zhao joined Unicom Groupsince 1999. From 1999 to 2003, he served as General Manager of China UnicomShanghai Branch. Mr. Zhao is now the Chairman of China UnitedTelecommunications (Hong Kong) Ltd., Executive Director and Vice President ofChina Unicom (Hong Kong) Group Limited and a Director of UnicomInternational.  Mr. Zhao has been in themanagement role of telecommunications operations for a long period and hasextensive telecommunications management experience.

 

WilliamLo Wing Yan was appointed in July 2002 as an Executive Director and VicePresident of our company.  Mr. Lo assiststhe President in handling investor relations and issues relating tointernational co-operation.  Mr. Lograduated from Cambridge University in 1987, with a PhD degree in GeneticEngineering. From 1988 to 1990, Mr. Lo was a management consultant withMcKinsey & Company. From 1994 to 1998, Mr. Lo was the Founding ManagingDirector of Hongkong Telecom IMS Limited. From 1998 to 1999, Mr. Lo served as Chief Executive Officer ofCitibank’s Global Consumer Banking Business for Hong Kong and Macau. Mr. Loserves as a non-executive director on the board of a number of publicly listedcompanies in Hong Kong and New York, including Softbank InvestmentInternational Ltd, Vartronix International Ltd, Ocean Grand Chemicals HoldingsLtd, Superdata Software Holdings Ltd, I.T Ltd, Capital Publications Ltd,Panorama International Holdings Ltd and Nam Tai Electronics, Inc. In 1999, Mr.Lo was appointed as a Justice of the Peace (JP) of Hong Kong. In 2003, Mr. Lowas appointed as Committee Member of Shantou People’s Political ConsultativeConference. Mr. Lo has extensive work experience and management expertise inthe areas of information technology, telecommunications and banking industry.

 

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YeFengping was appointed in January 2003 as an Executive Director and VicePresident of our company. Mr. Ye assists the President in handling generaladministration and media relations. Mr. Ye, a senior engineer, graduated from NanjingPosts and Telecommunications Institution in 1984, with a major inTelecommunications Engineering and obtained a Master of Business Administrationdegree from the University of Minnesota’s Carlson School in 2004.From 1984 to 1998, Mr. Ye worked for the Shenzhen Posts and TelecommunicationsBureau and once served as Deputy Department Head in the Materials ManagementDepartment and General Manager of the Materials Supply Company of the Bureau.From 1998 to 2000, Mr. Ye worked for the Shenzhen Telecommunications Bureau asChief of the Corporate Development Department. Mr. Ye joined China Unicom inApril 2000 as Deputy General Manager and later General Manager of China UnicomCorporation Limited’s Shenzhen Branch. He also served as Deputy General Managerof China Unicom Corporation Limited’s Guangdong Branch and General Manager ofthe Sales and Marketing Department of Unicom Group.  Currently, Mr. Ye is also a Director and President ofUnicom International.  Mr.Ye has over twenty years of experience in the telecommunications industry andextensive experience in marketing planning and management.

 

LiuYunjie was appointed in February 2004 as a Non-Executive Director of ourcompany.  Mr. Liu is a professor levelsenior engineer and graduated from the Department of Applied Physics at BeijingUniversity in 1968. From 1983 to 1995, Mr. Liu served as Deputy DirectorGeneral and later Director General of the Institute of Data CommunicationResearch of the MPT.  From 1995 to 1998,Mr. Liu served as Deputy Director General of the Directorate General ofTelecommunications and as Director General of the Bureau of Data Communicationsof the MPT.  Mr. Liu was also Presidentof the Institute of Postal Science Research and Planning of the MPT from 1998to 1999. Since April 1999, Mr. Liu has served as the Chief Engineer and laterVice President of Unicom Group.  Mr. Liu was Vice President of our companyfrom May 2000 to January 2004.  He is nowa director of the A Share Company.  Mr.Liu has extensive experience in telecommunications technology and management,particularly in the area of data communications.

 

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

 

Shan Weijian was appointed in May 2003 asan Independent Non-Executive Director of our company.  Mr. Shan is the Co-Managing Partner ofNewbridge Capital.  Mr. Shan serves onthe boards of Bank of China (Hong Kong), Korea First Bank, Taiwan CementCorporation International, Baoshan Iron and Steel, among others.  Before joining Newbridge, Mr. Shan was aManaging Director at J.P. Morgan.  Prior toJ.P. Morgan, he was a professor at the Wharton School of University of Pennsylvania.  His earlier employers include the World Bank,Grahman and James, a law firm based in San Francisco, and Beijing University ofInternational Business and Economics.  Mr.Shan holds a Ph.D. from the University of California-Berkeley.

 

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Linus Cheung WingLam was appointed in May 2004 as an Independent Non-Executive Directorof our company.  Prior to hisappointment, Mr. Cheung was Deputy Chairman of PCCW Limited.  Prior to the merger of Pacific CenturyCyberworks Limited and Cable & Wireless HKT Limited (Hongkong Telecom), Mr.Cheung was the Chief Executive of Hongkong Telecom and an Executive Director ofCable & Wireless plc in the United Kingdom. Mr. Cheung also worked at Cathay Pacific Airways for 23 years beforedeparting as Deputy Managing Director. In 1990 he was appointed an Official Justice of the Peace and in 1992 hewas appointed a Non-official Justice of the Peace.  Mr. Cheung is currently a member of theChinese People’s Political Consultative Conference for the Tianjin MunicipalGovernment.  He received a bachelor’s ofsocial science degree with honors and a diploma in Management Studies from theUniversity of Hong Kong.  Mr. Cheung isalso an Honorary Fellow of the University of Hong Kong and of The CharteredInstitute of Marketing in the United Kingdom.

 

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

### *** ***

Theaggregate compensation paid by us to our directors and executive officers as agroup in 2004 was approximately RMB16.64****million,including retirement and other benefits. Each of our executive directors and executive officers enters intoa bonus agreement with us that ties the amount of bonus the director or officerwill receive at the end of a year to our operating results of the year and thejob performance of the director or officer. Some of ourdirectors and executive directors also hold options to purchase shares in ourcompany.  See “E.  Share Ownership” below for detaileddescriptions of our share option schemes and options granted to our directorsand executive officers as well as compensation for the year 2004.

 

102

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

### *** ***

**General**

** **

Pursuantto our Articles of Association, at each annual general meeting, one-third ofour directors retire from office by rotation except for any director holdingoffice as Chairman or Chief Executive Officer. The retiring Directors are eligible for re-election.  The Board may at any time appoint a newdirector to fill a vacancy or as an additional director.  The Board may also appoint and remove ourexecutive 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.  The following table sets forth certaininformation concerning our current directors and former directors who served asdirectors in 2004.

 
| **Name**                                                | ** ** | **Appointment Date** | ** ** | **Re-appointment Date**                     | ** ** | **Resignation Date** |
|---------------------------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|----------------------|
| Current Directors                                       |       |                 |       |                                        |       |                 |
| Chang Xiaobing                                          |       | December 21, 2004    |       | —                                      |       | —               |
| Shang Bing                                              |       | November 5, 2004     |       | May 12, 2005                                |       | —               |
| Tong Jilu                                               |       | February 1, 2004     |       | May 12, 2004                                |       | —               |
| Zhao Le                                                 |       | February 1, 2004     |       | May 12, 2004 and May 12, 2005               |       | —               |
| Lo Wing Yan, William                                    |       | July 8, 2002         |       | May 12, 2003 and May 12, 2004               |       | —               |
| Ye Fengping                                             |       | January 2, 2003      |       | May 12, 2003 and May 12, 2004               |       | —               |
| Liu Yunjie                                              |       | February 1, 2000     |       | May 12, 2004                                |       | —               |
| Cheung Wing Lam, Linus                                  |       | May 12, 2004         |       | —                                      |       | —               |
| Wu Jinglian                                             |       | April 20, 2000       |       | May 13, 2002, May 12, 2004 and May 12, 2005 |       | —               |
| Shan Weijian                                            |       | May 12, 2003         |       | May 12, 2005                                |       | —               |
| Former Directors                                        |       |                 |       |                                        |       |                 |
| Wang Jianzhou                                           |       | —               |       | —                                      |       | November 5, 2004     |
| Shi Cuiming                                             |       | —               |       | —                                      |       | February 1, 2004     |
| Ge Lei                                                  |       | —               |       | —                                      |       | February 1, 2004     |
| Lee Hon Chiu                                            |       | —               |       | —                                      |       | May 12, 2004         |
| Craig O. McCaw                                          |       | —               |       | —                                      |       | May 12, 2005         |
| C. James Judson (Alternate Director to  Craig O. McCaw) |       | —               |       | —                                      |       | May 12, 2005         |

 

103

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**Audit Committee**

** **

Theaudit committee reviews and supervises our financial reporting process andinternal financial controls.  The dutiesof the audit committee include the following:

 

•                                          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; and

 

•                                          reviewing the relevant reports concerningour internal controls and procedures.

 

TheBoard of Directors recently approved certain amendments to the duties of theaudit committee, including strengthening of responsibilities in the followingareas:

 

•                                          supervising the external auditor, whowill directly report to the committee;

 

•                                          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.

 

As ofMay 31, 2005, the members of the audit committee are Shan Weijian, Wu Jinglianand Linus Cheung Wing Lam.

 

**Remuneration Committee**

** **

Theremuneration committee meets regularly to consider human resources issues,issuance of share options and other matters relating to compensation.  In particular, the remuneration committeemakes recommendations to 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, 2005, the members of theremuneration committee are Wu Jianlian, Chairman of the committee, Liu Yunjieand Linus Cheung Wing Lam.

 

104

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

### *** ***

As ofDecember 31, 2004, we had 39,589 employees, which was similar to the 38,728employees of our company at the end of 2003 (including employees in the nineprovinces, autonomous regions and municipalities we acquired through Unicom NewWorld at the end of 2003).  Theseemployees are classified by function as follows:

 
| **By Function**                                 | ** ** | **Number of  Employees** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------|------------|------------|------------|
| Management and administration                   |       | 6,267                    | ** ** |       |       |       |       |
| Other general administration                    |       | 7,035                    | ** ** |       |       |       |       |
| Marketing and sales                             |       | 11,749                   | ** ** |       |       |       |       |
| Technical, engineering and network  maintenance |       | 10,828                   | ** ** |       |       |       |       |
| Retail and customer service                     |       | 1,362                    | ** ** |       |       |       |       |
| General support                                 |       | 2,348                    |       | ** ** |       |       |       |
| **Total**                                       |       | 39,589                   |       |       |       |       |       |

 
| **By Business Segment** |   | **Number of  Employees** |   |   |   |   |   |
|-------------------------|--------|--------------------------|--------|--------|--------|--------|--------|
| Cellular                |   | 33,141                   |   |   |   |   |   |
| GSM                     |   | 22,297                   |   |   |   |   |   |
| CDMA                    |   | 10,844                   |   |   |   |   |   |
|                    |   |                     |   |   |   |   |   |
| Long  distance          |   | 2,181                    |   |   |   |   |   |
| Data and  Internet      |   | 4,267                    |   |   |   |   |   |
| **Total**               |   | 39,589                   |   |   |   |   |   |

 

As ofDecember 31, 2004, wealso employed approximately 62,600 temporary employees.

 

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

### *** ***

As ofMay 31, 2005, our directors and executive officers as a group do not own anyshares in our company.

 

As ofMay 31, 2005, our directors and executive officers as a group hold options for7,519,400 shares, or less than 0.1% of our issued and outstanding sharecapital, including the following options granted under our pre-global offeringshare option scheme and share option scheme:

 

105

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*Options granted under the shareoption scheme*

 
| **Name**                | ** ** | **Number of  Shares  Covered** | ** ** | **Expiration Date**                                    | ** ** | **Exercise Price**                | ** ** | **Consideration  Paid**      | ** ** | **Compensation  for 2004  (RMB)** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| Chang  Xiaobing(1)      |       | 526,000                        | *          | December 20, 2010                                      |       | HK$6.20                           |       | HK$1.00                      |       | 77,000                            |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Shang  Bing(2)          |       | 292,000                        |       | July 9, 2008                                           |       | HK$6.18                           |       | HK$1.00                      |       | 553,000                           |       |
|                    |       | 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                      |       |                              |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Tong  Jilu              |       | 292,000                        |       | July 9, 2008                                           |       | HK$6.18                           |       | HK$1.00                      |       | 2,562,000                         |       |
|                    |       | 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                      |       |                              |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Zhao  Le                |       | 136,000  204,000272,000        | *          | July 9, 2008May 20, 2009  July 19, 2010                |       | HK$6.18HK$4.30  HK$5.92           |       | HK$1.00HK$1.00HK$1.00        |       | 1,996,000                         |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Lo  Wing Yan, William   |       | 176,000262,000                 | *          | May 20, 2009  July 19, 2010                            |       | HK$4.30  HK$5.92                  |       | HK$1.00HK$1.00               |       | 2,392,000                         |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Ye  Fengping            |       | 132,000204,000136,000262,000   |       | July 9, 2008May 20, 2009  June 21, 2010  July 19, 2010 |       | HK$6.18HK$4.30  HK$15.42  HK$5.92 |       | HK$1.00HK$1.00HK$1.00HK$1.00 |       | 2,177,000                         |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Liu  Yunjie             |       | 292,000292,000                 | *          | May 20, 2009  July 19, 2010                            |       | HK$4.30HK$5.92                    |       | HK$1.00HK$1.00               |       | 292,000                           |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Wu  Jinglian            |       | 292,000292,000292,000          | *          | July 9, 2008May 20, 2009  July 19, 2010                |       | HK$6.18HK$4.30  HK$5.92           |       | HK$1.00HK$1.00HK$1.00        |       | 319,000                           |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Shan  Weijian           |       | 292,000292,000                 | *          | May 20, 2009  July 19, 2010                            |       | HK$4.30  HK$5.92                  |       | HK$1.00HK$1.00               |       | 319,000                           |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Cheung  Wing Lam, Linus |       | 292,000                        | *          | July 19, 2010                                          |       | HK$5.92                           |       | HK$1.00                      |       | 203,000                           |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Wang  Jianzhou(3)(8)    |       | 420,000420,000526,000          | *          | July 9, 2008May 20, 2009  July 19, 2010                |       | HK$6.18HK$4.30  HK$5.92           |       | HK$1.00HK$1.00HK$1.00        |       | 2,214,000                         |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Craig  O. McCaw(4)(8)   |       | 292,000292,000292,000          | *          | July 9, 2008May 20, 2009July 19, 2010                  |       | HK$6.18HK$4.30HK$5.92             |       | HK$1.00HK$1.00HK$1.00        |       | 319,000                           |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Shi  Cuiming (5)(8)     |       | 396,000396,000                 |       | July 9, 2008May 20, 2009                               |       | HK$6.18HK$4.30                    |       | HK$1.00  HK$1.00             |       | 3,073,000                         |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Ge  Lei (6)(8)          |       | 292,000292,000                 |       | July 9, 2008May 20, 2009                               |       | HK$6.18HK$4.30                    |       | HK$1.00HK$1.00               |       | 27,000                            |       |
|                    |       |                           |       |                                                   |       |                              |       |                         |       |                              |       |
| Lee  Hon Chiu (7)(8)    |       | 292,000292,000                 |       | July 9, 2008May 20, 2009                               |       | HK$6.18HK$4.30                    |       | HK$1.00HK$1.00               |       | 116,000                           |       |

 

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----

(1)          Mr. Chang was appointed as Chairman andChief Executive Officer of our company in December 2004.

 

(2)          Mr. Shang was appointed as ExecutiveDirector and President of our company in November 2004.

 

(3)          Mr. Wang resigned as Chairman, ChiefExecutive Officer and President of our company on November 5, 2004.

 

(4)          Mr. McCaw resigned as director of ourCompany on May 12, 2005.

 

(5)          Mr. Shi Cuiming resigned as ExecutiveDirector and Executive Vice President on February 1, 2004.

 

(6)          Mr. Ge Lei resigned as Non-ExecutiveDirector on February 1, 2004.

 

(7)          Mr. Lee Hon Chiu resigned as IndependentNon-Executive Director on May 12, 2004.

 

(8)          For the directors who resigned during theyear 2004, the numbers of options indicated represent the numbers of optionsheld by the respective directors as of their dates of resignation.

 

*                 Granted in 2004.

 

*Options granted under the pre-globaloffering 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                |       |
| Liu Yunjie       |       | 292,600                       |       | June 21, 2010       |       | HK$15.42                |       | HK$1.00                |       |
| Zhao Le          |       | 204,400                       |       | June 21, 2010       |       | HK$15.42                |       | HK$1.00                |       |
| Wang Jianzhou(1) |       | 396,200                       |       | June 21, 2010       |       | HK$15.42                |       | HK$1.00                |       |
| Shi Cuiming(2)   |       | 396,200                       |       | June 21, 2010       |       | HK$15.42                |       | HK$1.00                |       |
| Ge Lei(3)        |       | 292,600                       |       | June 21, 2010       |       | HK$15.42                |       | HK$1.00                |       |

 

----

(1)          Mr. Wang resigned as Chairman, ChiefExecutive Officer and President of our company on November 5, 2004.

 

(2)          Mr. Shi Cuiming resigned as ExecutiveDirector and Executive Vice President on February 1, 2004.

 

(3)          Mr. Ge Lei resigned as Non-ExecutiveDirector on February 1, 2004.

 

**Stock Incentive Schemes**

** **

Weretained a compensation consulting firm to help us design stock incentiveschemes that align the interests of our management and employees with those ofour shareholders and link their compensation with our operating results andshare performance.

 

107

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*Share Option Scheme.*  We adopted ashare option scheme on June 1, 2000 and amended the scheme on May 13,2002.  The amended scheme provides forthe grant of options to our employees, including executive directors andnon-executive directors.  Any grant ofshare options to a “connected person” (as defined in the Listing Rules of theHong Kong Stock Exchange) of Unicom requires approval by our independentnon-executive directors, excluding any independent non-executive director whois the grantee of the option.  We plan togrant options****that cover a totalnumber of ordinary shares not exceeding 10% of the total number of our issuedand outstanding shares as of May 13, 2002. The option period commences on any date after the date on which anoption is offered, but may not exceed 10 years from the offer date.  The subscription price of a share in respectof any particular option granted under this share option scheme will be determinedby our board of directors in its discretion at the grant date, which shall beno less than the higher of: (i) the nominal value of the shares;(ii) the closing price of the shares on the Hong Kong Stock Exchange onthe grant date in respect of such option; and (iii) the average closingprice of the shares on the Hong Kong Stock Exchange for the five trading daysimmediately preceding the grant date.  Asof May 31,****2005, 6,818,000 optionsgranted by us were outstanding and held by 10 directors and approximately 2,500of our employees.  As of May 31, 2005, 9,226,000 optionswith an exercise price of HK$6.18, 164,000 options with an exercise price ofHK$5.92, 88,000 options with an exercise price of HK$4.65 and 6,891,200 optionswith an exercise price of HK$4.30 had been exercised.

 

*Pre-Global Offering Share Option Scheme.* We also adopted a pre-global offering share option scheme on June 1,2000.  As of May 31, 2005, 701,400options granted by us were outstanding and held by 3 directors and approximately250 of our employees.  We do not expectto grant further options under this scheme. On May 13, 2002, this scheme was amendedalong with the amendment of the share option scheme described above.  The amended terms of the pre-global offeringshare option scheme are substantially the same as the share option scheme,except for the following:

 

•                                          The subscription price of a share inrespect of any particular option granted under the pre-global offering shareoption scheme is HK$15.42, the offer price in the Hong Kong public offeringportion 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 fromJune 22, 2000.

 

As of December31, 2004, no options granted under this scheme had been exercised.

 

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

## ** **

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

### *** ***

As ofMay 31, 2005, our controlling shareholder, Unicom Group, through its 17.91%direct interest in Unicom BVI, and its majority-owned subsidiary, China UnitedTelecommunications Corporation Limited, which in turn holds 82.09% of UnicomBVI, beneficially owned 9,725,000,020 shares of Unicom, or 77.37% of our totaloutstanding shares.  See “A. History andDevelopment of the Company” under Item 4 above.** **Unicom Group iscontrolled by the Ministry of Finance and a group of approximately fifteencompanies, most of which are state-owned enterprises in China.  Shares owned by Unicom Group do not carryvoting rights different from our other issued shares.

 

As ofMay 31, 2005, most of our record shareholders were located outside of theUnited States.  In addition, as of May31, 2005, there were approximately 24 million ADSs outstanding, eachrepresenting 10 shares and together representing 1.90% of our total outstandingshares or 8.44% of our total outstanding shares not held by our controllingshareholder.

 

108

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

### *** ***

Principaltransactions between us and our controlling shareholder, Unicom Group, includethe following categories:

 

•                                          agreements relating to the restructuringin connection with our initial public offering;

•                                          agreements relating to the restructuringin connection with the acquisition of Unicom New Century from Unicom Group;

•                                          agreements relating to the acquisition ofUnicom New World from Unicom Group and the sale of Guoxin Paging to UnicomGroup;

•                                          agreements relating to the acquisition ofUnicom International from Unicom Group;

•                                          provision of ongoing telecommunicationsand ancillary services and premises;

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

•                                          guarantee of our bank loans by UnicomGroup and short-term loans from Unicom Group.

 

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

** **

***The Reorganization Agreement***

*** ***

Inrelation to the restructuring in connection with our initial public offering,our wholly-owned subsidiary, CUCL, entered into a reorganization agreement withUnicom Group dated April 21, 2000.  Thisagreement includes the following terms:

 

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

 

(b)                                 mutual warranties and indemnities givenby Unicom Group and CUCL in relation to the assets and liabilities transferredto CUCL and in relation to the restructuring,

 

(c)                                  undertakings by Unicom Group in favor ofCUCL, including undertakings:

 

•                                          to hold andmaintain all licenses received from the MII in connection with any of ourbusinesses for our benefit, and to allocate spectrum and to provide otherresources to us;

 

•                                          subject toapplicable Chinese laws and regulations in effect at the relevant time, to takeall actions necessary to obtain, maintain, renew and otherwise extend to or forour benefit such governmental or regulatory licenses, consents, permits orother approvals as we shall require to continue to operate our businesses;

 

•                                          to arrange forus to participate in its international roaming arrangements;

 

•                                          not to engagein any business which competes with our businesses except for the existingcompeting businesses of Unicom Group;

 

•                                          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;

 

109

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•                                          in order tominimize the risk of competition with our Internet business, to take steps todispose of its interest in Beijing Shi Hua within twenty-four months followingreceipt of a notification from us that we intend to provide Internet serviceswhich we consider similar to those provided by Beijing Shi Hua;

 

•                                          to ensure thatwe can continue to use premises for which title documentation cannot beobtained at this time for a period of three years following the restructuring;

 

•                                          not to disposeof any of our shares it beneficially owns or to take or permit any otheractions, including primary issuances of securities by us or CUCL, which wouldresult in us or CUCL no longer constituting majority owned subsidiaries ofUnicom Group; and

 

•                                          not to seek anoverseas listing for any of its businesses or the businesses of itssubsidiaries in which we are engaged or may engage in the future except throughus,

 

(d)                                 an option granted by Unicom Group to usto acquire Unicom Group’s interest in any telecommunications interest such asUnicom Paging, Unicom Xingye and Unicom Group’s CDMA telephony license andbusiness, and

 

(e)                                  a commitment by Unicom Group that it willprovide continuous financial support to us when necessary.

 

***Equity Transfer Agreement***

*** ***

Inrelation to the restructuring in connection with our initial public offering,we, Unicom Group, China Unicom (Hong Kong) Group Limited and China Unicom (BVI)Limited entered into an equity transfer agreement, dated April 21, 2000.  This agreement includes the following terms:

 

(a)                                  Unicom Group’s agreement to transfer allof its equity interest in CUCL to us;

 

(b)                                 our agreement to issue shares to ChinaUnicom (BVI) Limited, China Unicom (BVI) Limited’s agreement to issue shares toChina Unicom (Hong Kong) Group Limited and China Unicom (Hong Kong) GroupLimited’s agreement to issue shares to Unicom Group;

 

(c)                                  Unicom Group’s and our agreement that:

 

•                                          we shall beentitled to apply in Hong Kong, Macau, Taiwan and in all places outside ofChina for all trademarks incorporating the word Unicom in English and Chineseand the Unicom logo; and

 

•                                          once thesetrademarks have been registered, we will sublicense these trademarks to UnicomGroup, CUCL, Guoxin Paging and Guoxin Paging’s subsidiaries on a royalty-freebasis; and

 

(d)                                 warranties and indemnities given byUnicom Group to us in relation to CUCL.

 

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***Trademark Agreement***

 

Unicom Group isthe registered owner of the Unicom trademark in English and the trademarkbearing the Unicom logo, which are registered at the People’s Republic of ChinaState Trademark Bureau.  Under a PRCtrademark license agreement entered into on May 25, 2000 between Unicom Groupand CUCL, CUCL and our affiliates were granted the right to use thesetrademarks on a royalty-free basis for an initial period of five years,renewable at the option of CUCL.  Underthe terms of this agreement, we and our affiliates are the exclusive licenseesof these trademarks provided that Unicom Group may also license thesetrademarks to any of its existing or future subsidiaries.  Unicom Group also agreed to license to CUCLany trademark that it registers in China in the future which incorporates theword Unicom.

 

CUCLentered into a service agreement with Unicom Paging on August 1, 2001.  Under the terms of the agreement, bothparties agreed to license their respective trademarks and logos to eachother on equitable terms and free of charge.

 

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

** **

***The Reorganization Agreement***

 

Inrelation to the restructuring in connection with the acquisition by us ofUnicom New Century from Unicom Group, Unicom Group entered into areorganization agreement with Unicom New Century, dated November 18, 2002.  This agreement includes the following terms:

 

(a)                                  Unicom Group’s agreement to transfer toUnicom New Century the assets and liabilities attributable to the businesses asdescribed in “A. History and Development of the Company -Restructuring and Acquisition of Unicom New Century” under Item 4;

 

(b)                                 mutual warranties and indemnities givenby Unicom Group and Unicom New Century in relation to the assets andliabilities transferred to Unicom New Century and in relation to therestructuring; and

 

(c)                                  undertakings by Unicom Group in favor ofUnicom New Century, including undertakings:

 

•                                          to hold andmaintain all licenses 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 toapplicable Chinese laws and regulations in effect at the relevant time, to takeall actions necessary to obtain, maintain, renew and otherwise extend to or forthe benefit of Unicom New Century such governmental or regulatory licenses,consents, permits or other approvals as Unicom New Century may require tocontinue to operate its businesses; and

 

•                                          not to engagein any business which competes with our businesses except for the existingcompeting businesses of Unicom Group.

 

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***Conditional Sale and Purchase Agreement***

*** ***

In relation to theacquisition by us of Unicom New Century from Unicom Group, we and Unicom BVIentered into a conditional sale and purchase agreement, dated November 20,2002.  This agreement includes thefollowing terms:

 

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

 

(b)                                 our agreement to pay Unicom BVI a cashconsideration in the amount of HK$4,523,181,304 (approximately RMB4.8 billion);and

 

(c)                                  warranties given by Unicom BVI****to us in relation to Unicom New Century.

 

***Trademark Agreement***

*** ***

Under a trademarklicense agreement entered into on November 20, 2002 between the A Share Companyand Unicom New Century, Unicom New Century and our affiliates were granted theright to use the Unicom trademarks and logo on a royalty-free basis for aninitial period of ten years, renewable for a further ten-year term at theoption of Unicom New Century.  Theparties will negotiate the royalty payments during the renewed term; however,in no event will such payment exceed the royalty payments, if any, paid byUnicom Group’s other wholly- or majority-owned subsidiaries.  The A Share Company has also agreed tolicense to Unicom New Century any trademark that Unicom Group registers in Chinain the future which incorporates the word Unicom.

 

**Agreements relating tothe Acquisition of Unicom New World from Unicom Group and the Sale of GuoxinPaging to Unicom Group**

** **

***The Reorganization Agreement***

 

Inrelation to the restructuring in connection with the acquisition by us ofUnicom New World from Unicom Group, Unicom Group entered into a reorganizationagreement with Unicom New World, dated November 4, 2003.  This agreement includes the following terms:

 

(a)                                  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 -Acquisitionof Unicom New World and Sale of Guoxin Paging” under Item 4;

 

(b)                                 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

 

(c)                                  undertakings by Unicom Group in favor ofUnicom New World, including undertakings:

 

•                                          to hold andmaintain all licenses received from the MII in connection with any of thetransferred businesses for the benefit of Unicom New World, and to allocatespectrum and to provide other resources to Unicom New World;

 

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•                                          subject toapplicable Chinese laws and regulations in effect at the relevant time, to takeall actions necessary to obtain, maintain, renew and otherwise extend to or forthe benefit of Unicom New World such governmental or regulatory licenses,consents, permits or other approvals as Unicom New World may require tocontinue to operate its businesses; and

 

•                                          not to engagein any business which competes with our businesses except for the existingcompeting businesses of Unicom Group.

 

***Conditional Sale and Purchase Agreement with respect toUnicom New World***

*** ***

Inrelation to the acquisition by us of Unicom New World from Unicom Group, we andUnicom BVI entered into a conditional sale and purchase agreement, datedNovember 20, 2003.  This agreement includesthe following terms:

 

(a)                                  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;

 

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

 

(c)                                  warranties given by Unicom BVI****to us in relation to Unicom New World.

 

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

 

Inrelation to the sale by us of Guoxin Paging to Unicom Group, CUCL and the AShare Company entered into a conditional sale and purchase agreement, datedNovember 20, 2003.  This agreementincludes the following terms:

 

(a)                                  CUCL’s agreement to sell to the A ShareCompany, and the A Share Company’s agreement to acquire from CUCL, all ofCUCL’s equity interest in Guoxin Paging;

 

(b)                                 the A Share Company’s agreement to payCUCL a cash consideration in the amount of HK$2,590,917,656 (approximatelyRMB2.75 billion); and

 

(c)                                  warranties given by CUCL to the A ShareCompany in relation to Guoxin Paging.

 

***Trademark Agreement***

*** ***

Under a trademarklicense agreement entered into on November 20, 2003 between the A Share Companyand Unicom New World, Unicom New World and our affiliates were granted theright to use the Unicom trademarks and logo on a royalty-free basis for aninitial period of ten years, renewable for a further ten-year term at theoption of Unicom New World.  The partieswill negotiate the royalty payments during the renewed term; however, in noevent will such payment exceed the royalty payments, if any, paid by UnicomGroup’s other wholly- or majority-owned subsidiaries.  The A Share Company has also agreed tolicense to Unicom New World any trademark that Unicom Group registers in Chinain the future which incorporates the word Unicom.

 

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

** **

In relation to the acquisition by us of UnicomInternational from Unicom Group, we and China Unicom (Hong Kong) Group Limited,which is a indirectly wholly-owned beneficiary of Unicom Group, entered into aconditional sale and purchase agreement, dated July 28, 2004.  Thisagreement includes the following terms:

 

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

 

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

 

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

 

**Provision of OngoingTelecommunications and Ancillary Services and Premises**

** **

We had enteredinto a number of service arrangements with Unicom Group and/or its subsidiarieswith respect to provision of ongoing telecommunications and ancillary servicesbetween Unicom Group and us, including leasing of satellite transmissioncapacity, supply of international telecommunication network gateway services, supply of varioustelephone cards, supply of equipment procurement services, supply of cellularsubscriber services, supply of customer services, supply of agency services,leasing of transmission line capacity and interconnection and roamingarrangements, as well as provision of premises.

 

OnMarch 24, 2005, we and Unicom Group entered into a comprehensive servicesagreement, or the New Comprehensive Services Agreement, a comprehensiveoperator services agreement, or the New Comprehensive Operator ServicesAgreement, and a premisesleasing agreement, or the New Guoxin Premises Leasing Agreement,to replace the previous servicearrangements between Unicom Group and us.

 

Eachof the New Comprehensive Services Agreement, the New Comprehensive OperatorServices Agreement and the New Guoxin Premises Leasing Agreement has an initialterm of two years commencing on January 1, 2005 and is renewable for furthertwo-year terms at our option.

 

***Leasing of Satellite Transmission Capacity***

*** ***

Welease satellite transmission capacity from a 95.00% owned subsidiary of UnicomGroup.  We use this capacity tosupplement our long distance network.

 

Thatsubsidiary of Unicom Group and CUCL previously entered into a satellitetransmission channel leasing agreement, dated May 25, 2000.  Under that agreement, payments for leasing ofsatellite transmission capacity were calculated on the basis of tariffs set bythe 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.  The total leasing charges for satellitetransmission capacity for 2004 were approximately RMB14.15****million.

 

The New Comprehensive Services Agreement, which replaced the satellitetransmission channel agreement, contains similar terms with respect to thelease of satellite transmission capacity.

 

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

 

UnicomGroup provides us with access to international connections for ourinternational long distance service through its international telecommunicationnetwork gateways.  CUCL and Unicom Group previously entered intoa services agreement, dated May 25, 2000, under which Unicom Group agreed tosupply international telecommunication network gateway services to us.  Unicom Group has undertaken not to supplyinternational telecommunication network gateway services to third parties.  The charges for these services were based on Unicom Group’s cost of operationand maintenance of the international telecommunication network gateway facilities, includingdepreciation, plus a margin of 10% over cost. We retained all revenues generated by our international longdistance service.  Total charges for thesupply of international telecommunication network gateway services in 2004 wereapproximately RMB17.06****million.

 

TheNew Comprehensive Services Agreement contains similar terms with respect to thesupply of international telecommunication network gateway services.

 

***Supply of Telephone Cards***

*** ***

Each of CUCL,Unicom New Century and Unicom New World previously entered into a servicesagreement with Unicom Group, dated May 25, 2000, November 20, 2002 and November20, 2003 respectively, to provide for a telephone cards supply arrangementunder which, Unicom Groupagreed through itssubsidiary, Unicom Xingye, to supply various kinds of telephone cards,including SIM cards, UIM cards, IP telephony cards and rechargeable callingcards, 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.** **Total charges for the supply of telephone cards for2004 wereapproximately RMB1.09 billion.

 

TheNew Comprehensive Services Agreement contain similar terms with respect to thesupply of telephone cards.

 

***Supply of Equipment Procurement Services***

*** ***

Priorto the restructuring in connection with our initial public offering, UnicomImport and Export Co. Ltd., a 95.0% direct subsidiary of Unicom Group, handledmost procurement of foreign and domestic telecommunications equipment and othermaterials required for construction of Unicom Group’s networks.  Each of CUCL, Unicom New Century and UnicomNew World previously entered into a services agreement with Unicom Group, datedMay 25, 2000, November 20, 2002 and November 20, 2003 respectively, to providefor 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.

 

Thesethree agreements were amended on November 22, 2004 so that with effect fromJuly 1, 2004, the above rates were lowered as follows:

 

•                                          0.55% of the contract value of thosecontracts under US$30 million (including US$30 million) and 0.35% ofthe contract value of those procurement contracts over US$30 million, in thecase of imported equipment, or

 

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•                                          0.25% of the contract value of thosecontracts under RMB200 million (including RMB 200 million) and 0.15% of thecontract value of those contracts over RMB 200 million, in the case of domesticequipment.

 

In addition, pursuant to thisamendment on November22, 2004, Unicom Group agreed to indemnify us for any losscaused by any negligence, default, act or omission of Unicom Group or UnicomImport and Export Co. Ltd. up to an amount equal to the total amount of agencyservices fees paid to Unicom Group under the three agreements.  Our total payment to Unicom Group forequipment procurement services for 2004 was approximately RMB17.76 million.

 

Underthe New Comprehensive Services Agreement, Unicom Group agreed to provide uscomprehensive procurement services at the same rates as those appliedwith effect from July 1, 2004 pursuant to the November 22, 2004amendment mentioned above.

 

Inaddition, under the New Comprehensive Services Agreement, Unicom Group has continued 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 ServicesAgreement.

 

***Interconnection Arrangements***

*** ***

Ourvarious telecommunication networks interconnect with various telecommunicationnetworks of Unicom Group.  CUCLpreviously entered into two services agreements with Unicom Group, dated May25, 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.  These four services agreements provided forour interconnection arrangements with Unicom Group, under which interconnection settlement between UnicomGroup’s networks and our networks was based on relevant standards establishedfrom time to time by the MII.  However,in the case of calls between cellular subscribers of different networks indifferent 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.

 

In2004, interconnection revenue and interconnection expenses derived from theprevious arrangements with Unicom Group were approximately RMB193.5 million andRMB40.1 million, respectively.

 

Underthe New Comprehensive Services Agreement, interconnection settlements betweenUnicom Group’s networks and our networks are as follows:

 

(a)                                  Settlementbetween the cellular network of both parties

 

With respect tocellular calls between different provinces, settlement will be made by one ofthefollowing twomethods that is more favourable to us:

 

(i)                                     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;

 

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(ii)                                  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.

 

(b)                                 Otherinterconnection settlement between the networks of both parties

 

Bothparties agree to conduct settlement in accordance with the relevant provisionsinthe NoticeConcerning the Issue of the Measures on Settlement of Interconnectionbetween PublicTelecommunications Networks and Sharing of Relaying Fees(Xin Bu Dian [2003] No. 454) promulgated by the MII on October 28, 2003(and its amendments from time to time).

 

***Roaming Arrangements***

*** ***

We andUnicom Group provide roaming services to each other.  In addition, we make our long distancenetwork available to Unicom Group in its implementation of its roamingarrangements with other operators. CUCL previously entered into two servicesagreements with Unicom Group, dated May 25, 2000 and November 22, 2001,respectively, and each of Unicom New Century and Unicom New World previouslyentered into a services agreement with Unicom Group, dated November 20, 2002and November 20, 2003 respectively. These four services agreements provided for our roaming arrangementswith Unicom Group, under which charges for these roaming services betweenus and Unicom 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 revenuefrom third party operators for calls using our long distance network.

 

In2004, roaming revenue and roaming expenses derived from the previous arrangementswith Unicom Group were approximately RMB26.7 million and approximatelyRMB23.8 million, respectively.

 

Underthe New Comprehensive Services Agreement, the roaming fee arrangements betweenUnicom Group and us are as follows:

 

(a)                                  The cellularsubscribers using roaming 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.

 

(i)                                     If our cellularsubscribers roam in the service areas of Unicom Group, we will be entitled toreceive the roaming fees, which will be apportioned in the following way: (A)RMB0.40 (the rate for local call charges under MII guidelines) will be paid toUnicom Group; and (B) the remaining RMB0.20 will be withheld by us;

 

(ii)                                  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: (A) RMB0.56 will be paid to us; and (B) RMB0.04 will be withheldby Unicom Group.

 

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(b)                                 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.

 

***Leasing of Transmission Line Capacity***

*** ***

UnicomGroup leases fixed-line transmission capacity from CUCL.  CUCL previously entered into a servicesagreement with Unicom Group, dated May 25, 2000, to provide for thistransmission line capacity leasing arrangement under which lease charges were based on tariffsstipulated by the MII from time to time less a discount of up to 10%.  The discount given by CUCL to Unicom Groupmust 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.  In 2004, we received from Unicom Group totalleasing fees of approximately RMB39****million.

 

TheNew Comprehensive Services Agreement contains similar terms with respect to theleasing of transmission line capacity by us to Unicom Group.

 

***Supply of Cellular Subscriber Value-added Services***

 

Priorto the sale of Guoxin Paging to Unicom Group, it provided operator-basedvalue-added services to our cellular subscribers through its paging network,equipment and operators.  Such servicesinclude the “Unicom Assistant” services. Following the sale of Guoxin Paging to Unicom Group at the end of 2003,Unicom Group has agreed to provide (through Guoxin Paging) to us cellularsubscriber value-added services pursuant to a previous comprehensive operatorservices agreement dated November 20, 2003. The various local branches of Guoxin Paging 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.

 

Wemade total payment of approximately RMB859 million to Unicom Group in 2004 forits supply of cellular subscriber value-added services.

 

Underthe New Comprehensive Operator Services Agreement, we will retain 40% of therevenue derived and actually received by us from value-added services providedto our subscribers by Unicom Group (through Guoxin Paging) and allocate 60% ofsuch revenue 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.

 

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***Supply of Customer Services***

 

Pursuant to aprevious comprehensive operator services agreement dated November 20, 2003, Unicom Group has agreed to provide(acting on its own or through Guoxin Paging) to us customer services.  These customer services included business inquiries, tariff inquiries,account maintenance, complaints handling, customer interviews and subscriberretention.  Service fees payable by us toUnicom Group or Guoxin Paging were calculated on the basis of the costs of thecustomer service plus a profit margin of no more than 10%.  The costs of the customer service were thecosts per operator seat multiplied by the number of effectively operatingoperator seats.  The cost per operatorseat in economically developed areas, such as Beijing and Shanghai, was theactual cost, i.e., actual wages, administration expenses, operation andmaintenance expenses, depreciation of equipment and leasing fees for premises attributableto the customer service in such area for the previous year.  The cost per operator seat in other area wasagreed upon between the local branches of Guoxin Paging and us, subject to ourfinal 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.  Our total payment to Unicom Group for itssupply of customer services in 2004 was RMB525 million.

 

Underthe New Comprehensive Operator Services Agreement, the cost per operator seatin economically developed areas such as Beijing and Shanghai remains to be the actual cost per operator seat,while the cost per operator seat in an area other than economically developedareas will be the lower of the actual cost per operator seat in that area andthe nationwide (excluding Beijing and Shanghai) average of actual cost peroperator plus 10%.  Other than this, theNew Comprehensive Services Agreement contains similar terms with respect to thesupply of customer services.

 

***Supply of Agency Services***

*** ***

Pursuantto a previous comprehensive operator services agreement dated November 20,2003,Unicom Groupagreed to provide (through Guoxin Paging) to us subscriber developmentservices, including by telephone or through other channels utilizing GuoxinPaging’s paging network, equipment and operators.  Agency fees payable by us to Unicom Group orGuoxin Paging could not exceed the average of agency fees payable to anythird party agent providing subscriber development services to us in the sameregion.  We paid agency fees ofapproximately RMB9.05 million to Unicom Group in 2004 for its supply of agencyservices described above.

 

TheNew Comprehensive Operator Services Agreement contains similar terms withrespect to the supply of agency services.

 

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***Mutual Provision of Premises***

*** ***

UnicomGroup and CUCL provide to each other premises from time to time pursuant to the services agreement between Unicom Groupand CUCL dated May 25, 2000.  Unicom Groupalso provided premises to Unicom New Century 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.  Other than premises leased from thirdparties, the rental rates in each case were based on the lower of depreciationcosts and market prices for similar premises in that locality, but CUCL could charge Unicom Group market rates forpremises leased to Unicom Group.  Incases where the premises were leased from a third party, the rental was the amount payable in the head lease. Inthe case of shared premises, the price was split in proportion to the respectiveareas occupied by the parties.  Inconnection with our provision of premises to Guoxin Paging, which was effectivefrom January 1, 2004, the rental was based on the higher of depreciationcosts and market prices for similar premises in each locality.  The net charges for premises leased to us byUnicom Group as offset by our charges for premises leased to Unicom Group for2004 were RMB25.53****million.

 

Theterms in the New Comprehensive Services Agreement with respect to mutualprovision of premises and the terms in the New Guoxin Premises LeasingAgreement with respect to our provision of premises to Guoxin Paging aresimilar to those in the previous agreements.

 

**Leasing of CDMA NetworkCapacity**

** **

*Old CDMA Lease*

 

Ourwholly-owned subsidiary, CUCL, entered into a lease agreement on November 22, 2001with Unicom Group andits subsidiary Unicom Horizon, pursuant to which Unicom Horizon agreed to leaseto CUCL capacity on its CDMA network in CUCL’s cellular service areas, givingCUCL the exclusive right to operate the CDMA network in CUCL’s service areas.  The initial term of the lease was one year, renewable each year at CUCL’soption.  In addition, as part of theacquisition arrangements of Unicom New Century and Unicom New World, Unicom NewCentury and Unicom New World each also entered into CDMA capacity leaseagreements with Unicom Group and Unicom Horizon, on November 20, 2002 andNovember 20, 2003, respectively.  Theterms of these leasing arrangements were in all material respects the same asthose contained in the CDMA lease agreement entered into by CUCL as describedabove, except for the amount of leased capacity and the areas in which thecapacity is eased.  We refer to these three lease agreements as the Old CDMA Leases. Under the Old CDMA Leases, Unicom Horizon agreed to lease capacity on its CDMAnetwork to each of CUCL, Unicom New Century and Unicom New World in theirrespective cellular service areas.  In2004, our total lease payment under the Old CDMA Leases was RMB6.59 billion.

 

Underthe Old CDMA Leases, Unicom Horizon agreed to plan, finance and construct the CDMA network,including the procurement of all equipment, and to ensure that the CDMA network was constructed in accordance with thedetailed specifications and timetable agreed between Unicom Horizon andus.  All payments, costs, expenses andamounts paid or incurred by Unicom Horizon that were directly attributable to the constructionof the CDMA network 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,

•                                          insurancepremiums and capitalized interest on loans,

 

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•                                          anytaxes levied or paid in respect of the procurement of equipment and theconstruction of the CDMA network, including import taxes and custom duties, and

•                                          allcosts incurred in relation to any upgrade of technology.

 

The Old CDMA Leasesrequired that the network construction cost be verified and appropriatedocumentation provided to us or our auditors for verification.  The lease fee was calculated so as to enable Unicom Horizon to recover itstotal network construction cost within seven years, together with an internalrate of return of 8%.

 

We were responsible for the operation,management and maintenance of the CDMA network in accordance with the relevantrequirements of the Old CDMA Leases andhad the exclusive right toprovide CDMA services in our cellular service areas.  All operating revenue, including airtimecharges, monthly subscription fees, interconnection charges, income from salesof UIM cards and handsets and other income generated from or in connection withthe operation of the CDMA network belonged to us.  All costs of operating and managing the CDMA network and all maintenancecosts of a non-capital nature should be borne by us except that constructed capacityrelated costs (i.e. those costs of operating and managing the CDMA network whichrelated directly to the constructed capacity on the CDMA network, including therental fees for stations and base stations and related expenses including waterand electricity charges, heating charges and fuel charges for the relevantequipment etc., as well as maintenance costs of a non-capital nature) should beborne by us only to the extent of such part of the costs that corresponded tothe proportion of capacity actually leased under the Old CDMA Leases.  Such part of the Constructed Capacity RelatedCosts that corresponded to the proportion of capacity not actually leased underthe Old CDMA Leases should be borne by Unicom New Horizon.

 

Inaddition to the capacity that we agreed to lease in the first term, subject togiving not less than 180 days’ prior notice to Unicom Horizon, we could requestto lease additional capacity.  UnicomHorizon was required to ensure that all capacity which we had so requested was suppliedby the due date of delivery of the capacity, provided that, unless otherwiseagreed, Unicom Horizon would not be obliged to expand the CDMA network beyond acertain limit.  We could not reduce theamount of capacity leased during the initial one-year lease term.  However, subject to providing not less than180 days’ prior written notice to or with the prior written consent of UnicomHorizon, we could reduce the amount of capacity leased for any additional leaseterm, provided that we must lease all capacity which we had requested orotherwise committed to lease for at least one year following the date ofdelivery or renewal of the lease of such capacity.

 

Subjectto certain exceptions, including delay caused by a force majeure event, amaterial breach of the Old CDMA Leases by us or compliance with applicable lawsand regulations, if any capacity was not ready for operational service by therelevant delivery date, then Unicom Horizon should be liable to provide a delaydiscount to us, equal to the daily lease fee in respect of the relevantcapacity multiplied by the number of days of delay, which should be creditedagainst future lease fee payments.

 

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We hadthe option to purchase the CDMA network, which could be exercised at any timeduring the initial lease term or any additional lease term of the lease andwithin one year thereafter.  Theacquisition price would be negotiated between Unicom Horizon and us, based onthe appraised value of the CDMA network determined by an independent assetsappraiser in accordance with applicable PRC laws and regulations and takingaccount of prevailing market conditions and other factors, provided that it wouldnot exceed such price as would, taking into account all lease fee payments madeby us to Unicom Horizon and all delay discounts of lease fee, enable UnicomHorizon to recover its total network construction cost, together with aninternal rate of return on its investment of 8%.  The exercise of the purchase option would besubject to the relevant laws, regulations and listing rules in Hong Kong andthe PRC, particularly those governing connected transactions.  Title to the CDMA network assets would remainvested in Unicom Horizon until the CDMA network assets were transferred to usfollowing exercise of the purchase option.

 

Inconsideration of our entering into the Old CDMA Leases, Unicom Groupunconditionally and irrevocably guaranteed the due and punctual performance byUnicom Horizon of its obligations under the Old CDMA Leases.  Unicom Group also agreed to indemnify us forany loss suffered as a result of any defect in any of the equipment or any losscaused by any negligence, default, act or omission of Unicom Horizon or UnicomGroup under the Old CDMA Leases or in connection with the CDMA network.  The aggregate liability of Unicom Group forany claim should not exceed the total amount of lease fee payments made toUnicom Horizon and, where the purchase option had been exercised, the totalpurchase price paid for the CDMA network. The guarantee and indemnity provided by Unicom Group under the Old CDMALeases would continue in force until the expiration of the relevant Old CDMALease.

 

We couldterminate the Old CDMA Leases by not less than 180 days’ prior written notice,with effect from the end of any additional term.  In addition, Unicom Group or we could terminatean Old CDMA Lease if the other committed any continuing or material breach ofthe relevant Old CDMA Leases.  UnicomGroup or Unicom Horizon was not otherwise permitted to terminate the lease.

 

*New CDMALease*

 

OnMarch 24, 2005, we entered into a new CDMA lease agreement, or New CDMA Lease,with Unicom Group and its subsidiary Unicom Horizon to replace the Old CDMALease.  The New CDMA Lease has an initialterm of two years commencing January 1, 2005 and may be renewed at our option.  The length of each renewed term shall beagreed by all parties to the New CDMA Lease.

 

Underthe New CDMA Lease, Unicom Horizon has agreed to lease all constructed capacityof its CDMA network to us and the lease fee for the CDMA network will be asfollows:

 

•                                          in2005, 29% of the audited annual service revenue generated by our CDMA cellular business,or CDMA Business Income; and

 

•                                          in2006, 30% of the CDMA Business Income,

 

providedthat the annual lease fee may not be less than a certain minimum level.  The minimum lease fee for 2005 will be 90% ofthe total amount of lease fee paid by us to Unicom Horizon pursuant to the OldCDMA Leases for 2004.  The minimum leasefee for 2006 will be 90% of the total amount of lease fee paid by us to UnicomHorizon pursuant to the New CDMA Lease for 2005.  The lease fee arrangements for any renewedterm of the New CDMA Lease will be subject to negotiations among the parties tothe New CDMA Lease.

 

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Subjectto certain exceptions, including delay caused by a force majeure event(including natural disasters, national emergencies, civil disturbances, riots,acts of terrorism, industrial disputes and other similar events beyond thecontrol of the parties), a material breach of the New CDMA Lease by us orcompliance with applicable laws and regulations, if Unicom Horizon fails toprovide any capacity of its CDMA network which affects the provision ofservices by us, Unicom Horizon shall be liable to provide a discount for delayto us, calculated as follows:

 
| Discount for delay                         | = | Number of our  CDMA  subscribers affected by  the delay | x | delay period  (number of days) | x | ARPU of CDMA  subscribers |
|--------------------------------------------|---|---------------------------------------------------------|---|--------------------------------|---|---------------------------|
| the number of  days in  the relevant month |

 

In theabove formula, “number of our CDMA subscribers affected by the delay” shall beconfirmed by us on the basis of substantive evidence; “ARPU of CDMA subscribers”shall be the average monthly ARPU figure of the CDMA subscribers in therelevant areas for the three months immediately prior to the delay, ascalculated and confirmed by us.

 

Theproportion of the constructed capacity related costs to be borne by us shall becalculated by reference to the actual number of our cumulative CDMA subscribersat the end of the month prior to the occurrence of the costs divided by 90%, asa percentage of the total amount of capacity (expressed in terms of the numberof subscribers) constructed on the CDMA network.

 

Theother key terms of the New CDMA Lease, including exclusive operating rights,purchase option, guarantee and indemnity, are substantially similar to those ofthe Old CDMA Leases.

 

**Guarantee of OurBank Loans by Unicom Group**

 

As ofDecember 31, 2004, short-term bank loans of approximately RMB3,397****million and long-term bank loans ofapproximately RMB6,779 million of our operating subsidiaries were guaranteed byUnicom Group.  Such guarantees wereprovided for our benefit without any cost to us.

 

As ofDecember 31, 2004, there is no outstanding loans from Unicom Group to us.

 

### ***C.***                                    Interestsof Experts and Counsel

 

                        Notapplicable.

 

## **Item 8.  FinancialInformation**

 

SeeItem 18, “Financial Statements”.

 

**Legal Proceedings**

 

We arenot involved in any material litigation, arbitration or administrativeproceedings.  So far as we are aware, nosuch litigation, arbitration or administrative proceedings are pending orthreatened.

 

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**Policy on Dividend Distribution**

 

Theobjective of our dividend policy is to maximize our shareholders’ value.  The declaration and payment of futuredividends will depend upon, among other things, business prospects, futureearnings, cash flow, liquidity level and cost of capital.  We believe such policy will provide ourshareholders with a stable return in the long term along with the growth of ourcompany.  We may only pay dividends outof our distributable profits.

 

## **Item 9.  TheOffer and Listing**

 

**Market Price Information**

 

OurAmerican depositary shares, each representing ten ordinary shares, are listedand traded on the New York Stock Exchange. Our ordinary shares are listed and traded on the Hong Kong StockExchange.  The New York Stock Exchangeand the Hong Kong Stock Exchange are the principal trading markets for our ADSsand ordinary shares, which are not listed on any other exchanges in or outsidethe United States.

 

Thehigh and low closing prices of our ordinary shares on the Hong Kong StockExchange and of our ADSs on the New York Stock Exchange since listing are asfollows:

 
| ** **                   | ** ** | **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 |   |
| Quarterly:                   |       |                               |       |                    |       |   |   |   |   |
| First Quarter,  2003         |       | 6.00                               |       | 4.25                    |       | 7.72 |   | 5.40 |   |
| Second Quarter,  2003        |       | 5.75                               |       | 3.92                    |       | 7.46 |   | 5.02 |   |
| Third Quarter,  2003         |       | 6.35                               |       | 5.05                    |       | 8.29 |   | 6.54 |   |
| Fourth Quarter,  2003        |       | 8.00                               |       | 6.65                    |       | 10.55 |   | 8.42 |   |
| First Quarter,  2004         |       | 10.20                              |       | 7.00                    |       | 13.18 |   | 8.93 |   |
| Second Quarter,  2004        |       | 7.60                               |       | 5.20                    |       | 9.55 |   | 6.78 |   |
| Third Quarter,  2004         |       | 6.65                               |       | 5.55                    |       | 8.53 |   | 7.10 |   |
| Fourth Quarter,  2004        |       | 6.45                               |       | 5.50                    |       | 8.28 |   | 7.15 |   |
| Monthly:                     |       |                               |       |                    |       |   |   |   |   |
| January 2005                 |       | 6.35                               |       | 5.60                    |       | 8.11 |   | 7.30 |   |
| February 2005                |       | 7.00                               |       | 6.10                    |       | 9.05 |   | 7.80 |   |
| March 2005                   |       | 7.25                               |       | 6.00                    |       | 9.19 |   | 7.57 |   |
| April 2005                   |       | 6.45                               |       | 5.90                    |       | 8.26 |   | 7.61 |   |
| May 2005                     |       | 6.40                               |       | 6.00                    |       | 8.23 |   | 7.73 |   |
| June 2005  (through June 24) |       | 6.65                               |       | 6.05                    |       | 8.42 |   | 7.79 |   |

 

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## **Item 10.  AdditionalInformation**

 

### ***A.***                                    ShareCapital

 

Not applicable.

 

### ***B.***                                    Memorandumand Articles of Association

 

**General**

 

Underour Memorandum of Association, we have the capacity, rights, powers,liabilities and privileges of a natural person. The following is a summary of selected provisions of our Articles ofAssociation:

 

**Directors**

 

***Material Interests and Voting***

 

Adirector shall not vote (or be counted in the quorum) on any resolution of ourboard of directors in respect of any contract or arrangement or proposal inwhich he or any of his associates (as defined in the Hong Kong Stock ExchangeListing Rules) is, to his knowledge, materially interested, and if he shall doso, his vote shall not be counted (nor shall he be counted in the quorum forthat resolution), but this prohibition does not apply to any contract,arrangement or other proposal for or concerning:

 

•                                          thegiving of any security or indemnity either (a) to the director or any of hisassociates (as defined in the Hong Kong Stock Exchange Listing Rules) inrespect of money lent or obligations incurred by him or any of them at therequest of or for the benefit of Unicom or any of its subsidiaries or (b) to athird party in respect of a debt or obligation of Unicom or any of itssubsidiaries for which the director or any of his associates has himselfassumed responsibility or guaranteed or secured in whole or in part;

 

•                                          anoffer of shares or debentures or other securities of or by Unicom (or any othercompany which Unicom may promote or be interested in) where the director or anyof his associates is a participant in the underwriting or sub-underwriting ofthe offer;

 

•                                          anyother company in which the director or any of his associates is interestedonly, whether directly or indirectly, as an officer or shareholder or in whichthe director is beneficially interested in shares of that company, providedthat he, together with any of his associates is not beneficially interested in5% or more of (a) the issued shares of any class of such company (or of anythird company through which such interest is derived) or (b) the voting rightsattached to such issued shares or securities (excluding for the purpose ofcalculating such 5% interest any indirect interest of such director or any ofhis associates by virtue of an interest of Unicom in such company);

 

•                                          thebenefit of employees of Unicom or any of its subsidiaries including (a) theadoption, modification or operation of any employees share scheme under whichthe director or any of his associates may benefit or (b) the adoption,modification or operation of a pension fund or retirement, death or disabilitybenefits scheme which relates both to directors, their associates and employeesof Unicom or any of its subsidiaries and does not provide in respect of thedirector or any of his associates any privilege or advantage not generallyaccorded to the class of persons to which such scheme or fund relates; or

 

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•                                          anycontract or arrangement in which the director or any of his associates isinterested in the same manner as other holders of shares or debentures or othersecurities of Unicom by virtue only of his interest in shares or debentures orother securities of Unicom.

 

***Remuneration and Pensions***

 

Thedirectors of Unicom are entitled to receive by way of remuneration for theirservices such sum as is from time to time determined by Unicom in generalmeeting.  The directors are also entitledto be repaid all traveling, hotel and other expenses reasonably incurred by themin or about the performance of their duties as directors.  The board of directors may grant specialremuneration to any director who performs services which in the opinion of theboard are outside the scope of the ordinary duties of a director.

 

Theboard may establish and maintain any contributory or non-contributory pensionor superannuation funds for the benefit of, or give donations, gratuities,pensions, allowances or emoluments to, any persons (a) who are or were at anytime in the employment or service of Unicom, or of any company which is asubsidiary of Unicom, or is allied or associated with Unicom or with any suchsubsidiary company, or (b) who are or were at any time directors or officers ofUnicom or of any such other company above, and holding or who have held anysalaried employment or office in Unicom or such other company, and the wives,widows, families and dependants of any such persons and may make payments foror towards the insurance of any such persons. Any director holding any such employment or office is entitled to participatein, and retain for his own benefit, any such donation, gratuity, pension,allowance or emolument.

 

***Borrowing Powers***

 

Thedirectors may exercise all the powers of Unicom to borrow money and to mortgageor charge all or any part of the undertaking, property and assets (present andfuture) and uncalled capital of Unicom and to issue debentures, debenturestocks, bonds and other securities, whether outright or as collateral securityfor any debt, liability or obligation of Unicom or of any third party.

 

***Qualification of Directors***

 

Adirector of Unicom is not required to hold any qualification shares.  No person is required to vacate office or beineligible for re-election or reappointment as a director.

 

***Rotation of Directors***

 

Atevery annual general meeting, one-third of the directors for the time being,or, if the number is not three or a multiple of three, then the number nearestone-third, shall retire from office by rotation except for any director holdingoffice as Chairman or Chief Executive Officer. The directors to retire in every year shall be those who have beenlongest in office since their last election. In addition, a director appointed by the board to fill in a casualvacancy or as an addition to the board shall retire at the next followinggeneral meeting and shall not be taken into account in determining the numberof directors who are to retire by rotation at each annual general meeting.  The retiring directors shall be eligible forre-election.

 

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**Rights Attached toOrdinary Shares**

 

***Voting Rights***

 

Underthe Companies Ordinance, any action to be taken by the shareholders in ageneral meeting requires the affirmative vote of either an ordinary or aspecial resolution passed at the meeting. An ordinary resolution is one passed by the majority of suchshareholders as are entitled to, and do, vote in person or by proxy at ageneral meeting.  A special resolution isone passed by not less than three-quarters of such shareholders as are entitledto, and do, vote in person or by proxy at a general meeting.  Most shareholders decisions are passed byordinary resolutions.  However, theCompanies Ordinance and our articles of association stipulate that certainmatters may only be passed by special resolutions.

 

Subjectto any special rights, privileges or restrictions as to voting that may fromtime to time be attached to any class or classes of shares, at any generalmeeting a resolution put to the vote of the meeting shall be decided on a showof hands unless a poll is required by the Listing Rules of the Hong Kong StockExchange or is demanded by:

 

•                                          thechairman of the meeting,

 

•                                          atleast three shareholders present in person or by proxy and entitled to vote atthe meeting,

 

•                                          anyshareholder or shareholders present in person or by proxy and representing inthe aggregate not less than one-tenth of the total voting rights of allshareholders having the right to attend and vote at the meeting, or

 

•                                          anyshareholder or shareholders present in person or by proxy and holding sharesconferring a right to attend and vote at the meeting on which there have beenpaid up sums in the aggregate equal to not less than one-tenth of the total sumpaid up on all shares conferring that right.

 

On ashow of hands, every individual shareholder who is present in person and everycorporate shareholder who is present by a representative duly authorized undersection 115 of the Companies Ordinance has one vote.

 

On apoll, every shareholder present in person or, if the shareholder is acorporation, by duly authorized representative, or by proxy has one vote forevery share of which he or she is the shareholder which is fully paid up orcredited as fully paid up.  However, noamount paid up or credited as paid up on a share in advance of calls orinstallments is treated for the foregoing purposes as paid up on the share.

 

Anyaction to be taken by the shareholders requires the affirmative vote of amajority of the shares at a meeting of shareholders.  There are 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***

 

Underthe Companies Ordinance, our board of directors may, without prior approval ofour shareholders, offer to issue new shares to existing shareholdersproportionately according to their shareholdings.  Our board of directors may not offer to issuenew shares in any other manner without the prior approval of our shareholdersin a general meeting.  Any such approvalgiven in a general meeting will continue in force until the conclusion of thefollowing annual general meeting or the expiration of the period within whichthe next annual general meeting is required by law to be held or when revokedor varied by an ordinary resolution of our shareholders in a general meeting,whichever comes first.  If such approvalis given, the unissued shares shall be at the disposal of our board ofdirectors, which may offer, allot, grant options over or otherwise dispose ofthem to such persons, at such times and for such consideration and upon suchterms and conditions as our board of directors may determine.

 

Inaccordance with the Listing Rules of the Hong Kong Stock Exchange, any suchapproval given by the shareholders must be limited to shares with an aggregatenominal value not exceeding 20 per cent of the aggregate nominal value of ourshare capital in issue plus the aggregate nominal amount of share capitalrepurchased by us since the granting of such approval.

 

***Dividends***

 

Subjectto the Companies Ordinance and as set out in our articles of association, ourshareholders in a general meeting may from time to time by ordinary resolutiondeclare dividends to be paid to our shareholders according to their rights andinterests in the profits available for distribution, but no dividend shall bedeclared in excess of the amount recommended by our board of directors.

 

Inaddition to any dividends declared in a general meeting upon the recommendationof the board of directors, our board of directors may from time to time declareand pay to our shareholders such interim dividends as appear to our board ofdirectors to be justified by our financial position.  Our board of directors may also pay any fixeddividend which is payable on any of our shares on any other dates, whenever ourfinancial position, in the opinion of our board of directors, justifies suchpayments.

 

Alldividends or bonuses unclaimed for one year after having become payable may beinvested or otherwise made use of by the board for the benefit of Unicom untilclaimed.  All dividends or bonusesunclaimed for six years after having been declared may be forfeited by theboard and will revert to Unicom.

 

***Winding Up***

 

If weare wound up, the surplus assets remaining after payment to all creditors shallbe divided among the shareholders in proportion to the capital paid up on theshares held by them, subject to the rights of the holders of any shares whichmay be issued on special terms or conditions.

 

If weare wound up, the liquidator may, with the sanction of a special resolution,divide among our shareholders in specie or in kind the whole or any part of ourassets or vest any part of our assets in trustees upon such trusts for thebenefit of our shareholders or any of them as the resolution shall provide.

 

***Miscellaneous***

 

Shareholdersare not entitled to any redemption rights, conversion rights or preemptiverights on the transfer of ordinary shares.

 

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Thetransfer agent and registrar for the shares is Hong Kong Registrars Limited, 46thFloor, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

 

***Modification of Rights***

 

Subjectto the Companies Ordinance, any of the rights from time to time attaching toany class of shares may, subject to the provisions of the Companies Ordinance,be varied or abrogated with the consent in writing of the holders of not lessthan three-fourths of the issued shares of that class or with the sanction of aspecial resolution passed at a separate general meeting of the holders ofshares of that class.  The provisions ofour Articles of Association relating to general meetings apply to such separategeneral meetings, except that the necessary quorum is not less than two personsholding or representing by proxy one-third in nominal value of the issuedshares of that class, and that any holder of the shares of the class present inperson or by proxy may demand a poll.

 

**Annual General andExtraordinary General Meetings**

 

Wemust hold in each year a general meeting as our annual general meeting inaddition to any other meetings in that year. The annual general meeting is held at such time (within a period of notmore than fifteen months, or such longer period as the Registrar of Companiesof Hong Kong may authorize in writing, after the holding of the last precedingannual general meeting) and place as may be determined by the Directors.  All other general meetings are calledextraordinary general meetings.  TheDirectors may call an extraordinary general meeting at any time or upon requestin accordance with the Hong Kong Companies Ordinance.

 

Subject to the Companies Ordinance, an annualgeneral meeting and a meeting called for the passing of a special resolutioncan be called by not less than twenty-one days’ notice in writing, and anyother general meeting can be called by not less than fourteen days’ notice inwriting.  The notice must specify theplace, date and time of meeting, and, in the case of special business, thegeneral nature of that business.

 

**Limitations onRights to Own Securities**

 

Thereare no limitations on the rights to own securities, including the rights of non-residentor foreign shareholders to hold or exercise voting rights on the securities,imposed by Hong Kong law or by our Memorandum of Association or our Articles ofAssociation.

 

**Changes in Capital**

 

We mayexercise any powers conferred or permitted by the Companies Ordinance topurchase or otherwise acquire our own shares and warrants at any price or togive, directly or indirectly, by means of a loan, guarantee, the provision ofsecurity or otherwise, financial assistance for the purpose of or in connectionwith a purchase made by any person of any shares or warrants in Unicom.  Repurchases of our own shares may be madeeither by way of a general offer to all shareholders in proportion to theirshareholdings, by purchasing our shares on a stock exchange or by an off-marketcontract with individual shareholders. Any such purchase or other acquisition or financial assistance must bemade or given in accordance with any relevant rules or regulations issued bythe Hong Kong Stock Exchange or the Securities and Futures Commission of HongKong.

 

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We ingeneral meeting may, from time to time, by ordinary resolution increase ourauthorized share capital by the creation of new shares, and prescribe theamount of new capital and number of new shares. We may from time to time by ordinary resolution:

 

•                                          consolidateand divide all or any of our share capital into shares of a larger amount thanour existing shares;

 

•                                          divideour shares into several classes and attach to them any preferential, deferred,qualified or special rights, privileges or conditions;

 

•                                          cancelany shares which at the date of the passing of the resolution have not beentaken or agreed to be taken by any person, and diminish the amount of our sharecapital by the amount of the shares so canceled;

 

•                                          sub-divideour shares or any to them into shares of a smaller amount than is fixed by ourMemorandum of Association, subject nevertheless to the provisions of theCompanies Ordinance; and

 

•                                          makeprovision for the issue and allotment of shares which do not carry any votingrights.

 

### ***C.***                                    MaterialContracts

 

Inaddition to contracts we have entered into with our controlling shareholder,Unicom Group, or its subsidiaries, as described in “Related Party Transactions”under Item 7, Unicom Group, we or our subsidiaries have entered into thefollowing contracts that are not in the ordinary course of business within thetwo years preceding the date of this annual report that are or may be material:

 

•                                          Ourshare option schemes, as described in “A. Directors and Senior Management” and “E. ShareOwnership – Stock Incentive Schemes” under Item 6.

 

•                                          ConditionalSale and Purchase Agreement between Unicom BVI and our Company, dated November20, 2003, relating to our acquisition of Unicom New World.  See “A. History and Development of theCompany – Acquisition of Unicom New World and the Sale of Guoxin Paging” underItem 4.

 

•                                          ConditionalSale and Purchase Agreement between CUCL and A Share Company, dated November20, 2003, relating to the sale of Guoxin Paging by us to Unicom Group.  See “A. History and Development of theCompany – Acquisition of Unicom New World and the Sale of Guoxin Paging” underItem 4.

 

•                                          ConditionalSale and Purchase Agreement between China Unicom (Hong Kong) Group Limited andour Company, dated July 28, 2004, relating to our acquisition of UnicomInternational.  See “A. History andDevelopment of the Company – Acquisition of China Unicom International Limited”under Item 4.

 

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### ***D.***                                    ExchangeControls

 

Theability of our operating subsidiaries, CUCL and Unicom New World, to satisfytheir respective foreign exchange obligations and to pay dividends to usdepends on existing and future exchange control regulations in China.  The Renminbi is currently convertible underthe current account, which includes trade and service related foreign exchangetransactions.  Renminbi currently cannotbe converted under the capital account, which includes foreign directinvestment.  CUCL and Unicom New World,our wholly-owned subsidiaries that hold substantially all of our assets, are bothforeign investment enterprises.  Theforeign investment enterprise status will allow these subsidiaries to purchaseforeign exchange at designated foreign exchange banks for settlement of currentaccount transactions without the approval of the State Administration forForeign Exchange.  These current accounttransactions include payment of dividends. However, the relevant Chinese government authorities may in the futurelimit or eliminate the authorizations for a foreign investment enterprise toretain its foreign exchange to satisfy its foreign exchange obligations or topay dividends in the future. Furthermore, certain foreign exchange transactions of these subsidiariesunder the capital account still require approvals from the State Administrationfor Foreign Exchange.  This requirementaffects our subsidiaries’ ability to obtain foreign exchange through equityfinancing, including by means of capital contributions from us.

 

Underexisting Hong Kong law, (i) there are no foreign exchange controls or otherlaws which restrict the import or export of capital and which would affect theavailability of cash and cash equivalents for our use, (ii) there are noforeign exchange controls or other laws, decrees or regulations that affect theremittance of interest, dividends or other payments on our outstanding debt andequity securities to U.S. residents and (iii) there are no limitations on therights of non-resident or foreign owners to hold our debt or equity securities.

 

### ***E.***                                    Taxation

 

Thetaxation of income and capital gains of holders of ordinary shares or ADSs issubject to the laws and practices of Hong Kong and of jurisdictions in whichholders of ordinary shares or ADSs are resident or otherwise subject totax.  The following summary of certainrelevant taxation provisions is based on current law and practice, is subjectto change and does not constitute legal or tax advice.  The discussion does not deal with allpossible tax consequences relating to an investment in the ordinary shares orADSs.  In particular, the discussion doesnot address the tax consequences under state, local and other laws, such asnon-Hong Kong and non-U.S. federal laws. The discussion is based upon laws and relevant interpretations in effectas of the date of this annual report.

 

**Hong Kong**

 

***Tax on Dividends***

 

Underthe current practices of the Hong Kong Inland Revenue Department, no tax ispayable in Hong Kong in connection with dividends paid by us.

 

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***Profits***

 

No taxis imposed in Hong Kong in respect of capital gains from the sale of property,such as the shares and ADSs.  Tradinggains from the sale of property by persons carrying on a trade, profession orbusiness in Hong Kong where such gains are derived from or arise in Hong Kongfrom such trade, profession or business will be chargeable to Hong Kong profitstax which is currently imposed at the rate of 17.5% on corporations andindividuals at a maximum rate of 15.5% with effect from April 1, 2003 and 16.0%with effect from April 1, 2004.  Gainsfrom sales of the shares effected on the Hong Kong Stock Exchange will beconsidered to be derived from or arise in Hong Kong.  Liability for Hong Kong profits tax wouldthus arise in respect of trading gains from sales of shares or ADSs realized bypersons carrying on a business of trading or dealing in securities in HongKong.

 

***Stamp Duty***

 

HongKong stamp duty, currently charged at the rate of 0.1% of the higher of theconsideration for or the value of the shares, will be payable by the purchaseron every purchase and by the seller on every sale of shares.  In addition, a fixed duty of HK$5 iscurrently payable on any instrument of transfer of shares.

 

Thewithdrawal of shares upon the surrender of ADRs, and the issuance of ADRs uponthe deposit of shares, will also attract stamp duty at the rate described abovefor sale and purchase transactions 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 thedeposit of shares issued directly to The Bank of New York, as depositary of theADSs, or for the account of The Bank of New York does not attract stampduty.  No Hong Kong stamp duty is payableupon the transfer of ADSs outside Hong Kong.

 

***Estate Duty***

 

Theshares are Hong Kong property under Hong Kong law, and accordingly such sharesmay be subject to estate duty on the death of the beneficial owner of suchshares, regardless of the place of the owner’s residence, citizenship ordomicile.  We cannot assure you that theHong Kong Inland Revenue Department will not treat the ADSs as Hong Kongproperty that may be subject to estate duty on the death of the beneficialowner of the ADS even if the ADRs evidencing such ADSs are located outside HongKong at the date of such death.  HongKong estate duty is imposed on a progressive scale from 5% to 15%.  The rate of and the threshold for estate dutyhas, in the past, been adjusted on a fairly regular basis.  No estate duty is payable when the aggregatevalue of the dutiable estate does not exceed HK$7.5 million, and the maximumrate of duty of 15% applies when the aggregate value of the dutiable estateexceeds HK$10.5 million.  The rates andthresholds stated here apply to the estate of persons who died after April 1,1998.

 

**United States**

 

***United States Federal Income Taxation***

 

Thissection describes the material United States federal income tax consequences toa U.S. holder (as defined below) of owning shares or ADSs.  It applies to you only if you hold yourshares or ADSs as capital assets for tax purposes.  This section does not apply to you if you area member of a special class of holders subject to special rules, including:

 

•                                          adealer in securities,

•                                          atrader in securities that elects to use a mark-to-market method of accountingfor your securities holdings,

•                                          atax-exempt organization,

 

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•                                          aninsurance company,

•                                          aperson liable for alternative minimum tax,

•                                          aperson that actually or constructively owns 10% or more of our voting stock,

•                                          aperson that holds shares or ADSs that are a hedge or that are hedged againstcurrency risks or as part of a straddle or a conversion transaction, or

•                                          aperson whose functional currency is not the U.S. dollar.

 

Thissection is based on the Internal Revenue Code of 1986, as amended, itslegislative history, existing and proposed regulations, published rulings andcourt decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.  In addition, this section is based in partupon the representations of the Depositary and the assumption that eachobligation in the deposit agreement and any related agreement will be performedin accordance with its terms.

 

Youare a U.S. holder if you are a beneficial owner of shares or ADSs and you are:

 

•                                          acitizen or resident of the United States,

•                                          acorporation organized under the laws of the United States or any States,

•                                          anestate whose income is subject to United States federal income tax regardlessof its source, or

•                                          atrust if a United States court can exercise primary supervision over the trust’sadministration and one or more United States persons are authorized to controlall substantial decisions of the trust.

 

Youshould consult your own tax advisor regarding the United States federal, stateand local tax consequences of owning and disposing of shares and ADSs in yourparticular circumstances.

 

Thisdiscussion addresses only United States federal income taxation.

 

Ingeneral, and taking into account the earlier assumptions, for United Statesfederal income tax purposes, if you hold ADRs evidencing ADSs, you will betreated as the owner of the shares represented by those ADSs.  Exchanges of shares for ADSs, and ADSs forshares, generally will not be subject to United States federal income tax.

 

***Taxation of Dividends***

 

Under the United States federal income tax laws, andsubject to the passive foreign investment company, or PFIC, rules discussedbelow, if you are a U.S. holder, the gross amount of any dividend we pay out ofour current or accumulated earnings and profits (as determined for UnitedStates federal income tax purposes) is subject to United States federaltaxation.  If you are a noncorporate U.S.holder, dividends paid to you after December 31, 2002 and before January 1,2009 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 the ex-dividend dateand meet other holding period requirements. Dividends we pay with respect to the shares or ADSs will be qualified dividendincome provided that, in the year that you receive the dividend, the shares orADSs are readily tradable on an established securities market in the UnitedStates.

 

133

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Thedividend is taxable to you when you, in the case of 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 amount of the dividend distribution thatyou must include in your income as a U.S. holder will be the U.S. dollar valueof the Hong Kong Dollar payments made, determined at the spot Hong Kong/U.S.dollar rate on the date the dividend distribution is includible in your income,regardless of whether the payment is in 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 loss generally will be income orloss from sources within the United States for foreign tax credit limitationpurposes.  Distributions in excess ofcurrent and accumulated earnings and profits, as determined for United Statesfederal income tax purposes, will be treated as a non-taxable return of capitalto the extent of your basis in the shares or ADSs and thereafter as capitalgain.

 

Specialrules apply in determining the foreign tax credit limitation with respect todividends that are subject to the maximum 15% tax rate.  Dividends will be income from sources outsidethe United States, but dividends paid in taxable years beginning before January1, 2007 generally will be “passive income” or “financial services income” anddividends paid in taxable years beginning after December 31, 2006 will, dependingon your 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***

 

Subjectto the passive foreign investment company rules discussed below, if you are aU.S. holder and you sell or otherwise dispose of your shares or ADSs, you willrecognize capital gain or loss for United States federal income tax purposesequal to the difference between the U.S. dollar value of the amount that yourealize and your tax basis, determined in U.S. dollars, in your shares orADSs.  Capital gain of a non-corporateU.S. holder that is recognized on or after May 6, 2003 and before January 1,2009 is generally taxed at a maximum rate of 15% where the property is heldmore than one year.  The gain or losswill generally be income or loss from sources within the United States forforeign tax credit limitation purposes. Your ability to deduct capital losses is subject to limitations.  Any Hong Kong stamp duty that you pay willnot be a creditable tax for United States federal income tax purposes, but youmay be able to deduct such stamp duty subject to limitations under the Code.

 

***Passive Foreign Investment Company Rules***.  We believe that we should not be treated as apassive foreign investment company for United States federal income taxpurposes, but this conclusion is a factual determination that is made annuallyand thus may be subject to change.

 

In general, if you are a U.S. holder, we will be apassive foreign investment company with respect to you if for any taxable yearin which you held our ADSs or shares:

 

•                                          atleast 75% of our gross income for the taxable year is passive income, or

•                                          atleast 50% of the value, determined on the basis of a quarterly average, of ourassets is attributable to assets that produce or are held for the production ofpassive income.

 

134

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Passiveincome generally includes dividends, interest, royalties, and rents, but notincluding certain rents and royalties derived in the active conduct of a tradeor business, annuities, gains from assets that produce passive income.  If a foreign corporation owns directly orindirectly at least 25% by value of the stock of another corporation, theforeign corporation is treated for purposes of the passive foreign investmentcompany tests as owning its proportionate share of the assets of the othercorporation, and as receiving directly its proportionate share of the othercorporation’s income.

 

If weare treated as a passive foreign investment company, and you are a U.S. holderthat does not make a mark-to-market election, as described below, you will besubject to special rules with respect to:

 

•                                          anygain you realize on the sale or other disposition of your shares or ADSs, and

 

•                                          anyexcess distribution that we make to you. Generally, any distributions to you during a single taxable year thatare greater than 125% of the average annual distributions received by you inrespect of the shares or ADSs during the three preceding taxable years or, ifshorter, your holding period for the shares or ADSs.

 

Underthese rules:

 

•                                          thegain or excess distribution will be allocated ratably over your holding periodfor the shares or ADSs,

 

•                                          theamount allocated to the taxable year in which you realized the gain or excessdistribution will be taxed as ordinary income,

 

•                                          theamount allocated to each prior year, with certain exceptions, will be taxed atthe highest tax rate in effect for that year, and

 

•                                          theinterest charge generally applicable to underpayments of tax will be imposed inrespect of the tax attributable to each such year.

 

Specialrules apply for calculating the amount of the foreign tax credit with respectto excess distributions by a passive foreign investment company.

 

If youown shares or ADSs in a passive foreign investment company that are treated asmarketable stock, you may make a mark-to-market election.  If you make this election, you will not besubject to the passive foreign investment company rules described above.  Instead, in general, you will include asordinary income each year the excess, if any, of the fair market value of yourshares or ADSs at the end of the taxable year over your adjusted basis in yourshares or ADSs.  You will also be allowedto take an ordinary loss in respect of the excess, if any, of the adjustedbasis of your shares or ADSs over their fair market value at the end of thetaxable year (but only to the extent of the net amount of previously includedincome as a result of the mark-to-market election).  Your basis in the shares or ADSs will beadjusted to reflect any such income or loss amounts.  Your gain, if any, recognized upon the saleof your shares or ADSs will be taxed as ordinary income.

 

135

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Inaddition, notwithstanding any election you make with regard to the shares orADSs, dividends that you receive from us will not constitute qualified dividendincome to you if we are a PFIC either in the taxable year of the distributionor the preceding taxable year.  Dividendsthat you receive that do not constitute qualified dividend income are noteligible for taxation at the 15% maximum rate applicable to qualified dividendincome.  Instead, you must include thegross amount of any such dividend paid by us out of our accumulated earningsand profits (as determined for United States federal income tax purposes) inyour gross income, and it will be subject to tax at rates applicable toordinary income.

 

If youown shares or ADSs during any year that we are a passive foreign investmentcompany, you must file Internal Revenue Service Form 8621.

 

### ***F.***                                    Dividendsand Paying Agents

 

Notapplicable.

 

### ***G.***                                    Statementby Experts

 

Notapplicable.

 

### ***H.***                                   Documentson Display

 

Youcan read and copy documents referred to in this annual report that have beenfiled with the U.S.  Securities andExchange Commission, or the SEC, at the SEC’s public reference room located at 100 FStreet, N.E., Room 1580, Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 forfurther information on the public reference rooms and their copy charges.

 

### ***I.***                                        SubsidiaryInformation

 

Not applicable.

 

## **Item 11.  Quantitativeand Qualitative Disclosures About Market Risks**

 

Ourexposure to financial market risks relates primarily to changes in interestrates and currency exchange rates.

 

**Interest Rate Risk**

 

We aresubject to market risks due to fluctuations in interest rates, principally as aresult of our long-term loans, all of which bear variable interest rates.  The original maturities of our long-termloans range from one to seven years.

 

ThePeople’s Bank of China has the sole authority in China to establish officialinterest rates for Renminbi-denominated loans. Financial institutions in China set their effective interest rateswithin the range established by the People’s Bank of China.  The fair value of our borrowings is the sameas the carrying value since all our bank loan interest are variable.  Most of our bank loans are denominated inRenminbi and borrowed from domestic banks at interest rates that vary inaccordance with the standard guidance interest rates announced by relevantChinese government authorities.

 

136

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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$300 million tranche, with an interestrate of 0.35% over the US$ LIBOR, and a seven-year US$200 million tranche, withan interest rate of 0.44% per annum over the US$ LIBOR.

 

In February 2004, we entered into a US$500million long-term syndicated loan agreement with 12 financial institutions tofinance working capital and network construction expenditure. This facility isrepayable in three years and carries an interest rate of 0.40% over US$ LIBORper annum.

 

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 2004. We are alsoconsidering hedging our borrowings denominated in Renminbi once interest rateswaps 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, 2004. We donot have fixed rate debt obligation as of December 31, 2004. 

 
| ** **                         | ** ** | ** **                                             | ** ** | **As  of December 31,  2004** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **Expected  Maturity Date**                            | ** ** | ** **                         | ** ** | **Fair** | ** ** |
| ** **                         | ** ** | **2005**                                               | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                         | ** ** | **(RMB equivalent in million,  except interest rate)** | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Variable rate bank and other loans |       | 20,015                                                 |       | 11,882                             |       | 7,957 |   | 7,605 |   | 1,014 |   | 1,818 |   | 50,290 |   | 50,290 |   |
| Average interest rate(1)           |       | 4.16                                                   | %          | 4.09                               | %          | 4.03 | % | 3.73 | % | 3.61 | % | 3.10 | % | — |   | — |   |

 

----

(1)                  The interest rates for variable rate bankand other loans are calculated based on the weighted average interest rates atthe end of 2004.

 

For the year ended December 31, 2004, 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 ofRMB230 million in 2004.

 

137

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**Exchange Rate Risk**

 

The majority of our indebtedness and capital expendituresare in Renminbi. Currency exchange rate risk exists with respect to ourrepayment of indebtedness to our foreign lenders, payables to equipmentsuppliers and contractors and our dividend payments to holders of ordinaryshares and ADSs in foreign currencies. As of December 31, 2004,approximately RMB10.06****billion ofcapital commitments was authorized and contracted for in currencies other thanRenminbi and foreign currency-denominate debt outstanding, representing ourthree-tranches US$700 million term loan entered into with 13 financialinstitutions in September 2003 and $500 million long-term syndicated loanentered into with 12 financial institutions in February 2004 as describedabove. In addition, we had approximately US$85 million in bank balances andcash, and short-term bank deposits as of December 31, 2004. Although theRenminbi to US$ exchange rate has been relatively stable since 1994, we cannotpredict nor give any assurance of its future stability. Fluctuations inexchange rates may lead to significant fluctuations in the exposure of ourforeign-currency-denominated liabilities and assets. We may, from time to time,enter into currency swap agreements and foreign exchange forward contractsdesigned to mitigate our exposure to foreign currency risks, although we didnot consider this to be necessary in 2004.

 

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, 2004.

 
| ** **                                                        | ** ** | ** **                                             | ** ** | **As  of December 31,  2004** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                        | ** ** | **Expected  Maturity Date**                            | ** ** | ** **                         | ** ** | **Fair** | ** ** |
| ** **                                                        | ** ** | **2005**                                               | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** |
| ** **                                                        | ** ** | **(RMB equivalent in million,  except interest rate)** | ** ** |
| **On-balance sheet financial instruments:**                       |       |                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits with banks:                                   |       |                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| in U.S. dollars                                                   |       | 662                                                    |       | —                             |       | — |   | — |   | — |   | — |   | 662 |   | 662 |   |
| in Hong Kong dollars                                              |       | —                                                 |       | —                             |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Bank balances and cash                                            |       |                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| in U.S. dollars                                                   |       | 40                                                     |       | —                             |       | — |   | — |   | — |   | — |   | 40 |   | 40 |   |
| in Hong Kong dollars                                              |       | 80                                                     |       | —                             |       | — |   | — |   | — |   | — |   | 80 |   | 80 |   |
| **Debts:**                                                        |       |                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate bank and other loans (U.S. dollar)                  |       | —                                                 |       | 1,655                              |       | 4,139 |   | 2,483 |   | — |   | 1,655 |   | 9,932 |   | 9,932 |   |
| Average interest rate(1)                                          |       | —                                                 |       | 2.85                               | %          | 2.82 | % | 2.78 | % | — |   | 2.89 | % | **—** |   | — |   |
| **Off-balance sheet commitments:**                                |       |                                                   |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital commitments authorized and contracted for in  U.S. dollar |       | 126                                                    |       | —                             |       | — |   | — |   | — |   | — |   | 126 |   | 126 |   |

 

----

(1)                  The interest rates for variable rate bankand other loans are calculated based on the weighted average interest rates atthe end of 2004.

 

138

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## **Item12.  Description of Securities Other thanEquity Securities**

 

Not Applicable.

 

# **PART II**

# ** **

## **Item13.  Defaults, Dividend Arrearages andDelinquencies**

## ** **

None.

 

## **Item14.  Material Modifications to the Rightsof Security Holders and Use of Proceeds**

## ** **

None.

 

## **Item15.  **Controls andProcedures

## ** **

In the course of our regular internal audit during2004, we identified certain improper accounting recordings and errors at ourJiangxi and Xinjiang branches. These two branches were acquired by us inconnection with our acquisition of the cellular telecommunications businessesin nine provinces and autonomous regions in the PRC on December 31, 2002.We have identified and communicated these issues to our audit committee. Wehave concluded that no restatement of our consolidated financial statements asof and for the years ended December 31, 2002 and 2003 is necessary asthese issues did not result in a material misstatement of such consolidatedfinancial statements and did not have a material impact on ourfinancial condition and results of operations.

 

However, our management is of the view that theseissues at our Jiangxi and Xinjiang branches reflect a material weakness ininternal control over financial reporting. In particular, these issues withrespect to these two branches relate to, among others, provision for bad debt, recordingsof mobile handset costs and agency commission as well as revenue recognition.These issues resulted in an overstatement of our net income of approximately RMB34million and RMB115 million for the years 2002 and 2003, respectively. Ourmanagement has made the appropriate corrections to these issues in ourconsolidated financial statements as of and for the year ended December 31, 2004.

 

Upon the identification of these issues at our Jiangxiand Xinjiang branches, our management promptly imposed disciplinary actionagainst the responsible employees at these two branches. We have not identifiedsimilar issues at our other branches in the course of our regular internalaudit.

 

Our chief executive officer and chief financialofficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the U.S. SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of December 31,2004, the end of the period covered by this annual report. In making thisevaluation, our chief executive officer and chief financial officer haveconsidered matters relating to the issues referenced above, including theprocess described below that was undertaken to ensure that such issues wouldnot be repeated.

 

In response to the issues identified by us at ourJiangxi and Xinjiang branches, our management, under the direction of our auditcommittee and upon the recommendations of our company’s independent registeredpublic accounting firm, has directed that we dedicate resources and take aseries of measures to strengthen control processes and procedures in order toprevent a recurrence of such issues and to improve our internal control overfinancial reporting. These measures include, among others:

 

•                                          strengtheningthe internal audit and monitoring controls over our branches;

 

139

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•                                          improvinginformation management system to enhance internal control and reinforcingexisting control over the financial reporting process;

 

•                                          implementingmore stringent responsibility systems to ensure the accuracy in the reportingof financial data;

 

•                                          establishingan enterprise risk management system and risk evaluation procedures;

 

•                                          strengtheningthe period-end financial reporting process, including enhancing the trainingsof our finance and accounting personnel with respect to U.S. and Hong Kongaccounting practices; and

 

•                                          furtherformalizing anti-fraud and whistleblower policies and procedures.

 

Our management is fully aware of the importance ofmaintaining and improving our controls and procedures. In preparation for thecompliance with Section 404 of the Sarbanes-Oxley Act of 2002 and under the supervision and with theparticipation of our senior management, including our chief executive officerand chief financial officer, we are in the process of conducting furtherevaluation of our internal control over financial reporting and plan to designand implement enhanced processes and controls to improve our internal controlover financial reporting. As we are still in the evaluation process, we mayidentify areas of internal control deficiencies that may requireappropriate actions for correction or improvement. We are committed to further improving our controls and procedures.

 

Based on their evaluation of the effectiveness of ourdisclosure controls and procedures as described above, and subject to the fullimplementation of the measures discussed above, our chief executive officer andchief financial officer have concluded that, as of the end of the periodcovered by this annual report, our disclosure controls and procedures wereadequate to ensure that material information relating to us and ourconsolidated subsidiaries was made known to them by others within our companyand our consolidated subsidiaries.

 

Other than as described above, there were nosignificant changes in our internal control over financial reporting thatoccurred during the period covered by this annual report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

## **Item16A.  Audit Committee Financial Expert**

## ** **

Our board of directors has determined that Mr. ShanWeijian, a member of our audit committee, is an audit committee financialexpert.

 

## **Item 16B.  Codeof Ethics**

## ** **

We have adopted a code of ethics that applies to ourchief executive officer, chief financial officer,  president, vice-president, controller andother senior officers. We have posted the text of such code of ethics on ourInternet website at www.chinaunicom.com.hk.

 

140

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## **Item16C.  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 and 2004:

 
| ** **         | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2003**                                   | ** ** | **2004** | ** ** |
| ** **         | ** ** | **(in US dollars)**                        | ** ** |
| Audit fees         |       | 6,528,000                                  |       | 6,950,000 |   |
| Audit-related fees |       | 1,900,000                                  |       | 10,000 |   |
| Tax fees           |       | 2,000                                      |       | 14,000 |   |
| All other fees     |       | —                                     |       | 190,000 |   |
| **Total**          |       | 8,430,000                                  |       | 7,164,000 |   |

 

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 of Unicom Group. 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 those other assurancesand related services provided by auditors, but not restricted to those that canonly reasonably be provided by the external auditor signing the audit report,that are reasonably related to the performance of the audit or review of ourCompany’s financial statements such as acquisition due diligence, consultationsconcerning financial accounting and reporting standards.

 

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-approvalPolicies and Procedures**

 

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.These services must be approved by the Audit Committee on a case-by-case basisafter an application including proposed budget and scope of services to beprovided by our independent auditors is submitted to the Audit Committee.

 

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## **Item16D.  Exemptions from the ListingStandards for Audit Committees**

## ** **

Not applicable.

 

## **Item16E.  Purchases of Equity Securities bythe Issuer and Affiliated Purchasers**

## ** **

Not applicable.

 

# **PART III**

# ** **

## **Item 17.  Financial Statements**

## ** **

We have elected to provide financial statements andrelated information specified in Item 18 in lieu of Item 17.

 

## **Item 18.  Financial Statements**

## ** **

See “Index to Consolidated FinancialStatements” for a list of all financial statements filed as part of thisannual report.

 

## **Item 19.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                         |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                         |
| 1.1                 |       | Memorandum of  Association of Unicom, dated January 27, 2000(1).                                                                                                                                              |
|                |       |                                                                                                                                                                                                               |
| 1.2                 |       | Amended Articles of Association of Unicom (as  amended)(1).                                                                                                                                                        |
|                |       |                                                                                                                                                                                                               |
| 1.3                 |       | Amended Articles  of Association of Unicom (as amended on May 12, 2004)(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 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).                                                                                                                                           |

 

142

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| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                          |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                |
| 4.9                 |       | Reorganization  Agreement between Unicom Group and Unicom New Century, dated November 18,  2002. (English translation)(5).                                                                                     |
|                |       |                                                                                                                                                                                                                |
| 4.10                |       | Form of  Conditional Sale and Purchase Agreement between Unicom BVI and our company,  dated November 20, 2002(5).                                                                                         |
|                |       |                                                                                                                                                                                                                |
| 4.11                |       | Comprehensive  Services Agreement between Unicom Group and A Share Company, dated November 20,  2002. (English translation)(5).                                                                                |
|                |       |                                                                                                                                                                                                                |
| 4.12                |       | Transfer  Agreement with respect to the Comprehensive Services Agreement between A  Share Company and Unicom New Century, dated November 20, 2002. (English  translation)(5).                                  |
|                |       |                                                                                                                                                                                                                |
| 4.13                |       | Form of  CDMA Network Capacity Lease Agreement among Unicom Horizon, A Share Company  and Unicom Group, dated November 20, 2002(5).                                                                       |
|                |       |                                                                                                                                                                                                                |
| 4.14                |       | Transfer  Agreement with respect to the CDMA Network Capacity Lease Agreement between A  Share Company and Unicom New Century, dated November 20, 2002. (English  translation)(5).                             |
|                |       |                                                                                                                                                                                                                |
| 4.15                |       | Reorganization  Agreement between Unicom Group and Unicom New World, dated November 4,  2003. (English translation)(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 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.                       |
|                |       |                                                                                                                                                                                                                |
| 4.27                |       | CDMA Network  Capacity Lease Agreement between Unicom Horizon, A Share Company and Unicom  Group, dated March 24, 2005.                                                                                        |

 

143

----

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                            |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                  |
| 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).               |
|                |       |                                                                                                                                                                                  |
| 4.29                |       | Comprehensive  Services Agreement between A Share Company and Unicom Group, dated March 24,  2005. (English translation).                                                        |
|                |       |                                                                                                                                                                                  |
| 4.30                |       | Transfer  Agreement of the Comprehensive Services Agreement between A Share Company,  CUCL and Unicom New World, dated March 24, 2005. (English translation).                    |
|                |       |                                                                                                                                                                                  |
| 4.31                |       | Operator-based  Comprehensive Services Agreement between Unicom New Guoxin and A Share  Company, dated March 24, 2005. (English translation).                                    |
|                |       |                                                                                                                                                                                  |
| 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). |
|                |       |                                                                                                                                                                                  |
| 4.33                |       | Premise Leasing  Agreement between CUCL, Unicom New World and A Share Company, dated March 24,  2005. (English translation).                                                     |
|                |       |                                                                                                                                                                                  |
| 4.34                |       | Transfer  Agreement of the Premise Leasing Agreement between A Share Company and Unicom  New Guoxin, dated March 24, 2005. (English translation).                                |
|                |       |                                                                                                                                                                                  |
| 8.1                 |       | List of our  significant subsidiaries.                                                                                                                                                |
|                |       |                                                                                                                                                                                  |
| 11.1                |       | Code of Ethics(6)                                                                                                                                                                     |
|                |       |                                                                                                                                                                                  |
| 12.1                |       | CEO  Certification                                                                                                                                                                    |
|                |       |                                                                                                                                                                                  |
| 12.2                |       | CFO  Certification                                                                                                                                                                    |
|                |       |                                                                                                                                                                                  |
| 13.1                |       | CEO  Certification                                                                                                                                                                    |
|                |       |                                                                                                                                                                                  |
| 13.2                |       | CFO  Certification                                                                                                                                                                    |

 

----

(1)          Incorporated by reference to ourRegistration Statement on Form F-1 (File No. 333-11938) filed withthe SEC in connection with our initial public offering in June 2000.

 

(2)          Incorporated by reference to theRegistration Statement on Form F-6 (Filed No. 333-11952) filed withthe SEC with respect to American Depositary Shares representing our shares.

 

(3)          Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31,2000.

 

(4)          Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31,2001.

 

(5)          Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31,2002.

 

(6)           Incorporated by reference to our AnnualReport on Form 20-F (File No. 1-15028) for the year ended December 31,2003.

 

144

----

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused and authorizedthe undersigned to sign this annual report on its behalf.

 

Date: June 28, 2005

 
|   |   | CHINA UNICOM  LIMITED |
|--------|--------|-----------------------|
|   |   |                  |
|   |   |                  |
|   | By:    | /s/ Chang  Xiaobing   |   |
|   |   | Name:                 | Chang  Xiaobing |
|   |   | Title:                | Chairman and  Chief Executive Officer |
|        |        |                       |  |  |

 

145

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

 

**AUDITED CONSOLIDATED FINANCIALSTATEMENTS**

 

**FOR THE YEARS ENDED**

 

**DECEMBER 31, 2002, 2003 AND 2004**

 

----

 

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **
| **CHINA  UNICOM LIMITED AND ITS SUBSIDIARIES**                                                                         | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                             | ** ** | ** ** |
| Report  of Independent Registered Public Accounting Firm                                                               |       |       |
| Consolidated  statements of income for the years ended December 31, 2002, 2003 and 2004                                |       |       |
| Consolidated balance  sheets as of December 31, 2003 and 2004                                                          |       |       |
| Consolidated  statements of changes in shareholders’ equity for the years ended December  31, 2002, 2003 and 2004 |       |       |
| Consolidated  statements of cash flows for the years ended December 31, 2002, 2003 and 2004                            |       |       |
| Notes  to the consolidated financial statements                                                                        |       |       |

 

----

 

### **Report of Independent Registered Public Accounting Firm**

 

**TO THE BOARD OF DIRECTORS AND SHAREHOLDERSOF CHINA UNICOM LIMITED**

*(Incorporated in the Hong KongSpecial Administrative Region of the People’s Republic of China (“HongKong”)**with limited liability)*

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, of cash flows and of changes in shareholders’ equitypresent fairly, in all material respects, the financial position of ChinaUnicom Limited (the “Company”) and its subsidiaries (the “Group”) at December31, 2003 and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004, in conformitywith accounting principles generally accepted in Hong Kong. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

Accounting principles generallyaccepted in Hong Kong vary in certain significant respects from accountingprinciples generally accepted in the United States of America.  Information relating to the nature and effectof such differences is presented in Note 40 to the consolidated financialstatements.

 

 

**PricewaterhouseCoopers**

*CertifiedPublic Accountants*

 

Hong Kong, June 16, 2005

 

F - 2

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004**

**(Expressed in thousands, except per share data)**

 
| ** **                                             | ** ** | **Note**                   | ** ** | **200****2**    | ** ** | **200****3** | ** ** | **200****4** | ** ** | **200****4** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-----------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                             | ** ** | ** **                 | ** ** | **RMB**         | ** ** | **RMB**      | ** ** | **RMB**      | ** ** | **US$**      | ** ** |
| ** **                                             | ** ** | ** **                 | ** ** | **As restated** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
| Operating revenue (Turnover):                          |       |                       |       |            |       |         |       |         |       |         |       |
| GSM Business                                           |       | 6, 31,  34                 |       | 27,387,925      |       | 40,303,611   |       | 46,579,235   |       | 5,627,890    |       |
| CDMA Business                                          |       | 3(f), 6, 20(a), 23, 31, 34 |       | 3,225,347       |       | 16,623,518   |       | 24,219,602   |       | 2,926,310    |       |
| Data and Internet Business                             |       | 6, 31, 34                  |       | 2,793,039       |       | 3,437,083    |       | 3,662,734    |       | 442,546      |       |
| Long Distance Business                                 |       | 6, 31, 34                  |       | 2,765,723       |       | 2,273,148    |       | 1,848,009    |       | 223,284      |       |
| Paging Business                                        |       | 6, 31, 34                  |       | 2,161,188       |       | 1,403,053    |       | —       |       | —       |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Total service revenue                                  |       |                       |       | 38,333,222      |       | 64,040,413   |       | 76,309,580   |       | 9,220,030    |       |
| Sales of telecommunications products                   |       | 6, 31, 34                  |       | 2,243,303       |       | 3,595,912    |       | 3,022,031    |       | 365,134      |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Total operating revenue                                |       | 6, 34                      |       | 40,576,525      |       | 67,636,325   |       | 79,331,611   |       | 9,585,164    |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Operating expenses:                                    |       |                       |       |            |       |         |       |         |       |         |       |
| Leased lines and network capacities                    |       | 7, 8, 31                   |       | (1,583,255      | )          | (4,320,382   | )          | (7,398,128   | )          | (893,872     | )          |
| Interconnection charges                                |       | 8, 31                      |       | (3,229,640      | )          | (5,920,793   | )          | (7,516,586   | )          | (908,184     | )          |
| Depreciation and amortization                          |       | 7                          |       | (11,255,724     | )          | (16,385,293  | )          | (19,063,074  | )          | (2,303,277   | )          |
| Personnel                                              |       | 7, 8, 12, 13               |       | (3,335,218      | )          | (4,574,546   | )          | (4,526,100   | )          | (546,862     | )          |
| Selling and marketing                                  |       | 7, 20(a), 23, 31           |       | (5,980,948      | )          | (15,156,835  | )          | (18,944,348  | )          | (2,288,932   | )          |
| General, administrative and other expenses             |       | 7, 8, 31                   |       | (5,631,850      | )          | (9,112,385   | )          | (10,448,241  | )          | (1,262,399   | )          |
| Cost of telecommunications products sold               |       | 31                         |       | (2,236,206      | )          | (3,652,045   | )          | (3,478,989   | )          | (420,345     | )          |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Total operating expenses                               |       |                       |       | (33,252,841     | )          | (59,122,279  | )          | (71,375,466  | )          | (8,623,871   | )          |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Operating income                                       |       |                       |       | 7,323,684       |       | 8,514,046    |       | 7,956,145    |       | 961,293      |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Loss on sale of discontinued operation (Guoxin Paging) |       | 5                          |       | —          |       | (663,279     | )          | —       |       | —       |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
|                                                   |       |                       |       | 7,323,684       |       | 7,850,767    |       | 7,956,145    |       | 961,293      |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Interest income                                        |       | 7                          |       | 470,282         |       | 173,033      |       | 102,907      |       | 12,434       |       |
| Finance costs                                          |       | 9                          |       | (1,474,441      | )          | (1,936,022   | )          | (1,688,418   | )          | (204,001     | )          |
| Other (expense) income, net                       |       | 10                         |       | (16,359         | )          | 8,071        |       | 95,990       |       | 11,598       |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Income before taxation                                 |       | 7                          |       | 6,303,166       |       | 6,095,849    |       | 6,466,624    |       | 781,324      |       |
| Taxation                                               |       | 3(a), 14                   |       | (1,720,205      | )          | (1,888,381   | )          | (2,079,625   | )          | (251,269     | )          |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Income after taxation                                  |       |                       |       | 4,582,961       |       | 4,207,468    |       | 4,386,999    |       | 530,055      |       |
| Minority interests                                     |       |                       |       | 15,252          |       | 9,629        |       | —       |       | —       |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Net income                                             |       | 15                         |       | 4,598,213       |       | 4,217,097    |       | 4,386,999    |       | 530,055      |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Proposed final dividend                                |       | 15                         |       | 1,255,300       |       | 1,255,317    |       | 1,256,349    |       | 151,797      |       |
|                                                   |       |                       |       |            |       |         |       |         |       |         |       |
| Dividend paid                                          |       | 15                         |       | —          |       | 1,255,300    |       | 1,256,160    |       | 151,774      |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F - 3

----

** **
| ** **                                                        | ** ** | **Note**   | ** ** | **200****2**    | ** ** | **200****3** | ** ** | **200****4** | ** ** | **200****4** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                                        | ** ** | ** ** | ** ** | **As restated** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Basic earnings per share                                          |       | 16         |       | RMB             | 0.366      |         | RMB        | 0.336        |       | RMB          | 0.349      |   | USD | 0.042 |   |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Diluted earnings per share                                        |       | 16         |       | RMB             | 0.366      |         | RMB        | 0.336        |       | RMB          | 0.348      |   | USD | 0.042 |   |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Number of shares outstanding for basic  earnings (in thousands)   |       | 16         |       | 12,552,996      |       | 12,553,010   |       | 12,561,242   |       | 12,561,242   |       |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Number of shares outstanding for diluted  earnings (in thousands) |       | 16         |       | 12,552,996      |       | 12,568,683   |       | 12,607,241   |       | 12,607,241   |       |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Basic earnings per ADS                                            |       | 16         |       | RMB             | 3.663      |         | RMB        | 3.359        |       | RMB          | 3.492      |   | USD | 0.422 |   |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Diluted earnings per ADS                                          |       | 16         |       | RMB             | 3.663      |         | RMB        | 3.355        |       | RMB          | 3.480      |   | USD | 0.420 |   |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Number of ADS outstanding for basic  earnings (in thousands)      |       | 16         |       | 1,255,300       |       | 1,255,301    |       | 1,256,124    |       | 1,256,124    |       |
|                                                              |       |       |       |            |       |         |       |         |       |         |       |
| Number of ADS outstanding for diluted  earnings (in thousands)    |       | 16         |       | 1,255,300       |       | 1,256,869    |       | 1,260,724    |       | 1,260,724    |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F - 4

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**AS OF DECEMBER31, 2003 and 2004**

**(Expressed in thousands)**

 
| ** **                                           | ** ** | **Note**            | ** ** | **200****3** | ** ** | **200****4** | ** ** | **200****4** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                                           | ** ** | ** **          | ** ** | **RMB**      | ** ** | **RMB**      | ** ** | **US$**      | ** ** |
|                                                 |       |                |       |         |       |         |       |         |       |
| **Non-current assets:**                              |       |                |       |         |       |         |       |         |       |
| Property, plant and equipment, net                   |       | 21                  |       | 118,104,848  |       | 118,904,060  |       | 14,366,467   |       |
| Goodwill                                             |       | 3(a), 22            |       | 3,315,468    |       | 3,136,557    |       | 378,971      |       |
| Other assets                                         |       | 23                  |       | 5,849,430    |       | 5,736,384    |       | 693,093      |       |
| Deferred tax assets                                  |       | 14                  |       | 324,900      |       | —       |       | —       |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| Total non-current assets                             |       |                |       | 127,594,646  |       | 127,777,001  |       | 15,438,531   |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| **Current assets:**                                  |       |                |       |         |       |         |       |         |       |
| Current portion of deferred tax assets               |       | 3(a), 14            |       | 873,849      |       | 606,009      |       | 73,220       |       |
| Amounts due from Unicom Group                        |       | 31(c)               |       | —       |       | 61,401       |       | 7,419        |       |
| Amounts due from related parties                     |       | 31(b)               |       | 263,414      |       | 193,048      |       | 23,325       |       |
| Amounts due from domestic carriers                   |       | 33(b)               |       | 184,613      |       | 269,919      |       | 32,613       |       |
| Prepayments and other current assets                 |       | 20                  |       | 3,147,777    |       | 3,059,714    |       | 369,687      |       |
| Inventories                                          |       | 19                  |       | 2,169,354    |       | 3,114,632    |       | 376,322      |       |
| Accounts receivable, net                             |       | 18                  |       | 5,471,547    |       | 5,229,980    |       | 631,907      |       |
| Short-term bank deposits                             |       |                |       | 912,794      |       | 662,025      |       | 79,989       |       |
| Bank balances and cash                               |       | 4(b)(i), 27(a)(iii) |       | 9,219,936    |       | 4,655,464    |       | 562,492      |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| Total current assets                                 |       |                |       | 22,243,284   |       | 17,852,192   |       | 2,156,974    |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| **Current liabilities:**                             |       |                |       |         |       |         |       |         |       |
| Payables and accrued liabilities                     |       | 25                  |       | 17,098,420   |       | 16,785,749   |       | 2,028,122    |       |
| Amounts due to Unicom Group                          |       | 31(c)               |       | 432,047      |       | —       |       | —       |       |
| Amounts due to related parties                       |       | 31(b)               |       | 108,891      |       | 5,760        |       | 696          |       |
| Amounts due to domestic carriers                     |       | 33(b)               |       | 778,841      |       | 948,574      |       | 114,611      |       |
| Current portion of obligations under  finance leases |       | 28, 33(b)           |       | 25,435       |       | 938,189      |       | 113,356      |       |
| Current portion of long-term bank loans              |       | 27                  |       | 7,197,877    |       | 11,086,305   |       | 1,339,492    |       |
| Taxes payable                                        |       |                |       | 623,857      |       | 395,688      |       | 47,809       |       |
| Advances from customers                              |       |                |       | 6,666,086    |       | 7,034,995    |       | 849,996      |       |
| Short-term bank loans                                |       | 26                  |       | 10,975,199   |       | 8,928,417    |       | 1,078,767    |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| Total current liabilities                            |       |                |       | 43,906,653   |       | 46,123,677   |       | 5,572,849    |       |
|                                                 |       |                |       |         |       |         |       |         |       |
| **Net current liabilities**                          |       |                |       | (21,663,369  | )          | (28,271,485  | )          | (3,415,875   | )          |
| ** **                                           |       |                |       |         |       |         |       |         |       |
| **Total assets less current liabilities**            |       |                |       | 105,931,277  |       | 99,505,516   |       | 12,022,656   |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F - 5

----

 
| ** **                       | ** ** | **Note**   | ** ** | **200****3** | ** ** | **200****4** | ** ** | **200****4** | ** ** |
|----------------------------------|------------|------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **RMB**      | ** ** | **RMB**      | ** ** | **US$**      | ** ** |
|                             |       |       |       |         |       |         |       |         |       |
| **Financed by:**                 |       |       |       |         |       |         |       |         |       |
| **Shareholders’ equity:**   |       |       |       |         |       |         |       |         |       |
| Share capital                    |       | 29         |       | 1,331,390    |       | 1,332,487    |       | 160,996      |       |
| Share premium                    |       |       |       | 52,483,266   |       | 52,546,294   |       | 6,348,854    |       |
| Reserves                         |       | 15(a)      |       | 1,719,331    |       | 2,148,631    |       | 259,606      |       |
| Retained earnings:               |       |       |       |         |       |         |       |         |       |
| Proposed final dividend          |       | 15(b)      |       | 1,255,317    |       | 1,256,349    |       | 151,797      |       |
| Others                           |       | 3(a)       |       | 12,826,186   |       | 15,526,693   |       | 1,875,998    |       |
|                             |       |       |       |         |       |         |       |         |       |
| Shareholders’ equity        |       |       |       | 69,615,490   |       | 72,810,454   |       | 8,797,251    |       |
|                             |       |       |       |         |       |         |       |         |       |
| **Non-current liabilities:**     |       |       |       |         |       |         |       |         |       |
| Long-term bank loans             |       | 27         |       | 36,212,791   |       | 26,137,188   |       | 3,158,000    |       |
| Obligations under finance leases |       | 28, 33(b)  |       | 99,719       |       | 488,956      |       | 59,078       |       |
| Deferred tax liabilities         |       | 14         |       | —       |       | 66,340       |       | 8,015        |       |
| Other long-term liabilities      |       |       |       | 3,277        |       | 2,578        |       | 312          |       |
|                             |       |       |       |         |       |         |       |         |       |
| Total non-current liabilities    |       |       |       | 36,315,787   |       | 26,695,062   |       | 3,225,405    |       |
|                             |       |       |       |         |       |         |       |         |       |
|                             |       |       |       | 105,931,277  |       | 99,505,516   |       | 12,022,656   |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F - 6

----

 

**C****HINA UNICOM LIMITED AND SUBSIDIARIES**

**CONSOLIDATED****STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004**

**(****Expressed in thousands of RMB****)**

** **
| ** **                                                                                 | ** ** | **Share  capital** | ** ** | **Share  premium** | ** ** | **Revaluation  reserve** | ** ** | **Statutory  reserve** | ** ** | **Retained  profits** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------------|------------|------------------------|------------|-----------------------|------------|------------|------------|
|                                                                                       |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| Balance at January 1, 2002, as previously reported                                         |       | 1,331,371          |       | 52,482,127         |       | 176,853                  |       | 649,433                |       | 7,041,379             |       | 61,681,163 |       |
| Change in accounting policy:                                                               |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| -  Additional provision for deferred tax assets (see Note 3(a))                            |       | —             |       | —             |       | —                   |       | —                 |       | 373,159               |       | 373,159    |       |
| -  To adjust for statutory reserve due to the change in accounting policy (see Note 15(a)) |       | —             |       | —             |       | —                   |       | 37,316                 |       | (37,316               | )          | —     |       |
| Balance at January 1, 2002, as restated                                                    |       | 1,331,371          |       | 52,482,127         |       | 176,853                  |       | 686,749                |       | 7,377,222             |       | 62,054,322 |       |
| Net income for the year, as restated (see Note 3(a))                                       |       | —             |       | —             |       | —                   |       | —                 |       | 4,598,213             |       | 4,598,213  |       |
| Appropriation to statutory reserve, as  restated (see Note  15(a))                         |       | —             |       | —             |       | —                   |       | 436,463                |       | (436,463              | )          | —     |       |
| Balance at December 31, 2002, as restated                                                  |       | 1,331,371          |       | 52,482,127         |       | 176,853                  |       | 1,123,212              |       | 11,538,972            |       | 66,652,535 |       |
|                                                                                       |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| Dividends (see Note 15(b))                                                                 |       | —             |       | —             |       | —                   |       | —                 |       | (1,255,300            | )          | (1,255,300 | )          |
| Exercise of share options                                                                  |       | 19                 |       | 1,139              |       | —                   |       | —                 |       | —                |       | 1,158      |       |
| Net income for the year                                                                    |       | —             |       | —             |       | —                   |       | —                 |       | 4,217,097             |       | 4,217,097  |       |
| Appropriation to statutory reserve (see Note 15(a))                                        |       | —             |       | —             |       | —                   |       | 419,266                |       | (419,266              | )          | —     |       |
| Balance at December 31, 2003                                                               |       | 1,331,390          |       | 52,483,266         |       | 176,853                  |       | 1,542,478              |       | 14,081,503            |       | 69,615,490 |       |
|                                                                                       |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| Dividends (see Note 15(b))                                                                 |       | —             |       | —             |       | —                   |       | —                 |       | (1,256,160            | )          | (1,256,160 | )          |
| Exercise of share options (see Note 30(g))                                                 |       | 1,097              |       | 63,028             |       | —                   |       | —                 |       | —                |       | 64,125     |       |
| Net income for the year                                                                    |       | —             |       | —             |       | —                   |       | —                 |       | 4,386,999             |       | 4,386,999  |       |
| Appropriation to statutory reserve (see Note 15(a))                                        |       | —             |       | —             |       | —                   |       | 429,300                |       | (429,300              | )          | —     |       |
| Balance at December 31, 2004                                                               |       | 1,332,487          |       | 52,546,294         |       | 176,853                  |       | 1,971,778              |       | 16,783,042            |       | 72,810,454 |       |
|                                                                                       |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| Representing:                                                                              |       |               |       |               |       |                     |       |                   |       |                  |       |       |       |
| Proposed final dividend (see Note   15(b))                                            |       |               |       |               |       |                     |       |                   |       | 1,256,349             |       |       |       |
| Others                                                                                     |       |               |       |               |       |                     |       |                   |       | 15,526,693            |       |       |       |
| Balance at December 31, 2004                                                               |       |               |       |               |       |                     |       |                   |       | 16,783,042            |       |       |       |

 

The accompanying notes are an integral part of theconsolidated financial statements.

 

F - 7

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004**

**(Expressed in thousands)**

 
| ** **                                                     | ** ** | **Note**   | ** ** | **2002**    | ** ** | **2003**    | ** ** | **2004**    | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **RMB**     | ** ** | **RMB**     | ** ** | **RMB**     | ** ** | **US$**    | ** ** |
|                                                           | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| **Net cash  inflow from operations**                           |       | (a)        |       | 15,675,105  |       | 26,449,770  |       | 27,703,311  |       | 3,347,225  |       |
| Interest received                                              |       |       |       | 599,506     |       | 204,025     |       | 106,365     |       | 12,851     |       |
| Interest paid                                                  |       |       |       | (1,868,208  | )          | (2,540,513  | )          | (2,310,270  | )          | (279,136   | )          |
| Dividends received                                             |       |       |       | 24,978      |       | 2,573       |       | —      |       | —     |       |
| Dividends paid to minority  owners of subsidiaries             |       |       |       | (31,902     | )          | (4,689      | )          | —      |       | —     |       |
| PRC income tax paid                                            |       |       |       | (1,345,201  | )          | (1,545,907  | )          | (1,680,111  | )          | (202,998   | )          |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| Net cash inflow from operating  activities                     |       |       |       | 13,054,278  |       | 22,565,259  |       | 23,819,295  |       | 2,877,942  |       |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| **Investing  activities**                                      |       |       |       |        |       |        |       |        |       |       |       |
| Purchase of property, plant  and equipment                     |       |       |       | (21,152,102 | )          | (21,184,245 | )          | (19,161,078 | )          | (2,315,119 | )          |
| Sale of property, plant and  equipment                         |       |       |       | 24,552      |       | 94,804      |       | 53,970      |       | 6,521      |       |
| Purchase of minority interests                                 |       |       |       | (257,337    | )          | —      |       | —      |       | —     |       |
| Decrease in short-term bank  deposits                          |       |       |       | 20,096,738  |       | 3,832,411   |       | 250,769     |       | 30,299     |       |
| Purchase of Unicom New  Century, net of cash acquired          |       | 4(a)       |       | (3,692,687  | )          | —      |       | —      |       | —     |       |
| Payment of direct acquisition  cost of Unicom New Century      |       |       |       | —      |       | (59,767     | )          | (4,566      | )          | (552       | )          |
| Purchase of Unicom New World,  net of cash acquired            |       | 4(b)       |       | —      |       | (2,326,449  | )          | —      |       | —     |       |
| Payment of direct acquisition  cost of Unicom  New  World |       |       |       | —      |       | —      |       | (14,039     | )          | (1,696     | )          |
| Purchase of Unicom  International, net of cash acquired        |       | 4(c)       |       | —      |       | —      |       | 44,267      |       | 5,349      |       |
| Purchase of trading securities                                 |       |       |       | (14,557     | )          | (87,956     | )          | —      |       | —     |       |
| Sale of trading securities                                     |       |       |       | 18,865      |       | 118,575     |       | —      |       | —     |       |
| Purchase of investment in  associated companies                |       |       |       | (2,105      | )          | (10,062     | )          | —      |       | —     |       |
| Sale of investment in  associated companies                    |       |       |       | 4,241       |       | 853         |       | —      |       | —     |       |
| Sale of investment securities                                  |       |       |       | 35,300      |       | 19,753      |       | —      |       | —     |       |
| Sale of Guoxin Paging, net of  cash disposed                   |       | 5          |       | —      |       | 1,259,159   |       | 450,000     |       | 54,371     |       |
| Purchase of other assets                                       |       |       |       | (226,947    | )          | (708,379    | )          | (577,926    | )          | (69,827    | )          |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| Net cash outflow from  investing activities                    |       |       |       | (5,166,039  | )          | (19,051,303 | )          | (18,958,603 | )          | (2,290,654 | )          |
| ** **                                                     |       |       |       |        |       |        |       |        |       |       |       |
| **Financing  activities**                                      |       |       |       |        |       |        |       |        |       |       |       |
| Proceeds from exercise of  share options                       |       |       |       | —      |       | 1,158       |       | 64,125      |       | 7,748      |       |
| Decrease of payables to Unicom  Group                          |       |       |       | (1,393,434  | )          | (724,127    | )          | —      |       | —     |       |
| Proceeds from short-term bank loans                            |       |       |       | 9,623,438   |       | 10,901,425  |       | 10,224,971  |       | 1,235,422  |       |
| Proceeds from long-term bank loans                             |       |       |       | 7,757,005   |       | 11,075,836  |       | 11,083,383  |       | 1,339,139  |       |
| Repayment of short-term bank loans                             |       |       |       | (7,928,938  | )          | (10,278,727 | )          | (12,271,753 | )          | (1,482,723 | )          |
| Repayment of long-term bank loans                              |       |       |       | (19,925,822 | )          | (18,497,783 | )          | (17,245,641 | )          | (2,083,688 | )          |
| Dividends paid (see Note  15(b))                               |       |       |       | —      |       | (1,255,300  | )          | (1,256,160  | )          | (151,774   | )          |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| Net cash outflow from  financing activities                    |       |       |       | (11,867,751 | )          | (8,777,518  | )          | (9,401,075  | )          | (1,135,876 | )          |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| Net decrease in cash and cash  equivalents                     |       |       |       | (3,979,512  | )          | (5,263,562  | )          | (4,540,383  | )          | (548,588   | )          |
| Cash and cash equivalents,  beginning of year                  |       |       |       | 18,413,010  |       | 14,433,498  |       | 9,169,936   |       | 1,107,949  |       |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| Cash and cash equivalents, end  of year                        |       |       |       | 14,433,498  |       | 9,169,936   |       | 4,629,553   |       | 559,361    |       |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
| **Analysis  of the balances of cash and cash equivalents:**    |       |       |       |        |       |        |       |        |       |       |       |
| ** **                                                     |       |       |       |        |       |        |       |        |       |       |       |
| Cash balances                                                  |       |       |       | 5,942       |       | 4,610       |       | 4,756       |       | 575        |       |
| Bank balances                                                  |       |       |       | 14,427,556  |       | 9,215,326   |       | 4,650,708   |       | 561,917    |       |
| Less: Restricted bank deposits                                 |       | (i)        |       | —      |       | (50,000     | )          | (25,911     | )          | (3,131     | )          |
|                                                           |       |       |       |        |       |        |       |        |       |       |       |
|                                                           |       |       |       | 14,433,498  |       | 9,169,936   |       | 4,629,553   |       | 559,361    |       |

 

----

Note (i): As of December31, 2004,approximately RMB26 millionbank balances (2002: Nil; 2003: RMB50 million) wasrestricted by the bank to secure for long-term bank loans.

 

F - 8

----

 

(a)   The reconciliationof income before taxation to net cash inflow from operations was as follows:

 
| ** **                                                                           | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2004**  | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-----------|------------|
| ** **                                                                           | ** ** | **RMB**    | ** ** | **RMB**    | ** ** | **RMB**    | ** ** | **US$**   | ** ** |
|                                                                                 |       |       |       |       |       |       |       |      |       |
| Income before taxation                                                               |       | 6,303,166  |       | 6,095,849  |       | 6,466,624  |       | 781,324   |       |
| Adjustments for:                                                                     |       |       |       |       |       |       |       |      |       |
| Depreciation and amortization                                                        |       | 11,255,724 |       | 16,385,293 |       | 19,063,074 |       | 2,303,277 |       |
| Amortization of deferred  customer acquisition costs of contractual CDMA subscribers |       | 1,385,424  |       | 5,836,587  |       | 6,120,737  |       | 739,532   |       |
| Interest income                                                                      |       | (470,282   | )          | (173,033   | )          | (102,907   | )          | (12,434   | )          |
| Interest expense                                                                     |       | 1,456,736  |       | 1,919,375  |       | 1,668,467  |       | 201,591   |       |
| Loss on sale of Guoxin Paging                                                        |       | —     |       | 663,279    |       | —     |       | —    |       |
| Loss on disposal of property, plant and  equipment                                   |       | 82,467     |       | 49,940     |       | 10,537     |       | 1,273     |       |
| Provision for impairment loss of property,  plant and equipment and goodwill         |       | 38,797     |       | 528,048    |       | —     |       | —    |       |
| Provision for doubtful debts                                                         |       | 971,989    |       | 1,749,887  |       | 2,191,820  |       | 264,825   |       |
| Share of (incomes)/losses from associated  companies                                 |       | (553       | )          | 2,275      |       | —     |       | —    |       |
| Dividends from investment securities                                                 |       | (24,978    | )          | (2,573     | )          | —     |       | —    |       |
| Realized gains on trading securities                                                 |       | (1,876     | )          | (12,045    | )          | —     |       | —    |       |
| Unrealized losses/(gains) on trading  securities                                     |       | 27,461     |       | (10,129    | )          | —     |       | —    |       |
| Realized gains on investment securities                                              |       | (18,098    | )          | (13,268    | )          | —     |       | —    |       |
| Realized gains in associated companies                                               |       | (1,251     | )          | —     |       | —     |       | —    |       |
| Provision of impairment loss of investment securities                           |       | 650        |       | —     |       | —     |       | —    |       |
| Operating income before working capital  changes                                     |       | 21,005,376 |       | 33,019,485 |       | 35,418,352 |       | 4,279,388 |       |
| Increase in accounts receivable                                                      |       | (2,085,863 | )          | (2,650,625 | )          | (1,915,496 | )          | (231,438  | )          |
| (Increase)/ decrease in inventories                                                  |       | (1,276,602 | )          | 1,263,299  |       | (939,899   | )          | (113,562  | )          |
| Increase in other assets                                                             |       | (5,478,259 | )          | (3,169,766 | )          | (5,251,569 | )          | (634,516  | )          |
| Increase in  prepayments and other current assets                                    |       | (1,142,810 | )          | (1,342,086 | )          | (792,416   | )          | (95,743   | )          |
| Decrease/ (increase) in amounts due from domestic  carriers                          |       | 8,599      |       | (22,227    | )          | (85,306    | )          | (10,307   | )          |
| Decrease in  amounts due from related parties                                        |       | 280,216    |       | 553,354    |       | 70,516     |       | 8,520     |       |
| Increase/ (decrease) in payables and accrued  liabilities                            |       | 1,488,449  |       | (35,732    | )          | 1,835,813  |       | 221,810   |       |
| Increase/ (decrease) in advances from  customers                                     |       | 1,978,456  |       | (55,497    | )          | 367,431    |       | 44,394    |       |
| Increase/ (decrease)in amounts due to domestic  carriers                             |       | 221,196    |       | (161,937   | )          | 169,733    |       | 20,508    |       |
| Decrease in  amounts due to Unicom Group                                             |       | —     |       | (562,633   | )          | (943,448   | )          | (113,991  | )          |
| Increase/ (decrease) in amounts due to  related parties                              |       | 676,347    |       | (385,865   | )          | (230,400   | )          | (27,838   | )          |
|                                                                                 |       |       |       |       |       |       |       |      |       |
| Net cash inflow from  operations                                                     |       | 15,675,105 |       | 26,449,770 |       | 27,703,311 |       | 3,347,225 |       |

 

(b)   Supplementalinformation:

 

Payables to equipment suppliers forconstruction-in-progress during 2004decreased by approximately RMB775 million (2002: RMB2, 201 million; 2003: RMB3, 234 million).

 

F - 9

----

 

##### **CHINA UNICOM LIMITED**

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

**(Amounts expressed in RMB unlessotherwise stated)**

 

**1.****    ****ORGANISATION AND PRINCIPAL ACTIVITIES**

 

ChinaUnicom Limited (the “Company”) was incorporated in the Hong Kong SpecialAdministrative Region (“Hong Kong”), the People’s Republic of China (the “PRC”)on February 8, 2000. Theprincipal activities of the Company are investment holding and the Company’ssubsidiaries are engaged in the provision of GSM and CDMA cellular, data,Internet, longdistance and paging (discontinued in2004)services in the PRC. The GSM and CDMA business hereinafter collectively referto as the “Cellular Business”. The Company and its subsidiaries are hereinafterreferred to as the “Group”.

 

TheGroup completed the following acquisitions and sale activities in 2002, 2003 and 2004 respectively:

 

***Acquisition ofUnicom New Century Telecommunications Corporation Limited (“Unicom New Century”)***

 

In 2002, the Company acquired the entire equityinterests in Unicom New Century from its ultimate parent company, China UnitedTelecommunications Corporation (a state-owned enterprise established in thePRC, hereinafter referred to as “Unicom Group”). For details of thisacquisition, please refer to Note 4(a).

 

***Acquisition ofUnicom New World Telecommunications Corporation Limited (“Unicom New World”)***

 

In 2003, the Company acquired the entire equityinterests in Unicom New World from Unicom Group. For details of thisacquisition, please refer to Note 4(b).

 

***Sale of******Guoxin Paging Corporation Limited (“Guoxin Paging”)***

 

In 2003, the Company sold the entire equity interests inGuoxin Paging to Unicom Group. For details of the sale, please refer to Note 5.

 

***Acquisition ofChina Unicom International Limited (“Unicom International”)***

 

In 2004, the Company acquired the entire equityinterests in Unicom International from China Unicom (Hong Kong) Group Limited(a wholly-owned subsidiary of Unicom Group, hereafter referred to as “UnicomGroup (HK)”). For details of this acquisition, please refer to Note 4(c).

 

Afterthe above acquisitions and sales, the Company expands its cellular business’sgeographical coverage to 30 provinces, municipalities and autonomous regions(which covers the whole mainland China apart from Guizhou province) in the PRC,and discontinued its nationwide paging operating in the PRC.

 

On July 30, 2004, China Unicom Corporation Limited(hereinafter referred to as “CUCL”, a direct wholly-owned subsidiary of theCompany) combined with Unicom New Century and obtained the revised businesslicense. After the combination, Unicom New Century was legally dissolved andCUCL extended its Cellular Business in 21 provinces.

 

On October 15, 2004, the Company together withUnicom International set up and incorporated China Unicom (Macau) CompanyLimited (“Unicom Macau”) in Macau Special Administrative Region of the PRC (“Macau”).The Company effectively held 100% in the entire issued capital of Unicom Macau.

 

The immediate holding company of the Company is ChinaUnicom (BVI) Limited (“Unicom BVI”).  Themajority of the equity interests in Unicom BVI is owned by China UnitedTelecommunications Corporation Limited (a joint stock company incorporated inthe PRC on December 31, 2001, with its A shares listed on the Shanghai Stock Exchangeon October 9, 2002).

 

Thedirectors of the Company consider Unicom Group to be the ultimate parentcompany.

 

F - 10

----

 

**2.****    ****BASIS OF PRE****SENTATION**

 

Thefinancial statements have been prepared under the historical cost conventionexcept that, certain land and building and investments in securities are statedat fair value. They have been prepared in accordance with accounting principlesgenerally accepted in Hong Kong (“HK GAAP”) issued by the Hong Kong Instituteof Certified Public Accountants(“HKICPA”). This basis of accounting differsfrom that used in the preparation of statutory financial statements for PRCstatutory reporting purposes, which were based on the accounting principles andfinancial regulations applicable to enterprises established in the PRC (“PRCGAAP”).

 

Theprincipal adjustments made to conform to HK GAAP include the following:

 

•      Reversal of revaluation surplus andrelated depreciation and amortization charges arising from the revaluation ofassets performed by independent valuers registered in the PRC;

 

•      Additional accrual for retirement benefits;

 

•      Additional provision for housingbenefits;

 

•      Additional capitalization of borrowingcosts;

 

•      Provision for deferred taxation on HKGAAP adjustments; and

 

•      Capitalizationof the direct costs associated with the acquisition of subsidiaries.

 

TheCompany has adopted the purchase method to account for the acquisitions ofUnicom New Century, Unicom New World and Unicom International. The differencebetween the purchase consideration and the fair values of the net assetsacquired has been recorded as goodwill/negative goodwill, which is amortizedusing the straight-line method over relevant beneficial periods. The effectivedates of the acquisitions of Unicom New Century, Unicom New World and UnicomInternational were December 31, 2002, December 31, 2003 and September 16, 2004respectively. The operating results of these acquired subsidiaries have beenincluded in the consolidated statements of income of the Group after theacquisitions were effective.

 

Thesale of Guoxin Paging has been accounted for as a disposal of discontinued operation by the Group. The difference between thesale proceeds and the carrying amount of net assets of Guoxin Paging as of theeffective date of disposal (December 31, 2003) was recorded as the loss on saleof discontinued operation in the consolidated statements of income of theGroup.  The operating results of GuoxinPaging for 2003 were included in the consolidated statements of income of theGroup up to the effective date of the sale.

 

F - 11

----

 

**3.****    ****PRINCIPAL ACCOUNTING POLICIES**

 

Theprincipal accounting policies adopted in the preparation of the financialstatements are set out as follows:

 

***(******a)******  ******Basis of preparation***

 

As of December 31, 2004, the current liabilities of theGroup had exceeded the current assets by approximately RMB28.3 billion (2003:RMB21.7 billion). The decrease in working capital was mainly attributable tothe use of short-term bank deposits to repay long-term bank loans. Taking intoaccount of available financing and continuous net cash inflow from operatingresults, the Group has sufficient working capital for present requirements. Asa result, the financial statements of the Group for the year ended December 31,2002, 2003 and 2004 have been prepared under the going concern basis.

 

**Recently issued accounting standards**

 

In year 2003, the Group adopted the following Statementsof Standard Accounting Practice (“SSAP”) issued by the HKICPA which areeffective for accounting periods commencing on or after January 1, 2003:

 
| SSAP 12 (revised) | Income Tax                                                 |
|-------------------|------------------------------------------------------------|
| SSAP 35           | Government Grants and  Disclosure of Government Assistance |

 

Upon the adoption of SSAP 12 “Income Taxes” (revised)(“SSAP 12”) in 2003, deferred taxation is provided in full, using the liabilitymethod, on temporary differences arising between the tax bases of assets andliabilities and their carrying amounts in the financial statements. Taxationrates enacted or substantively enacted at the balance sheet date are used todetermine deferred taxation. Deferred tax assets are recognized to the extentthat it is probable that future taxable income will be available against whichthe temporary differences can be utilized.

 

Prior to 2003, deferred taxation was accounted forat the current taxation rate in respect of timing differences between income ascomputed for taxation purpose and income as stated in the statement of income. A deferred tax asset was not recognized unless the related benefitsare expected to crystallize in the foreseeable future. The adoption of SSAP 12 in2003 represents a change in accounting policy which has been applied retrospectively so that the comparatives presentedhave been restated to conform to the changed policy.

 

As detailed in the consolidated statement ofchanges in equity, the above change in the accounting policy has resulted in anincrease of opening retained earnings as of January 1, 2002 and 2003 byapproximately RMB373,159,000 and RMB405,300,000,respectively, representing the deferred tax assets relating to the provisionfor doubtful debts previously not recognized. This change has resulted in anincrease in deferred tax assets at January 1, 2003 by approximately RMB405,300,000.  The netincome for the year ended December 31, 2002 has also been increased byapproximately RMB32,141,000.

 

The adoption of SSAP 12 has also resulted in anincrease of the deferred tax assets of Unicom New Century as of December 31,2002 by approximately RMB80,448,000. This adjustment increasedthe net assets value of Unicom New Century on December 31, 2002 and accordinglyreduced the goodwill recorded by the Group arising from the acquisition ofUnicom New Century on December 31, 2002.

 

Since the impact of the adoption of SSAP 35 “Government Grants and Disclosure of Government Assistance” on theGroup’s financial statements is not significant, no prior period adjustment hasbeen required.

 

F - 12

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The HKICPA hasissued a number of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)and Hong Kong Accounting Standards (“HKASs”), herein collectively referred toas new HKFRSs, which are effectivefor accounting periods beginning on or after January 1, 2005. The Group has not early adopted these newHKFRSs in the financial statements for the year ended December 31, 2004. The Group is in the process of making anassessment of the impact of these new HKFRSs and has so far concluded that the moresignificant differences between new HKFRSs and current accounting policies thatare expected to affect the Group are as follows:

 

**(i)****     ****Share-based payment**

 

UnderHKFRS 2 “Share-based payment”, the Group is required to determine the fairvalue of all share-based payments to employees as remuneration and recognize anexpense in the statement ofincome.Under the specific transitional provisions of HKFRS 2, this treatment appliesto equity-settled share-based payment transactions where shares, share optionsor other equity instruments were granted after November 7, 2002 and had not yetvested on January 1, 2005 and to liabilities arising from share-based paymenttransactions existing on January 1, 2005. This treatment would result in anincrease in personnel expenses as such items have not been recognized asexpenses previously by the Group. The Grouprecognizes stock-based employee compensation costs based on the estimated fairvalue of share options at the grant date by using the Black-Scholes Option pricing model, after takinginto consideration of risk-free rate, expected life of option, expected dividendyield and volatility etc, which are expensed over the relevant vesting periods. Upon the adoption of HKFRS 2 in 2005 on a retrospective basis, it wouldresult in a decrease in net income by approximately RMB89 million for the yearended December 31, 2004 (2002: Nil, 2003: RMB22 million). This treatment wouldalso result in an employee share-based compensation reserve as of December 31,2004 of approximately RMB111 million (2003: RMB22 million) with a correspondingdecrease in the retained earnings as of December 31, 2003 and 2004 of the same amount respectively.

 

**(ii)****   ****Goodwill /Negative goodwill**

 

UnderHKFRS 3 “Business Combinations”, goodwill is no longer amortized but instead is subject to impairment test on annual basis or when thereare indications of impairment. This policy is applied prospectively fromJanuary 1, 2005.This resultsin a change to the Group’s accounting policy applied previously under which goodwill is amortized overthe beneficial period of 20 years and assessed for an indication of impairmentat each balance sheet date (see Note3(e)). In accordance with the provisionof HKFRS3, the Group will cease amortization of goodwill from January 1, 2005, andaccumulated amortization as at December 31, 2004 will be eliminated against thecost of goodwill. As of December 31, 2004, the carryingamount of goodwill, net of accumulated amortization, amounted to approximately RMB3,144million (2003: approximately RMB3,315 million) and theamortization for the year ended December 31, 2004 amounted to RMB171 million(2002: RMB23 million, 2003: RMB115 million) (see Note 22).

 

Upon the adoption of HKFRS 3 in 2005, negativegoodwill previouslyrecognized with carrying amount ofapproximately RMB7 million as of December 31, 2004, which represented theexcess of fair values of the net identifiable assets and liabilities acquired overthe purchase consideration at the

 

F - 13

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date of acquisition, will be derecognized at January 1, 2005 (see Note 4(c), 22), with a corresponding adjustment to theretained earnings of the Group.

 

As required under HKFRS 3, upon the adoption ofHKFRS 3 from January 1, 2005, the Group will also apply HKAS 36 “Impairment ofassets” and HKAS 38 “Intangible assets” prospectively from the same date. Theadoption of these accounting policies would have no significant impact on theGroup’s operating results.

 

**(iii)****  ****Land use right in PRC**

 

UnderHKAS 17 “Leases”, land use right in the PRC will no longer be accounted for asproperty, plant and equipment. Instead, it will be reclassified as other assets -long-term prepayment of lease, which will be stated at cost and recognized as anexpense on a straight-line basis over the lease term. This policy will beapplied prospectively from January 1, 2005 by the Group. As of December 31, 2004, the carrying amount of land use right in thePRC amounted to approximately RMB412 million (2003: RMB242 million) (see Note21). This change would have no material impact on the operating results of theGroup.

 

**(iv)****   ****R****evenue**

 

Upon adoption of the new HKFRS, the Group willchange its accounting policy for upfront non-refundable revenue, such asconnection fee, which has previously been recognized upon completion ofactivation services. Effective from January 1, 2005, upfrontnon-refundable revenue and the related direct incremental cost incurred aredeferred and recognized over the expectedcustomer service periods. The expected customer service period for the CellularBusiness is estimated based on the expected stabilized churn rates ofsubscribers. Management judges that this change of accounting policy providesreliable and more relevant information because it better reflects the economiceffects of the transactions and is consistent with the accounting policyadopted for the Group’s financial information presented under generallyaccepted accounting principles in the United States of America (see Note 40(D)(i)).

 

This change of accounting policy will be accounted for retrospectivelyand the relevant comparatives will need to be restated. Upon the adoption ofthe change in this accounting policy in 2005, it would result in an increase ofnet income by approximately RMB196 million for the year ended December 31, 2004(2002: RMB66 million, 2003: RMB82 million), and a decrease of retained earningsas of December 31, 2004 by approximately RMB368 million (2002: RMB646 million,2003: RMB564 million).

 

The Group will continue to assess the above impact andother potential impact of the other new HKFRSs. Other significant changes may be identified as a result.

 

***(******b)******  ******Groupaccounting***

 

**(i)****   ****Consolidation**

 

The consolidated financial statements include the financialstatements of the Company and its subsidiaries made up to December 31.

 

Subsidiaries are those entities in which theCompany, directly or indirectly, controls the composition of the board ofdirectors; controls more than half of the voting power; or holds more than half of the issued share capital.

 

The results of subsidiaries acquired or disposed ofduring the year are included in the consolidated statement of income from theeffective dates of acquisitions or up to the effective date of disposal, asappropriate.

 

All significant inter company transactions andbalances within the Group are eliminated on consolidation.

 

Minority interests represent the interests ofoutside shareholders in the operating results and net assets of subsidiaries.

 

F - 14

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**(ii)****  ****Associated companies**

 

Anassociated company is a company, not being a subsidiary, in which an equityinterest is held for the long-term and significant influence is exercised inits management.

 

Theconsolidated statements of income include the Group’s share of the results ofassociated companies for the year, and the consolidated balance sheet includethe Group’s share of the net assets of the associated companies andgoodwill/negative goodwill (net of accumulated amortization) on acquisitions.

 

Equityaccounting is discontinued where the carrying amount of the investment in anassociated company reaches zero, unless the Group has incurred obligations orguaranteed obligations in respect of the associated companies.

 

Where,in the opinion of the directors, there is an impairment loss of an associatedcompany, permanently reduced below its carrying value, or the market value hasfallen below the carrying value over a sustained period, a provision is made forsuch impairment loss.

 

***(c******)******  ******Useof estimates***

 

Thepreparation of financial statements in conformity with HK GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsand disclosures. Accordingly, actual results may differ from those estimatesand assumptions.

 

***(d******)******  ******Property,plant and equipment***

 

**(i)****   ****Land use rights and building**

 

Landuse rights and buildings are stated at valuation. Independent valuations areperformed periodically with the last valuation performed on March 31, 2000. Inthe intervening years, the directors review the carrying value of land userights and buildings and adjustment is made where in the directors’ opinionthere has been a material change in value. Any increase in land use rights andbuildings valuation is credited to the revaluation reserve; any decrease isfirst offset against an increase on earlier valuation in respect of the sameproperty and is thereafter charged to the statement of income. Upon thedisposal of revalued land use rights and buildings, the realized portion of therevaluation reserve is transferred from the valuation reserve to retainedearnings.

 

**(ii)****  ****Other fixed assets**

 

Otherfixed assets, comprising leasehold improvement, 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.

 

F - 15

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**(iii)********Depreciation**

 

Landuse rights are amortized over the period of the lease while other fixed assetsare depreciated at rates sufficient to write off their costs less accumulatedlosses over their estimated useful lives on a straight-line basis. Theestimated useful lives of property, plant and equipment are as follows:

 
| ** **                                | ** ** | **Depreciable life**     | ** ** | **Residual value** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------|------------|
|                                      |       |                     |       |               |       |
| Land use rights                           |       | Over the period of lease |       | —             |       |
| Buildings                                 |       | 8 – 40 years        |       | 3                  | %          |
| Leasehold improvements                    |       | Over the lease term      |       | —             |       |
| Telecommunications equipment              |       | 3 – 15 years        |       | 3                  | %          |
| Office furniture, fixtures and other |       | 4 – 14 years        |       | 3                  | %          |

 

**(iv)**** ****Construction-in-progress**

 

Construction-in-progressrepresents buildings under construction and plant and equipment 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.

 

Noprovision for depreciation is made on construction-in-progress until such timeas the assets are completed and ready for use.

 

**(v)****   ****Impairment and gains or loss on disposal**

 

Ateach balance sheet date, both internal and external sources of information areconsidered to assess whether there is any indication that assets includingproperty, plant and equipment are impaired. If any such indication exists, therecoverable amount of the asset is estimated and where relevant, an impairmentloss is recognized to reduce the assets to its recoverable amount. Suchimpairments losses are recognized in the statement of income except where theasset is carried at valuation and the impairment loss does not exceed therevaluation surplus for that same asset, in which cases it is treated as arevaluation decrease. In determining the recoverable amount, expected futurecash flows generated by the property, plant and equipment are discounted totheir present values.

 

Provisionfor impairment loss is charged to the statement of income and classified under “general,administrative and other expenses” as a component of operating expenses.Reversal of impairment losses recognized in prior years is recorded whenimpairment losses recognized for the asset no longer exist or have decreased.The reversal is recorded in the statement of income.

 

Thegain or loss on disposal of a property, plant and equipment is the differencesbetween the net sales proceeds and the carrying amount of the relevant assets,and is recognized in the statement of income. Any revaluation reserve balanceremaining attributable to the relevant asset is transferred to retainedearnings and is shown as a movement in reserves.

 

F - 16

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***(******e******)******  ******Goodwill/Negativegoodwill***

 

Goodwillrepresents the excess of purchase consideration over the fair values of theGroup’s share of the net identifiable assets and liabilities of the acquiredsubsidiary/associated company at the date of acquisition. Goodwill is carriedat cost less accumulated amortization and accumulated impairment losses.Goodwill is amortized using the straight-line method over the estimatedeconomic lives of the acquired businesses. Goodwill arising on major strategicacquisitions of the Group to expand its geographical market coverage isamortized over 20 years.

 

Negative goodwill represents the excess of the fairvalues of the Group’s share of the net identifiable assets and liabilities ofthe acquired subsidiary over the purchase consideration at the date ofacquisition. Negative goodwill is recognized using the straight-line methodover the remaining weighted average useful life of acquired identifiablenon-monetary assets.

 

Whenlater events and circumstances occur which indicate the carrying balance ofgoodwill may not be recoverable, the unamortized balance is written down to itsestimated recoverable amount. Estimated recoverable amount is determined basedon estimated discounted future net cash flows of the related business over itsremaining life.

 

***(******f******)******   ******Otherassets***

 

Otherassets mainly represent (i)expenditures on facilities for interconnection with otheroperators, for which the Group has a permanent use right, (ii) long-term prepaidleased lines and rentals and (iii) deferredcustomer acquisition costs of CDMA contractual subscribers.

 

Expenditureson interconnection facilitiesare amortized using the straight-line method over the beneficial period of 5 years.Long-termprepaid leased lines and rentals are amortized using astraight-line method over the lease period.

 

Deferredcustomer acquisition costs of CDMA contractual subscriber represent the cost ofCDMA handsets given to contractual subscribers under special promotional packages. Deferred customeracquisition costs, to the extent recoverable, are amortized over the contractual period (notexceeding 2 years) to match with the minimum contract revenue.  Deferred customer acquisition costs ofcontractual CDMA subscribers are included in “prepayment and other currentassets” when the customer contract is within 1 year, whereas they are recordedas “other assets” when the contract period is over 1 year.

 

F - 17

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***(******g******)******  ******Investments******insecurities***

 

**(i****)****   ****Investment securities**

 

Equity securities intended to beheld on a continuing basis are classified as investment securities and recordedat cost less any provision for impairment loss.

 

Thecarrying amounts of investment securities are reviewed at the end of each yearto assess whether the fair values have declined below the carryingamounts.  When a decline other thantemporary decline has occurred, the carrying amount of such securities will bereduced to its fair value. The impairment loss is recognized as an expense inthe statements of income. This impairment loss is written back to statements ofincome when the circumstances and events that led to the write-downs orwrite-offs cease to exist and there is persuasive evidence that the newcircumstances and events will persist for the foreseeable future.Upon disposal of investment securities,income or loss thereon is accounted for in the statements of income.

 

**(ii)****  ****Trading securities**

 

Trading securities are carried at fair value.  At each balance sheet date, the net unrealized gains or losses arising from the changes in fair value of tradingsecurities are recognized in thestatements of income.  Gains or losses ondisposal of trading securities, representing the differences between the netsales proceeds and the carrying amounts, are recognized in the statements ofincome as they arise.

 

***(h)******  ******Cashand cash equivalents***

 

Cash and cash equivalents are carried at cost inthe balance sheet. For the purposes of the cash flow statement, cash and cashequivalents comprise cash on hand, deposits held at call with banks, cashinvestments with maturity of 3 months or less from the date of investment.

 

***(******i******)******   ******Short-termbank deposits***

 

Short-termbank deposits are cash invested in fixed-term deposits with original maturitiesranging from more than 3 months to 1 year.

 

F - 18

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**(*****j******)******   ******Accountsreceivables and other receivables***

 

Provision is made against accounts receivable andother receivables to the extent they are considered to be doubtful. They arestated in the balance sheet net of such provision.

 

***(k)******  ******Inventories***

 

Inventories,which principally comprise handsets, SIM cards, UIM cards and accessories, arestated at the lower of cost and net realizable value. Cost is based on theweighted average method and comprises all costs of purchase and other costsincurred in bringing the inventories to their present location and condition.Net realizable value is determined on the basis of anticipated sales proceedsless estimated selling expenses. The amount of any reversal of any write-downof inventories, arising from an increase in net realizable value, is recognizedas a reduction in the amount of inventories recognized as expense in the periodin which the reversal occurs.

 

***(******l******)******   ******Advancesfrom customers***

 

Advancesfrom customers are amounts paid by customers for GSM and CDMA prepaid cards,GSM and CDMA prepaid service fees, Internet protocol (“IP”) telephone cards andother calling cards which cover future telecommunications services (over aperiod of 3 to 12 months). Customer advances are stated at the amount ofproceeds received less the amount already recognized as revenues upon therendering of services.

 

***(m******)****** ******Assetsunder lease***

 

**(i)****   ****Finance leases**

 

Leases that substantially transfer to the Group allthe risks and rewards of ownership of assets are accounted for as financeleases. Finance leases are capitalized at the inception of the lease at thelower of the fair value of the leased assets or the present value of theminimum lease payments. Each lease payment is allocated between the capital andfinance charges so as to achieve a constant rate on the capital balancesoutstanding. The corresponding rental obligations, net of finance charges, areincluded in long-term liabilities. The finance charges are charged to thestatement of income over the lease periods.

 

Assets held under finance leases are depreciatedover the shorter of their estimated useful lives and the lease periods.

 

**(ii)****  ****Operating leases**

 

Leases where substantially all the risks andrewards of ownership of assets remain with the lessor are accounted for asoperating leases. Minimum lease payments under operating leases net of anyincentives received from the lessor are recognized as leasing expenses in thestatement of income on a straight-line basis over the lease periods. Leasedrental received under operating leases are recognized as lease rental income ona straight-line basis over the lease periods.

 

F - 19

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***(******n******)******  ******Borrowingcosts***

 

Borrowing costs are expensed as incurred, exceptfor interest directly attributable to the acquisition, construction orproduction of an asset, which necessarily takes a substantial period of time toget ready for its intended use, in which case they are capitalized as part ofthe cost of that asset. Capitalization of borrowing costs commences whenexpenditures for the asset and borrowing costs are being incurred and theactivities to prepare the asset for its intended use are in progress. Borrowingcosts are capitalized up to the date when the project is completed and readyfor its intended use.

 

To the extent that funds are borrowed specifically for the purpose ofobtaining a qualifying asset, the amount of borrowing costs eligible forcapitalization is determined as the actual borrowing costs incurred on thatborrowing during the period less any investment income on the temporaryinvestment of those borrowings.

 

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 recognized as expenseswhen incurred.

 

Thecapitalized borrowing rate represents the cost of capital for raising therelated borrowings externally and varies from 4.54% to 5.73% for the year endedDecember 31, 2004 (2002: 4.54% to 6.24%, 2003: 4.44% to 5.76%).

 

***(******o******)******  ******Provision******s***

 

Provisions arerecognized when the Group has present obligations (legal or constructive) as aresult of a past event, it is probable (i.e. more likely than not) that anoutflow of resources embodying economic benefit will be required to settle theobligation, and a reliable estimate of the amount can be made. Provisions arereviewed at each balance sheet date and adjusted to reflect the current bestestimate. Where the effect of the time value of money is material, the amountof a provision is the present value of the expenditures expected to be requiredto settle the obligation.

 

F - 20

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***(******p******)******  ******Revenuerecogn******ition***

 

**(i)**    Revenue is recognized when it is probablethat the economic benefits associated with a transaction will flow to the Groupand when the revenue and cost can be measured reliably, on the following basis:

 

•      Usage fees are recognized when theservice is rendered;

 

•      Monthly fees are recognized as revenue inthe month during which the service is rendered;

 

•      Revenue from telephone cards, whichrepresent prepaid service fees received from customers for telephone services,is recognized when the related service is rendered upon actual usage of thetelephone cards by customers;

 

•      Leased line rental income is recognizedon a straight-line basis over the lease term; and

 

•      Sales of telecommunications products,such as handsets, SIM cards, UIM cards, pagers andaccessories etc, are recognized when title has been passed to the buyers.

 

**(ii)**   **Interest income**

 

Interestincome from deposits in banks or other financial institutions is recognized ona time proportion basis, taking into account the principal amounts and theinterest rates applicable.

 

**(iii)****Dividend income**

 

Dividendincome is recognized when the rights to receive payment is established.

 

***(q)******  ******Foreigncurrency translation***

 

TheGroup maintains its books and records in Renminbi (“RMB”), which is not freelyconvertible into foreign currencies. Transactions in foreign currencies are translatedat the exchange rates at the dates of the transactions. Monetary assets andliabilities denominated in other currencies are translated at exchange ratesruling at the balance sheet date. Exchange differences arising from changes inexchange rates subsequent to the transaction dates are dealt with in thestatement of income.

 

For the convenience of the reader, translation ofamounts for RMB into United States dollars (“US”) has been made at the noonbuying rate in New York city for cable transfer payables in foreign currenciesas certified for customers purposes by the Federal Reserve Bank of New York onDecember 31, 2004 of US$1.00=RMB8.2765. No representation is made that RMBamounts could have been, or could be, converted into US$ at that rate onDecember 31, 2004, or at other rate.

 

F - 21

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***(******r******)******   ******Employee******benefits***

 

**(i)****   ****Retirement benefi****ts**

 

TheGroup’s contributions to the defined contribution retirement scheme areexpensed as incurred and are reduced by contributions forfeited by thoseemployees who leave the scheme prior to vesting fully in the contributions.

 

**(ii)****  ****Housing ben****efits**

 

TheGroup’s contributions to the housing fund, special monetary housing benefitsand other housing benefits are expensed as incurred.

 

**(iii)********Equity compensation benefits**

 

Shareoptions are granted to directors and employees under the relevant share optionschemes of the Company approved by the Board of Directors (see Note 30). The financial impact of the share options grantedis not recorded in the financial statements until such time when the optionsare exercised. When the options are exercised, the proceeds received net of anytransaction costs are credited to share capital (nominal value) and sharepremium.

 

***(******s******)******   ******Taxation***

 

**(i)****   ****Income tax**

 

Incometax is provided on the basis of income for statutory financial reportingpurposes, adjusted for income and expense items, which are not assessable ordeductible for tax purposes.

 

**(ii)****  ****Deferred taxation**

 

Deferred taxation is provided in full, using theliability method, on temporary differences arising between the tax bases ofassets and liabilities and their carrying amounts in the financial statements.Taxation rates enacted or substantively enacted at the balance sheet date are usedto determine deferred taxation. Deferred tax assets are recognized to theextent that it is probable that future taxable profit will be available againstwhich the temporary differences can be utilized.

 

***(******t******)******   ******Relatedparties***

 

Entitiesare considered to be related if one has the ability to control the other,directly or indirectly, or has the ability to exercise significant influenceover the financial and operating decisions of the other. Entities are alsoconsidered to be related if they are subject to common control or commonsignificant influence.

 

F - 22

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***(u)******  ******Contingent liabilities and contingent assets***

 

Acontingent liability is a possible obligation that arises from past events andwhose existence will only be confirmed by the occurrence or non-occurrence ofone or more uncertain future events not wholly within the control of the Group.It can also be a present obligation arising from past events that is notrecognized because it is not probable that outflow of economic resources willbe required or the amount of obligation cannot be measured reliably.

 

Acontingent liability is not recognized but is disclosed in the notes to thefinancial statements. When a change in the probability of an outflow occurs sothat outflow is probable, the liability will then be recognized as a provision.

 

Acontingent asset is a possible asset that arises from past events and whoseexistence will be confirmed only by the occurrence or non-occurrence of one ormore uncertain events not wholly within the control of the Group.

 

Contingentassets are not recognized but are disclosed in the notes to the financialstatements when an inflow of economic benefits is probable. When an inflow isvirtually certain, an asset is recognized.

 

***(v)******  ******Events after the balance sheet date***

 

Eventsafter the balance sheet date that provide additional information about theposition at the balance sheet date or those that indicate the going concernassumption is not appropriate (adjusting events) are reflected in the financialstatements. Events after the balance sheet date that are not adjusting eventsare disclosed in the notes when material.

 

***(w)****** ******Segment reporting***

 

Inaccordance with the Group’s internal financial reporting, the Group hasdetermined that business segments be presented as the primary reporting format.

 

Unallocatedcosts primarily represent corporate expenses. Segments assets consist primarilyof property, plant and equipment, other assets, prepayments, inventories,receivables and operating cash. Segment liabilities comprise operatingliabilities. Capital expenditure mainly comprises additions to property, plantand equipment.

 

***(******x******)******  ******E******arnings per share and perAmerican Depository Share (“ADS”)***

 

Basicearnings per share have been computed by dividing net income by the number ofweighted average number of ordinary shares outstanding during the year.

 

Dilutedearnings per share has been computed by dividing the profit attributable toshareholders by the weighted average number of ordinary shares, after adjustingfor the effects of the dilutive potential ordinary shares.

 

Basicand diluted net earnings per ADS have been computed by multiplying the netincome per share by 10, which is the number of shares represented by each ADS.

 

F - 23

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**4.****    ****ACQUISITIONS**

 

**(a)****  ****Acquisition of Unicom New Century**

 

Unicom New Century was a limited liability companyestablished in the PRC on July 16, 2002 to engage in the provision of GSM and CDMA cellulartelecommunications services in 6 provinces, 2 autonomous regions and 1municipality in the PRC, namely, Sichuan, Heilongjiang, Jilin,Henan, Jiangxi, Shannxi, Guangxi,Xinjiang and Chongqing. The Cellular Business of Unicom New Century and therelevant net assets were previously owned and operated by various branches ofUnicom Group.

 

Pursuant to the resolution passed by the Company’s Board of Directors on November20, 2002 and the extraordinary general meeting of the Company’s shareholders onDecember 23, 2002, the Company acquired the entire equity interests in UnicomNew Century (via the intermediary holding company, Unicom New Century (BVI)Limited) at a cash consideration of approximately RMB4,909million (including other direct costs of acquisition of approximately RMB109million).  Thereafter, Unicom New Century has become awholly-owned subsidiary of the Company.

 

The aforementioned acquisition of Unicom NewCentury became effective on December 31, 2002 when all the conditions to theacquisition were satisfied and cash consideration was settled by theGroup.  The Company has adopted thepurchase method of accounting to account for this acquisition.  The total fair value of the identifiableassets and liabilities of Unicom New Century as of December 31, 2002 amountedto approximately RMB2,624 million. The excess ofpurchase consideration over the fair value of identifiable assets andliabilities has been recorded as goodwill amounting to approximately RMB2,285 million, which is amortized using the straight-linemethod over the beneficial period of 20 years.

 

As the effectivedate of this acquisition was December 31, 2002, both the operating results and the financial position of Unicom NewCentury have been included in the consolidated financial statements of theGroup for the year ended December 31, 2003. However, the 2002 comparatives only reflected the financial position ofUnicom New Century in the consolidated balance sheet and excluded the operatingresults of Unicom New Century in the consolidated statements of income of theGroup.

 

Operating revenue and net income for the year endedDecember 31, 2003 of Unicom New Century amounted to approximately RMB15,946million and RMB364 million respectively.

 

On June 30, 2003, the Company entered into a sharetransfer agreement with Unicom New Century (BVI) Limited and acquired theentire share capital of Unicom New Century from Unicom New Century (BVI)Limited. Thereafter, Unicom New Century became a direct wholly-owned subsidiaryof the Company. On July 30,2004, CUCL combined with Unicom New Century.

 

F - 24

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The fair value of the net assets acquired and netcash outflow in respect of the acquisition of Unicom New Century as of December 31, 2002 was asfollowing:

 
| ** **                                                                        | ** ** | **As of December 31,  2002** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                        | ** ** | **RMB’000**             | ** ** |
|                                                                              |       |                         |       |
| Net assets acquired:                                                              |       |                         |       |
| Property, plant and equipment, net                                                |       | 23,330,775                   |       |
| Other assets                                                                      |       | 1,799,357                    |       |
| Deferred tax assets                                                               |       | 56,368                       |       |
| Current portion of deferred tax assets                                            |       | 251,255                      |       |
| Amounts due from related parties                                                  |       | 809,526                      |       |
| Amounts due from domestic carriers                                                |       | 20,601                       |       |
| Prepayments and other current assets                                              |       | 714,396                      |       |
| Inventories                                                                       |       | 1,201,310                    |       |
| Accounts receivable, net                                                          |       | 715,331                      |       |
| Bank balances and cash                                                            |       | 1,107,313                    |       |
| Payables and accrued liabilities                                                  |       | (4,940,983                   | )          |
| Amounts due to Unicom Group                                                       |       | (778,109                     | )          |
| Amounts due to related parties                                                    |       | (649,896                     | )          |
| Amounts due to domestic carriers                                                  |       | (160,018                     | )          |
| Current portion of long-term bank loans                                           |       | (2,668,782                   | )          |
| Long-term bank loans                                                              |       | (15,465,331                  | )          |
| Taxes payable                                                                     |       | (215,734                     | )          |
| Advances from customers                                                           |       | (1,496,228                   | )          |
| Short-term loans from Unicom  Group                                               |       | (724,127                     | )          |
| Short-term bank loans                                                             |       | (363,000                     | )          |
|                                                                              |       |                         |       |
|                                                                              |       | 2,544,024                    |       |
| Goodwill                                                                          |       | 2,365,197                    |       |
| Less: Direct costs of acquisition                                                 |       | (109,221                     | )          |
|                                                                              |       |                         |       |
| Consideration paid                                                                |       | 4,800,000                    |       |
|                                                                              |       |                         |       |
| Analysis of the net outflow in respect of  the acquisition of Unicom New Century: |       |                         |       |
| Cash consideration                                                                |       | 4,800,000                    |       |
| Bank balances and cash in hand  acquired                                          |       | (1,107,313                   | )          |
|                                                                              |       |                         |       |
| Net cash outflow in respect of the  acquisition of Unicom New Century             |       | 3,692,687                    |       |

 

**(b)****         ****Acquisition of Unicom New World**

 

Unicom New World was a limited liability company establishedin the PRC on November 4, 2003 to engage in the provision of GSM and CDMA cellulartelecommunications services in 6 provinces and 3 autonomous regions in the PRC, namely,Shanxi, Hunan, Hainan, Yunnan, Gansu, Qinghai, Inner Mongolia, Ningxia andXizang. The Cellular business ofUnicom New World and the relevant net assets were previously owned and operatedby various branches of Unicom Group.

 

Pursuant to the resolution passed by the Company’s Board of Directors on November 20, 2003 and the extraordinarygeneral meeting of the Company’s shareholders on December 23, 2003, the Company acquired theentire equity interests in Unicom New World (via the intermediary holdingcompany, Unicom New World (BVI) Limited) at a cash consideration of approximately RMB3,249million (including other direct costs of acquisition of approximately RMB49million).  Thereafter, Unicom New World has become awholly-owned subsidiary of the Company.

 

F - 25

----

 

After all the conditionsto the acquisition were satisfied and the cashconsideration was settled by the Group, the acquisition of Unicom New World became effective on December 31, 2003. The Company has adopted thepurchase method of accounting to account for this acquisition. The total fairvalue of the identifiable assets and liabilities of Unicom New World as of December 31, 2003 amountedto approximately RMB2,104 million, the excess of purchase consideration overthe fair value of the identifiable assets and liabilities has been recorded as goodwillamounting to approximately RMB1,145 million, which is amortized using the straight-line method over the expected beneficial period of20 years.

 

As the effectivedate of this acquisition was December 31, 2003, both the operating results and the financial position of Unicom NewWorld have been included in the consolidated financial statements of the Groupfor the year ended December 31, 2004. However, the 2003 comparatives onlyreflected the financial position of Unicom New World in the consolidatedbalance sheet as of December 31, 2003 and excluded the operating results ofUnicom New World in the consolidated statement of income of the Group for both2002 and 2003.

 

For the year ended December 31, 2004, operatingrevenue and net income of Unicom New World amounted to approximately RMB9,041million and RMB415 million respectively.

 

CUCL has planned to combine with Unicom New Worldin 2005, the relevant legal procedures regarding the combination is in process.For the details of this combination, please refer to Note 37(a).

 

F - 26

----

 

The fair value of the net assets acquired and netcash outflow in respect of the acquisition of Unicom New World as of December31, 2003 was as follows:

 
| ** **                                                                              | ** ** | **Note**   | ** ** | **As of December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                                                              | ** ** | ** ** | ** ** | **RMB’000**             | ** ** |
| The fair value of the net assets acquired:                                              |       |       |       |                         |       |
| Property, plant and equipment, net                                                      |       |       |       | 12,106,458                   |       |
| Other assets                                                                            |       |       |       | 583,827                      |       |
| Deferred tax assets                                                                     |       |       |       | 14,010                       |       |
| Current portion of deferred tax assets                                                  |       |       |       | 192,918                      |       |
| Amounts due from related parties                                                        |       |       |       | 207,237                      |       |
| Amounts due from domestic carriers                                                      |       |       |       | 5,745                        |       |
| Prepayments and other current assets                                                    |       |       |       | 283,287                      |       |
| Inventories                                                                             |       |       |       | 307,503                      |       |
| Accounts receivable, net                                                                |       |       |       | 357,880                      |       |
| Bank balances and cash                                                                  |       | (i)        |       | 923,551                      |       |
| Payables and accrued liabilities                                                        |       |       |       | (1,951,215                   | )          |
| Amounts due to Unicom Group                                                             |       |       |       | (1,005,135                   | )          |
| Amounts due to related parties                                                          |       |       |       | (324,597                     | )          |
| Amounts due to domestic carriers                                                        |       |       |       | (52,473                      | )          |
| Current portion of long-term bank loans                                                 |       |       |       | (2,213,216                   | )          |
| Long-term bank loans                                                                    |       |       |       | (5,473,734                   | )          |
| Taxes payable                                                                           |       |       |       | (46,764                      | )          |
| Advances from customers                                                                 |       |       |       | (604,862                     | )          |
| Short-term bank loans                                                                   |       |       |       | (1,206,000                   | )          |
|                                                                                    |       |       |       | 2,104,420                    |       |
| Goodwill                                                                                |       |       |       | 1,144,957                    |       |
| Less: direct costs of acquisition                                                       |       |       |       | (49,377                      | )          |
|                                                                                    |       |       |       |                         |       |
| Consideration paid                                                                      |       |       |       | 3,200,000                    |       |
|                                                                                    |       |       |       |                         |       |
| The net cash outflow in respect of the acquisition of Unicom New World was  as follows: |       |       |       |                         |       |
| Cash consideration                                                                      |       |       |       | 3,200,000                    |       |
| Bank balances and cash acquired (less  restricted bank deposits)                        |       | (i)        |       | (873,551                     | )          |
|                                                                                    |       |       |       |                         |       |
| Net cash outflow in respect of the  acquisition of Unicom New World                     |       |       |       | 2,326,449                    |       |

 

----

Note(i):               As of December 31, 2003, approximately RMB50 million bank balances wererestricted by the bank to secure the long-term bank loans.

 

F - 27

----

 

**(c)****         ****Acquisition of Unicom International**

 

UnicomInternational was a limited liability company established in Hong Kong on May24, 2000 to engage in voice wholesale business, telephone cards business, lineleasing services, managed bandwidth services and mobile virtual networkservices. Unicom International’s wholly-owned US subsidiary, China Unicom USACorporation (“Unicom USA”), carries wholesale business of voice traffic betweenUS and mainland China. Unicom International was a wholly-owned subsidiary ofUnicom Group (HK).

 

Pursuantto the acquisition agreement signed between Unicom Group (HK) and the Companydated July 28, 2004, the Company agreed to acquire the entire equity interestsin Unicom International from Unicom Group (HK) by a cash consideration ofHK$37,465,996 (equivalent to approximately RMB39,740,000, including directcosts of acquisition). After all the conditions to the acquisition weresatisfied and cash consideration was settled by the Company, the acquisition ofUnicom International became effective in September 2004. The Company hasadopted the purchase method of accounting to account for this acquisition. Thetotal fair value of the identifiable assets and liabilities of UnicomInternational in September 2004 amounted to approximately RMB47 million. Theexcess of the fair value of the identifiable assets and liabilities overpurchase consideration has been recorded as negative goodwill amounting toRMB7.73 million, which is recognized in the consolidated statement of income ofthe Group using the straight-line method over the remaining weighted averageuseful life of the acquired identifiable non-monetary assets (approximately 6years). As this acquisition was effective in September 2004, accordingly, theoperating results of Unicom International for the period from the acquisitioneffective date to December 31, 2004 have been included in the consolidatedstatement of income of the Group in year 2004.

 

F - 28

----

 

**5.****             ****SALE****OF DISCONTINUED OPERATION (GUOXIN PAGING)**

 

GuoxinPaging 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.

 

The Group originally had 5 operating segmentsnamely GSM Business, CDMA Business, Data and Internet Business, Long DistanceBusiness and Paging Business (see Note 34). Pursuant to the ordinary resolutionpassed by the Company’s Board of Directors on November 20, 2003, the Board of Directorsannounced the plan to dispose of the Paging Business to the ultimate parentcompany, Unicom Group. The disposal is consistent with the Group’s long termstrategy to focus its activities in the core telecommunication business. After obtaining the independent shareholders’ approval in an extraordinary general meeting of the Company’s shareholders onDecember 23, 2003, the Company completed the sale of the entire equity interests ofGuoxin Paging to Unicom Group at a cash considerationof RMB2,750 million.

 

The sale of Guoxin Paging became effective onDecember 31, 2003 after all the conditions to the sale were satisfied, the majority of cash proceedswas settled by Unicom Group, andownership 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.

 

Since the effectivedate of this sale was December 31, 2003, the operating results of Guoxin Paginghave 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 (2002: approximately RMB3,972 million and RMB414 millionrespectively). Details of the sale were set forth in the related shareholders’circular “Connected Transactions” of the Company dated November 26, 2003.

 

(a)   Thetotal assets and total liabilities of Guoxin Paging as of December 31, 2003comprised the following:

 
| ** **          | ** ** | **Guoxin Paging****As of December 31****2003** | ** ** |
|---------------------|------------|------------------------------------------------|------------|
| ** **          | ** ** | **RMB ’000**                              | ** ** |
|                |       |                                           |       |
| Non-current  assets |       | 3,914,492                                      |       |
| Current assets      |       | 2,048,250                                      |       |
|                |       |                                           |       |
| Total assets        |       | 5,962,742                                      |       |
| Total liabilities   |       | (1,997,772                                     | )          |
|                |       |                                           |       |
| Minority interest   |       | (551,691                                       | )          |
|                |       |                                           |       |
| Net assets          |       | 3,413,279                                      |       |

 

F - 29

----

 

(b)         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, net                                                    |       | 3,647,083                    |       |
| Other assets                                                                          |       | 151,067                      |       |
| Investment securities                                                                 |       | 99,157                       |       |
| Investment in associated companies                                                    |       | 17,185                       |       |
| Amount due from Unicom Group                                                          |       | 9,440                        |       |
| Amount due from related parties                                                       |       | 277,457                      |       |
| Amount due from domestic carriers                                                     |       | 54,821                       |       |
| Prepayments and other current assets                                                  |       | 207,813                      |       |
| Inventories                                                                           |       | 104,753                      |       |
| Accounts receivable, net                                                              |       | 107,632                      |       |
| Trading securities                                                                    |       | 165,493                      |       |
| Short-term bank deposits                                                              |       | 80,000                       |       |
| Bank balances and cash                                                                |       | 1,040,841                    |       |
| Dividend payable                                                                      |       | (8,260                       | )          |
| Payables and accrued liabilities                                                      |       | (1,491,890                   | )          |
| Amount due to related parties                                                         |       | (121,173                     | )          |
| Amount due to domestic carriers                                                       |       | (235,275                     | )          |
| Taxes payable                                                                         |       | (17,669                      | )          |
| Advances from customers                                                               |       | (123,505                     | )          |
| Minority interests                                                                    |       | (551,691                     | )          |
|                                                                                  |       | 3,413,279                    |       |
|                                                                                  |       |                         |       |
| Less: sale proceeds                                                                   |       | (2,750,000                   | )          |
|                                                                                  |       |                         |       |
| Loss on sale of discontinued operation                                                |       | 663,279                      |       |
|                                                                                  |       |                         |       |
| The net cash inflow in respect of the sale  of discontinued operation was as follows: |       |                         |       |
| Sale proceeds received                                                                |       | 2,300,000                    |       |
| Bank balances and cash disposed                                                       |       | (1,040,841                   | )          |
|                                                                                  |       |                         |       |
| Net cash inflow in respect of the sale of  discontinued operation                     |       | 1,259,159                    |       |

 

F - 30

----

 

(c)          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** | ** ** |
|----------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2002**                  | ** ** | **2003**                                    | ** ** | **200****4**          | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** |
| ** **                             | ** ** | **RMB’000**          | ** ** | **RMB’000**                            | ** ** | **RMB’000**      | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                             | ** ** | ** **                | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenue  (Turnover)          |       | 36,604,071                |       | 65,249,242                                  |       | 79,331,611            |       | 3,972,454 |   | 2,387,083 |   | — |   | 40,576,525 |   | 67,636,325 |   | 79,331,611 |   |
| Operating  expenses                    |       | (28,656,496               | )          | (55,531,586                                 | )          | (71,375,466           | )          | (4,596,345 | ) | (3,590,693 | ) | — |   | (33,252,841 | ) | (59,122,279 | ) | (71,375,466 | ) |
|                                   |       |                      |       |                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income  (loss)               |       | 7,947,575                 |       | 9,717,656                                   |       | 7,956,145             |       | (623,891 | ) | (1,203,610 | ) | — |   | 7,323,684 |   | 8,514,046 |   | 7,956,145 |   |
| Loss on sale of discontinued operation |       | —                    |       | —                                      |       | —                |       | — |   | (663,279 | ) | — |   | — |   | (663,279 | ) | — |   |
| Interest income                        |       | 452,908                   |       | 163,934                                     |       | 102,907               |       | 17,374 |   | 9,099 |   | — |   | 470,282 |   | 173,033 |   | 102,907 |   |
| Finance costs                          |       | (1,466,093                | )          | (1,930,784                                  | )          | (1,688,418            | )          | (8,348 | ) | (5,238 | ) | — |   | (1,474,441 | ) | (1,936,022 | ) | (1,688,418 | ) |
| Other (loss)  income, net              |       | (41,352                   | )          | (31,797                                     | )          | 95,990                |       | 24,993 |   | 39,868 |   | — |   | (16,359 | ) | 8,071 |   | 95,990 |   |
|                                   |       |                      |       |                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  before taxation         |       | 6,893,038                 |       | 7,919,009                                   |       | 6,466,624             |       | (589,872 | ) | (1,823,160 | ) | — |   | 6,303,166 |   | 6,095,849 |   | 6,466,624 |   |
| Taxation                               |       | (1,895,987                | )          | (2,307,596                                  | )          | (2,079,625            | )          | 175,782 |   | 419,215 |   | — |   | (1,720,205 | ) | (1,888,381 | ) | (2,079,625 | ) |
|                                   |       |                      |       |                                        |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  after taxation          |       | 4,997,051                 |       | 5,611,413                                   |       | 4,386,999             |       | (414,090 | ) | (1,403,945 | ) | — |   | 4,582,961 |   | 4,207,468 |   | 4,386,999 |   |

 

(d)         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** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **2002**                   | ** ** | **2003**                                     | ** ** | **200****4**         | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** |
| ** **                                            | ** ** | **RMB’000**           | ** ** | **RMB’000**                             | ** ** | **RMB’000**     | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                            | ** ** | ** **                 | ** ** | ** **                                   | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash inflow  from operating activities            |       | 12,692,415                 |       | 22,141,521                                   |       | 23,819,295           |       | 361,863 |   | 423,738 |   | — |   | 13,054,278 |   | 22,565,259 |   | 23,819,295 |   |
| Net cash outflow  from investing activities           |       | (4,579,122                 | )          | (18,660,174                                  | )          | (18,958,603          | )          | (586,917 | ) | (391,129 | ) | — |   | (5,166,039 | ) | (19,051,303 | ) | (18,958,603 | ) |
| Net cash outflow  from financing activities           |       | (11,703,468                | )          | (8,752,829                                   | )          | (9,401,075           | )          | (164,283 | ) | (24,689 | ) | — |   | (11,867,751 | ) | (8,777,518 | ) | (9,401,075 | ) |
|                                                  |       |                       |       |                                         |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  (decrease)/increase in cash and cash equivalents |       | (3,590,175                 | )          | (5,271,482                                   | )          | (4,540,383           | )          | (389,337 | ) | 7,920 |   | — |   | (3,979,512 | ) | (5,263,562 | ) | (4,540,383 | ) |

 

Guoxin Paging subsequently changed its name toUnicom New Guoxin Telecommunications Corporation Limited (hereinafter referredto as “New Guoxin”) on April 29, 2004.

 

F - 31

----

 

**6.     OPERATING REVENUE**

 

Operatingrevenue primarily comprises usage fees,monthly fees, interconnection revenue, leased line rental income and sales oftelecommunications productsearned by the Group from GSM, CDMA, data, Internet, long distance and paging services.  Tariffs for these services are subject toregulations by various government authorities, including the State Developmentand Reform Commission, the Ministry of Information Industry (“MII”)****and the provincial price regulatoryauthorities.

 

Operatingrevenue is net of business tax and government surcharges.

 

Themajor components of operating revenue are as follows:

 
| ** **                               | ** ** | **Note**   | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **GSM  Business**                        |       |       |       |             |       |             |       |             |       |
| Usage fee                                |       | (i) (a)    |       | 20,274,987       |       | 29,072,249       |       | 31,997,020       |       |
| Monthly fee                              |       | (ii)       |       | 4,169,129        |       | 7,042,299        |       | 6,922,400        |       |
| Interconnection revenue                  |       | (iii)      |       | 1,709,771        |       | 1,926,907        |       | 2,614,268        |       |
| Other revenue                            |       | (v)        |       | 1,234,038        |       | 2,262,156        |       | 5,045,547        |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Total GSM service revenue                |       |       |       | 27,387,925       |       | 40,303,611       |       | 46,579,235       |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **CDMA  Business**                       |       |       |       |             |       |             |       |             |       |
| Usage fee                                |       | (i) (a)    |       | 2,231,050        |       | 11,671,523       |       | 16,164,333       |       |
| Monthly fee                              |       | (ii)       |       | 713,483          |       | 3,488,411        |       | 4,638,024        |       |
| Interconnection revenue                  |       | (iii)      |       | 184,296          |       | 607,830          |       | 927,288          |       |
| Other revenue                            |       | (v)        |       | 96,518           |       | 855,754          |       | 2,489,957        |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Total CDMA service revenue               |       |       |       | 3,225,347        |       | 16,623,518       |       | 24,219,602       |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **Data and  Internet Business**          |       |       |       |             |       |             |       |             |       |
| Usage fee                                |       | (i) (b)    |       | 2,069,415        |       | 2,443,610        |       | 2,685,083        |       |
| Monthly fee                              |       | (ii)       |       | 9,478            |       | 9,085            |       | —           |       |
| Interconnection revenue                  |       | (iii)      |       | 348,248          |       | 361,514          |       | 131,371          |       |
| Leased lines rental                      |       | (iv)       |       | 274,274          |       | 420,433          |       | 344,014          |       |
| Other revenue                            |       | (v)        |       | 91,624           |       | 202,441          |       | 502,266          |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Total Data and Internet  service revenue |       |       |       | 2,793,039        |       | 3,437,083        |       | 3,662,734        |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **Long Distance  Business**              |       |       |       |             |       |             |       |             |       |
| Usage fee                                |       | (i) (b)    |       | 1,223,051        |       | 1,148,040        |       | 879,281          |       |
| Interconnection revenue                  |       | (iii)      |       | 664,302          |       | 365,724          |       | 454,383          |       |
| Leased lines rental                      |       | (iv)       |       | 873,054          |       | 701,549          |       | 512,134          |       |
| Other revenue                            |       | (v)        |       | 5,316            |       | 57,835           |       | 2,211            |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Total Long Distance service  revenue     |       |       |       | 2,765,723        |       | 2,273,148        |       | 1,848,009        |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **Paging  Business**                     |       |       |       |             |       |             |       |             |       |
| Monthly fee                              |       | (ii)       |       | 1,912,786        |       | 612,999          |       | —           |       |
| Interconnection revenue                  |       | (iii)      |       | 113,123          |       | 1,654            |       | —           |       |
| Other revenue                            |       | (v)        |       | 135,279          |       | 788,400          |       | —           |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Total Paging service revenue             |       |       |       | 2,161,188        |       | 1,403,053        |       | —           |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **Total service  revenue**               |       |       |       | 38,333,222       |       | 64,040,413       |       | 76,309,580       |       |
|                                     |       |       |       |             |       |             |       |             |       |
| Sales of telecommunications  products    |       |       |       | 2,243,303        |       | 3,595,912        |       | 3,022,031        |       |
|                                     |       |       |       |             |       |             |       |             |       |
| **Total  operating revenue**             |       |       |       | 40,576,525       |       | 67,636,325       |       | 79,331,611       |       |

 

F - 32

----

 

----

 
| Notes: |
|--------|
|   |   |   |
| (i)    | Usage fees comprise: |
|   |   |   |
|   | (a) | charges for incoming  and outgoing calls made by cellular subscribers including charges for local  calls, domestic direct dial (“DDD”) and international direct dial (“IDD”) as  well as roaming fees for calls made by cellular subscribers outside their  local service areas; and |
|   |   |   |
|   | (b) | charges for IP  telephone calls, data and Internet services and fixed line long distance calls. |
|   |   |   |
| (ii)   | Monthly fees represent  fixed amounts charged to cellular, data, Internet, and paging subscribers on  a monthly basis for maintaining their access to the related services. |
|   |   |   |
| (iii)  | Interconnection  revenue represents amounts received from other operators, including Unicom  Group, for calls from their networks to the Group’s networks. It also includes roaming-in fees  received from other operators, including Unicom Group, for calls made by  their subscribers using the Group’s  cellular networks (see Notes  31(a) and 33(a)). |
|   |   |   |
| (iv)   | Leased line rental  income represents rentals received for leasing of transmission lines to  Unicom Group, business customers and other domestic carriers in the PRC. |
|   |   |   |
| (v)    | Other revenue mainly  represents revenue from the provision of value-added services such as short  message, CDMA1X wireless data service and secretarial services to  subscribers. |
|        |  |  |  |

 

F - 33

----

 

**7****.     INCOMEBEFORE TAXATION**

 

Incomebefore taxation is stated after charging and crediting the following:

 
| ** **                                                                           | ** ** | **Note**   | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **After****charging/(****crediting):**                                               |       |       |       |             |       |             |       |             |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Share of (income) losses from  associated companies                                  |       | 10         |       | (553             | )          | 2,275            |       | —           |       |
| Dividends from investment  securities                                                |       | 10         |       | (24,978          | )          | (2,573           | )          | —           |       |
| Realized gains on trading  securities                                                |       | 10, 17     |       | (1,876           | )          | (12,045          | )          | —           |       |
| Unrealized losses (gains) on  trading securities                                     |       | 10, 17     |       | 27,461           |       | (10,129          | )          | —           |       |
| Realized gains on investment  securities                                             |       | 10         |       | (18,098          | )          | (13,268          | )          | —           |       |
| Gains on disposal of interests  in associated company                                |       | 10         |       | (1,251           | )          | —           |       | —           |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Interest income                                                                      |       |       |       | (470,282         | )          | (173,033         | )          | (102,907         | )          |
| Interest expense                                                                     |       | 9          |       | 1,879,663        |       | 2,523,512        |       | 2,316,318        |       |
| Less: amounts capitalized in  construction-in-progress                               |       | 9          |       | (422,927         | )          | (604,137         | )          | (647,851         | )          |
| Total interest expenses                                                              |       |       |       | 1,456,736        |       | 1,919,375        |       | 1,668,467        |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Depreciation:                                                                        |       |       |       |             |       |             |       |             |       |
| - Assets held under finance  leases                                                  |       | 21         |       | 20,046           |       | 12,154           |       | 111,473          |       |
| - Other assets                                                                       |       |       |       | 10,830,635       |       | 15,963,117       |       | 18,116,132       |       |
| Total depreciation                                                                   |       | 21         |       | 10,850,681       |       | 15,975,271       |       | 18,227,605       |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Amortization of goodwill                                                             |       | 22         |       | 23,414           |       | 115,260          |       | 171,184          |       |
| Other amortization                                                                   |       | 23         |       | 381,629          |       | 294,762          |       | 664,285          |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Amortization of deferred  customer acquisition costs of contractual CDMA subscribers |       | 20(a)      |       | 1,385,424        |       | 5,836,587        |       | 6,120,737        |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Loss on disposal of property,  plant and equipment                                   |       | 8(iv)      |       | 82,467           |       | 49,940           |       | 10,537           |       |
|                                                                                 |       |       |       |             |       |             |       |             |       |
| Auditors’  remuneration                                                         |       |       |       | 38,916           |       | 54,003           |       | 57,522           |       |

 

F - 34

----

 
| ** **                                                             | ** ** | **Note**   | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **After****charging/(****crediting):**                                 |       |       |       |             |       |             |       |             |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Operating lease expense:                                               |       |       |       |             |       |             |       |             |       |
| - Leased lines                                                         |       |       |       | 691,358          |       | 805,018          |       | 809,202          |       |
| - CDMA network capacities                                              |       | 31(a),32   |       | 891,897          |       | 3,515,364        |       | 6,588,926        |       |
| - Other leasing expense                                                |       | 8(iv)      |       | 610,931          |       | 882,671          |       | 1,042,020        |       |
| Total operating lease expense                                          |       |       |       | 2,194,186        |       | 5,203,053        |       | 8,440,148        |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Provision for doubtful debts:                                          |       |       |       |             |       |             |       |             |       |
| - GSM Business                                                         |       |       |       | 802,914          |       | 1,116,523        |       | 1,317,374        |       |
| - CDMA Business                                                        |       |       |       | 42,050           |       | 397,810          |       | 645,470          |       |
| - Data and Internet Business                                           |       |       |       | 70,922           |       | 125,676          |       | 164,514          |       |
| - Long Distance Business                                               |       |       |       | 46,124           |       | 75,870           |       | 64,462           |       |
| - Paging Business                                                      |       |       |       | 9,979            |       | 34,008           |       | —           |       |
| Total provision for doubtful  debts                                    |       | 8(iv)      |       | 971,989          |       | 1,749,887        |       | 2,191,820        |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Cost of inventories                                                    |       |       |       | 2,161,512        |       | 3,570,234        |       | 3,440,826        |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Write-down of inventories to  net realizable value                     |       |       |       | 7,156            |       | 47,101           |       | 69,475           |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Additional provision for  impairment losses in investment securities   |       |       |       | 650              |       | —           |       | —           |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Personnel:                                                             |       |       |       |             |       |             |       |             |       |
| - Salaries and wages                                                   |       |       |       | 2,654,845        |       | 3,676,168        |       | 3,647,629        |       |
| - Contributions to defined  contribution pension schemes               |       | 12         |       | 203,164          |       | 273,182          |       | 244,397          |       |
| - Contributions to  supplementary defined contribution pension schemes |       | 12         |       | 11,066           |       | 39,854           |       | 41,596           |       |
| - Special monetary housing  benefits                                   |       | 13         |       | 277,944          |       | 109,210          |       | 21,907           |       |
| - Contributions to other housing  fund                                 |       | 13         |       | 92,549           |       | 170,614          |       | 224,686          |       |
| - Other housing benefits                                               |       | 13         |       | 95,650           |       | 305,518          |       | 345,885          |       |
| Total personnel                                                        |       |       |       | 3,335,218        |       | 4,574,546        |       | 4,526,100        |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Additional provision for  impairment of:                               |       |       |       |             |       |             |       |             |       |
| - Property, plant and  equipment                                       |       | 21         |       | —           |       | 528,048          |       | —           |       |
| - Goodwill                                                             |       |       |       | 38,797           |       | —           |       | —           |       |
| Total provision for impairment                                         |       | 8(iv)      |       | 38,797           |       | 528,048          |       | —           |       |
|                                                                   |       |       |       |             |       |             |       |             |       |
| Exchange losses, net                                                   |       | 10         |       | 21,533           |       | 9,960            |       | 7,657            |       |

 

F - 35

----

 
| **8****.** | **OPERATING EXPENSES**                                  |
|------------|---------------------------------------------------------|
|       |                                                    |   |
|       | Major components of  operating expenses are as follows: |
|       |                                                    |   |
|       | (i)                                                     | Leased line charges incurred  in association with leasing of transmission capacity from other operators and leasing expenses related to CDMA  network capacities from Unicom New Horizon Mobile Telecommunication Company  Limited (“Unicom New Horizon”) (see Notes 31(a), 32 and 33(a)). |
|       |                                                    |   |
|       | (ii)                                                    | Interconnection  charges represent amounts paid to other operators, including Unicom Group,  for calls from the Group’s  networks to the networks of other operators. |
|       |                                                    |   |
|       | (iii)                                                   | Personnel costs  comprise staff salaries and wages, contributions to defined contribution  pension schemes and housing benefits etc. |
|       |                                                    |   |
|       | (iv)                                                    | General,  administrative and other expenses are analyzed as follows: |
|            |                                                         |  |  |

 
| ** **                                                                                     | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                                           |       |             |       |             |       |             |       |
| Operating lease rental  expenses                                                               |       | 610,931          |       | 882,671          |       | 1,042,020        |       |
| Repair and maintenance  expenses                                                               |       | 832,259          |       | 1,387,466        |       | 1,648,986        |       |
| Provision for doubtful debts                                                                   |       | 971,989          |       | 1,749,887        |       | 2,191,820        |       |
| Loss on disposal of property,  plant and equipment                                             |       | 82,467           |       | 49,940           |       | 10,537           |       |
| Provisions for impairment of  property, plant and equipment and goodwill (see Notes 21 and 22) |       | 38,797           |       | 528,048          |       | —           |       |
| Traveling, entertainment and meeting  expenses                                                 |       | 850,876          |       | 1,242,166        |       | 1,322,438        |       |
| Power and water charges                                                                        |       | 729,650          |       | 1,313,099        |       | 1,763,766        |       |
| Office expenses                                                                                |       | 582,187          |       | 749,080          |       | 706,892          |       |
| Other                                                                                          |       | 932,694          |       | 1,210,028        |       | 1,761,782        |       |
|                                                                                           |       |             |       |             |       |             |       |
|                                                                                           |       | 5,631,850        |       | 9,112,385        |       | 10,448,241       |       |

 

**9****.    ****FINANCE********COSTS**

 
| ** **                                             | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|--------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                   |       |             |       |             |       |             |       |
| Interest on bank loans  repayable over 5 years         |       | 41,115           |       | 124,105          |       | 537,261          |       |
| Interest on bank loans  repayable within 5 years       |       | 1,838,548        |       | 2,399,407        |       | 1,750,209        |       |
| Interest element of finance  lease                     |       | 7,059            |       | 7,050            |       | 28,848           |       |
| Less: Amounts capitalized in  construction-in-progress |       | (422,927         | )          | (604,137         | )          | (647,851         | )          |
|                                                   |       |             |       |             |       |             |       |
| Total interest expenses                                |       | 1,463,795        |       | 1,926,425        |       | 1,668,467        |       |
| Bank charges                                           |       | 10,646           |       | 9,597            |       | 19,951           |       |
|                                                   |       |             |       |             |       |             |       |
|                                                   |       | 1,474,441        |       | 1,936,022        |       | 1,668,418        |       |

 

F - 36

----

 

**10.**** ****OTHER EXPENSE (INCOME), NET**

 
| ** **                                           | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                 |       |             |       |             |       |             |       |
| Share of (income) losses from associated  companies  |       | (553             | )          | 2,275            |       | —           |       |
| Dividends from investment securities                 |       | (24,978          | )          | (2,573           | )          | —           |       |
| Realized gains on trading securities                 |       | (1,876           | )          | (12,045          | )          | —           |       |
| Unrealized losses (gains) on trading  securities     |       | 27,461           |       | (10,129          | )          | —           |       |
| Realized gains on investment securities              |       | (18,098          | )          | (13,268          | )          | —           |       |
| Compensation from vendors                            |       | —           |       | —           |       | (73,585          | )          |
| Losses from  exchange difference                     |       | 21,533           |       | 9,960            |       | 7,657            |       |
| Gain on disposal  of interests in associated company |       | (1,251           | )          | —           |       | —           |       |
| Other                                                |       | 14,121           |       | 17,709           |       | (30,062          | )          |
|                                                 |       |             |       |             |       |             |       |
|                                                 |       | 16,359           |       | (8,071           | )          | (95,990          | )          |

 

**11.  DIRECTORS’, SENIOR EXECUTIVES’ AND SUPERVISORS’EMOLUMENTS**

 

**(a)   Directors’emoluments**

 

Theaggregate amounts of fees and emoluments payable to directors of the Companyduring the years 2002, 2003 and 2004 were set out below:

 
| ** **                                       | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                             |       |             |       |             |       |             |       |
| Non-executive directors:                         |       |             |       |             |       |             |       |
| Fees                                             |       | 849              |       | 1,594            |       | 1,594            |       |
|                                             |       |             |       |             |       |             |       |
| Executive  directors:                            |       |             |       |             |       |             |       |
| Fees                                             |       | —           |       | —           |       | —           |       |
| Other  emoluments                                |       |             |       |             |       |             |       |
| -  Salaries, allowance and other allowances      |       | 9,722            |       | 9,352            |       | 9,242            |       |
| -  Pension benefits/pension scheme contributions |       | 38               |       | 106              |       | 128              |       |
| -  Bonuses paid and payable                      |       | 5,887            |       | 9,688            |       | 5,676            |       |
|                                             |       |             |       |             |       |             |       |
|                                             |       | 15,647           |       | 19,146           |       | 15,046           |       |
|                                             |       |             |       |             |       |             |       |
|                                             |       | 16,496           |       | 20,740           |       | 16,640           |       |

 

Non-executive directors’ emoluments disclosed aboveinclude approximately RMB1,275,000 (2002: RMB636,000; 2003: RMB1,275,000) paidto independent non-executive directors.

 

During 2004, 4,020,000 (2002: 2,802,000; 2003:2,772,000) share options were granted to the directors under the amended ShareOption Scheme approved by the independent non-executive directors on July 20,2004 and December 21, 2004 respectively. See Notes 30(e) and 30(f) for thedetails of share options granted during the years.

 

F - 37

----

 

The emoluments of the directors analyzed by thenumber of directors and emolument ranges were as follows:

 
| ** **                                        | ** ** | **Number of directors** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|
| **(All  amounts expressed in Hong Kong dollars)** | ** ** | **200****2**            | ** ** | **200****3** | ** ** | **200****4** | ** ** |
| ** **                                        | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| $nil  - $1,000,000                                |       | 4                       |       | 5 |   | 9 |   |
| $1,000,001  - $1,500,000                          |       | 2                       |       | — |   | — |   |
| $1,500,001  - $2,000,000                          |       | —                  |       | — |   | 1 |   |
| $2,000,001  - $2,500,000                          |       | 1                       |       | 2 |   | 4 |   |
| $2,500,001  - $3,000,000                          |       | 1                       |       | 1 |   | 1 |   |
| $3,000,001  - $3,500,000                          |       | 1                       |       | — |   | — |   |
| $3,500,001  - $4,000,000                          |       | 1                       |       | 1 |   | — |   |
| $6,500,001 - $7,000,000                           |       | —                  |       | 1 |   | — |   |
|                                              |       |                    |       |   |   |   |   |
|                                              |       | 10                      |       | 10 |   | 15 |   |

 

No directors waived the right to receive emolumentsduring the year.

 

**(b)****         ****F****ive highest paid individuals**

 

Thefive individuals whose emoluments were the highest of the Group for 2004 wereall directors of the Company (2002: 4; 2003: 4) whose emoluments are reflected in the analysis presentedabove. The emoluments payable to the remaining individual during year 2002 and2003 are as follows:

 
| ** **                                     | ** ** | **2002**         | ** ** | **200****3**     | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                     | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                           |       |             |       |             |       |
| Salaries, allowance and other allowances       |       | 1,432            |       | 1,435            |       |
| Pension benefits/pension scheme  contributions |       | —           |       | 38               |       |
| Bonuses paid and payable                       |       | 849              |       | 850              |       |
|                                           |       |             |       |             |       |
|                                           |       | 2,281            |       | 2,323            |       |

 

Theemoluments of the remaining individual during 2002 and 2003 both fell within the band of HK$2,000,001-HK$2,500,000.

 

Noemolument was paid to the five highest paid individuals as an inducement tojoin or upon joining the Company or as compensation for loss of office.

 

F - 38

----

 

**12****.  RETIREMENTBENEFITS**

 

Allthe full time employees of the Group are covered by a state-sponsored pensionscheme under which the employees are entitled to an annual pension equal totheir basic salaries at their retirement dates. The PRC government isresponsible for the pension liability to these retired employees. The Group wasrequired to make defined contributions to the pension scheme at the rate of 19%for the year ended December 31, 2004 (2002 and 2003: 19%) ofthe employees’ basic salaries. Under this scheme, the Group has no obligationfor post-retirement benefits beyond the annual contributions.

 

Inaddition, effective from August 11, 1998, a supplementary defined contributionpension plan managed by an independent insurance company was established. Underthis plan, the Group makes a monthly defined contribution of 2% to 24% (2002 and 2003: 2% to 6%)of the monthly salary of each employee. There were no vested benefitsattributable to past services upon adoption of the plan.

 

Retirementbenefits charged to the statements of income were as follows:

 
| ** **                                                           | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                 |       |             |       |             |       |             |       |
| Contributions to defined contribution pension schemes                |       | 203,164          |       | 273,182          |       | 244,397          |       |
| Contributions to supplementary  defined contribution pension schemes |       | 11,066           |       | 39,854           |       | 41,596           |       |

 

**1****3****.  HOUSINGBENEFITS**

 

Underhousing reform schemes in accordance with government regulations at theprovincial level in the PRC, the Group provided benefits to certain qualifiedemployees to enable them to purchase living quarters at a discount. In the caseof New Guoxin, the living quarters were provided by China Telecom prior to theestablishment of New Guoxin and the related benefits were not charged to theGroup. In the case of the GSM Business, certain of these living quarters wereprovided by Unicom Group and the related benefits were not charged to theGroup. Housing benefits which were not charged to the Group amounted toapproximately RMB14.9 million for 2004 (2002 and 2003: RMB18.5million).

 

Subsequentto the establishment of New Guoxin, for living quarters purchased or built bythe Group, the liability to provide the housing benefits was recognized by theGroup upon finalization of the allocation of the housing units to specificemployees. The amount of the benefits was the difference between the cost ofthe quarters purchased by the employees and the amount actually charged to theemployees. The benefits are recorded as expenses over the estimated remainingaverage service life of the participating employees.

 

Inaddition, all of the full time employees of the Group are entitled toparticipate in a state-sponsored housing fund. The fund can be used for theconstruction of living quarters or may be withdrawn upon the retirement of theemployees. The Group is required to make annual contributions to the housingfund at a rate on 10%(2002 and 2003: 10%) of theemployees’ basic salaries.

 

Accordingto the central government policy on housing reform based on a State Councilcircular issued in 1998, monetary housing subsidies in the form of special cashpayments are to be made by certain PRC enterprises to their employees in orderto enable them to purchase living quarters. Under this general policy,enterprises are allowed to establish their own housing reform schemes takinginto consideration the actual financial capability of the enterprises.

 

F - 39

----

 

The Groupfinalized its monetary housing benefit scheme as a special employee incentivescheme for all qualified employees in year 2001. According to the scheme, thetotal amount of monetary housing benefit for each employee is determined basedon the working age of the employee and the property market price prevailing inthe relevant location. The total monetary housing benefit is divided into threeannual payments in the proportion of 40%, 30% and 30% respectively. In order tobe included in the incentive scheme, employees are required to sign a servicecontract with a minimum service period of three years. The employees will beentitled to the first 40% payment only when the following criteria are met:

 

(i)             theprovincial branch in which the employees are working has achieved the annualperformance budget set by head office management; and

 

(ii)          theemployees continue to be under the employment of the Group at the time of thepayment.

 

Similarly, theemployees will only be entitled to the second and then the third annual paymentswhen and only when the above two conditions are also fulfilled in subsequentyears.

 

The Groupaccrues for each annual payment upon the fulfillment of the above criteria bythe employees, at which time the liability is considered to have arisen.

 

Forthe years ended December 31, 2002, 2003 and 2004, certain provinces achieved the annual performance budgetand werethus approved by management to distribute and pay out such monetary housing benefits. The provision for special monetary housing benefits for qualifiedemployees of these provinces for the years ended December 31, 2002, 2003 and 2004 amounted to approximately RMB277,944,000,RMB109,210,000 and RMB21,907,000 respectively, based on the aforementioned distribution plan. The remaining provinces were not entitled to the special monetary housing benefits since they did not achieve their annual performance budget in 2002, 2003 and2004and accordingly, no provisionfor such benefits was made.

 

Theexpenses incurred by the Group in relation to the housing benefits describedabove were as follows (excluding those paid by Unicom Group and China Telecomand not charged to the Group):

 
| ** **                         | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                               |       |             |       |             |       |             |       |
| Special monetary housing  benefits |       | 277,944          |       | 109,210          |       | 21,907           |       |
| Contributions to housing fund      |       | 92,549           |       | 170,614          |       | 224,686          |       |
| Other housing  benefits            |       | 95,650           |       | 305,518          |       | 345,885          |       |
|                               |       |             |       |             |       |             |       |
|                               |       | 466,143          |       | 585,342          |       | 592,478          |       |

 

F - 40

----

 

**14. ****TAXATION**

 

Provisionfor taxation represents:

 
| ** **                                                                            | ** ** | **2002**         | ** ** | **200****3**     | ** ** | **2004**         | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                                                            | ** ** | **As restated**  | ** ** | ** **       | ** ** | ** **       | ** ** |
| Provision for PRC enterprise income tax on  the estimated taxable income for the year |       | 1,192,801        |       | 1,064,968        |       | 1,422,635        |       |
| Deferred taxation                                                                     |       | 527,404          |       | 823,413          |       | 656,990          |       |
| ** **                                                                            | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|                                                                                  |       | 1,720,205        |       | 1,888,381        |       | 2,079,625        |       |

 

Thereis no Hong Kong income tax liability as the Group does not have any assessable income sourced from Hong Kongfor 2002, 2003 and 2004.

 

Theincome tax liabilities of the Group wereassessed as follows:

 

(a)          The tax liabilities of CUCL and its wholly-owned subsidiaries for 2002,2003 and 2004 were assessed in accordance with FIE (“Foreign InvestmentEnterprises”) taxation requirements on a consolidated basis as a single entityand settled income tax liabilities centrally in Beijing as approved by the taxauthority;

 

(b)         Prior to the acquisitions of Unicom New Century (which has been mergedinto and succeeded by CUCL) and Unicom New World at 2002 and 2003 year-end,Unicom Group was assessed for PRC enterprise tax liability under the relevanttax rules and regulations applicable to state-owned enterprises, and at thestatutory rate of 33% on a consolidation basis as a single entity. The taxprovision for Unicom New Century and Unicom New World were determined on aseparate return basis using the same tax policy applicable to Unicom Group.Under this basis, the tax liabilities attributable to Unicom New Century andUnicom New World were determined as if it were assessed for income taxseparately from Unicom Group. In 2003, tax liabilities of Unicom New Centurywas assessed in accordance with FIE taxation requirements on a consolidatedbasis as a single entity; and the tax liabilities of Unicom New World for 2004was also assessed in accordance with FIE taxation requirements on aconsolidated basis as a single entity; and.

 

(c)          Various provincial branches/municipal cities of CUCL, Unicom New Centuryand Unicom New World were granted a preferential treatment by tax authoritiesto assess their enterprise income tax at the rates of 30%, 15% or 10% in years2002, 2003 and 2004. The remaining provincial branches were assessed at thestandard tax rate of 33%.

 

F - 41

----

 

Thereconciliation of PRC enterprise income tax between the statutory tax rate of33% and the effective tax rate actually recorded in the statements of income isas follows:

 
| ** **                                                                      | ** ** | **2002**        | ** ** | **2003**   | ** ** | **200****4** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|--------------|------------|
| ** **                                                                      | ** ** | **As restated** | ** ** | ** ** | ** ** | ** **   | ** ** |
| **PRC**                                                                         | ** ** | ** **      | ** ** | ** ** | ** ** | ** **   | ** ** |
| ** **                                                                      | ** ** | ** **      | ** ** | ** ** | ** ** | ** **   | ** ** |
| Statutory tax rate of 33%                                                       |       | 33.0            | %          | 33.0       | %          | 33.0         | %          |
| Non-deductible expenses                                                         |       | 1.5             |       | 0.3        |       | 2.0          |       |
| Effect of preferential tax rates                                                |       | (3.2            | )          | (1.6       | )          | (2.1         | )          |
| Increase in opening deferred tax assets  resulting from an increase in tax rate |       | —          |       | (2.3       | )          | (0.4         | )          |
| Tax credits (see Note (a))                                                      |       | (2.8            | )          | —     |       | (0.3         | )          |
| Additional expense deductible for tax purpose (see Note (b))                    |       | —          |       | (0.9       | )          | —       |       |
| Write-off of deferred tax assets previously  recognized for New Guoxin          |       | —          |       | 1.9        |       | —       |       |
|                                                                            |       |            |       |       |       |         |       |
| Effective PRC income tax rate                                                   |       | 28.5            | %          | 30.4       | %          | 32.2         | %          |
|                                                                            |       |            |       |       |       |         |       |
| **Hong Kong**                                                                   |       |            |       |       |       |         |       |
|                                                                            |       |            |       |       |       |         |       |
| Statutory tax rate of 17.5%                                                     |       | 16.0            | %          | 17.5       | %          | 17.5         | %          |
| Non-deductible expenses                                                         |       | —          |       | (96.9      | )          | 189.0        |       |
| Non-taxable income:                                                             |       |            |       |       |       |         |       |
| - Interest income                                                               |       | (16.0           | )          | 79.4       |       | (170.8       | )          |
| - Leased line income sourced from outside Hong Kong                             |       | —          |       | —     |       | (27.0        | )          |
|                                                                            |       |            |       |       |       |         |       |
| Effective HK income tax rate                                                    |       | —          |       | —     |       | 8.7          | %          |
|                                                                            |       |            |       |       |       |         |       |
| Total  overall effective income tax rate                                        |       | 27.3            | %          | 31.0       | %          | 32.2         | %          |

 

Taxeffect of preferential tax rate is as follows:

 
| ** **                         | ** ** | **200****2** | ** ** | **200****3** | ** ** | **200****4** | ** ** |
|------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                               |       |         |       |         |       |         |       |
| Aggregate amount (RMB in millions) |       | 191          |       | 97           |       | 135          |       |
| Per share effect (RMB)             |       | 0.015        |       | 0.008        |       | 0.011        |       |

 

----

Notes:

 

(a)          For 2002 and 2004, tax credits represented investment taxcredits relating to the additions of certain domestic equipment that weredeductible against current tax.

 

(b)         During 2003,CUCL, Unicom New Century and Unicom New World confirmed with relevant tax authoritiesin the PRC that certain monetary housing benefits, which were previouslytreated as non-deductible expenses for income taxassessment purposes in prior years, could be used to deductagainst enterprise income tax over 3 years. Accordingly, all the related deferred taxassets have been recognized in 2003. Such deferred tax assets will be utilized on a straight-line basis over 3 years.

 

F - 42

----

 

Themovement of the deferred tax assets is as follows:

 
| ** **                                                                                               | ** ** | ** ** | ** ** | **2002**                      | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | ** ** | ** ** | **RMB’000  As restated** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                                                                               | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **       | ** ** | ** **       | ** ** |
| Balance, beginning of year                                                                               |       |       |       | 1,581,408                     |       | 1,815,234        |       | 1,198,749        |       |
| Change in accounting policy:                                                                             |       |       |       |                          |       |             |       |             |       |
| -   Recognition of additional deferred tax assets in relation to  provision for doubtful debts |       | 3(a)       |       | 373,159                       |       | —           |       | —           |       |
| Acquisition of Unicom New  Century                                                                       |       |       |       | 388,071                       |       | —           |       | —           |       |
| Acquisition of Unicom New  World                                                                         |       |       |       | —                        |       | 206,928          |       | —           |       |
| Acquisition of Unicom International                                                                      |       |       |       | —                        |       | —           |       | (2,090           | )          |
| Deferred taxation charged to statements of  income                                                       |       |       |       | (527,404                      | )          | (823,413         | )          | (656,990         | )          |
|                                                                                                     |       |       |       |                          |       |             |       |             |       |
| Balance, end of year                                                                                     |       |       |       | 1,815,234                     |       | 1,198,749        |       | 539,669          |       |

 

Deferredtaxation as of year-end represents the taxation effect of the following temporary differences:

 
| ** **                                                                        | ** ** | **Note**   | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                              |       |       |       |             |       |             |       |
| Deferred tax assets:                                                              |       |       |       |             |       |             |       |
| Interest on loans from CCF joint ventures                                         |       | (a)        |       | 256,673          |       | 150,954          |       |
| Loss arising from terminations of CCF  Arrangements                               |       | (a)        |       | 236,249          |       | 174,637          |       |
| Income tax on advances from customers for  telephone cards                        |       |       |       | 261,467          |       | —           |       |
| Provision for impairment loss for property,  plant and equipment                  |       |       |       | 4,875            |       | 4,721            |       |
| Provision for doubtful debts of Cellular  Business                                |       |       |       | 534,839          |       | 526,514          |       |
| Write-off of other assets                                                         |       |       |       | 7,563            |       | —           |       |
| Write-down of inventories to net realizable  value                                |       |       |       | 15,905           |       | 39,103           |       |
| Amortization of retirement benefits                                               |       |       |       | 18,549           |       | 6,678            |       |
| Additional depreciation deductible for tax  purpose                               |       |       |       | 101,267          |       | 18,258           |       |
| Differences on tax basis for the residual  value of property, plant and equipment |       |       |       | 7,608            |       | 10,045           |       |
| Monetary housing benefits                                                         |       |       |       | 56,826           |       | 17,171           |       |
| Other                                                                             |       |       |       | 29,309           |       | 16,740           |       |
|                                                                              |       |       |       |             |       |             |       |
|                                                                              |       |       |       | 1,531,130        |       | 964,821          |       |
|                                                                              |       |       |       |             |       |             |       |
| Deferred tax liabilities:                                                         |       |       |       |             |       |             |       |
| Change of depreciation period                                                     |       |       |       | (28,268          | )          | —           |       |
| Accelerated depreciation for  tax purpose                                         |       |       |       | —           |       | (26,280          | )          |
| Capitalized interest already deducted for  tax purpose                            |       |       |       | (304,113         | )          | (398,872         | )          |
|                                                                              |       |       |       |             |       |             |       |
|                                                                              |       |       |       | (332,381         | )          | (425,152         | )          |
|                                                                              |       |       |       |             |       |             |       |
| Net deferred tax assets                                                           |       |       |       | 1,198,749        |       | 539,669          |       |
|                                                                              |       |       |       |             |       |             |       |
| Less: Current portion of deferred tax  assets                                     |       |       |       | (873,849         | )          | (606,009         | )          |
|                                                                              |       |       |       |             |       |             |       |
|                                                                              |       |       |       | 324,900          |       | (66,340          | )          |

 

F - 43

----

 

----

Note:

 

(a)                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, and 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 and the then prevailing marketborrowing rates. Afterwards, all CCF Arrangements had been terminated in 1999and 2000, the related loss on the termination of CCF Arrangements was chargedto the statements of income asincurred. Pursuant to the approval of relevant tax authorities, since all theinterest costs and the loss on termination of these CCF Arrangements can bededucted against current tax over 7 years. The resulting deferred tax assetswere recognized accordingly.

 

**1****5****.  NETINCOME**

 

(a)                CUCL, UnicomNew Century (which has been merged into and succeeded by CUCL), and Unicom NewWorld were registered as foreign investment enterprises in the PRC. Inaccordance with the Articles of Association of CUCL and Unicom New World, theyare required to provide for certain statutory reserves, namely, general reservefund and staff bonus and welfare fund, which are appropriated from profit aftertax and minority interests but before dividend distribution.

 

CUCLand Unicom New World are required to allocate at least 10% of their incomeafter tax and minority interests determined under PRC GAAP to the generalreserve fund until the cumulative amounts reach 50% of the registered capital.The statutory reserve can only be used, upon approval obtained from the relevantauthority, to offset accumulated losses or increase capital.

 

Appropriationto the staff bonus and welfare fund is at the discretion of the directors. Thestaff bonus and welfare fund can only be used for special bonuses or thecollective welfare of the employees and are not distributable as cashdividends. Under HK GAAP, the appropriations to the staff bonus and welfarefund will be charged to statements of incomeas expenses incurred since any assets acquired through this fund belong to theemployees. For the years ended December 31, 2004, no appropriation to staffbonus and welfare fund has been made (2002 and 2003: Nil).

 

Accordingly,CUCL and Unicom New Worldappropriated approximately RMB387,185,000 (2002: RMB436,463,000; 2003: RMB382,030,000), and RMB42,115,000 (2002 and 2003:Nil) respectively to the general reserve fund for the yearended December 31, 2004. Unicom New Century appropriated approximately RMB37,236,000 to thegeneral reserve fund for the year ended December 31, 2003.

 

Asstated in Note 3(a), the change in accounting policy on income taxes has resultedin an increase of distributable reserves to shareholders of CUCL for the yearsended December 31, 2002. As a result, CUCL has made additional appropriation tothe statutory reserves amounting to approximately RMB37,316,000 and RMB40,530,000in 2002 and 2003 respectively.

 

F - 44

----

 

(b)               At the annual general meeting held on May 12, 2004, the shareholders ofthe Company approved the payment of final dividend of RMB0.10 per ordinaryshare for the year ended December 31, 2003 totaling RMB1,256,159,607 which hasbeen reflected as an appropriation of retained earning for 2004. As of December31, 2004, such dividends have been fully paid by the Company.

 

Ata meeting held on March 24, 2005, the Board of Directors of the Companyproposed the payment of final dividend of RMB0.10 per ordinary share to theshareholders for the year ended December 31, 2004 totaling RMB1,256,349,207.This proposed dividend has not been reflected as a dividend payable in thefinancial statements as of December 31, 2004, but will be reflected as anappropriation of retained earning in thefinancial statements for the year ending December 31, 2005.

 

(c)                For the yearended December 31, 2004, net incomeincluded a income of approximately

RMB9,358,000 (2002: net income of approximately RMB287,492,000; 2003: loss ofapproximately RMB21,654,000) which has been dealt with in the financialstatements of the Company. As of December 31, 2004, the amount of distributablereserves to shareholders of the Company amounted to approximately RMB1,330,427,000 (2002: RMB3,854,183,000; 2003: RMB2,577,229,000).

 

**1****6****.  EARNINGSPER SHARE**

 

**Earningsper share and per American Depository Share (“ADS”)**

 

Basic earnings pershare for the years ended December 31, 2002, 2003 and 2004 were computed by dividing the net income by the weighted averagenumber of ordinary shares in issue during the years.

 

Dilutedearnings per share for the years ended December 31, 2002, 2003 and 2004 were computed bydividing the net income by theweighted average number of ordinary shares in issue during the years, afteradjusting for the effects of the potential dilutive ordinary shares. All potentialdilutive ordinary shares arose from share options granted under (i) the amendedPre-Global Offering Share Option Scheme; and (ii) the amended Share OptionScheme as described in Note 30. For 2003 and 2004, all potential dilutiveshares arose from share options granted in 2002, 2003 and 2004 under theamended Share Option Scheme (see details in Note 30), which if converted toordinary shares would decrease net income per share. For 2002, there was nodilution of earnings per share after taking into account the dilutive effect ofthe share options. The anti-dilutive shares arising from the share options in2004 of approximately 31,944,000 shares (2002: 48,745,000 shares; 2003:66,573,000 shares) were not included in the calculation of diluted earnings pershare.

 

Basicand diluted earnings per ADS have been computed by multiplying the earnings pershare by 10, which is the number of shares represented by each ADS.

 

Reconciliationof the numerators and denominators of the basic and diluted earnings per sharecomputations:

 
| ** **                            | ** ** | **200****2**     | ** ** | **200****3**  | ** ** | **200****4**                       | ** ** |
|---------------------------------------|------------|------------------|------------|---------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Net  income**  | ** ** | **Shares**    | ** ** | **Per****s****hare****a****mount** | ** ** | **Net  income** | ** ** | **Shares** | ** ** | **Per****s****hare****a****mount** | ** ** | **Net  income** | ** ** | **S****hares** | ** ** | **Per****s****hare****a****mount** | ** ** |
| ** **                            | ** ** | **RMB’000** | ** ** | **’000** | ** ** | **RMB**                            | ** ** | **RMB’000** | ** ** | **’000** | ** ** | **RMB** | ** ** | **RMB’000** | ** ** | **’000** | ** ** | **RMB** | ** ** |
| ** **                            | ** ** | **As restated**  | ** ** | ** **    | ** ** | **As restated**                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                  |       |             |       |          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings                        |       | 4,598,213        |       | 12,552,996    |       | 0.366                              |       | 4,217,097 |   | 12,553,010 |   | 0.336 |   | 4,386,999 |   | 12,561,242 |   | 0.349 |   |
| Effect of conversion of share options |       | —           |       | —        |       | —                             |       | — |   | 15,673 |   | — |   | — |   | 45,999 |   | — |   |
|                                  |       |             |       |          |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings                      |       | 4,598,213        |       | 12,552,996    |       | 0.366                              |       | 4,217,097 |   | 12,568,683 |   | 0.336 |   | 4,386,999 |   | 12,607,241 |   | 0.348 |   |

 

F - 45

----

 

**1****7****.****      ****TRADING SECURITIES**

 

Tradingsecurities represented listed equity securities in the PRC, which were carried at fair value. Therealized gains on tradingsecurities for the year ended December 31, 2002 and2003 amounted toapproximatelyRMB1,876,000 and RMB12,045,000****respectively;and the unrealized loss for the year ended December 31, 2002 amounted to RMB 27,461,000 and unrealized gains amounted to RMB10,129,000 for the year ended December 31, 2003 respectively. As ofDecember 31, 2004, no tradingsecurities are maintained by the Group after the sale of New Guoxin onDecember 31, 2003.

 

**1****8****.  ACCOUNTSRECEIVABLE, NET**

 
| ** **                                          | ** **                                                   | **200****3**     | ** ** | **200****4**     | ** ** |
|-----------------------------------------------------|--------------------------------------------------------------|------------------|------------|------------------|------------|
| ** **                                          | ** **                                                   | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                |                                                         |             |       |             |       |
| Accounts receivable for GSM services                |                                                         | 5,268,041        |       | 4,464,963        |       |
| Accounts receivable for CDMA services               |                                                         | 2,408,093        |       | 3,448,273        |       |
| Accounts receivable for Data and Internet  services |                                                         | 696,802          |       | 537,418          |       |
| Accounts receivable for Long Distance  services     |                                                         | 587,570          |       | 712,833          |       |
|                                                | Sub-total                                                    |             | 8,960,506  |             | 9,163,487  |   |
|                                                |                                                         |             |       |             |       |   |
| Less:                                               | Provision for doubtful debts for GSM  services               |             | (2,716,396 | )                | (2,521,313 | ) |
|                                                | Provision for doubtful debts for CDMA  services              |             | (508,970   | )                | (1,110,024 | ) |
|                                                | Provision for doubtful debts for Data and  Internet services |             | (158,313   | )                | (200,373   | ) |
|                                                | Provision for doubtful debts for Long  Distance services     |             | (105,280   | )                | (101,797   | ) |
|                                                |                                                         |             |       |             |       |
|                                                |                                                         | 5,471,547        |       | 5,229,980        |       |

 

Theaging analysis of accounts receivable was as follows:

 
| ** **                         | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                               |       |             |       |             |       |
| Not yet due (within credit period) |       | 3,433,584        |       | 3,595,337        |       |
| Due within three months            |       | 1,744,568        |       | 1,373,240        |       |
| Three months to six months         |       | 750,719          |       | 732,890          |       |
| Six months to one year             |       | 1,299,386        |       | 1,398,175        |       |
| More than one year                 |       | 1,732,249        |       | 2,063,845        |       |
|                               |       |             |       |             |       |
|                               |       | 8,960,506        |       | 9,163,487        |       |

 

The normal credit period granted by the Group is onaverage 30 days from the date of invoice.

 

Provision for doubtful debts was analyzed asfollows:

 
| ** **                          | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                |       |             |       |             |       |
| Balance, beginning of year          |       | 1,733,972        |       | 3,488,959        |       |
| Provision for the year              |       | 1,749,887        |       | 2,191,820        |       |
| Acquisition of Unicom New World     |       | 199,904          |       | —           |       |
| Acquisition of Unicom International |       | —           |       | 9,306            |       |
| Sale of New Guoxin                  |       | (64,664          | )          | —           |       |
| Written-off for the year            |       | (130,140         | )          | (1,756,578       | )          |
|                                |       |             |       |             |       |
| Balance, end of year                |       | 3,488,959        |       | 3,933,507        |       |

 

F - 46

----

 

**1****9****.  INVENTORIES**

 
| ** **      | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-----------------|------------|------------------|------------|------------------|------------|
| ** **      | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|            |       |             |       |             |       |
| Handsets        |       | 1,133,027        |       | 2,045,502        |       |
| Telephone cards |       | 855,183          |       | 832,050          |       |
| Other           |       | 181,144          |       | 237,080          |       |
|            |       |             |       |             |       |
|            |       | 2,169,354        |       | 3,114,632        |       |

 

**20****.  PREPAYMENTSAND OTHER CURRENT ASSETS**

 
| ** **                                                           | ** ** | **Note**   | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                 |       |       |       |             |       |             |       |
| Prepaid rental                                                       |       |       |       | 233,461          |       | 277,999          |       |
| Deposits and prepayments                                             |       |       |       | 1,624,874        |       | 1,334,220        |       |
| Interest receivable                                                  |       |       |       | 4,872            |       | 1,414            |       |
| Advances to employees                                                |       |       |       | 164,487          |       | 164,386          |       |
| Deferred customer acquisition costs of  contractual CDMA subscribers |       | (a)        |       | 535,521          |       | 860,225          |       |
| Other                                                                |       |       |       | 584,562          |       | 421,470          |       |
|                                                                 |       |       |       |             |       |             |       |
|                                                                 |       |       |       | 3,147,777        |       | 3,059,714        |       |

 

Theaging analysis of prepaymentsand other current assetswas as follows:

 
| ** **      | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-----------------|------------|------------------|------------|------------------|------------|
| ** **      | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|            |       |             |       |             |       |
| Within one year |       | 3,109,944        |       | 2,855,331        |       |
| Over one year   |       | 37,833           |       | 204,383          |       |
|            |       |             |       |             |       |
|            |       | 3,147,777        |       | 3,059,714        |       |

 

F - 47

----

 

----

Note:

 

(a)                   As part of the arrangement with certain CDMAcontractual subscribers under special promotion packages, CDMA handsets wereprovided to certain subscribers for their use at no additional charge duringspecified contract periods ranging from 6 months to 2 years.

 

Under theterms of these contracts, subscribers are required to spend a minimum amount ofservice fees during the contract period. In addition, to secure futureperformance, these subscribers are also required to (i) prepay service fees ordeposits, (ii) maintain a restricted bank deposits in a designated commercialbanks to secure the minimum contract amount, or (iii) provide the Group with aguarantor who will compensate the Group for any loss upon theirnon-performance. The costs of CDMA handsets under the abovecontractual arrangements aretreated as deferred customer acquisition costs, to the extent recoverable basedon management periodic assessment, and are amortized over the contractual period (not exceeding 2years) to match with the Group’s minimum contract revenue.

 

For the yearended December 31, 2004, amortization of these deferred customer acquisitioncosts of contractual CDMA subscribers amounted to approximately RMB6,121million (2002: RMB1,385 million; 2003: RMB5,837 million), which was recorded in“selling and marketing” expenses.  As ofDecember 31, 2004, the carrying amount of unamortized deferred customeracquisition costs of contractual CDMA subscribers totaled approximately RMB4,745million (2003 RMB4,447 million), with approximately RMB860 million (2003 RMB536 million) recorded in “prepayment and other current assets” (for contractperiod within 1 year) and with approximately RMB3,885 million (2003: RMB3,911million) recorded in “other assets” (for contract period over 1 year) (see Note23).

 

In addition,the Group obtained certain CDMA handsets to develop the above CDMA contractualsubscribers through finance lease arrangement (see Note 28). The carryingamount of these deferred customer acquisition costs of contractual CDMA subscribersarising from the finance lease amounted to approximately RMB896 million as of31 December 2004.

 

As ofDecember 31, 2004, the carrying amount of prepaid service fees and depositsobtained by the Group under the above contracts amounted to RMB2,301 million andRMB148 million (2003: RMB2,366million and RMB153 million) respectively.

 

F - 48

----

 

**21****.  PROPERTY,PLANT AND EQUIPMEN****T****, NET**

 
| ** **                                | ** ** | **2004**                            | ** ** | **2003**                            | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                | ** ** | **Land use  rights  and buildings** | ** ** | **Telecommunications    equipment** | ** ** | **Office  furniture,  fixtures and  others** | ** ** | **Leasehold  improvements** | ** ** | **Construction  in  progress** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                | ** ** | **RMB’000**                    | ** ** | **RMB’000**                    | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Cost or  valuation:                       | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning of year                         |       | 13,103,955                          |       | 115,221,436                         |       | 4,494,776 |   | 1,054,779 |   | 21,741,746 |   | 155,616,692 |   | 138,317,709 |   |
| Additions                                 |       | 301,360                             |       | 1,029,561                           |       | 413,399 |   | 92,837 |   | 17,196,742 |   | 19,033,899 |   | 18,806,907 |   |
| Acquisition of  Unicom New World          |       | —                              |       | —                              |       | — |   | — |   | — |   | — |   | 12,106,458 |   |
| Acquisition of  Unicom International      |       | —                              |       | 45,987                              |       | — |   | — |   | 11,438 |   | 57,425 |   | — |   |
| Transfer from CIP                         |       | 2,541,675                           |       | 12,407,593                          |       | 239,585 |   | 66,565 |   | (15,255,418 | ) | — |   | — |   |
| Sale of New Guoxin                        |       | —                              |       | —                              |       | — |   | — |   | — |   | — |   | (12,421,053 | ) |
| Disposals                                 |       | (27,255                             | )          | (174,102                            | )          | (44,291 | ) | (101,773 | ) | — |   | (347,421 | ) | (1,193,329 | ) |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| End of year                               |       | 15,919,735                          |       | 128,530,475                         |       | 5,103,469 |   | 1,112,408 |   | 23,694,508 |   | 174,360,595 |   | 155,616,692 |   |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Representing:                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| At cost                                   |       | 13,548,962                          |       | 128,530,475                         |       | 5,103,469 |   | 1,112,408 |   | 23,694,508 |   | 171,989,822 |   | 153,245,919 |   |
| At valuation                              |       | 2,370,773                           |       | —                              |       | — |   | — |   | — |   | 2,370,773 |   | 2,370,773 |   |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
|                                      |       | 15,919,735                          |       | 128,530,475                         |       | 5,103,469 |   | 1,112,408 |   | 23,694,508 |   | 174,360,595 |   | 155,616,692 |   |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Accumulated  depreciation and impairment: |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                         |       | 1,524,647                           |       | 33,821,346                          |       | 1,641,112 |   | 510,432 |   | 14,307 |   | 37,511,844 |   | 30,831,080 |   |
| Charge for the  year                      |       | 994,931                             |       | 16,106,795                          |       | 892,457 |   | 233,422 |   | — |   | 18,227,605 |   | 15,975,271 |   |
| Impairment losses                         |       | —                              |       | —                              |       | — |   | — |   | — |   | — |   | 528,048 |   |
| Sale of New Guoxin                        |       | —                              |       | —                              |       | — |   | — |   | — |   | — |   | (8,773,970 | ) |
| Disposals                                 |       | (7,893                              | )          | (139,184                            | )          | (34,064 | ) | (101,773 | ) | — |   | (282,914 | ) | (1,048,585 | ) |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| End of year                               |       | 2,511,685                           |       | 49,788,957                          |       | 2,499,505 |   | 642,081 |   | 14,307 |   | 55,456,535 |   | 37,511,844 |   |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net book value:                           |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| End of year                               |       | 13,408,050                          |       | 78,741,518                          |       | 2,603,964 |   | 470,327 |   | 23,680,201 |   | 118,904,060 |   | 118,104,848 |   |
|                                      |       |                                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                         |       | 11,579,308                          |       | 81,400,090                          |       | 2,853,664 |   | 544,347 |   | 21,727,439 |   | 118,104,848 |   | 107,486,629 |   |

 

Asof December 31, 2004,prepayments for property, plant and equipment to be used in constructionamounting to approximately RMB1,604 million (2002: RMB4,164 million;2003: RMB1,431 million) have been included in construction-in-progress.

 

For 2004, interest of approximately RMB648 million (2002: RMB423 million; 2003: RMB604 million) was capitalized to construction-in-progress.

 

As of December 31, 2004, the cost or valuation ofland use rights (located in the PRC) and the accumulated depreciation amountedto approximately RMB525 million and RMB113 million respectively (2002: RMB348million and RMB77 million; 2003: RMB303 million and RMB61 million).

 

Land userights and buildings of the Group as of March 31, 2000 were valued bySallmanns (Far East) Ltd., registered property valuers in Hong Kong, using thereplacement cost or open market value approach, as appropriate. The resultingrevaluation surplus and deficit amounted to RMB177 million and RMB28 million, respectively. Upon thesale of New Guoxin at December 31, 2003, the revaluation surplus ofthe Group amounted to RMB83 million as of December 31, 2003 and 2004. The additional depreciationattributable to the revaluation surplus amounted to approximately RMB4.16million for 2004 (2002 and 2003: RMB8.80million). The revaluation deficit was charged to the statements ofincome during the year ended December 31,2000. As of December 31, 2004, forthese land use right and buildings stated at revalued amounts, their carrying amountwould have been approximately RMB1,695 million (2002: RMB2,032 million; 2003:RMB1,783 million) had they been carried at cost less accumulated depreciation.

 

F - 49

----

 

Telecommunication equipment held under financeleases comprised of certain sub sea transmission cables and wireless publicphone equipment. As of December 31, 2004, net book value of  certain sub sea transmission cables andwireless public equipments held under finance leases amounted to approximatelyRMB134 million (2003: RMB147 million) and RMB468 million (2003 Nil)respectively (see Note (28)).

 

Impairment of assets for the Paging Business(discontinued in 2004):

 

Management conducts an impairment assessment at each balance sheet dateto identify whether the carrying values of the property, plant and equipmentmay be impaired. In 2002 and 2003, the Group conducted such re-assessment of therecoverable amount of the paging assets based on the best estimates of thediscounted net future cash flows expected to be generated from the PagingBusiness in the future years. Management has made key assumptions andestimations on the appropriate discount rate adopted (8% per annum), the periodcovered by the cash flow forecast, the impact of the continuous decline oftraditional paging business, the future loss of subscribers, the expected trendin average revenue per subscriber, as well as incremental cash flows arisingfrom new paging businesses and the effects of the adoption of cost reductionplans. All these assumptions and estimations are made based on historicaltrends adjusted for the current market situation (including physical conditionsof these assets) and the forecast of the future development of new value-addedpaging businesses.

 

In 2002, the Group conducted re-assessment of the recoverable amount ofthe paging assets based on the best estimates of the discounted net future cashflows expected to be generated from the Paging Business in the future years.Management expected further reduction of cash inflows to be generated from thetraditional Paging Business. Based on the estimate of the discounted net cashflows expected to arise from the continuing use of the paging assets, the Groupconcluded that the carrying amount of the paging assets as of December 31, 2002did not exceed its recoverable amount and accordingly no additional impairmentloss was recognized in 2002.

 

In 2003, based on the updated analysis and theworsening trend of the decline of the traditional Paging Business in the firsthalf of 2003, despite the continuousgrowth of new value-added Paging Businesses, the Group expected that the related incremental future cashinflows to be generated from these new paging services could unlikely offsetthe effects of the rapid decline of the traditional Paging Business in future. Consequently, based on the latest estimate of the discounted future netcash flows expected to arise from the continuing operations of the PagingBusiness, after considering the unexpected rapid decline of the traditionalPaging Business in the first half of 2003, the Groupconcluded that the carryingamount of paging assets as at June 30, 2003 hadexceeded their expected recoverable amounts. Accordingly, the Group has recorded an additional impairment loss for property, plant and equipment of the Paging Business amounting toapproximately RMB528 million for the year ended December 31, 2003.

 

In addition, the Group has also recognized losseson disposal of property, plant and equipment of approximately RMB11 million forthe year ended December 31, 2004 (2002: RMB82 million; 2003: RMB50 million)

 

F - 50

----

 

**22****.  GOODWILL**

 
| ** **                                                                          | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                          | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                                |       |             |       |             |       |
| Cost:                                                                               |       |             |       |             |       |
| Goodwill arising from acquisition of Unicom  New Century (see  Note 4(a))           |       | 2,284,749        |       | 2,284,749        |       |
| Goodwill arising from acquisition of Unicom  New World (see Note  4(b))             |       | 1,144,957        |       | 1,144,957        |       |
| Negative goodwill arising from acquisition  of Unicom International (see Note 4(c)) |       | —           |       | (7,727           | )          |
|                                                                                |       | 3,429,706        |       | 3,421,979        |       |
|                                                                                |       |             |       |             |       |
| Less: Accumulated amortization                                                      |       | (114,238         | )          | (285,422         | )          |
|                                                                                |       |             |       |             |       |
|                                                                                |       | 3,315,468        |       | 3,136,557        |       |

 

Goodwill arising fromthe acquisition of Unicom New Century and Unicom New World represented theexcess of purchase consideration over the fair value of the separatelyidentifiable net assets acquired (see Note 4). The amortization charge of goodwill amounted to approximately RMB171,485,000 for the year ended December 31, 2004 (2003: RMB114,238,000).

 

Negative goodwillarising from the acquisition of Unicom International represented the excess ofthe fair value of the separately identifiable net assets acquired over thepurchase consideration. The recognition of the negative goodwill amounted toapproximately RMB301,000 for the year endedDecember 31, 2004.

 

**23****.  OTHERASSETS**

 
| ** **                                                           | ** ** | **Note**   | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                 |       |       | ** ** | ** **       |       |             |       |
| Interconnection facilities                                           |       |       |       | 613,622          |       | 441,968          |       |
| Other                                                                |       |       |       | 1,588,839        |       | 1,852,818        |       |
|                                                                 |       |       |       | 2,202,461        |       | 2,294,786        |       |
|                                                                 |       |       |       |             |       |             |       |
| Less: Accumulated amortization                                       |       |       |       | (1,162,464       | )          | (1,401,973       | )          |
|                                                                 |       |       |       | 1,039,997        |       | 892,813          |       |
|                                                                 |       |       |       |             |       |             |       |
| Prepaid rental and leased line                                       |       |       |       | 897,783          |       | 958,886          |       |
| Deferred customer acquisition costs of  contractual CDMA subscribers |       | 20(a)      |       | 3,911,650        |       | 3,884,685        |       |
|                                                                 |       |       |       |             |       |             |       |
|                                                                 |       |       |       | 5,849,430        |       | 5,736,384        |       |

 

Forthe year ended December 31, 2004,amortization of other assets, excluding deferred customer acquisition costs ofcontractual CDMA subscribers and prepaid rental and leased line,amounted to approximately RMB664,285,000 (2002: RMB381,629,000; 2003: RMB294,762,000).

 

F - 51

----

 

**2****4****.  INVESTMENTIN SUBSIDIARIES**

 

During2004, the Companyacquired the entire equity interest in Unicom International, which holds the entire equity interests in UnicomUSA. The acquisition became effective inSeptember 2004.

 

Asof December 31, 2004, thedetails of the Company’s subsidiaries were as follows:

 
| **Name**                                                                                                                                                        | ** ** | **Place  and date of  incorporation and  legal entity**                | ** ** | **Percentage of  equity interests  held** | ** ** | **Issued and  fully paid  capital** | ** ** | **Principal activities** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                      | ** ** | ** **                                                             | ** ** | **Direct**                                | ** ** | **Indirect**                        | ** ** | **RMB’000**         | ** ** | ** ** | ** ** |
|                                                                                                                                                            |       |                                                                   |       |                                      |       |                                |       |                     |       |   |   |
| China Unicom Corporation Limited

 

(On July 30, 2004, CUCL combined with  Unicom New Century, and Unicom New Century was legally dissolved) (see Note 1) |       | The PRC,  April 21, 2000,  limited liability company                   |       | 100.00                                    | %          | —                              |       | 45,370,994               |       | 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 |   |
|                                                                                                                                                            |       |                                                                   |       |                                      |       |                                |       |                     |       |   |   |
| Unicom New World Telecommunications Co.,  Ltd.                                                                                                                  |       | The PRC,  November 4, 2003,  limited liability company                 |       | —                                    |       | 100.00                              | %          | 2,054,770                |       | Telecommunications operation |   |
|                                                                                                                                                            |       |                                                                   |       |                                      |       |                                |       |                     |       |   |   |
| China Unicom International Limited                                                                                                                              |       | Hong Kong,  May 24, 2000  limited liability company                    |       | 100                                       | %          | —                              |       | 106                      |       | Telecommunications service |   |
|                                                                                                                                                            |       |                                                                   |       |                                      |       |                                |       |                     |       |   |   |
| China Unicom USA Co.                                                                                                                                            |       | USA,  May 24, 2002,  corporation                                       |       | —                                    |       | 100                                 | %          | 83                       |       | Telecommunications service |   |
|                                                                                                                                                            |       |                                                                   |       |                                      |       |                                |       |                     |       |   |   |
| China Unicom (Macau) Limited                                                                                                                                    |       | Macau,  October 15, 2004,  limited liability company                   |       | 99.00                                     | %          | 1.00                                | %          | 10,326                   |       | Telecommunications operation |   |

 

Amountsdue to/from subsidiaries included in the Company’s balance sheet are unsecured,non-interest bearing and repayable/receivable on demand.

 

F - 52

----

 

**2****5.****  PAYABLESAND ACCRUED LIABILITIES**

 
| ** **                                           | ** ** | **Note**   | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                 |       |       |       |             |       |             |       |
| Payables to contractors and equipment  suppliers     |       |       |       | 11,789,366       |       | 10,592,518       |       |
| Accrued expenses                                     |       |       |       | 1,417,750        |       | 1,355,183        |       |
| Payables to telecommunications products  suppliers   |       |       |       | 1,346,784        |       | 1,772,693        |       |
| Customer deposits                                    |       |       |       | 1,198,812        |       | 1,370,015        |       |
| Salary and welfare payables                          |       |       |       | 494,794          |       | 465,154          |       |
| Amounts due to Services Provider / Content  Provider |       |       |       | 369,330          |       | 573,804          |       |
| Other                                                |       | (a)        |       | 481,584          |       | 656,382          |       |
|                                                 |       |       |       |             |       |             |       |
|                                                 |       |       |       | 17,098,420       |       | 16,785,749       |       |

 

----

Note:

 

(a)          Otherincludes miscellaneous accruals for housing fund and other governmentsurcharges.

 

Theaging analysis of payables andaccrued liabilities is as follows:

 
|                   | ** ** | ** ** | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **             | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                   |       |       |       |             |       |             |       |
| Less than six months   |       |       |       | 12,253,057       |       | 13,343,784       |       |
| Six months to one year |       |       |       | 3,051,167        |       | 2,257,802        |       |
| More than one year     |       |       |       | 1,794,196        |       | 1,184,163        |       |
|                   |       |       |       |             |       |             |       |
|                   |       |       |       | 17,098,420       |       | 16,785,749       |       |

 

F - 53

----

 

**2****6****.  SHORT-TERMBANK LOANS**

 

Interestrates on RMB denominated short-termbank loans ranged from 4.54% to 5.31% per annum for 2004 (2002: 4.54% to5.56%; 2003: 4.54% to 5.31%).

 

Supplementalinformation with respect to short-term bank loans was as follow:

 
| ** **                     | ** ** | **Balance at  year end** | ** ** | **Weighted  average  interest rate  at year end** | ** ** | **Maximum  amount  outstanding  during the year** | ** ** | **Average  amount  outstanding  during the  year*** | ** ** | **Weighted  average  interest rate  during the  year**** | ** ** |
|--------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|------------|
|                           | ** ** | **RMB’000**         | ** ** | **per annum**                                     | ** ** | **RMB’000**                                  | ** ** | **RMB’000**                                    | ** ** | **per annum**                                            | ** ** |
|                           |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| December 31, 2003              |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| RMB dominated bank loans       |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| - secured (see Note (a)(ii))   |       | 520,000                  |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| - unsecured (see Note (a)(i))  |       | 10,455,199               |       |                                              |       |                                              |       |                                                |       |                                                     |       |
|                           |       | 10,975,199               |       | 5.22                                              | %          | 10,975,199                                        |       | 10,060,850                                          |       | 5.15                                                     | %          |
|                           |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| December 31, 2004              |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| RMB dominated bank loans       |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| - secured (see Note (a)(ii))   |       | 100,000                  |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| - unsecured (see Note (a)(i))  |       | 8,131,431                |       |                                              |       |                                              |       |                                                |       |                                                     |       |
|                           |       | 8,231,431                |       | 4.86                                              | %          | 10,975,199                                        |       | 9,603,315                                           |       | 5.06                                                     | %          |
|                           |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| HK$ dominated  bank loans |       |                     |       |                                              |       |                                              |       |                                                |       |                                                     |       |
| - unsecured (see Note (b))     |       | 696,986                  |       |                                              |       |                                              |       |                                                |       |                                                     |       |
|                           |       | 696,986                  |       | 0.90                                              | %          | 696,986                                           |       | 348,493                                             |       | 1.08                                                     | %          |

 

----

*                 The averageamount outstanding is computed by dividing the total of outstanding principalbalance as of January 1 and December 31, as applicable, by 2.

 

**          The weightedaverage interest rate is computed by dividing the total of weighted averageinterest rates as of January 1 and December 31, as applicable, by 2.

 

Notes:

 

(a)As ofDecember31, 2004, short-term bank loans of the Group denominated inRMB were secured by the following:

 

(i)Approximately RMB3,397 million (2003: RMB70million) of short-term bank loans were guaranteed by Unicom Group.

 

(ii)Approximately RMB100 million (2003: RMB520 million) of short-term bank loanswere secured by the future service feerevenue tobe generated by the cellular operations.

 

(b)As of December 31, 2004, HK$ denominated short-term bank loans of the Company ofapproximately HK$655 million (equivalent to approximated RMB697 million) wereto finance the working capital. The bank loans were repayable in 1 year andcarried an interest rate of 0.22% over HIBOR per annum.

 

F - 54

----

 

**2****7.****      ****LONG-TERM BANK LOANS**

** **
|                        | ** ** | **Interest rates and final maturity**                                                                                                                     | ** ** | **200****3**     | ** ** | **200****4**     |   |
|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|--------|
|                        |       |                                                                                                                                                      | ** ** | **RMB’000** | ** ** | **RMB’000** |   |
| RMB  denominated bank loans |       | Fixed  interest rate ranging from 4.78% to 5.73%  (2003: 4.44% to 5.76%) per annum with maturity through 2010 (2003: maturity through 2009) (see Note(a)) |       |             |       |             |   |
|                        |       |                                                                                                                                                      |       |             |       |             |   |
| - secured                   |       |                                                                                                                                                      |       | 10,622,366       |       | 6,804,566        |   |
| - unsecured                 |       |                                                                                                                                                      |       | 26,994,612       |       | 20,487,127       |   |
|                        |       |                                                                                                                                                      |       |             |       |             |   |
|                        |       |                                                                                                                                                      |       | 37,616,978       |       | 27,291,693       |   |
|                        |       |                                                                                                                                                      |       |             |       |             |   |
| USD  denominated bank loans |       | Floating  interest rate of USD LIBOR plus interest margin of 0.28% to 0.44% per annum with  maturity through 2010 (see Note  (b))                    |       | 5,793,690        |       | 9,931,800        |   |
|                        |       |                                                                                                                                                      |       |             |       |             |   |
| Less:  Current portion      |       |                                                                                                                                                      |       | (7,197,877       | )          | (11,086,305      | )      |
|                        |       |                                                                                                                                                      |       |             |       |             |   |
|                        |       |                                                                                                                                                      |       | 36,212,791       |       | 26,137,188       |   |

 

Therepayment schedule of the long-term bank loans is as follows:

 
| ** **                                            | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Balances due:                                         |       |             |       |             |       |
| - not later than one year                             |       | 7,197,877        |       | 11,086,305       |       |
| - later than one year and not later than  two years   |       | 15,549,832       |       | 10,226,776       |       |
| - later than two years and not later than  five years |       | 18,837,560       |       | 14,092,792       |       |
| Thereafter                                            |       | 1,825,399        |       | 1,817,620        |       |
|                                                  |       |             |       |             |       |
|                                                  |       | 43,410,668       |       | 37,223,493       |       |
| Less: Portion classified as current liabilities       |       | (7,197,877       | )          | (11,086,305      | )          |
|                                                  |       |             |       |             |       |
|                                                  |       | 36,212,791       |       | 26,137,188       |       |

 

----

Notes*:*

 

(a)   As of December 31, 2004, long-term bank loans of the Group denominated in RMB weresecured by the following:

 

(i)      Approximately RMB6,805 million (2003: RMB10,622 million) of long-term bank loans were secured by the futureservice fee revenue to be generated by the cellular operations of the relevantbranches. Included in these long-termbank loans, approximately RMB2,824 million (2003: RMB3,600 million) was also guaranteed by Unicom Group;

 

(ii)     In addition to the above, approximately RMB3,955 million (2003: RMB8,004million) of long-term bank loans above were guaranteed by Unicom Group; and

 

(iii)    Approximately RMB26 million (2003: RMB50 million) of long-term bank loanswere secured by restricted bank deposits.

 

(b)         On September 26, 2003, theCompany signed an agreement with 13 financial institutions for a long-termsyndicated loan of USD0.7 billion (the “Facility”). TheFacility was 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 and carried an interest rateof 0.28%, 0.35% and 0.44% over US dollar LIBOR per annum for each trancherespectively. In October 2003, the company and CUCL entered into an agreementto lend the bank loans to CUCL with similar terms to finance the networkconstructions of CUCL.

 

In addition, on February25, 2004, CUCL signed anagreement with various financialinstitutions for a long-term syndicated loan of USD0.5 billion to finance the working capital and network construction expenditure. Thisfacility was repayable in 3 years and carried an interest rate of 0.40% over US dollar LIBOR per annum.

 

F - 55

----

 

**28****.****OBLIGATIONS UNDER FINANCELEASES**

 

Obligations under finance leases were analyzed asfollows:

 
| *** ***                                                  | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| *** ***                                                  | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Total minimum lease payments  under finance leases repayable: |       |             |       |             |       |
| - not later than one year                                     |       | 25,926           |       | 938,189          |       |
| - later than one year and not  later than two years           |       | 8,642            |       | 405,453          |       |
| - later than two years and not  later than five years         |       | 26,017           |       | 74,078           |       |
| - later than five years                                       |       | 145,753          |       | 137,104          |       |
|                                                          |       |             |       |             |       |
|                                                          |       | 206,338          |       | 1,554,824        |       |
| Less:Future finance charges                                   |       | (81,184          | )          | (127,679         | )          |
|                                                          |       |             |       |             |       |
| Present value of minimum  obligations                         |       | 125,154          |       | 1,427,145        |       |
|                                                          |       |             |       |             |       |
| Representing obligations under  finance leases:               |       |             |       |             |       |
| - current liabilities                                         |       | 25,435           |       | 938,189          |       |
| - non-current liabilities                                     |       | 99,719           |       | 488,956          |       |
|                                                          |       |             |       |             |       |
| The present value of obligations  under finance leases:       |       |             |       |             |       |
| -  not later than one year                               |       | 25,435           |       | 938,189          |       |
| - later than one year and not  later than two years           |       | 7,691            |       | 358,850          |       |
| - later than two years and not  later than five years         |       | 20,533           |       | 60,692           |       |
| -  later than five years                                 |       | 71,495           |       | 69,414           |       |
|                                                          |       | 125,154          |       | 1,427,145        |       |
|                                                          |       |             |       |             |       |
| Less: Portion classified as  current liabilities              |       | (25,435          | )          | (938,189         | )          |
|                                                          |       |             |       |             |       |
|                                                          |       | 99,719           |       | 488,956          |       |

 

Obligations under finance leases were related to the leasing of certainsub sea transmission cables (see Notes 21 and 33(b)), CDMA handsets (see Note 20(a))and wireless public phone equipments (see Note 21).

 

Interest rates of obligations under finance leases ranged from 4% to 6%per annum.

 

**29****.  SHARECAPITAL**

 
| ** **                                     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                     | ** ** | **HK$’000** | ** ** | **HK$’000** | ** ** |
| Authorized:                                    |       |             |       |             |       |
| 30,000,000,000 ordinary shares of HK$0.1  each |       | 3,000,000        |       | 3,000,000        |       |

 
| ** **             | ** ** | ** ** | ** ** | **200****3**                             | ** ** | **200****4**     | ** ** |
|------------------------|------------|------------|------------|------------------------------------------|------------|------------------|------------|
| ** **             | ** ** | **Note**   | ** ** | **Number of****s****hares  (’000)** | ** ** | **HK$’000** | ** ** | **RMB****e****quivalent  ’000** | ** ** | **Number of****s****hares  (’000)** | ** ** | **HK$’ 000** | ** ** | **RMB****e****quivalent  ’000** | ** ** |
| Issued and fully paid: | ** ** | ** ** | ** ** | ** **                               | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| -Unicom BVI            |       |       |       | 9,725,000                                |       | 972,500          |       | 1,030,850 |   | 9,725,000 |   | 972,500 |   | 1,030,850 |   |
| -Public investors      |       | (a)        |       | 2,828,172                                |       | 282,817          |       | 300,540 |   | 2,838,492 |   | 283,849 |   | 301,637 |   |
|                   |       |       |       |                                     |       |             |       |   |   |   |   |   |   |   |   |
|                   |       |       |       | 12,553,172                               |       | 1,255,317        |       | 1,331,390 |   | 12,563,492 |   | 1,256,349 |   | 1,332,487 |   |

 

----

Note: (a) Increase of10,320,000 ordinary shares in year 2004 (2003: 176,000) represents the ordinaryshares in issued under the share option scheme (see Note 30(g)).

 

F - 56

----

 

**30****.  SHAREOPTION SCHEME**

 

TheCompany adopted a share option scheme (the “Share Option Scheme”) and a fixedaward pre-global offering share scheme (“Pre-Global Offering Share OptionScheme”) on June 1, 2000 for the granting of share options to qualified employees,with terms amended on May 13, 2002 to comply with the requirements set out inthe New Chapter 17 of the Listing Rules.

 

Movementsin the number of share options outstanding during the years 2002, 2003and 2004 are as follows:

 
| ** **                 | ** ** | **Number of share options involved** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2002**                             | ** ** | **2003** | ** ** | **200****4** | ** ** |
|                       |       |                                 |       |   |   |   |   |
| Balance, beginning of year |       | 33,840,600                           |       | 69,868,600 |   | 172,367,400 |   |
| Granted                    |       | 36,028,000                           |       | 105,956,000 |   | 113,322,000 |   |
| Exercised                  |       | —                               |       | (176,000 | ) | (10,320,000 | ) |
| Cancelled                  |       | —                               |       | (3,281,200 | ) | (1,306,000 | ) |
|                       |       |                                 |       |   |   |   |   |
| Balance, end of year       |       | 69,868,600                           |       | 172,367,400 |   | 274,063,400 |   |

 

Asof December 31, 2004,information of outstanding options is 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****s****hares  outstanding as of  December 31, 2004** | ** **  | **Number of****s****hares  outstanding as of  December 31, 2003** | ** **  |
|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------|-------------|-------------------------------------------------------------------|-------------|
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| Shares granted under the Pre-Global  Offering Share Option Scheme: |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| June 22, 2000  (see Note  (a))                                     |       | June 22, 2002 to   June 21, 2010                         |       | HK$                                                         | 15.42      |                                                              | 25,436,600  |                                                              | 25,436,600  |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| Shares granted under the Share Option  Scheme:                     |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| June 30, 2001  (see Note  (b))                                     |       | June 30, 2001 to June 21, 2010                      |       | HK$                                                         | 15.42      |                                                              | 6,508,000   |                                                              | 6,508,000   |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| August 2, 2002  (see Note (c))                                     |       | July 10, 2003 to July 9, 2008                       |       | HK$                                                         | 6.18       |                                                              | 25,954,800  |                                                              | 34,466,800  |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| May 21, 2003  (see Note  (d))                                      |       | May 21, 2004 to May 20, 2009                        |       | HK$                                                         | 4.30       |                                                              | 102,476,000 |                                                              | 105,590,000 |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| May 30, 2003  (see Note (d))                                       |       | May 21, 2004 to May 20, 2009                        |       | HK$                                                         | 4.66       |                                                              | 366,000     |                                                              | 366,000     |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| July 20, 2004  (see Note  (e))                                     |       | July 20, 2005 to May 19, 2010                       |       | HK$                                                         | 5.92       |                                                              | 112,668,000 |                                                              | —      |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
| December 21, 2004  (see Note  (f))                                 |       | December 21, 2005 to December 20, 2010              |       | HK$                                                         | 6.20       |                                                              | 654,000     |                                                              | —      |   |
|                                                               |       |                                                     |       |                                                        |       |                                                              |        |                                                              |        |
|                                                               |       |                                                     |       |                                                        |       | 274,063,400                                                       |        | 172,367,400                                                       |        |

 

F - 57

----

 

(a)   According to the resolution passed by theBoard of Directors in June 2000, a total of the 27,116,600 options were grantedon June 22, 2000 to the senior management, including directors, and certainother employees (which represent, on their full exercise, 27,116,600 shares ofthe Company) under the fixed award Pre-Global Offering Share Option Schemeadopted by the Company on June 1, 2000 in the following terms:

 

(i)    the exercise price is equivalent to theshare issue price of the Global Offering of HK$15.42 per share (excluding thebrokerage fee and HKSE transaction levy); and

 

(ii)   the options are vested and exercisableafter 2 years from the grant date and expire 10 years from the date of grant.

 

No further option can be granted under thePre-Global Offering Option Scheme.

 

The Pre-Global Offering Option Scheme had beenamended in conjunction with the amended terms of the Share Option Scheme on May13, 2002. Apart from the above two terms, the principal terms are the same asthe amended Share Option Scheme in all material aspects.

 

(b)   On June 1, 2000, the Company adopted theShare Option Scheme pursuant to which the directors of the Company may, attheir discretion, invite employees, including executive directors, of theCompany or any of its subsidiaries, to take up options to subscribe for sharesup to a maximum aggregate number of shares (including those that could besubscribed for under the pre-global offering share option scheme as describedabove) equal to 10% of the total issued share capital of the Company.  According to the Share Option Scheme, the nominal consideration payable by a participantfor the grant of options will beHK$1.00.  The exercise price payable by aparticipant upon the exercise of anoption willbe determined by the directors attheir discretion at the date of grant, except that such price may not be setbelow a minimum price which is the higher of:

 

(i)    the nominal value of a share; and

 

(ii)   80% of the average of the closing pricesof shares on the HKSE on the five trading days immediately preceding the dateof grant of the option on which there were dealings in the shares on the HKSE.

 

Theperiod during which an option may be exercised will be determined by thedirectors at their discretion, except that no option may be exercised laterthan 10 years from June 22, 2000. According to a resolution of the Board of Directorsin June 2001, the Company has granted 6,724,000 share optionsunder the Share Option Scheme which represent, on their fullexercise, 6,724,000 shares to certain employees of the Group in the followingterms:

 

(i)    the price of a share payable by aparticipant upon the exercise of an option shall be HK$15.42 (excluding thebrokerage fee and HKSE transaction levy); and

 

(ii)   the period during which an option is vested and exercisablecommences from the date of grant of the options and will end by June 22, 2010.

 

F - 58

----

 

Theterms of the Share Option Scheme were amended on May 13, 2002 to comply withthe requirements set out in the New Chapter 17 of the Listing Rules which cameinto effect on September 1, 2001 with the following major amendments:

 

(i)             share optionmay be granted to employees including executive directors of the Group or anyof the non-executive directors;

 

(ii)          the optionperiod commences on a day after the date on which an option is offered but notlater than 10 years from the offer date; and

 

(iii)       minimumsubscription price shall not be less than the higher of:

 

•                  the nominalvalue of the shares;

 

•                  the closingprice of the shares of the Stock Exchange as stated in the Stock Exchange’squotation sheets on the offer date in respect of the options; and

 

•                  the averageclosing price of the shares on the Stock Exchange’s quotation sheets for thefive trading days immediately preceding the offer date.

 

(c)          According toresolution passed by the Board of Directors and the Independent Non-ExecutiveDirectors of the Company dated July 10,2002, a total of 36,028,000 share options were granted to eligible individualsincluding directors, independent non-executive directors, and the non-executivedirectors of the Company under the amended Share Option Scheme in the followingterms:

 

(i)             aggregate of2,802,000 options were granted to the executive directors, non-executivedirectors and independent non-executive directors of the Company;

 

(ii)          the exerciseprice is HK$6.18; and

 

(iii)  thevesting dates and exercisable periods of the options are as follows:

 
| **Vesting  dates** | ** ** | **Exercisable periods**        | ** ** | **Portions** | ** ** |
|--------------------|------------|--------------------------------|------------|--------------|------------|
|               |       |                           |       |         |       |
| July 10,  2003     |       | July 10,  2003 to July 9, 2008 |       | 40           | %          |
| July 10,  2004     |       | July 10,  2004 to July 9, 2008 |       | 30           | %          |
| July 10,  2005     |       | July 10,  2005 to July 9, 2008 |       | 30           | %          |

 

(d)         According toresolutions passed bythe Board of Directors and the Independent Non-Executive Directors of theCompany dated May 21,2003 and May 30, 2003, a total of105,590,000 share options and 366,000share options were granted to eligible individuals(including directors, independent non-executive directors, non-executivedirectors, middle to seniormanagement of the Group)respectively, under the amended Share Option Scheme inthe following terms:

 

(i)             an aggregateof 2,772,000 options were granted to the executive directors, non-executivedirectors and independent non-executive directors of the Company;

 

(ii)          the exerciseprice per share option are HK$4.30 and HK$4.66 respectively; and

 

(iii)       the vestingdates and exercisable periods of the options are as follows:

 
| **Vesting  dates** | ** ** | **Exercisable periods**       | ** ** | **Portions** |   |
|--------------------|------------|-------------------------------|------------|--------------|--------|
|               |       |                          |       |         |   |
| May 21, 2004       |       | May 21, 2004 to May  20, 2009 |       | 40           | %      |
| May 21, 2005       |       | May 21, 2005 to May 20, 2009  |       | 30           | %      |
| May 21, 2006       |       | May 21, 2006 to May 20, 2009  |       | 30           | %      |

 

F- 59

----

 

(e)          According toresolutions passed by the Board of Directors and the Independent Non-ExecutiveDirectors of the Company dated July 20, 2004, a total of 112,668,000 shareoptions were granted to eligible individuals (including directors, independentnon-executive directors, non-executive directors, middle to senior managementof the Group) respectively, under the amended Share Option Scheme in thefollowing terms:

 

(i)    an aggregate of 3,366,000 options weregranted to the executive directors, non-executive directors and independentnon-executive directors of the Company;

 

(ii)   the exercise price per share option isHK$5.92; and

 

(iii)  the vesting dates and exercisable periods ofthe options are 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 19, 2010 |       | 30           | %      |

 

(f)    According to resolutions passed by theBoard of Directors and the Independent Non-Executive Directors of the Company datedDecember 21, 2004, a total of 654,000 share options were granted to theexecutive directors of the Company, under the amended Share Option Scheme inthe following terms:

 

(i)    the exercise price per share option isHK$6.20; and

 

(ii)   the vesting dates and exercisable periods ofthe 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.

 

(g)         Details ofshare options exercised during the year were as following:

 
| **Period****of  option  exercised** | ** ** | **Exercise price** | ** ** | **Weighted average  closing price per  share immediately  before days of  exercise of options** | ** ** | **Proceeds received** | ** ** | **Number of  shares involved** | ** ** |
|-------------------------------------|------------|--------------------|------------|-------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **HK$**            | ** ** | **HK$**                                                                                         | ** ** | **HK$**               | ** ** | ** **                     | ** ** |
|                                |       |               |       |                                                                                            |       |                  |       |                           |       |
| January 5, to September  22, 2004   |       | 6.18               |       | 9.42                                                                                            |       | 52,604,160            |       | 8,512,000                      |       |
| May 25, to December  31, 2004       |       | 4.30               |       | 6.09                                                                                            |       | 7,774,400             |       | 1,808,000                      |       |
|                                |       |               |       |                                                                                            |       |                  |       |                           |       |
|                                |       |               |       |                                                                                            |       | 60,378,560            |       | 10,320,000                     |       |

 

F - 60

----

 

**31****.****      ****RELATED PARTY TRANSACTIONS**

 

Thetable set forth below summarizes the name of significant related parties andnature of relationship with the Companyas of December 31, 2004:

 
| **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                |
| Unicom Import and Export  Company Limited (“ Unicom I/E Co”)                                                                                                                 |       | A subsidiary of Unicom Group                |
| Unicom New Horizon Mobile  Telecommunications Company Limited (“Unicom New Horizon”)                                                                                         |       | A subsidiary of Unicom Group                |
| Unicom New Guoxin  Telecommunication 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”)                                                                                            |       | A subsidiary of the Company                 |
| Unicom New World  Telecommunications Corporation Limited (“Unicom New World”)                                                                                                |       | 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 the Company                 |

 

F - 61

----

 

**(a)****  ****Transactions with Unicom Groupand its subsidiaries**

 

Thefollowing is a summary of significant recurring transactions carried out withUnicom Group and its subsidiaries. These transactions also constitute connectedtransactions under the Listing Rules. In the director’s opinion, thesetransactions were carried out on normal commercial terms in the ordinary courseof business.

 
| ** **                                                                | ** ** | **Note**    | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** **  | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **Transactions with Unicom Group and its subsidiaries:**                  |       |        |       |             |       |             |       |             |       |
| Interconnection  and roaming revenues                                     |       | (i), (iii)  |       | 1,678,637        |       | 1,002,702        |       | 220,174          |       |
| Interconnection  and roaming charges                                      |       | (ii), (iii) |       | 331,179          |       | 316,271          |       | 63,891           |       |
| Revenue  remitted in respect of cellular subscriber value-added service   |       | (iv), (v)   |       | —           |       | —           |       | 858,778          |       |
| Charge  for customer services                                             |       | (iv), (vi)  |       | —           |       | —           |       | 524,718          |       |
| Charge  for cellular subscriber value-added service by UNISK              |       | (vii)       |       | —           |       | —           |       | 4,228            |       |
| Rental  charges for premises, equipment and facilities                    |       | (viii)      |       | 17,817           |       | 17,936           |       | 25,528           |       |
| Rental  income for premises and facilities                                |       | (iv), (ix)  |       | —           |       | —           |       | 19,475           |       |
| Revenue  for leasing of transmission line capacity                        |       | (x)         |       | 566,519          |       | 185,086          |       | 38,853           |       |
| CDMA  network capacity lease rental                                       |       | (xi)        |       | 891,897          |       | 3,515,364        |       | 6,588,926        |       |
| Constructed  capacity related cost of CDMA network                        |       | (xii)       |       | —           |       | —           |       | 305,903          |       |
| Charges  for the international gateway services                           |       | (xiii)      |       | 15,626           |       | 8,631            |       | 17,062           |       |
| Leasing  of satellite transmission capacity                               |       | (xiv)       |       | 35,153           |       | 26,400           |       | 14,152           |       |
| Sales  of CDMA handsets                                                   |       | (xv)        |       | 487,850          |       | 64,929           |       | —           |       |
| Purchase  of CDMA handsets                                                |       | (xvi)       |       | —           |       | —           |       | 14,655           |       |
| Purchase  of telecom cards                                                |       | (xvii)      |       | 877,221          |       | 1,186,500        |       | 1,087,498        |       |
| Commission  expenses for sales agency services incurred for telecom cards |       | (xviii)     |       | 18,497           |       | 16,175           |       | 16,023           |       |
| Agency  fee incurred for subscriber development                           |       | (iv), (xix) |       | —           |       | —           |       | 9,054            |       |
| Agency  fee incurred for procurement of telecommunications equipment      |       | (xx)        |       | 13,992           |       | 17,904           |       | 17,759           |       |
| Rental  for the PRC corporate office                                      |       | (xxi)       |       | 7,598            |       | —           |       | —           |       |
| Sales  of telecommunications equipment                                    |       | (xxii)      |       | 16,088           |       | —           |       | —           |       |

 
| (i)    |   | Interconnection revenues represent the amounts received or receivable  from Unicom Group for calls from its networks to the Group’s networks.  Roaming revenues represent revenue for calls made using the Group’s networks  by Unicom Group’s subscribers.                                                                                                                                                                                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (ii)   |   | Interconnection charges are for calls made from the Group’s networks  to Unicom Group’s networks. Roaming expenses represent expenses for calls  made by the Group’s subscribers using Unicom Group’s networks.                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (iii)  |   | Interconnection settlement between Unicom Group’s network and the  Group’s network is based on standards established from time to time by the  MII. In the case of calls between cellular subscribers in different  provinces, settlement is based on either the standards established by the MII  or an internal settlement arrangement applied by Unicom Group based on their  respective internal costs of providing this service. Also, charges for  roaming services between the Group and Unicom Group are based on their  respective internal costs of providing these services. |

 

F - 62

----

 
| (iv)   |   | Related party transactions existed between the Group and New Guoxin  after the sale of New Guoxin by CUCL on December 31, 2003. The nature, terms  and conditions of these new related party transactions with New Guoxin have  been set forth in the shareholders’ circular “Connected Transactions” of the  Company issued on November 26, 2003. Such transactions mainly included (i)  cellular subscriber value-added services, (ii) customer services, (iii)  agency services, and (iv) provision of premises.                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (v)    |   | Pursuant to the Comprehensive Operator Service Agreement  (“Comprehensive Service Agreement”) signed between the Group and New Guoxin  dated November 20, 2003, New Guoxin provides operator-based value-added  services to the Group’s cellular subscribers through its comprehensive  business network. The respective branches of New Guoxin and the Group may  agree on the proportion for sharing the revenue derived from such value-added  services, on the condition that such agreed proportion for New Guoxin shall  not be higher than the average proportion for independent value-added  telecommunications content providers who provide value-added  telecommunications content to the Group in the same region. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (vi)   |   | Pursuant to the Comprehensive Service Agreement, New Guoxin provides  business inquiries, tariff inquiries, account maintenance, complaints  handling, and customer interview and subscriber retention services to the  Group’s customers through the use of its 1001 paging network. The service fee  payable by the Group shall be calculated on the basis of the customer service  costs plus a profit margin, which shall not exceed 10%. The customer service  costs were determined by the actual cost per operator seat and the number of  effective operator seats.                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (vii)  |   | CUCL and UNISK signed a Cellular Subscriber Value-Added Services  Agreement (the “Agreement”) in March 2004. According to the Agreement, CUCL  agreed to provide its telecommunication channel and network subscriber  resources to UNISK to enable UNISK to provide value-added services to  subscribers through CUCL’s cellular telecommunications network and data  platform. The Agreement also stipulates that the content service fees paid by  subscribers for using UNISK’s value-added services are shared between CUCL  and UNISK based on agreed proportion. The content service fees are collected  from subscribers by CUCL and the relevant portion is paid to UNISK on a  regular basis.                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (viii) |   | CUCL, Unicom New Century (which has been merged into and succeeded by  CUCL) and Unicom New World respectively signed service agreements with Unicom  Group to mutually lease premises, equipment and facilities from each other.  Rentals are based on the lower of depreciation costs and market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (ix)   |   | Pursuant to the Guoxin Premises Leasing Agreement signed between the  Group and New Guoxin dated November 20, 2003, the Group agreed to provide  premises to New Guoxin. The rental amount in each case is based on the higher  of depreciation costs and market price for similar premises in that locality.                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

F - 63

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| (x)    |   | Unicom Group leases transmission line capacity from the Group in  accordance with the relevant provision of the services agreement. Revenue for  leases of transmission line capacity is based on tariffs stipulated by MII  from time to time less a discount of up to 10%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | In addition, according to the leased line agreement entered into  between the Group and Unicom USA, the Group leases transmission line to  Unicom USA. The revenue for the leases of transmission line was recognized  based on the market price amounted to approximately RMB14 million for the  nine months ended September 2004 (2003: Nil). Such transaction became  inter-group transactions and has been eliminated in the Group’s consolidated  financial statements after the acquisition of Unicom International in  September 2004.                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (xi)   |   | According to the CDMA Lease Agreements entered among CUCL, Unicom  Group and Unicom New Horizon, Unicom New Horizon agreed to lease the capacity  of CDMA network to CUCL covering 9 provinces and 3 municipalities. The lease  fee per unit of capacity is calculated on a basis that if full capacity is  leased, it would permit Unicom New Horizon to recover its investment in  constructing the CDMA network in 7 years, together with an internal return of  8%. In addition, Unicom New Century (which has been merged into and succeeded  by CUCL) and Unicom New World have also entered into CDMA capacity lease  agreements with Unicom Group and Unicom New Horizon. The terms of the leasing  arrangements are in all material respects the same as those contained in the  CDMA Lease Agreement entered into by CUCL (see Note 32 for details). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (xii)  |   | CUCL and Unicom New  World entered into a supplemental agreement with Unicom New Horizon on  November 22, 2004 in respect of CDMA capacity lease agreement. Pursuant to  the supplemental agreement, the constructed capacity related costs shall be  borne by the Group only to the extent of such part of costs that corresponds  to the proportion of capacity actually leased under the relevant CDMA lease  agreements. Such part of the constructed capacity related costs that  corresponds to the proportion of capacity not actually leased under the  relevant CDMA lease shall be borne by Unicom New Horizon.                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | The constructed  capacity related costs are defined as the costs of operating and managing the  CDMA network which relate directly to the constructed capacity of the CDMA  network, including the rental fees for stations and base stations and related  expenses including water and electricity charges, heating charges and fuel  charges for the relevant equipment etc., as well as maintenance costs of a  non-capital nature.                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (xiii) |   | Charges for international gateway services represent the amounts paid  or payable to Unicom Group for international gateway services provided for  the Group’s international long distance networks. The charge for this service  is based on the cost of operation and maintenance of the international  gateway facilities incurred by Unicom Group, including depreciation, together  with a margin of 10% over cost.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (xiv)  |   | Satellite transmission capacity leasing fees represent the amounts  paid or payable to Unicom NewSpace for the use of satellite transmission  capacity. The charges are based on the MII regulations then in effect less  the applicable discount up to 10% as agreed with Unicom NewSpace.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | In the second half of 2004, Unicom NewSpace sold the entire assets of  satellite transmission to Unicom Group. The rights and liabilities of  satellite transmission capacity lease agreement were succeeded by Unicom  Group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |

 

F - 64

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| (xv)    |   | According to the sales of CDMA handsets agreement entered into between  Unicom Group and Unicom Guomai Communications Corporation Limited (previously  a subsidiary of New Guoxin and sold to China Satellite Communications  Corporation in August 2004, “Unicom Guomai”) on January 1, 2003, Unicom Group  agreed to purchase CDMA handsets from Unicom Guomai. The selling price was  negotiated on an arm’s length basis, which is not lower than the price sold  by Unicom Guomai to independent third parties. Upon the completion of sales  of New Guoxin on December 31, 2003, transactions between Unicom Guomai and  Unicom Group did not constitute a related party transaction of the Company. |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xvi)   |   | According to the purchase of CDMA handset agreement entered into  between Unicom NewSpace and certain subsidiaries of the Group, the Group  agreed to purchase CDMA handsets from Unicom NewSpace. The purchase price  approximated market price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xvii)  |   | The Group signed a service agreement with Unicom Group to purchase  telephone cards from Unicom Group (to be imported by Unicom Xingye) at cost  plus a margin to be agreed from time to time, but not to exceed 20%, and  subject to appropriate volume discounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xviii) |   | Unicom International provided sales agency services such as selling of  telecommunications cards, leased lines and transfer calls to the Group. The  commission expenses are charged based on contractual prices which  approximated market rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | Prior to September 2004, the Group’s transactions with Unicom  International (previously a subsidiary of Unicom Group) were treated as  related party transaction, and had been included in the related party  transactions described above for the year ended December 31, 2002, 2003 and  2004. Such transaction became inter-group transactions and has been  eliminated in the Group’s consolidated financial statements starting from  September 2004.                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xix)   |   | Pursuant to the Comprehensive Service Agreement, New Guoxin provides  subscriber development services to the Group through telephone or other  channels by utilizing its paging network, equipment and operators. The agency  fee chargeable to the Group does not exceed the average of agency fees  chargeable by any independent third party agent in the same region.                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xx)    |   | The Group signed a service agreement with Unicom I/E Co., in which  Unicom 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 and  0.5% of the value of domestic equipment for such services.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   | On November 22, 2004, the Group entered into an amendment agreement  with Unicom I/E Co., with respect to the above service agreement.  Accordingly, with effect from July 1, 2004, the charge rates for the  equipment procurement service have been changed to 0.55% (for contract with  an amount of US$30 million (inclusive)) and 0.35% (for contract with an  amount of more than US$30 million) of the value of imported equipment, and  0.25% (for contract with an amount of RMB200 million (inclusive)) and 0.l5%  (for contract with an amount mort than RMB200 million) of the value of  domestic equipment.                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xxi)   |   | CUCL signed a rental  agreement with Beijing Xingye, under which Beijing Xingye leases office  premises to CUCL at its PRC corporate office. Monthly rental is calculated on  the basis of US$20 per square meter. This rental agreement was terminated in  September 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (xxii)  |   | Based on a resolution  passed by the shareholders of Unicom Guomai on April 23, 2002, Unicom Guomai  agreed to sell telecommunications equipment to certain branches of Unicom  Group, these contracts were obtained by Unicom Guomai through a tendering  process and the contract prices were negotiated on an arm’s length basis.                                                                                                                                                                                                                                                                                                                                                                                 |

 

F - 65

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| (xxiii) |   | Unicom Group is the registered proprietor of the “Unicom” trademark in  English and the trademark bearing the “Unicom” logo, which is registered at  the PRC State Trademark Bureau. Pursuant to an exclusive PRC trademark  license agreement entered into between Unicom Group and CUCL, CUCL and its  affiliates are granted the right to use these trademarks on a royalty free  basis for an initial period of 5 years, renewable at CUCL’s option.                                                                                                                                                            |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|    |   | As part of the acquisition arrangements of Unicom New Century and  Unicom New World, Unicom New Century and Unicom New World entered into PRC  trademark license agreement with Unicom Group respectively. Unicom New  Century (which has been merged into and succeeded by CUCL) and Unicom New  World are granted the right to use these trademarks on a royalty free basis  for an initial period of 10 years, renewable for another 10 years at CUCL and  Unicom New World’s options.                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (xxiv)  |   | According to the Multiple Service Agreement (the “Agreement”) signed  between the Group and Unicom Paging Limited (“Unicom Paging”, a subsidiary of  Unicom Group) dated August 1, 2001, the Group and Unicom Paging agree to  share the right to use the other party’s logo and trademark in the Paging  Business(discontinued in 2004) at no cost. In addition, the Agreement also  specifies the basis of allocating common expenses incurred by each party for  any shared resources and facilities. For the years ended December 31, 2002  and 2003, the amount of common expenses involved was insignificant. |

 

**(b)****    ****Amounts due from and to related parties/Unicom Group**

 

Amountsdue from and to related parties or Unicom Group are unsecured, non-interestbearing, repayable on demand and arise in the ordinary course of business inrespect of transactions with Unicom Group or the subsidiaries of Unicom Groupas described in (a) above.

 

**(c)****    ****Amount due to****/(from)****UnicomGroup**

** **
| ** **                                                                       | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                             |       |             |       |             |       |             |       |
| Due to Unicom Group, beginning of year                                           |       | 947,934          |       | 562,633          |       | 432,047          |       |
| Interconnection and roaming revenues                                             |       | (1,678,637       | )          | (1,002,702       | )          | (220,174         | )          |
| Interconnection and roaming charges                                              |       | 331,179          |       | 316,271          |       | 63,891           |       |
| Revenue for leasing of transmission line  capacity, premises  and facilities     |       | (566,519         | )          | (185,086         | )          | (38,853          | )          |
| Rental charges for premises, equipment and  facilities                           |       | 17,817           |       | 17,936           |       | 25,528           |       |
| Sales of CDMA mobile handsets                                                    |       | (487,850         | )          | (64,929          | )          | —           |       |
| Charges for the international gateway  services                                  |       | 15,626           |       | 8,631            |       | 17,062           |       |
| Leasing of satellite transmission capacity                                       |       | —           |       | —           |       | 7,076            |       |
| Network construction costs paid by Unicom  Group for CUCL of fixed-line networks |       | 112,474          |       | —           |       | —           |       |
| Settlement made during the year                                                  |       | 1,032,163        |       | 224,158          |       | (797,978         | )          |
| Proceeds (receivable)/ received from sale of New Guoxin                          |       | —           |       | (450,000         | )          | 450,000          |       |
| Amounts due to Unicom Group by Unicom New  Century                               |       | 838,446          |       | —           |       | —           |       |
| Amounts due to Unicom Group by Unicom New  World                                 |       | —           |       | 1,005,135        |       | —           |       |
| Due to/(from) Unicom Group, end of year                                          |       | 562,633          |       | 432,047          |       | (61,401          | )          |

 

F - 66

----

 

**(d) Bank loans guaranteed by Unicom Group**

 

As of December 31, 2004, the Group had approximatelyRMB6,779 million (2003:RMB11,604 million) of long-term bank loans and approximately RMB3,397 million (2003: RMB70million) of short-termbank loans guaranteed by Unicom Group.

 

**3****2.****  LEASING OF CDMANETWORK CAPACITY**

 

In November2001, CUCL entered into a CDMA capacity lease agreement (the “CDMA LeaseAgreement”) with Unicom Group and Unicom New Horizon. Pursuant to the CDMA LeaseAgreement, Unicom New Horizon agreed to lease the capacity of CDMA network to CUCLcovering the 9 provinces of and 3 municipalities.

 

Major terms ofthe CDMA Lease Agreement include the following:

 

•        CUCLhas the exclusive right to lease and operate the CDMA network capacity in theabove regions;

 

•        Theterm of the CDMA Lease Agreement is for an initial period of 1 year (the “InitialLease Term”), renewable for further one year terms at the option of the CUCL;

 

•        Thelease fee per unit of capacity is calculated on a basis that if full capacityis leased, it would permit Unicom New Horizon to recover its investment inconstructing the CDMA network in 7 years, together with an internal return of8%;

 

•        CUCLhas the option to add or reduce the capacity leased by giving specified periodof advance notice.  There is no minimumrequirement on the network capacity to be leased beyond the Initial Lease Term;and

 

•        CUCLhas the option to purchase the network assets. The acquisition price will be negotiated between the CUCL and Unicom NewHorizon, based on the appraised value of the network determined by an independentappraiser, provided that it will not exceed such price as would, add togetherwith any lease payments made previously, enable Unicom New Horizon to recoverits investment with an internal rate of return of 8%.

 

Commencementof the CDMA Lease Agreement was conditional upon, among others, the testing andinitial acceptance and delivery of phase I of the CDMA network and the receiptof all necessary government approvals. Upon the fulfillment of all theconditions precedent to the commencement of the CDMA Lease Agreement, theInitial Lease Term commenced on January 8, 2002. This lease arrangement has beenaccounted for as an operating lease of the network capacities. On January 8,2004, CUCL renewed the CDMA Lease Agreement with Unicom New Horizon for afurther one year.

** **

Unicom NewCentury (which has been merged into and succeeded by CUCL) and Unicom New Worldhave also entered into CDMA capacity lease agreements with Unicom Group andUnicom New Horizon in November 2002 and November 2003 respectively. The termsof these leasing arrangements are in all material respects the same as thosecontained in the CDMA Lease Agreement entered into by CUCL as described aboveexcept for the leased capacity. Under these lease agreements, Unicom NewHorizon agreed to lease the capacity of CDMA network to CUCL covering 6provinces, 2 autonomous regions and 1 municipality and to Unicom New Worldcovering 6 provinces and 3 autonomous regions. On December 31, 2003, CUCLrenewed the CDMA Lease Agreement with Unicom New Horizon for a further year.

 

F - 67

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The aforementioned CDMA network capacity leases have constitutedcontinuing connected transactions for the Company and were granted waivers fromstrictly compliance with the relevant provisions of the Listing Rules by theStock Exchange of Hong Kong Limited on December 27, 2001, December 31, 2002 andDecember 31, 2003 respectively. Such waivers will expire by the end of 2004,2005 and 2006 respectively. According to the shareholders’ circular “ContinuingConnected Transactions” of the Company dated December 1, 2004, CUCL and UnicomNew World have determined to renew the CDMA Lease Agreements with Unicom NewHorizon with the same terms as contained in the above CDMA Lease Agreement,effective on January 8, 2005 and December 31, 2004 respectively. The abovecontinuing connected transactions to renew the leasing of CDMA network capacityhave been approved and resolution passed by the minority shareholders of theCompany pursuant to the extraordinary shareholders’ meeting held by the Companyon  December 23, 2004.

 

The Group entered into a new CDMA capacity leaseagreement with Unicom NewHorizon to replace the old one from January 1, 2005 after the approval of the shareholderson May 12, 2005. For details of the changes of key terms in the new agreement,please refer to Note 37(b)(i).

 

**33****.**** ****TRANSACTIONS WITH DOMESTIC CARRIERS**

 

TheGroup’s telecommunications networks depend, inlarge part, on interconnection with domestic carriers’ public switchedtelephone network and on transmission lines leased from major domesticcarriers.  Major domestic carriersinclude China Telecommunications Corporation and its subsidiaries (“ChinaTelecom”), China Mobile Communications Corporation and its subsidiaries (“ChinaMobile”) and China Network Communication Group Corporation and its subsidiaries(“China Netcom”).

 

**(a)****  ****Transactions with domesticcarriers**

 

Thefollowing is a summary of significant transactions with domestic carriers inthe ordinary course of business:

 
| ** **              | ** ** | **Note**   | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **              | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                    |       |       |       |             |       |             |       |             |       |
| Interconnection revenue |       | (i)        |       | 771,751          |       | 1,647,221        |       | 2,889,497        |       |
| Interconnection charges |       | (i)        |       | 2,666,186        |       | 5,301,792        |       | 7,003,262        |       |
| Leased line revenue     |       | (ii)       |       | —           |       | 218,974          |       | 247,676          |       |
| Leased line charges     |       | (ii)       |       | 680,508          |       | 722,684          |       | 628,173          |       |

 

----

Notes:

 
| (i)    |   | The interconnection  revenue and charges mainly represent the amounts due from or to domestic  carriers for telephone calls made between the Group’s networks and the public  switched telephone network of domestic carriers. The interconnection  settlements are calculated in accordance with interconnection agreements  reached between the branches of the Group and domestic carriers on a  provincial basis. The terms of these agreements are set in accordance with  the standard settlement arrangement stipulated by the MII. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (ii)   |   | Leased line charges  are paid or payable to domestic carriers by the Group for the provision of  transmission line. At the same time, the Group leases transmission line to  domestic carriers in return of leased line rental income. The charges are  calculated at a fixed charge per line, depending on the number of lines being  used by the Group and domestic carriers.                                                                                                                                                                 |

 

F - 68

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**(b)****  ****Amounts due from and to domesticcarriers**

 
| ** **                                                        | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Amounts due from domestic carriers                                |       |             |       |             |       |
| - Receivable for interconnection  revenue and leased line revenue |       | 184,729          |       | 270,068          |       |
| - Less: provision for doubtful debts                              |       | (116             | )          | (149             | )          |
|                                                              |       |             |       |             |       |
|                                                              |       | 184,613          |       | 269,919          |       |
| Amounts due to domestic carriers                                  |       |             |       |             |       |
| - Payables for interconnection charges and  leased lines charges  |       | 778,841          |       | 948,574          |       |
|                                                              |       |             |       |             |       |
| Long-term payable due to domestic carriers                        |       |             |       |             |       |
| - Payables for obligations under finance  leases:                 |       |             |       |             |       |
|                                                              |       |             |       |             |       |
| - Current portion of obligations under  finance leases            |       | 25,435           |       | 25,926           |       |
| - Obligations under finance leases                                |       | 99,719           |       | 97,638           |       |
|                                                              |       |             |       |             |       |
|                                                              |       | 125,154          |       | 123,564          |       |

 

Allamounts due from and to domestic carriers were unsecured, non-interest bearingand repayable within one year.

 

Long-term payable for obligations under financelease was related to the leasing of certain sub sea transmission cables from adomestic carrier for a period of 25 years (see Note 28).

 

**34****.**** ****SEGMENT INFORMATION**

 

Operatingsegments represent components of an enterprise regarding which separatefinancial information is available for regular evaluation by the chiefoperating decision maker, or decision making group, when considering how toallocate resources and in assessing performance.

 

TheGroup organizes its business segments based on the various types oftelecommunications services provided to customers in the PRC. The majorbusiness segments operated by the Group are classified as below:

 

•      GSM Business — the provision of GSMtelephone and related services;

•      CDMA Business — the provision of CDMAtelephone and related services, through a leasing arrangement of CDMA networkcapacities from Unicom New Horizon (see Note 32);

•      Data and Internet Business — theprovision of domestic and international data, Internet and other relatedservices;

•      Long Distance Business — the provision ofdomestic and international long distance and other related services; and

•      Paging Business — the provision of pagingand related services (discontinued in 2004).

 

Theoperating segments are managed separately because each operating segmentrepresents a strategic business unit that provides various kinds oftelecommunication services. All the operating segments of the Group have beenaggregated into the above reportable segments since they are expected toexhibit similar future economic characteristics under central management atseparate locations.

 

TheGroup’s primary measure of segment results is based on segment income or loss before taxation.

 

F - 69

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**(a)****  ****Business segments**

 
| ** **                                                    | ** ** | **2004**                  | ** ** |
|---------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                    | ** ** | **Continuing operations** | ** ** |
| ** **                                                    | ** ** | **GSM  Business**         | ** ** | **CDMA  Business** | ** ** | **Internet  and  Data  Business** | ** ** | **Long  Distance  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
|                                                          | ** ** | **RMB’000**          | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Operating revenue (Turnover):                                 |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                     |       | 31,997,020                |       | 16,164,333 |   | 2,685,083 |   | 879,281 |   | — |   |   |   | 51,725,717 |   |
| Monthly fee                                                   |       | 6,922,400                 |       | 4,638,024 |   | — |   | — |   | — |   |   |   | 11,560,424 |   |
| Interconnection  revenue                                      |       | 2,614,268                 |       | 927,288 |   | 131,371 |   | 454,383 |   | — |   |   |   | 4,127,310 |   |
| Leased lines  rental                                          |       | —                    |       | — |   | 344,014 |   | 512,134 |   | — |   |   |   | 856,148 |   |
| Other revenue                                                 |       | 5,045,547                 |       | 2,489,957 |   | 502,266 |   | 2,211 |   | — |   |   |   | 8,039,981 |   |
| Total services revenue                                        |       | 46,579,235                |       | 24,219,602 |   | 3,662,734 |   | 1,848,009 |   | — |   |   |   | 76,309,580 |   |
| Sales of  telecommunications products                         |       | 886,527                   |       | 2,118,321 |   | 14,782 |   | 2,401 |   | — |   |   |   | 3,022,031 |   |
| Total operating revenue from external customers               |       | 47,465,762                |       | 26,337,923 |   | 3,677,516 |   | 1,850,410 |   | — |   |   |   | 79,331,611 |   |
| Intersegment  revenue                                         |       | 135,521                   |       | 107,477 |   | 2,059,881 |   | 1,264,140 |   | — |   | (3,567,019 | ) | — |   |
| Total operating revenue                                       |       | 47,601,283                |       | 26,445,400 |   | 5,737,397 |   | 3,114,550 |   | — |   |   |   | 79,331,611 |   |
| Operating  expenses:                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and  network capacities                          |       | (284,092                  | )          | (6,685,059 | ) | (361,412 | ) | (67,565 | ) | — |   |   |   | (7,398,128 | ) |
| Interconnection  charges                                      |       | (6,452,988                | )          | (2,794,843 | ) | (917,294 | ) | (918,480 | ) | — |   | 3,567,019 |   | (7,516,586 | ) |
| Depreciation and  amortization                                |       | (16,170,745               | )          | (438,957 | ) | (1,795,499 | ) | (530,695 | ) | (5,133 | ) | (122,045 | ) | (19,063,074 | ) |
| Personnel                                                     |       | (2,917,299                | )          | (861,614 | ) | (443,466 | ) | (279,664 | ) | (24,057 | ) |   |   | (4,526,100 | ) |
| Selling and  marketing                                        |       | (5,755,780                | )          | (11,337,638 | ) | (1,387,453 | ) | (463,477 | ) | — |   |   |   | (18,944,348 | ) |
| General,  administrative and other expenses                   |       | (7,016,838                | )          | (2,206,458 | ) | (865,889 | ) | (320,115 | ) | (38,941 | ) |   |   | (10,448,241 | ) |
| Cost of  telecommunications products sold                     |       | (742,177                  | )          | (2,708,699 | ) | (22,371 | ) | (5,742 | ) | — |   |   |   | (3,478,989 | ) |
| Total operating  expenses                                     |       | (39,339,919               | )          | (27,033,268 | ) | (5,793,384 | ) | (2,585,738 | ) | (68,131 | ) |   |   | (71,375,466 | ) |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income  (loss)                                      |       | 8,261,364                 |       | (587,868 | ) | (55,987 | ) | 528,812 |   | (68,131 | ) |   |   | 7,956,145 |   |
| Loss on sale of discontinued operation (New Guoxin)           |       |                      |       |   |   |   |   |   |   |   |   |   |   | — |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   | 7,956,145 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                               |       | 67,526                    |       | 11,093 |   | 5,504 |   | 3,653 |   | 129,512 |   | (114,381 | ) | 102,907 |   |
| Finance costs                                                 |       | (1,599,084                | )          | (36,755 | ) | (17,569 | ) | (36,962 | ) | (112,429 | ) | 114,381 |   | (1,688,418 | ) |
| Other income (expense), net                              |       | 14,725                    |       | 42,695 |   | (1,195 | ) | 140 |   | 39,625 |   |   |   | 95,990 |   |
| Segment income  (loss) before taxation and minority interests |       | 6,744,531                 |       | (570,835 | ) | (69,247 | ) | 495,643 |   | (11,423 | ) |   |   | 6,466,624 |   |
| Taxation                                                      |       | —                    |       | — |   | — |   | — |   | — |   |   |   | (2,079,625 | ) |
| Income after  taxation                                        |       | —                    |       | — |   | — |   | — |   | — |   |   |   | 4,386,999 |   |
| Minority  interests                                           |       | —                    |       | — |   | — |   | — |   | — |   |   |   | — |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                    |       | —                    |       | — |   | — |   | — |   | — |   |   |   | 4,386,999 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  information:                                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  doubtful debts                                 |       | 1,317,374                 |       | 645,470 |   | 164,514 |   | 64,462 |   | — |   |   |   | 2,191,820 |   |
| Impairment loss  recognized in the statement of income        |       | —                    |       | — |   | — |   | — |   | — |   |   |   | — |   |
| Capital  expenditures for segment assets (1)                  |       | 6,396,406                 |       | — |   | 2,444,623 |   | 1,949,202 |   | 7,595,817 |   |   |   | 18,386,048 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                                    | ** ** | **2003**                  | ** ** |
| ** **                                                    | ** ** | **Continuing operation**  | ** ** | **Discontinued  operation** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **GSM  Business**         | ** ** | **CDMA  Business** | ** ** | **Internet  and  Data  Business** | ** ** | **Long  Distance  Business** | ** ** | **Paging  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
|                                                          | ** ** | **RMB’000**          | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Operating revenue (Turnover):                                 |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                     |       | 29,072,249                |       | 11,671,523 |   | 2,443,610 |   | 1,148,040 |   | — |   | — |   |   |   | 44,335,422 |   |
| Monthly fee                                                   |       | 7,042,299                 |       | 3,488,411 |   | 9,085 |   | — |   | 612,999 |   | — |   |   |   | 11,152,794 |   |
| Interconnection  revenue                                      |       | 1,926,907                 |       | 607,830 |   | 361,514 |   | 365,724 |   | 1,654 |   | — |   |   |   | 3,263,629 |   |
| Leased lines  rental                                          |       | —                    |       | — |   | 420,433 |   | 701,549 |   | — |   | — |   |   |   | 1,121,982 |   |
| Other revenue                                                 |       | 2,262,156                 |       | 855,754 |   | 202,441 |   | 57,835 |   | 788,400 |   | — |   |   |   | 4,166,586 |   |
| Total services  revenue                                       |       | 40,303,611                |       | 16,623,518 |   | 3,437,083 |   | 2,273,148 |   | 1,403,053 |   | — |   |   |   | 64,040,413 |   |
| Sales of  telecommunications products                         |       | 862,777                   |       | 1,956,452 |   | 7,814 |   | 14,914 |   | 753,955 |   | — |   |   |   | 3,595,912 |   |
| Total operating revenue from external customers               |       | 41,166,388                |       | 18,579,970 |   | 3,444,897 |   | 2,288,062 |   | 2,157,008 |   | — |   |   |   | 67,636,325 |   |
| Intersegment  revenue                                         |       | 41,057                    |       | 41,725 |   | 1,826,222 |   | 866,728 |   | 230,075 |   | — |   | (3,005,807 | ) | — |   |
| Total operating revenue                                       |       | 41,207,445                |       | 18,621,695 |   | 5,271,119 |   | 3,154,790 |   | 2,387,083 |   | — |   |   |   | 67,636,325 |   |
| Operating  expenses:                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and  network capacities                          |       | (339,410                  | )          | (3,576,498 | ) | (294,888 | ) | (78,027 | ) | (80,084 | ) | — |   | 48,525 |   | (4,320,382 | ) |
| Interconnection  charges                                      |       | (5,478,520                | )          | (1,684,749 | ) | (732,210 | ) | (752,521 | ) | — |   | — |   | 2,727,207 |   | (5,920,793 | ) |
| Depreciation and  amortization                                |       | (13,117,906               | )          | (306,754 | ) | (1,305,239 | ) | (419,346 | ) | (1,144,922 | ) | (5,650 | ) | (85,476 | ) | (16,385,293 | ) |
| Personnel                                                     |       | (2,605,475                | )          | (660,894 | ) | (525,726 | ) | (333,051 | ) | (415,554 | ) | (33,846 | ) |   |   | (4,574,546 | ) |
| Selling and  marketing                                        |       | (4,605,600                | )          | (9,141,877 | ) | (883,495 | ) | (405,904 | ) | (126,018 | ) | — |   | 6,059 |   | (15,156,835 | ) |
| General,  administrative and other expenses                   |       | (5,571,493                | )          | (1,363,927 | ) | (761,405 | ) | (462,081 | ) | (916,418 | ) | (37,550 | ) | 489 |   | (9,112,385 | ) |
| Cost of  telecommunications products sold                     |       | (765,926                  | )          | (2,177,168 | ) | (22,250 | ) | (4,231 | ) | (907,697 | ) | — |   | 225,227 |   | (3,652,045 | ) |
| Total operating  expenses                                     |       | (32,484,330               | )          | (18,911,867 | ) | (4,525,213 | ) | (2,455,161 | ) | (3,590,693 | ) | (77,046 | ) |   |   | (59,122,279 | ) |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income  (loss)                                      |       | 8,723,115                 |       | (290,172 | ) | 745,906 |   | 699,629 |   | (1,203,610 | ) | (77,046 | ) |   |   | 8,514,046 |   |
| Loss on sale of discontinued operation (New Guoxin)           |       |                      |       |   |   |   |   |   |   |   |   |   |   | (663,279 | ) | (663,279 | ) |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   | 7,850,767 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                               |       | 58,006                    |       | 7,013 |   | 4,589 |   | 3,400 |   | 9,099 |   | 106,734 |   | (15,808 | ) | 173,033 |   |
| Finance costs                                                 |       | (1,754,050                | )          | (32,078 | ) | (62,791 | ) | (56,946 | ) | (5,238 | ) | (40,727 | ) | 15,808 |   | (1,936,022 | ) |
| Other income (expense), net                              |       | (21,609                   | )          | 3,680 |   | (4,741 | ) | 1,488 |   | 39,868 |   | (10,615 | ) |   |   | 8,071 |   |
| Segment income  (loss) before taxation and minority interests |       | 7,005,462                 |       | (311,557 | ) | 682,963 |   | 647,571 |   | (1,159,881 | ) | (21,654 | ) |   |   | 6,095,849 |   |
| Taxation                                                      |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   | (1,888,381 | ) |
| Income after  taxation                                        |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,207,468 |   |
| Minority  interests                                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   | 9,629 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                    |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,217,097 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  information:                                           |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  doubtful debts                                 |       | 1,116,523                 |       | 397,810 |   | 125,676 |   | 75,870 |   | 34,008 |   | — |   |   |   | 1,749,887 |   |
| Impairment loss  recognized in the statement of income        |       | —                    |       | — |   | — |   | — |   | 528,038 |   | — |   |   |   | 528,038 |   |
| Capital  expenditures for segment assets (1)                  |       | 8,906,166                 |       | — |   | 4,128,985 |   | 2,555,252 |   | 35,126 |   | 4,129,690 |   |   |   | 19,755,219 |   |
|                                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                       | ** ** | **As of 31 December****2004** | ** ** |
|----------------------------|------------|-------------------------------|------------|
|                       | ** ** | **GSM  Business**             | ** ** | **CDMA  Business** | ** ** | **Internet  and  Data  Business** | ** ** | **Long  Distance  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
|                       | ** ** | **RMB’000**              | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                       |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment  assets      |       | 100,220,012                   |       | 6,183,758 |   | 9,470,980 |   | 18,042,840 |   | 62,101,761 |   | (50,390,158 | ) | 145,629,193 |   |
| Total segment  liabilities |       | 48,676,856                    |       | 7,663,420 |   | 4,437,311 |   | 5,408,689 |   | 6,632,463 |   |   |   | 72,818,739 |   |

 
|                      |   | **As of 31 December 2003** |   |
|---------------------------|--------|----------------------------|--------|
|                      |   | **GSM  Business**          |   | **CDMA  Business** |   | **Internet  and  Data  Business** |   | **Long  Distance  Business** |   |   |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                      |   | **RMB’000**           |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                      |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets      |   | 104,430,531                |   | 4,717,167 |   | 8,611,873 |   | 19,061,967 |   |   |   | 63,234,534 |   | (50,218,142 | ) | 149,837,930 |   |
| Total segment liabilities |   | 56,837,496                 |   | 6,561,772 |   | 3,975,293 |   | 6,918,025 |   |   |   | 5,929,854 |   |   |   | 80,222,440 |   |

 

F - 70

----

 
| ** **                                                   | ** ** | **200****2**             | ** ** |
|--------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                   | ** ** | **Continuing operation** | ** ** | **Discontinued** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                   | ** ** | **GSM  Business**        | ** ** | **CDMA  Business** | ** ** | **Internet  and Data  Business** | ** ** | **Long  Distance  Business** | ** ** | **operation** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| **Paging  Business**                                         |
| ** **                                                   | ** ** | **RMB’000**         | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Operating revenue  (Turnover):                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                    |       | 20,274,987               |       | 2,231,050 |   | 2,069,415 |   | 1,223,051 |   | — |   | — |   |   |   | 25,798,503 |   |
| Monthly fee                                                  |       | 4,169,129                |       | 713,483 |   | 9,478 |   | — |   | 1,912,786 |   | — |   |   |   | 6,804,876 |   |
| Interconnection  revenue                                     |       | 1,709,771                |       | 184,296 |   | 348,248 |   | 664,302 |   | 113,123 |   | — |   |   |   | 3,019,740 |   |
| Leased lines  rental                                         |       | —                   |       | — |   | 274,274 |   | 873,054 |   | — |   | — |   |   |   | 1,147,328 |   |
| Other revenue                                                |       | 1,234,038                |       | 96,518 |   | 91,624 |   | 5,316 |   | 135,279 |   | — |   |   |   | 1,562,775 |   |
| Total services  revenue                                      |       | 27,387,925               |       | 3,225,347 |   | 2,793,039 |   | 2,765,723 |   | 2,161,188 |   | — |   |   |   | 38,333,222 |   |
| Sales of  telecommunications products                        |       | 721,100                  |       | 423,057 |   | 5,631 |   | 13,258 |   | 1,080,257 |   | — |   |   |   | 2,243,303 |   |
| Total operating  revenue from external customers             |       | 28,109,025               |       | 3,648,404 |   | 2,798,670 |   | 2,778,981 |   | 3,241,445 |   | — |   |   |   | 40,576,525 |   |
| Inter segment  revenue                                       |       | —                   |       | — |   | 559,888 |   | 682,423 |   | 731,009 |   | — |   | (1,973,320 | ) | — |   |
| Total operating  revenue                                     |       | 28,109,025               |       | 3,648,404 |   | 3,358,558 |   | 3,461,404 |   | 3,972,454 |   | — |   |   |   | 40,576,525 |   |
| Operating  expenses:                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and  network capacities                         |       | (205,374                 | )          | (932,994 | ) | (221,028 | ) | (93,079 | ) | (136,024 | ) | — |   | 5,244 |   | (1,583,255 | ) |
| Interconnection  charges                                     |       | (3,386,592               | )          | (279,440 | ) | (408,843 | ) | (555,470 | ) | — |   | — |   | 1,400,705 |   | (3,229,640 | ) |
| Depreciation and  amortization                               |       | (8,322,549               | )          | (100,902 | ) | (697,188 | ) | (687,420 | ) | (1,442,836 | ) | (4,829 | ) |   |   | (11,255,724 | ) |
| Personnel                                                    |       | (1,780,173               | )          | (281,243 | ) | (396,150 | ) | (290,977 | ) | (555,261 | ) | (31,414 | ) |   |   | (3,335,218 | ) |
| Selling and  marketing                                       |       | (2,663,531               | )          | (2,126,475 | ) | (651,594 | ) | (305,505 | ) | (238,640 | ) | — |   | 4,797 |   | (5,980,948 | ) |
| General,  administrative and other expenses                  |       | (3,370,938               | )          | (506,715 | ) | (590,531 | ) | (501,657 | ) | (597,427 | ) | (65,726 | ) | 1,144 |   | (5,631,850 | ) |
| Cost of  telecommunications products sold                    |       | (744,640                 | )          | (408,791 | ) | (11,299 | ) | (5,049 | ) | (1,626,157 | ) | — |   | 559,730 |   | (2,236,206 | ) |
| Total operating  expenses                                    |       | (20,473,797              | )          | (4,636,560 | ) | (2,976,633 | ) | (2,439,157 | ) | (4,596,345 | ) | (101,969 | ) |   |   | (33,252,841 | ) |
|                                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income  (loss)                                     |       | 7,635,228                |       | (988,156 | ) | 381,925 |   | 1,022,247 |   | (623,891 | ) | (101,969 | ) |   |   | 7,323,684 |   |
|                                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                              |       | 48,503                   |       | 4,146 |   | 4,525 |   | 5,516 |   | 17,374 |   | 390,218 |   |   |   | 470,282 |   |
| Finance costs                                                |       | (1,287,443               | )          | (47,979 | ) | (72,864 | ) | (48,789 | ) | (8,348 | ) | (9,018 | ) |   |   | (1,474,441 | ) |
| Other (expense)  income, net                                 |       | (46,889                  | )          | (10 | ) | (2,562 | ) | (152 | ) | 24,993 |   | 8,261 |   |   |   | (16,359 | ) |
| Segment income  (loss) before taxation and minority interest |       | 6,349,399                |       | (1,031,999 | ) | 311,024 |   | 978,822 |   | (589,872 | ) | 287,492 |   |   |   | 6,303,166 |   |
| Taxation                                                     |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | (1,720,205 | ) |
|                                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income after  taxation                                       |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,582,961 |   |
| Minority  interests                                          |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 15,252 |   |
|                                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                   |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   | 4,598,213 |   |
|                                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  information:                                          |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  doubtful debts                                |       | 802,914                  |       | 42,050 |   | 70,922 |   | 46,124 |   | 9,979 |   | — |   |   |   | 971,989 |   |
| Impairment loss  recognized in the statements of income      |       | —                   |       | — |   | — |   | 38,797 |   | — |   | — |   |   |   | 38,797 |   |
| Capital  expenditures for segment assets (1)                 |       | 7,899,442                |       | — |   | 3,247,507 |   | 3,343,330 |   | 208,460 |   | 4,236,036 |   |   |   | 18,934,775 |   |

 
| ** **                 | ** ** | **As of  December 31, 200****2** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **GSM   Business**               | ** ** | **CDMA  Business** | ** ** | **Internet  and Data  Business** | ** ** | **Long  Distance  Business** | ** ** | **Paging  Business** | ** ** | **Unallocated  amounts** | ** ** | **Elimination** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **RMB’000**                 | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                       |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets       |       | 97,888,808                       |       | 5,724,427 |   | 7,081,704 |   | 13,876,837 |   | 8,410,871 |   | 58,016,167 |   | (41,370,609 | ) | 149,628,205 |   |
| Total segment  liabilities |       | 67,666,655                       |       | 5,788,290 |   | 2,785,794 |   | 3,826,692 |   | 2,205,343 |   | 136,639 |   |   |   | 82,409,413 |   |

 

----

(1) Capital expenditures classified under “unallocatedamounts” represent capital expenditures on common facilities, which benefit allbusiness segments.

 

F - 71

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**(b)****  ****Geographical segments**

 

TheGroup’s services users are mainly in the PRC. There is no other geographicalsegment with segment revenue from external customers equal to or greater than10% of total consolidated revenue from sales to all external customers.

 

Althoughthe Group has its corporate headquarters in Hong Kong, a substantial portion ofthe Group’s non-current assets (including property, plant and equipment andother assets) are situated in mainland China, as the Group’s principalactivities are conducted in the PRC. For the year ended December 31, 2004,substantially all capital expenditures were incurred to acquire assets locatedin the mainland China. There is no other geographical segment with segmentassets equal to or greater than 10% of the total assets of all geographicalsegments.

 

**(c)****  ****Discontinued operation**

 

The subsidiary that carried out the Paging Business,New Guoxin, was disposed of on December 31, 2003, which has been reported as adiscontinued operation (see Note 5).

 

**3****5****. FAIR VALUE OF FINANCIALINSTRUMENTS**

 

Financialassets of the Group include bank balances and cash, short-term bank deposits,accounts receivable, prepayment 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 and domestic carriers.

 

Bankbalances and cash and short-termbank deposits denominated in foreign currencies as summarized below, have been translated to RMB at the applicable rates quoted bythe People’s Bank of China as of December 31, 2003 and 2004.

 
| ** **                   | ** ** | **200****3**           | ** ** | **200****4**       | ** ** |
|------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **Original  currency** | ** ** | **Exchange  rate** | ** ** | **RMB  equivalent** | ** ** | **Original  currency** | ** ** | **Exchange  rate** | ** ** | **RMB  equivalent** | ** ** |
| ** **                   | ** ** | **’000**          | ** ** | ** **         | ** ** | **RMB****’000** | ** ** | **’000** | ** ** | ** ** | ** ** | **RMB****’000** | ** ** |
| **Bank  balances and cash:** |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| - denominated in HK$         |       | 19,126                 |       | 1.06               |       | 20,382 |   | 75,562 |   | 1.06 |   | 80,406 |   |
| - denominated in US dollars  |       | 81,888                 |       | 8.27               |       | 677,764 |   | 4,803 |   | 8.28 |   | 39,753 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Sub-total                    |       |                   |       |               |       | 698,146 |   |   |   |   |   | 120,159 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| **Short-term  deposits:**    |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| - denominated in US dollars  |       | 110,285                |       | 8.27               |       | 912,794 |   | 79,946 |   | 8.28 |   | 661,675 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Sub-total                    |       |                   |       |               |       | 912,794 |   |   |   |   |   | 661,675 |   |
|                         |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Total                        |       |                   |       |               |       | 1,610,940 |   |   |   |   |   | 781,834 |   |

 

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 value as of December 31, 2003 and 2004 dueto the nature or short maturity of those instruments.

 

F - 72

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Thecarrying amounts of receivables and payables which are all subject to normaltrade credit terms approximate their fair values.

 

Thecarrying amounts of long-term bank loans approximate their fair values based onprevailing market borrowing rates available for comparable bank loans withsimilar terms and maturities.

 

**3****6****.**** ****CONTINGENCIES AND COMMITMENTS**

 

**(a)****  ****Capital commitments**

 

As of December 31, 2003 and 2004, the Group hadcapital commitments, mainly in relation to the construction oftelecommunications networks, as follows:

 
| ** **                        | ** ** | **200****4**            | ** ** | **200****3**     | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                        | ** ** | **Land and  buildings** | ** ** | **Equipment**    | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **RMB’000**        | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                              |       |                    |       |             |       |   |   |   |   |
| Authorized and contracted for     |       | 659,435                 |       | 4,387,705        |       | 5,047,140 |   | 6,711,938 |   |
| Authorized but not contracted for |       | 145,997                 |       | 1,344,328        |       | 1,490,325 |   | 1,195,162 |   |
|                              |       |                    |       |             |       |   |   |   |   |
| Total                             |       | 805,432                 |       | 5,732,033        |       | 6,537,465 |   | 7,907,100 |   |

 

Asof December 31, 2004,approximately RMB126 million (2003: RMB83 million) of capital commitment outstanding wasdenominated in US dollars (equivalent to US$15 million (2003 US$10million)).

 

F - 73

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**(b)****  ****Operating lease commitments**

 

As of December 31, 2003 and 2004, the Group hadtotal future aggregate minimum operating lease payments under operating leasesas follows:

 
| ** **                                           | ** ** | **200****4**            | ** ** | **200****3**     | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|------------------|------------|
| ** **                                           | ** ** | **Land and  buildings** | ** ** | **Equipment**    | ** ** | **CDMA  network  capacities****(Note (a))** | ** ** | **Total** | ** ** | **Total** | ** ** |
| ** **                                           | ** ** | **RMB’000**        | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                 |       |                    |       |             |       |   |   |   |   |   |   |
| Leases expiring:                                     |       |                    |       |             |       |   |   |   |   |   |   |
| - not later than one year                            |       | 612,169                 |       | 138,852          |       | 5,930,037 |   | 6,681,058 |   | 7,150,023 |   |
| - later than one year and not later than  five years |       | 1,703,163               |       | 211,034          |       | — |   | 1,914,197 |   | 1,391,120 |   |
| - later than five years                              |       | 1,011,280               |       | 56,423           |       | — |   | 1,067,703 |   | 953,917 |   |
|                                                 |       |                    |       |             |       |   |   |   |   |   |   |
| Total                                                |       | 3,326,612               |       | 406,309          |       | 5,930,037 |   | 9,662,958 |   | 9,495,060 |   |

 

----

| Note (a): | In relation to the above CDMA network capacities  commitment, it is estimated based on 90% of the total amount of lease fee  paid by the Group to Unicom New Horizon in 2004 pursuant to the New CDMA  Lease (see Note 37(b)(i) for details). The New CDMA Lease is to be approved  by the minority shareholders of the Company. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**(c)****  ****Commitment to purchase CDMA handsets**

 

Asof December 31, 2004, the Group committed to purchase CDMA handsets amounted toapproximately RMB1,968 million (2003: RMB920 million).

 

**3****7.**** ****EVENTSAFTER BALANCE SHEET**

 

**(a)****  ****Combination of Unicom New World**

 

With approval of Ministry of Commerce, CUCL hasplanned to combine with Unicom New World. After thecombination,Unicom New World will be legally dissolved and succeed by CUCL. As of June16, 2005, therelevant legalprocedures regarding the combination have not been completed.

 

**(b)****  ****New connected transaction agreements**

 

OnMarch 24, 2005, CUCL and Unicom New World entered into the new agreements of “NewComprehensive Service Agreement”, “New CDMA Lease”, “New Comprehensive OperatorServices Agreement” and “New Guoxin Premises Leasing Agreement” with UnicomGroup, Unicom New Horizon and New Guoxin to replace the old agreements. Theabove new connected transaction agreements were effective from January 1, 2005,which have been approved and resolution passed by the minority shareholders ofthe Company pursuant to extraordinary shareholders’ meeting held by the Companyon May 12, 2005. Changes of key terms in the new agreements and the oldagreements are set out as follows:

 

F- 74

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(i)                 New CDMA Lease

 

Pursuant to the New CDMA Lease, the CDMA lease hasan initial term of two years (the “Initial Term”), and the lease fee of theCDMA Network shall be determined on the basis of the lessee’s services revenue,details as follows:

 

i.             in 2005, the lease fee shall be 29% of the auditedCDMA service revenue of the lessee for that year, but shall not less than 90%of the total amount of lease fee paid by the Group to Unicom New Horizonpursuant to the old lease agreements for 2004 (see Note 32); and

 

ii.          in 2006, the lease fee shall be 30% of the auditedCDMA service revenue of the lessee for that year, but shall not less than 90%of the total amount of lease fee paid by the Group to Unicom New Horizonpursuant to the New CDMA Lease agreement for 2005.

 

Pursuant to the New CDMA Lease, the constructedcapacity related costs, including the rental fees for the exchange centers andthe base stations, water and electricity charges, heating charges and fuelcharges for the relevant equipment etc., as well as the maintenance costs of anon-capital nature, shall be borne by the lessor and lessee together. Theproportion of the constructed capacity related costs to be borne by the lesseeshall be calculated on a monthly basis by reference to the actual number ofcumulative CDMA subscribers of the Group at the end of the month prior to theoccurrence of the costs divided by 90%, as a percentage of the total capacityavailable on the Network.

 

(ii)              New Comprehensive Operator Services Agreement

 

Pursuantto the New Comprehensive Operator Services Agreement, the Group shall retain40% of the actually receivedrevenue generated from the value-added services provided to the Group’ssubscribers and allocate 60% of suchrevenue to New Guoxin and the settlement should be made among branches of the Group and New Guoxin respectively.

 

**38****.****      ****COMPARATIVE FIGURES**

 

Certain comparative figures have been adjusted toreflect the retrospective adjustment of deferred tax assets in accordance withSSAP 12 adopted in 2003.

 

**39.****      ****APPROVAL OF FINANCIAL STATEMENTS**

 

# **Thefinancial statements were approved by the Board of Directors on June 16, 2005.**

 

F- 75

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**40.****      ****SIGNIFICANT DIFFERENCES BETWEEN HK GAAP ANDUS GAAP**

 

Theconsolidated financial statements of the Group prepared under HK GAAP differ incertain material respects from those prepared under generally acceptedaccounting principles in the United States of America (“US GAAP”). Significantdifferences between HK GAAP and US GAAP relating to the Group are summarized below:

 

**(A)****      ****Effect of the acquisitions ofentities under common control**

 

UnderHK GAAP, the Group has adopted the purchase method of accounting to account forthe acquisitions of Unicom New Century, Unicom New World and UnicomInternational (the “Acquisitions”). Under the purchase method, the operatingresults of these acquired subsidiaries have been included in the consolidated statementsof income of the Group after the Acquisitions were effective. The differences between the costs of Acquisitions and the fairvalues of the separately identifiable net assets acquired have been recorded as goodwill/negative goodwill, which are amortized using the straight-line method over the relevant beneficial periods.

 

Asthe Group, Unicom New Century, Unicom New World and Unicom International wereunder the common control of Unicom Group prior to the Acquisitions, these Acquisitions are considered as a transfer ofbusinesses under common control and the acquired assets and liabilities are accountedfor at historical cost under US GAAP. Furthermore, the consolidated financial statements prepared under USGAAP for all periods presented have been retroactively restated as if UnicomNew Century, Unicom New World and Unicom International were always part of theGroup. The cash considerations paid by theCompany are treated as capital distribution in the respective years of the acquisitions. Goodwill/negative goodwill arising from the acquisitions and the related amortization of goodwill/negative goodwill recognized under HK GAAP have beenreversed under US GAAP. Transaction costs, which are capitalized as part of thecost of investment under HK GAAP, have been expensed in full under US GAAP.

 

**(B)****      ****Effect of the disposal of entityunder common control**

 

Under HK GAAP, the sale of New Guoxin has been accounted for as a sale of discontinuedoperation by the Group. The difference between the sale proceeds and thecarrying amount of net assets of New Guoxin as of December 31, 2003 (theeffective date of disposal) was recorded as the loss on sale of discontinued operation in the consolidated statements ofincome of the Group. The operating results of New Guoxin for 2003 were includedin the consolidated statementsof income of the 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 (see Note (H)). Inaddition, under US GAAP, the results of operations of a component, including a segment of an entitythat has been disposed of should be reported in discontinued operations as aseparate component of income, separately from continuing operations, in theperiod in which the disposal occurred aswell as in prior periods. Accordingly, all the operating results of NewGuoxin have been grouped into and reported in the statements of incomefor the years ended December 31, 2002 and 2003 as “Discontinued operation-Loss from discontinued operation”under US GAAP.

 

F - 76

----

 

**(C) Consolidation ofvariable interest entities**

 

Under HK GAAP,consolidation of business enterprises is based on voting control. Under USGAAP, pursuant to Financial Accounting Standard Board (“FASB”) InterpretationNo. 46 (revised in December 2003), “Consolidation of Variable Interest Entities”(“FIN 46R”), consolidation by business enterprises is based on an economicrisks and rewards model rather than a traditional voting interest model.Entities subject to consolidation under the economic risks and rewards model iscalled a Variable Interest Entity (“VIE”). In accordance with the provision of FIN46R, the Group has identified one VIE, Unicom New Horizon, in which it holds avariable interest in the form of lease renewal options. Unicom New Horizon is a100% owned subsidiary of the Group’s controlling shareholder, from which theGroup leases its CDMA assets on a capacity-used basis under operating leases,subject to indefinite renewal options. The Group has concluded that itscontrolling shareholder is the primary beneficiary of Unicom New Horizon, sinceit absorbs all of Unicom New Horizon’s expected losses (through its ownershipof 100% of Unicom New Horizon’s equity and an unconditional guarantee of 100%of Unicom New Horizon debt) and is indirectly associated with the operations ofthe leased CDMA assets through its majority ownership of the Group. As such,the adoption of FIN 46R did not result in any differences from the Group’s HKGAAP consolidated financial statements.

 

**(****D****)****      ****Revenue and costs recognition**

 

**(i)****               ****Upfront non-refundable revenue and relatedincremental cost**

 

Under HK GAAP, upfront non-refundable revenue, suchas connection fee, is recognized when received upon completion of activationservices. Under US GAAP, in accordance with Staff Accounting Bulletin (“SAB”) No.101, “Revenue Recognition in Financial Statements”, which was superseded by SABNo.104, “Revenue Recognition”, upfront non-refundable revenue and the relateddirect incremental costs incurred are deferred and recognized over theestimated customer service periods.  Theexpected customer service period for the Cellular Business is estimated based onthe expected stabilized churn rates. On this basis, the weighted averagecustomer service period based on current estimation considering the prevailingmarket environment is approximately 4 years (2002: 6 years; 2003: 4 years). Theeffects of the change of accounting estimate were to increase the net incomeand earningsper share by approximately RMB 70 millionand RMB 0.006 respectively for the year ended December 31, 2003.

 

**(ii)****            ****Revenue****a****rrangements with****m****ultiple****d****eliverables**

 

Under HK GAAP, revenue should be measured at thefair value of the consideration received and receivable. When the selling priceof a product includes an identifiable amount for subsequent servicing, thatamount is deferred and recognized as revenue over the period during which theservice is performed. The amount deferred is that which will cover the expectedcosts of the services under the agreement, together with a reasonable income onthose services.

 

Under US GAAP, pursuant to the Emerging Issues TaskForce Issue 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables” (“EITF Issue 00-21”), revenue-generating arrangements involvingmultiple deliverables should be divided into separate units of accounting andaccounted for separately, if (i) the deliverables are independently functionalor sufficiently separable and (ii) there is sufficient evidence of related fairvales. In 2004, the Group adopted the provisions of EITF Issue 00-21, whichafter an analysis of its various revenue-generating arrangements, except for(i) above, did not result in any differences from the Group’s HK GAAPconsolidated financial statements.

 

F - 77

----

 

**(****E****)****        ****Employee housing schemes**

 

Priorto the establishment 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 HK GAAP, housing benefitsincurred and borne by China Telecom and Unicom Group for these employees werenot recognized by the Group. Under US GAAP, the amount of such housing benefitsis being recognized as part of the Group’s operating expenses over the estimated average service lifeof the participating employees.  Thecorresponding credits are being accounted for as capital contributions.****Upon thecompletion of sale of New Guoxin on December 31, 2003, the related housingbenefits have been correspondingly accounted for with the net assets transferred.

 

**(****F****)****        ****Deferred taxation**

 

Uponthe adoption of SSAP 12 in 2003 under HK GAAP, which has been retroactivelyapplied to all periods presented, there is no longer a difference in accountingfor deferred taxation between HK GAAP and US GAAP. The remaining adjustmentrelated to deferred taxation represents the deferred tax effects of other USGAAP adjustments.

 

**(****G****)****      ****Revaluation of property, plant and equipment**

 

UnderHK GAAP, revaluation surplus in relation to buildings is recorded by the Groupas part of the property, plant and equipment. Thereafter, depreciation isprovided based on the revalued amounts. Under US GAAP, all property, plant andequipment are stated at historical cost less accumulated depreciation, andprepaid land use rights are stated at the unamortized prepaid amount as part of other assets.

 

**(****H****)****      ****Impairment of goodwill and long-lived assets**

 

Thecarrying amounts of property, plant and equipment and goodwill under HK GAAPare reviewed periodically in order to assess whether the recoverable amount hasdeclined below the carrying amount.  Whensuch a decline occurs, the carrying amount is reduced to the recoverable amountbased on the expected future cash flows generated by the assets discounted totheir present value.  A subsequentincrease in the recoverable amount is written back to the statements of incomewhen circumstances and events that led to the write-down or write-off cease toexist.

 

**(i)****     ****Goodwill**

 

UnderHK GAAP, goodwill is amortized using the straight-line method over the expectedbeneficial lives of the acquired businesses.

 

Under US GAAP, upon the adoption of Statementsof Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), the Group no longer amortizes goodwill but,rather, assesses the goodwill of each identified reporting unit for impairmentannually starting from January 1, 2002. Theadoption of SFAS 142 has resulted in a cumulative effect of accounting changeof approximately RMB42,175,000(net of tax approximately RMB20,773,000) on January 1, 2002 and has beenreflected in the condensed statements of income for the year ended December 31,2002 under US GAAP. Under US GAAP,there was no goodwill as of December 31, 2003 and 2004.

 

F - 78

----

 

**(ii)****       ****Long-lived assets**

 

OnJanuary 1, 2002, the Company has adopted Statements of Financial AccountingStandard No. 144 (“SFAS 144”), which supersedes SFAS 121 and AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations,Reporting the Effects of Disposal of Segment of a Business and Extraordinary,Unusual and Infrequently Occurring Events and Transactions”. SFAS 144 retainsthe previous accounting for the impairment of long-lived assets to be held andused in operation as prescribed under SFAS 121, but also establishes morerestrictive criteria that must be met to classify long-lived assets as held-forsale, and differentiates between long-lived assets that are disposed of by salefrom those disposed of other than by sale. SFAS 144 also increases the range ofdispositions that qualify for reporting as discontinued operations, and changesthe manner in which expected future operating losses from such operations areto be reported.

 

UnderSFAS 144, long-lived assets excluding goodwill are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by acomparison of the carrying amount of an asset to future undiscounted net cashflows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amounts of theassets exceed the fair value of the assets, which is determined based on theestimated future discounted net cash flows expected to be generated by theasset held for continuous use.  Assetsimpaired or to be disposed of are reported at the lower of the carrying amountsor fair values less costs to sell, which result in a new cost basis for theimpaired assets.  This new cost basis isnot to be adjusted for subsequent recoveries in value.

 

Basedon the above assessment performed and taking into account of the adoption of SFAS 144, no material differences arose in respectof the timing and the amount of impairment for equipment for the years ended December31, 2002, 2003 and 2004.

 

Forthe year ended December 31, 2003, asdescribed in Note (B) above, the disposal of New Guoxin has been treated as a transfer ofbusiness between entities under common controls.  For this kind of distribution of a businessto the owner in a spin-off, a re-assessment of the impairment of the long-livedassets of the business is required while they are classified as “held and used”and prior to the spin-off.  An impairmentloss would be recognized when the carrying amounts of the long-lived assets ofthe business as of the effective date of disposal exceeded their fair values.  After considering the above impairmentassessment, any difference between the sale proceeds and the new carrying values of assetsand liabilities of the business is treatedcontribution by (or distribution to) the owner, as appropriate. Accordingly, anadditional provision of impairment loss of the Paging assets amounting to approximately RMB608 million was recorded under US GAAP as at the effectivedate of the sale of NewGuoxin. There was no adjustment to the shareholders’ equitysince the sale proceedsapproximated the new carrying values of the net assets of New Guoxin, aftertaking into consideration the additional impairment provision described above.

 

F - 79

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**(****I****)****           ****Share option scheme**

 

UnderHK GAAP, the proceeds received from the exercise of the share options grantedunder the fixed award amended Share Option Scheme and Pre-Global Offering ShareOption Scheme are to be recognized as an increase to capital upon the exerciseof the share options as stated in Note 30 of the financial statements.

 

UnderUS GAAP, 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, if any, of thequoted market price of the shares on the date of grant over the exercise priceof the options, which is amortized over the vesting period of the option. Sincethe market price of the underlying stock on the date of grant did not exceed theexercise price of the options granted, no compensation cost for options hasbeen recognized in the reconciliation of net income to US GAAP. In accordancewith “Accounting for Stock-Based Compensation”(“SFAS 123”) as furtheramended by Statement of Financial Accounting Standards, No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure”(“SFAS 148”) which iseffective for the year ended December 31, 2002, the required pro forma information to be disclosed is set forthbelow*:*

 
| ** **                                                                                                       | ** ** | **2002**  | ** ** | **2003**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                                                                                             |       |      |       |      |       |      |       |
| Net income:                                                                                                      |       |      |       |      |       |      |       |
| As reported (RMB’000)                                                                                       |       | 5,035,767 |       | 4,736,121 |       | 4,712,687 |       |
| Less: Total  stock-based employee compensation expense determined under fair value based  method (RMB’ 000) |       | (90,288   | )          | (86,855   | )          | (146,541  | )          |
|                                                                                                             |       |      |       |      |       |      |       |
| Pro forma (RMB’000)                                                                                         |       | 4,945,479 |       | 4,649,266 |       | 4,566,146 |       |
|                                                                                                             |       |      |       |      |       |      |       |
| Basic earnings  per share:                                                                                       |       |      |       |      |       |      |       |
| As reported  (RMB)                                                                                               |       | 0.401     |       | 0.377     |       | 0.375     |       |
| Pro forma (RMB)                                                                                                  |       | 0.394     |       | 0.370     |       | 0.364     |       |
|                                                                                                             |       |      |       |      |       |      |       |
| Diluted earnings  per share:                                                                                     |       |      |       |      |       |      |       |
| As reported  (RMB)                                                                                               |       | 0.401     |       | 0.377     |       | 0.374     |       |
| Pro forma (RMB)                                                                                                  |       | 0.394     |       | 0.370     |       | 0.362     |       |
|                                                                                                             |       |      |       |      |       |      |       |
| Basic earnings per  ADS:                                                                                         |       |      |       |      |       |      |       |
| As reported  (RMB)                                                                                               |       | 4.012     |       | 3.773     |       | 3.752     |       |
| Pro forma (RMB)                                                                                                  |       | 3.940     |       | 3.704     |       | 3.635     |       |
|                                                                                                             |       |      |       |      |       |      |       |
| Diluted earnings  per ADS:                                                                                       |       |      |       |      |       |      |       |
| As reported  (RMB)                                                                                               |       | 4.012     |       | 3.768     |       | 3.738     |       |
| Pro forma (RMB)                                                                                                  |       | 3.940     |       | 3.699     |       | 3.622     |       |

 

F - 80

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**(****J****)****        ****Investment in equity securities**

 

UnderHK GAAP, negotiable equity securities including ownership interest in anenterprise, which are intended to be held on a continuing basis, are classifiedas investment securities and are stated at cost.  The carrying amounts of investment securitiesare written down to reflect any diminution in value expected to be other thantemporary.  Provisions against thecarrying value are reversed when the circumstances and events that led to thewrite-downs or write-offs cease to exist and if there is persuasive evidencethat the new circumstances and events will persist for the foreseeable future.

 

UnderUS GAAP, equity securities which are not marketable and do not have readilydeterminable fair values are classified as other investments, which are statedat cost less impairment in value other than temporary.  If impairment in value is judged to be otherthan temporary, the cost of the investment is written down to its recoverableamount as a new cost basis and the amount of the write-down is included in thestatements of income.  The new cost basisis not changed for subsequent recoveries in value.

 

Duringthe years ended December 31,2003 and2004, the Group did not have any investment in equitysecurities under HK GAAP and US GAAP. Accordingly, there wasno recovery in the value of investments in equity securities under HK GAAP.

 

**(****K****)****      ****New Accounting Pronouncements**

 

In December 2004,FASB issued Statement of Financial Accounting Standards No. 123(R) “Share-BasedPayment” (“SFAS 123(R)”), which is a revision of SFAS 123 and supersedes APB 25.SFAS 123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be valued at fair value on the date of grant, and tobe expensed over the applicable vesting period. Pro forma disclosures of thestatement of income effects of share-based payments are no longer analternative. SFAS 123(R) is effective for all stock-based awards granted on orafter June 15, 2005. In addition, companies must also recognize compensationexpense related to any awards that are not fully vested as of June 15, 2005.Compensation expense for the unvested awards will be measured based on the fairvalue of the awards previously calculated in developing the pro formadisclosures in accordance with the provisions of SFAS 123 and will be amortizedover the remaining vesting period. The Group is currently assessing the impactof adopting SFAS 123(R) to its consolidated operating results and financialposition.

 

F - 81

----

 

Differences between HKGAAP and US GAAP which affect net income of the Group are summarized below:

 
| ** **                                                                                                                                                         | ** ** | **Note**   | ** ** | **2002**         | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                                         | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                                                                                                                                         | ** ** | ** ** | ** ** | **As restated**  | ** ** | **As restated**  | ** ** | ** **       | ** ** |
| ** **                                                                                                                                                         | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income under  HK GAAP                                                                                                                                          |       | (1)        |       | 4,598,213        |       | 4,217,097        |       | 4,386,999        |       |
|                                                                                                                                                               |       |       |       |             |       |             |       |             |       |
| Impact of US GAAP  adjustments:                                                                                                                                    |       | (2)        |       |             |       |             |       |             |       |
| • Effect of acquisition of Unicom New Century                                                                                                                 |       | (A)        |       | 648,006          |       | —           |       | —           |       |
| • Transaction costs for the acquisition of Unicom New  Century                                                                                                |       | (A)        |       | (109,221         | )          | —           |       | —           |       |
| • Reversal of goodwill amortization and recognition of depreciation expenses based  on historical cost of property, plant and equipment of Unicom New Century |       | (A)        |       | —           |       | 88,794           |       | 85,476           |       |
| • Effect of acquisition of Unicom New World                                                                                                                   |       | (A)        |       | (118,879         | )          | 350,947          |       | —           |       |
| • Transaction costs for the acquisition of Unicom New  World                                                                                                  |       | (A)        |       | —           |       | (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           |       |
| • Effect of acquisition of Unicom International                                                                                                               |       | (A)        |       | 7,351            |       | 7,698            |       | 6,167            |       |
| • Transaction costs for the acquisition of Unicom  International                                                                                              |       | (A)        |       | —           |       | —           |       | (325             | )          |
| • Deferral of upfront non-refundable revenue                                                                                                                  |       | (D)        |       | (860,490         | )          | (1,417,474       | )          | (1,275,664       | )          |
| • Amortization of upfront non-refundable revenue                                                                                                              |       | (D)        |       | 526,982          |       | 1,223,938        |       | 1,303,683        |       |
| • Deferral of direct incremental cost                                                                                                                         |       | (D)        |       | 776,387          |       | 1,417,474        |       | 1,273,515        |       |
| • Amortization of direct incremental cost                                                                                                                     |       | (D)        |       | (435,385         | )          | (1,071,450       | )          | (1,188,804       | )          |
| • Employee housing benefits                                                                                                                                   |       | (E)        |       | (18,532          | )          | (18,532          | )          | (14,942          | )          |
| • Reversal of depreciation for revalued property, plant  and equipment                                                                                        |       | (G)        |       | 7,485            |       | 7,485            |       | 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                                                      |       | (H)        |       | (3,538           | )          | (3,538           | )          | —           |       |
| • Deferred tax effects of US GAAP adjustments                                                                                                                 |       | (F)        |       | 59,563           |       | (72,018          | )          | 95,948           |       |
| • Effect of change in accounting policy:                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Transitional  adjustment of goodwill impairment upon the adoption of SFAS 142 (net of tax  RMB20,773,000)                                                          |       | (H)        |       | (42,175          | )          | —           |       | —           |       |
|                                                                                                                                                               |       |       |       |             |       |             |       |             |       |
| Net income under  US GAAP (as restated  in 2002 and 2003)                                                                                                          |       | (2)        |       | 5,035,767        |       | 4,736,121        |       | 4,712,687        |       |

 

F - 82

----

 

Differencesbetween HK GAAP and US GAAP which affect shareholders’ equity of the Group are summarized below:

 
| ** **                                                                                                                                                          | ** ** | **Note**   | ** ** | **2003**         | ** ** | **2004**         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                                          | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                                                                                                                                          | ** ** | ** ** | ** ** | **As restated**  | ** ** | ** **       | ** ** |
|                                                                                                                                                                |       |       |       |             |       |             |       |
| Shareholders’  equity under HK GAAP                                                                                                                            |       | (1)        |       | 69,615,490       |       | 72,810,454       |       |
|                                                                                                                                                                |       |       |       |             |       |             |       |
| Impact of US  GAAP adjustments:                                                                                                                                     |       | (2)        |       |             |       |             |       |
| • Effect of acquisition of Unicom New Century                                                                                                                  |       | (A)        |       | (2,052,554       | )          | (2,052,554       | )          |
| • Transaction costs for the acquisition of Unicom New  Century                                                                                                 |       | (A)        |       | (109,221         | )          | (109,221         | )          |
| • Reversal of goodwill amortization and recognition of  depreciation expenses based on historical cost of property, plant and  equipment of Unicom New Century |       | (A)        |       | 88,794           |       | 174,270          |       |
| • 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           |       |
| • Effect of acquisition of Unicom International                                                                                                                |       | (A)        |       | 33,641           |       | 392              |       |
| • Transaction costs for the acquisition of Unicom  International                                                                                               |       | (A)        |       | —           |       | (325             | )          |
| • Deferred upfront non-refundable revenue                                                                                                                      |       | (D)        |       | (5,953,520       | )          | (7,229,184       | )          |
| • Accumulated amortization of upfront non-refundable  revenue                                                                                                  |       | (D)        |       | 2,646,464        |       | 3,950,147        |       |
| • Deferred direct incremental cost                                                                                                                             |       | (D)        |       | 5,037,375        |       | 6,310,890        |       |
| • Accumulated amortization of direct incremental cost                                                                                                          |       | (D)        |       | (2,088,332       | )          | (3,277,136       | )          |
| • Reversal of revaluation surplus of property, plant  and equipment:                                                                                           |       |       |       |             |       |             |       |
| • Cost                                                                                                                                                         |       | (G)        |       | (82,531          | )          | (82,531          | )          |
| • Accumulated depreciation                                                                                                                                     |       | (G)        |       | 15,351           |       | 19,478           |       |
| • Deferred tax effects of US GAAP adjustments                                                                                                                  |       | (F)        |       | (209,065         | )          | (113,117         | )          |
|                                                                                                                                                                |       |       |       |             |       |             |       |
| Shareholders’  equity under US GAAP  (as restated in 2003)                                                                                                     |       | (2)        |       | 65,946,144       |       | 69,442,322       |       |

 

F - 83

----

 

----

Notes:

 

(1)          Under HKGAAP, prior to 2003, deferred taxation was accounted for at the currenttaxation rate in respect of timing differences between net income as computedfor taxation purpose and net income as stated in the statements of income. Adeferred tax asset was not recognized unless the related benefits are expectedto crystallize in the foreseeable future. Upon the adoption of SSAP 12 in 2003,deferred taxation is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the financialstatements. Taxation rates enacted or substantively enacted at thebalance sheet date are used to determine deferred taxation. Deferred tax assetsare recognized to the extent that it is probable that future taxable incomewill be available against which the temporary differences can be utilized.

 

Thechange in the accounting policy has resulted in an increase of opening retainedearnings as of January 1, 2002 and 2003 by approximately RMB373,159,000 and RMB405,300,000,respectively, representing the deferred tax assets relating to the provisionfor doubtful debts previously not recognized. This change has resulted in anincrease in deferred tax assets at January 1, 2003 by approximatelyRMB405,300,000.  The net income for the yearended December 31, 2002 has also been increased by approximately RMB32,141,000.

 

Theadoption of SSAP 12 has also resulted in an increase of the deferred tax assetsof Unicom New Century as of December 31, 2002 by approximately RMB80,448,000.

 

UnderHK GAAP, the adoption of SSAP 12 in 2003 represents a change in accountingpolicy which has been applied retrospectivelyso that the comparatives presented have been restated to conform to the changedpolicy.

 

(2)          In accordance with the US GAAP accounting asdescribed in Note (A) above, the financial statements under US GAAP for priorperiods presented have been retroactively restated to include Unicom NewCentury, Unicom New World and Unicom International since the beginning of theearliest period presented.

 

F - 84

----

 

Thefollowing summarized the combined results ofoperations and the financial positions for the separate entities on a combinedbasis as of and for the years ended December 31, 2002, 2003 and 2004, restatedto reflect the impact of the effects of the disposal of New Guoxin and Acquisitionof entities under common control, which is accounted for at historical costunder US GAAP with prior periods restated as if the entities were alwayscombined, and other differences between HK GAAP and US GAAP.

 
| ** **                                      | ** ** | **The Group  (before the  acquisition of  Unicom  International)****(Note(a))** | ** ** | **Unicom  International  (Note(b))** | ** ** | **Elimination**  | ** ** | **The Group  (after the  acquisition of  Unicom  International)** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **RMB’000**                                                                | ** ** | **RMB’000**                     | ** ** | **RMB’000** | ** ** | **RMB’000**                                                  | ** ** |
| ** **                                      | ** ** | ** **                                                                      | ** ** | ** **                           | ** ** | ** **       | ** ** | ** **                                                        | ** ** |
| **For the  year ended December 31, 200****2**   |       |                                                                            |       |                                 |       |             |       |                                                              |       |
|                                            |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Results of  operations:                         |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Operating  revenue (Turnover)                   |       | 50,415,248                                                                      |       | 24,322                               |       | (18,497          | )          | 50,421,073                                                        |       |
| Net income from  continuing operations          |       | 5,492,804                                                                       |       | 7,351                                |       | —           |       | 5,500,155                                                         |       |
| Net loss from  discontinued operation           |       | (422,213                                                                        | )          | —                               |       | —           |       | (422,213                                                          | )          |
| Effect of change  in accounting policy          |       | (42,175                                                                         | )          | —                               |       | —           |       | (42,175                                                           | )          |
| Net income                                      |       | 5,028,416                                                                       |       | 7,351                                |       | —           |       | 5,035,767                                                         |       |
| Basic earnings  per share (RMB)                 |       | 0.401                                                                           |       | —                               |       | —           |       | 0.401                                                             |       |
|                                            |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| **As  of/for the year ended December 31, 2003** |       |                                                                            |       |                                 |       |             |       |                                                              |       |
|                                            |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Results of  operations:                         |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Operating  revenue (Turnover)                   |       | 71,958,253                                                                      |       | 46,265                               |       | (24,208          | )          | 71,980,310                                                        |       |
| Net income from  continuing operations          |       | 6,070,263                                                                       |       | 7,698                                |       | —           |       | 6,077,961                                                         |       |
| Net loss from  discontinued operation           |       | (1,341,840                                                                      | )          | —                               |       | —           |       | (1,341,840                                                        | )          |
| Net income                                      |       | 4,728,423                                                                       |       | 7,698                                |       | —           |       | 4,736,121                                                         |       |
| Basic earnings  per share (RMB)                 |       | 0.377                                                                           |       | —                               |       | —           |       | 0.377                                                             |       |
|                                            |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Financial  position:                            |       |                                                                            |       |                                 |       |             |       |                                                              |       |
| Non-current  assets                             |       | 128,169,420                                                                     |       | 60,621                               |       | —           |       | 128,230,041                                                       |       |
| Current assets                                  |       | 22,243,284                                                                      |       | 97,186                               |       | (93,115          | )          | 22,247,355                                                        |       |
| Total assets                                    |       | 150,412,704                                                                     |       | 157,807                              |       | (93,115          | )          | 150,477,396                                                       |       |
| Non-current  liabilities                        |       | 40,593,548                                                                      |       | —                               |       | —           |       | 40,593,548                                                        |       |
| Current  liabilities                            |       | 43,906,653                                                                      |       | 124,166                              |       | (93,115          | )          | 43,937,704                                                        |       |
| Total  liabilities                              |       | 84,500,201                                                                      |       | 124,166                              |       | (93,115          | )          | 84,531,252                                                        |       |
| Net assets                                      |       | 65,912,503                                                                      |       | 33,641                               |       | —           |       | 65,946,144                                                        |       |

 

F - 85

----

 
| ** **                                          | ** ** | **The Group  (before the  acquisition of  Unicom  International)****(Note(a))** | ** ** | **Unicom  International****(Note(b))** | ** ** | **Elimination**  | ** ** | **The Group  (after the  acquisition of  Unicom  International)** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **RMB’000**                                                                | ** ** | **RMB’000**                       | ** ** | **RMB’000** | ** ** | **RMB’000**                                                  | ** ** |
|                                                |       |                                                                            |       |                                   |       |             |       |                                                              |       |
| **As  of/for the year ended December 31, 200****4** |       |                                                                            |       |                                   |       |             |       |                                                              |       |
|                                                |       |                                                                            |       |                                   |       |             |       |                                                              |       |
| Results of  operations:                             |       |                                                                            |       |                                   |       |             |       |                                                              |       |
| Operating  revenue (Turnover)                       |       | 79,361,238                                                                      |       | 135,688                                |       | (108,612         | )          | 79,388,314                                                        |       |
| Net income                                          |       | 4,703,312                                                                       |       | 8,988                                  |       | 387              |       | 4,712,687                                                         |       |
| Basic earnings  per share (RMB)                     |       | 0.374                                                                           |       | —                                 |       | —           |       | 0.375                                                             |       |
|                                                |       |                                                                            |       |                                   |       |             |       |                                                              |       |
| Financial  position:                                |       |                                                                            |       |                                   |       |             |       |                                                              |       |
| Non-current  assets                                 |       | 128,697,817                                                                     |       | 64,865                                 |       | —           |       | 128,762,682                                                       |       |
| Current assets                                      |       | 17,865,977                                                                      |       | 148,991                                |       | (162,776         | )          | 17,852,192                                                        |       |
| Total assets                                        |       | 146,563,794                                                                     |       | 213,856                                |       | (162,776         | )          | 146,614,874                                                       |       |
| Non-current  liabilities                            |       | 31,045,613                                                                      |       | 3,262                                  |       | —           |       | 31,048,875                                                        |       |
| Current  liabilities                                |       | 46,118,868                                                                      |       | 167,972                                |       | (163,163         | )          | 46,123,677                                                        |       |
| Total liabilities                                   |       | 77,164,481                                                                      |       | 171,234                                |       | (163,163         | )          | 77,172,552                                                        |       |
| Net assets                                          |       | 69,399,313                                                                      |       | 42,622                                 |       | 387              |       | 69,442,322                                                        |       |

 

----

Note (a): The above balances include the operating results and financial positionof Unicom New Century and Unicom New World as of the end of and for all periodspresented. Further, as described in Note (B) above, New Guoxinwas sold to Unicom Group effective on December 31, 2003. As a result, the balance sheet of the Group did notinclude the financial positions of New Guoxin as of December 31, 2003.

 

Note (b): The above represent the operating results and financial conditions ofUnicom International for the whole years ended December 31 and as of year end.

 

F - 86

----

 

Thefollowing are the condensed statements of income, changes in shareholders’equity and cash flow information for the years ended December 31, 2002, 2003and 2004, condensed balance sheets information for the Group as of December 31,2003 and 2004, and additional financial information as of and for the yearsended December 31, 2002, 2003 and 2004, restated to reflect the impact of theeffects of the disposal of New Guoxin and Acquisition of entities under commoncontrol which is accounted for at historical cost with retroactive restatement underUS GAAP.

 

***CondensedStatements of******I******ncome***

 
| ** **                                                                                                                | ** ** | **Note**   | ** ** | **2002**         | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Operating  revenue (Turnover):                                                                                            |       | (g)        |       | 50,421,073       |       | 71,980,310       |       | 79,388,314       |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Operating  expenses:                                                                                                      |       |       |       |             |       |             |       |             |       |
| Leased lines and  network capacities                                                                                      |       | (g)        |       | (2,102,165       | )          | (4,729,159       | )          | (7,398,429       | )          |
| Interconnection  charges                                                                                                  |       | (g)        |       | (3,953,324       | )          | (6,111,437       | )          | (7,508,866       | )          |
| Depreciation and  amortization                                                                                            |       |       |       | (14,154,837      | )          | (16,757,294      | )          | (18,944,473      | )          |
| Personnel                                                                                                                 |       |       |       | (3,860,783       | )          | (4,654,670       | )          | (4,547,892       | )          |
| Selling and  marketing                                                                                                    |       | (g)        |       | (8,100,225       | )          | (16,689,275      | )          | (18,989,186      | )          |
| General,  administrative and other expenses                                                                               |       | (g)        |       | (7,286,952       | )          | (9,204,349       | )          | (10,471,208      | )          |
| Cost of  telecommunications products sold                                                                                 |       | (g)        |       | (1,203,368       | )          | (3,124,558       | )          | (3,342,797       | )          |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Total operating  expenses                                                                                                 |       |       |       | (40,661,654      | )          | (61,270,742      | )          | (71,202,851      | )          |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Operating income  from continuing operations                                                                              |       |       |       | 9,759,419        |       | 10,709,568       |       | 8,185,463        |       |
| Interest income                                                                                                           |       |       |       | 477,490          |       | 170,486          |       | 103,441          |       |
| Finance costs                                                                                                             |       |       |       | (2,765,871       | )          | (2,319,096       | )          | (1,688,418       | )          |
| Other (expenses) income, net                                                                                         |       |       |       | (45,734          | )          | (29,837          | )          | 95,932           |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Net income from  continuing operations before taxation, discontinued operation and effect of  change in accounting policy |       |       |       | 7,425,304        |       | 8,531,121        |       | 6,696,418        |       |
| Taxation                                                                                                                  |       | (c)        |       | (1,925,149       | )          | (2,453,160       | )          | (1,983,731       | )          |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Net income  before discontinued operation, and effect of change in accounting policy                                      |       |       |       | 5,500,155        |       | 6,077,961        |       | 4,712,687        |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Discontinued  operation                                                                                                   |       |       |       |             |       |             |       |             |       |
| • Loss from discontinued operation                                                                                   |       |       |       | (578,389         | )          | (1,762,222       | )          | —           |       |
| • Add: related tax impact                                                                                            |       | (c)        |       | 156,176          |       | 420,382          |       | —           |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Loss from  discontinued operation, net of tax                                                                             |       |       |       | (422,213         | )          | (1,341,840       | )          | —           |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Net income  before effect of change in accounting policy                                                                  |       |       |       | 5,077,942        |       | 4,736,121        |       | 4,712,687        |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Effect of change  in accounting policy:                                                                                   |       |       |       |             |       |             |       |             |       |
| • Transitional adjustment of goodwill impairment upon  the adoption of SFAS 142                                      |       |       |       | (62,948          | )          | —           |       | —           |       |
| • Less: related tax impact                                                                                           |       | (c)        |       | 20,773           |       | —           |       | —           |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
|                                                                                                                      |       |       |       | (42,175          | )          | —           |       | —           |       |
|                                                                                                                      |       |       |       |             |       |             |       |             |       |
| Net income                                                                                                                |       |       |       | 5,035,767        |       | 4,736,121        |       | 4,712,687        |       |

 

F - 87

----

 
| ** **                                                                                  | ** ** | **Note** | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|--------------|------------|
|                                                                                        |       |     |       |     |       |     |       |         |       |
| **Basic  earnings per share (RMB):**                                                        |       |     |       |     |       |     |       |         |       |
| Earnings per  share before discontinued operation and effect of change in accounting policy |       | (1)      |       | 0.438    |       | 0.484    |       | 0.375        |       |
| Loss from  discontinued operation, net of tax                                               |       |     |       | (0.034   | )          | (0.107   | )          | —       |       |
| Effect of change  in accounting policy, net of tax                                          |       |     |       | (0.003   | )          | —   |       | —       |       |
| Net income                                                                                  |       | (1)      |       | 0.401    |       | 0.377    |       | 0.375        |       |
|                                                                                        |       |     |       |     |       |     |       |         |       |
| **Diluted  earnings per share (RMB):**                                                      |       |     |       |     |       |     |       |         |       |
| Earnings per  share before discontinued operation and effect of change in accounting policy |       | (2)      |       | 0.438    |       | 0.484    |       | 0.374        |       |
| Loss from  discontinued operation, net of tax                                               |       |     |       | (0.034   | )          | (0.107   | )          | —       |       |
| Effect of change  in accounting policy, net of tax                                          |       |     |       | (0.003   | )          | —   |       | —       |       |
| Net income                                                                                  |       | (2)      |       | 0.401    |       | 0.377    |       | 0.374        |       |
|                                                                                        |       |     |       |     |       |     |       |         |       |
| **Basic  earnings per ADS (RMB):**                                                          |       |     |       |     |       |     |       |         |       |
| Earnings per  share before discontinued operation and effect of change in accounting policy |       | (1), (3) |       | 4.382    |       | 4.842    |       | 3.752        |       |
| Loss from  discontinued operation, net of tax                                               |       |     |       | (0.336   | )          | (1.069   | )          | —       |       |
| Effect of change  in accounting policy, net of tax                                          |       |     |       | (0.034   | )          | —   |       | —       |       |
| Net income                                                                                  |       | (1), (3) |       | 4.012    |       | 3.773    |       | 3.752        |       |
|                                                                                        |       |     |       |     |       |     |       |         |       |
| **Diluted  earnings per ADS (RMB):**                                                        |       |     |       |     |       |     |       |         |       |
| Earnings per  share before discontinued operation and effect of change in accounting policy |       | (2), (3) |       | 4.382    |       | 4.836    |       | 3.738        |       |
| Loss from  discontinued operation, net of tax                                               |       |     |       | (0.336   | )          | (1.068   | )          | —       |       |
| Effect of change  in accounting policy, net of tax                                          |       |     |       | (0.034   | )          | —   |       | —       |       |
| Net income                                                                                  |       | (2), (3) |       | 4.012    |       | 3.768    |       | 3.738        |       |

 

----

Notes:

 

(1)                Basicearnings per share before or afterdiscontinued operation and effect of change in accounting policy for theyearsended December 31, 2002, 2003 and 2004 were computed by dividing the net incomebefore or after discontinuedoperation and effect of change in accounting policy for the financial yearsunder US GAAP by the weighted average number of ordinary shares in issue during the years.

 

(2)                Dilutedearnings per share before or after discontinued operation and effect of changein accounting policy for the years ended December 31, 2002, 2003 and 2004 were computed by dividing the netincome before or after discontinued operation and effect of change inaccounting policy for the financial years under US GAAP by the weighted averagenumber of ordinary shares in issue during the years, after adjusting for thecumulative effects of the dilutive potential ordinary shares. All potentialdilutive shares arose from share options granted (i) under the amended Pre-GlobalOffering Share Option Scheme; and (ii) under the amended Share Option Scheme asdescribed in Note 30. For 2004, all potential dilutiveordinary shares arose from additional share options granted in 2004 under theamended Share Option Scheme (see Note 30),which if converted to ordinary shares would decrease earnings per share. Theanti-dilutive shares arisingfrom the share options of approximately 31,944,000 shares (2002: 48,745,000shares; 2003: 66,573,000 shares) were not included in the calculation ofdiluted earnings per share.

 

(3)                Basic anddiluted earnings per ADS before or after discontinued operation and effect ofchange in accounting policy were computed by multiplying the earnings per shareby 10, which is the number of shares represented by each ADS.

 

F - 88

----

 

***Condensed Balance Sheet******s***

 
| ** **                                                    | ** ** | **Note**   | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|
| ** **                                                    | ** ** | ** ** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **Assets**                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Current  assets:**                                          |       |       |       |             |       |             |       |
| Current portion  of deferred tax assets                       |       | (c)        |       | 873,849          |       | 606,009          |       |
| Amounts due from  Unicom Group                                |       |       |       | —           |       | 61,401           |       |
| Amounts due from  related parties                             |       |       |       | 176,061          |       | 193,048          |       |
| Amounts due from  domestic carriers                           |       |       |       | 184,613          |       | 269,919          |       |
| Prepayments and  other current assets                         |       | (d)        |       | 3,156,310        |       | 3,059,714        |       |
| Inventories                                                   |       |       |       | 2,172,115        |       | 3,114,632        |       |
| Accounts receivable                                           |       |       |       | 8,992,234        |       | 9,163,487        |       |
| Less: Provision  for doubtful debts                           |       |       |       | (3,498,305       | )          | (3,933,507       | )          |
| Accounts receivable,  net                                     |       |       |       | 5,493,929        |       | 5,229,980        |       |
| Short-term bank  deposits                                     |       |       |       | 912,794          |       | 662,025          |       |
| Bank balances  and cash                                       |       |       |       | 9,277,684        |       | 4,655,464        |       |
|                                                          |       |       |       |             |       |             |       |
| Total current  assets                                         |       |       |       | 22,247,355       |       | 17,852,192       |       |
|                                                          |       |       |       |             |       |             |       |
| **Non-current  assets:**                                      |       |       |       |             |       |             |       |
| Property, plant  and equipment, net                           |       | (a)        |       | 118,170,805      |       | 118,700,674      |       |
| Other assets                                                  |       | (b)        |       | 9,936,454        |       | 10,062,008       |       |
| Deferred tax  assets                                          |       | (c)        |       | 122,782          |       | —           |       |
|                                                          |       |       |       |             |       |             |       |
| **Total  assets:**                                            |       |       |       | 150,477,396      |       | 146,614,874      |       |
|                                                          |       |       |       |             |       |             |       |
| **L****iabilities ****and equity Current  liabilities:** |       |       |       |             |       |             |       |
| Payables and  accrued liabilities                             |       | (e)        |       | 17,127,113       |       | 16,785,749       |       |
| Amounts due to  Unicom Group                                  |       |       |       | 432,047          |       | —           |       |
| Amounts due to  related parties                               |       |       |       | 110,272          |       | 5,760            |       |
| Amounts due to  domestic carriers                             |       |       |       | 778,841          |       | 948,574          |       |
| Current portion  of obligations under finance leases          |       |       |       | 25,435           |       | 938,189          |       |
| Current portion  of long-term bank loans                      |       | (f)        |       | 7,197,877        |       | 11,086,305       |       |
| Taxes payable                                                 |       |       |       | 623,929          |       | 395,688          |       |
| Advances from  customers                                      |       |       |       | 6,666,991        |       | 7,034,995        |       |
| Short-term bank  loans                                        |       |       |       | 10,975,199       |       | 8,928,417        |       |
|                                                          |       |       |       |             |       |             |       |
| Total current  liabilities                                    |       |       |       | 43,937,704       |       | 46,123,677       |       |
|                                                          |       |       |       |             |       |             |       |
| **Non-current  liabilities:**                                 |       |       |       |             |       |             |       |
| Long-term bank  loans                                         |       | (f)        |       | 36,212,791       |       | 26,137,188       |       |
| Obligations  under finance leases                             |       |       |       | 99,719           |       | 488,956          |       |
| Deferred revenue                                              |       |       |       | 4,277,761        |       | 4,249,733        |       |
| Deferred tax  liabilities                                     |       | (c)        |       | —           |       | 170,420          |       |
| Other long-term  liabilities                                  |       |       |       | 3,277            |       | 2,578            |       |
|                                                          |       |       |       |             |       |             |       |
| Total  non-current liabilities                                |       |       |       | 40,593,548       |       | 31,048,875       |       |
|                                                          |       |       |       |             |       |             |       |
| **Shareholders’****equity**                              |       |       |       | 65,946,144       |       | 69,442,322       |       |
|                                                          |       |       |       |             |       |             |       |
| **Total  liability and shareholders’ equity**            |       |       |       | 150,477,396      |       | 146,614,874      |       |

 

F - 89

----

 

***Condensed Statement******s******of Changes in Shareholders’ Equity***

 
| ** **                                                                                                         | ** ** | **RMB’000** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
|                                                                                                               |       |             |       |
| Balance as of January 1, 2002, as previously reported before adjustingfor the acquisition of Unicom  International |       | 61,884,081       |       |
| Adjustment for the acquisition of Unicom International                                                             |       | 36,535           |       |
| Balance as of  January 1, 2002, as adjusted for the acquisition of Unicom  International                      |       | 61,920,616       |       |
| Net income for  the year ended December 31, 2002                                                                   |       | 5,035,767        |       |
| Deemed capital  contribution from owner for employee housing benefits                                              |       | 18,532           |       |
| Contribution  from owner                                                                                           |       | 2,083,967        |       |
| Deemed capital  distribution relating to the payment to Unicom Group for the transfer of Unicom New Century        |       | (4,800,000       | )          |
|                                                                                                               |       |             |       |
| Balance as of  December 31, 2002, as  adjusted for the acquisition of Unicom International                         |       | 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 as of  December 31, 2003, as adjusted for the acquisition of Unicom  International                         |       | 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 as of  December 31, 2004                                                                                   |       | 69,442,322       |       |

 

F - 90

----

 

***Condensed Cash Flow Statement******s***

 
| ** **                                    | ** ** | **2002**         | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|-----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Net cash inflows  (outflows) from:            |       |             |       |             |       |             |       |
| Operating  activities                         |       | 18,235,412       |       | 25,992,889       |       | 24,510,430       |       |
| Investing  activities                         |       | (10,260,814      | )          | (20,295,426      | )          | (19,668,070      | )          |
| Financing  activities                         |       | (12,772,555      | )          | (11,397,136      | )          | (9,440,491       | )          |
|                                          |       |             |       |             |       |             |       |
| Net decrease in  cash and cash equivalents    |       | (4,797,957       | )          | (5,699,673       | )          | (4,598,131       | )          |
| Cash and cash  equivalents, beginning of year |       | 19,725,314       |       | 14,927,357       |       | 9,227,684        |       |
|                                          |       |             |       |             |       |             |       |
| Cash and cash  equivalents, end of year       |       | 14,927,357       |       | 9,227,684        |       | 4,629,553        |       |
|                                          |       |             |       |             |       |             |       |
| Interest paid  (net of amount capitalized)    |       | (2,697,644       | )          | (2,322,892       | )          | (1,662,419       | )          |

 

**Supplemental information**

 

Payables to equipmentsuppliers for construction-in-progress during 2004 decreased by approximatelyRMB 775 million (2002:RMB1,502 million; 2003: RMB3,799 million).

 

***(a)******        ******Property,Plant and Equipment, net***

 
| ** **                             | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                   |       |             |       |             |       |
| Buildings                              |       | 12,800,363       |       | 15,395,232       |       |
| Telecommunication  equipment           |       | 116,385,370      |       | 128,797,453      |       |
| Office  furniture, fixtures and others |       | 4,498,081        |       | 5,103,469        |       |
| Leasehold  improvements                |       | 1,057,051        |       | 1,112,408        |       |
| Construction-in-progress               |       | 21,743,621       |       | 23,694,508       |       |
|                                   |       | 156,484,486      |       | 174,103,070      |       |
|                                   |       |             |       |             |       |
| Less:  Accumulated depreciation        |       | (38,313,681      | )          | (55,402,396      | )          |
|                                   |       |             |       |             |       |
|                                   |       | 118,170,805      |       | 118,700,674      |       |

 

F - 91

----

 

***(b)******        ******OtherAssets***

 
| ** **                                                           | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                 |       |             |       |             |       |
| Inter-connection  facilitates                                        |       | 629,595          |       | 441,968          |       |
| Deferred direct  incremental costs                                   |       | 6,465,485        |       | 7,738,673        |       |
| Other                                                                |       | 1,588,851        |       | 1,852,818        |       |
|                                                                 |       |             |       |             |       |
|                                                                 |       | 8,683,931        |       | 10,033,459       |       |
| Less:  Accumulated amortization                                      |       | (3,860,502       | )          | (6,161,207       | )          |
|                                                                 |       |             |       |             |       |
|                                                                 |       | 4,823,429        |       | 3,872,252        |       |
|                                                                 |       |             |       |             |       |
| Prepaid rental  and leased line                                      |       | 1,201,375        |       | 2,305,071        |       |
| Deferred  customer acquisition costs of contractual CDMA subscribers |       | 3,911,650        |       | 3,884,685        |       |
|                                                                 |       |             |       |             |       |
|                                                                 |       | 9,936,454        |       | 10,062,008       |       |

 

***(c)******         ******Taxation***

 

Detailed description of theassessment basis of income tax liability of the Group was set forth in Note 14of the financial statements.

 

Theincome tax liability of Unicom International was assessed as follows:

 

(i)       In 2003, the government enacted a change in the profits tax rate in HongKong from 16% in 2002 to 17.5%. Unicom International was assessed at tax rateof 16% for the year 2002, and 17.5% for the years ended December 31, 2003 and2004. Its subsidiary Unicom USA was assessed at tax rate of 8.84% in the UnitedStates for the years ended December 31, 2002, 2003 and 2004; and

 

(ii)    Unicom International had no Hong Kong tax liability for the years endedDecember 31, 2002, 2003 and 2004 as it does not have any assessable incomesourced from Hong Kong after offsetting prior year’s accumulated tax loss.

 

Thecomponents of income tax are as follows:

 
| ** **                                                                            | ** ** | **2002**         | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                                  |       |             |       |             |       |             |       |
| Provision for  PRC enterprise income tax of the estimated taxable income for the year |       | 1,578,591        |       | 1,078,096        |       | 1,422,689        |       |
| Deferred  taxation                                                                    |       | 169,609          |       | 954,682          |       | 561,042          |       |
|                                                                                  |       |             |       |             |       |             |       |
|                                                                                  |       | 1,748,200        |       | 2,032,778        |       | 1,983,731        |       |

 

F - 92

----

 

Thereconciliation of PRC enterprise income tax at the statutory tax rate of 33% and the effective tax rate actually recorded in the statementsof income is as follows:

 
| ** **                                                                     | ** ** | **2002**   | ** ** | **2003**   | ** ** | **200****4** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------|------------|
| **PRC**                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** |
| ** **                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **   | ** ** |
| Statutory tax  rate of 33%                                                     |       | 33         | %          | 33         | %          | 33           | %          |
| Non-deductible  expenses:                                                      |       |       |       |       |       |         |       |
| • Housing benefits                                                        |       | 0.1        |       | —     |       | 0.1          |       |
| • Personnel expenses                                                      |       | 1.7        |       | —     |       | 0.4          |       |
| • Selling and marketing expenses                                          |       | 0.2        |       | —     |       | 0.3          |       |
| • Other                                                                   |       | 1.0        |       | 0.6        |       | 1.2          |       |
| Additional  expenses for tax deductible purposes:                              |       |       |       |       |       |         |       |
| • Interest on loans from CCF joint ventures                               |       | (0.9       | )          | (0.3       | )          | —       |       |
| • Depreciation expenses                                                   |       | (0.2       | )          | (0.1       | )          | —       |       |
| • Monetary housing benefits                                               |       | —     |       | (0.8       | )          | —       |       |
| Effect of  preferential tax rates                                              |       | (3.2       | )          | (2.1       | )          | (2.0         | )          |
| Tax credits                                                                    |       | (4.6       | )          | —     |       | (2.3         | )          |
| Increase in  opening deferred tax asset resulting from an increase in tax rate |       | —     |       | (2.1       | )          | (0.4         | )          |
| Write-off  deferred tax assets previously recognized for New Guoxin            |       | —     |       | 1.8        |       | —       |       |
|                                                                           |       |       |       |       |       |         |       |
| **Effective  PRC income tax rate**                                             |       | 27.1       | %          | 30.0       | %          | 30.3         | %          |
|                                                                           |       |       |       |       |       |         |       |
| **Effective  HK income tax rate**                                              |       | —     |       | —     |       | 8.7          | %          |
|                                                                           |       |       |       |       |       |         |       |
| **Total overall  effective income tax rate**                                   |       | 25.9       | %          | 30.1       | %          | 29.6         | %          |

 

Effectof preferential tax rates is as follows:

 
| ** **                          | ** ** | **2002** | ** ** | **2003** | ** ** | **200****4** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|--------------|------------|
|                                |       |     |       |     |       |         |       |
| Aggregate amount  (RMB in millions) |       | 209      |       | 143      |       | 135          |       |
| Per share effect  (RMB)             |       | 0.017    |       | 0.011    |       | 0.011        |       |

 

F - 93

----

 

Themovement of deferred tax assets is as follows:

 
| ** **                                         | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                         | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| ** **                                         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Balance,  beginning of year                        |       | 1,955,485        |       | 996,631          |       |
| Deferred  taxation charged to statements of income |       | (954,682         | )          | (561,042         | )          |
| Deferred  taxation relating to sale of New Guoxin  |       | (4,172           | )          | —           |       |
|                                               |       |             |       |             |       |
| Balance, end of  year                              |       | 996,631          |       | 435,589          |       |

 

Deferredtaxation represents the taxation effect of the following temporary differences:

 
| ** **                                                                                        | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                        | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Non-current  deferred tax assets:                                                                 |       |             |       |             |       |
| Net amount of  deferral and amortization of upfront non-refundable revenue and incremental  costs |       | 1,063,541        |       | 1,187,448        |       |
| Interest on  loans from CCF joint ventures                                                        |       | 256,673          |       | 150,954          |       |
| Loss arising  from terminations of CCF Arrangements                                               |       | 236,249          |       | 174,637          |       |
| Provision for  impairment loss of property, plant and equipment                                   |       | 4,875            |       | 4,721            |       |
| Write-off of  other assets                                                                        |       | 7,563            |       | —           |       |
| Amortization of  retirement benefits                                                              |       | 18,549           |       | —           |       |
| Additional  depreciation deductible for tax purpose                                               |       | 101,267          |       | 18,258           |       |
| Differences in  tax basis for the residual value of the property, plant and equipment             |       | 7,608            |       | 10,045           |       |
| Other                                                                                             |       | 24,497           |       | 197              |       |
|                                                                                              |       |             |       |             |       |
|                                                                                              |       | 1,720,822        |       | 1,546,260        |       |
| Less: Valuation  allowance                                                                        |       | —           |       | —           |       |
|                                                                                              |       |             |       |             |       |
|                                                                                              |       | 1,720,822        |       | 1,546,260        |       |
| Non-current  deferred tax liabilities:                                                            |       |             |       |             |       |
| Net amount of  deferral and amortization of upfront non-refundable revenue and incremental  costs |       | (1,263,560       | )          | (1,291,528       | )          |
| Change of  depreciation period                                                                    |       | (30,367          | )          | (26,280          | )          |
| Capitalized  interest already deducted for tax purposes                                           |       | (304,113         | )          | (398,872         | )          |
|                                                                                              |       |             |       |             |       |
|                                                                                              |       | (1,598,040       | )          | (1,716,680       | )          |
|                                                                                              |       |             |       |             |       |
| Net non-current deferred tax assets/(liabilities)                                                 |       | 122,782          |       | (170,420         | )          |
|                                                                                              |       |             |       |             |       |
| Current portion  of deferred tax assets                                                           |       |             |       |             |       |
| Income tax on  advances from customers for telephone cards                                        |       | 261,467          |       | —           |       |
| Write-down of  inventory to net realizable value                                                  |       | 15,905           |       | 39,103           |       |
| Provision for  doubtful debts of Cellular Business                                                |       | 534,839          |       | 526,514          |       |
| Monetary housing  benefits                                                                        |       | 56,826           |       | 17,171           |       |
| Other                                                                                             |       | 4,812            |       | 23,221           |       |
|                                                                                              |       | 873,849          |       | 606,009          |       |
|                                                                                              |       |             |       |             |       |
| Total                                                                                             |       | 996,631          |       | 435,589          |       |

 

F - 94

----

 

***(d)******        ******Prepaymentand Other Current Assets***

 
| ** **                                                           | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                                                 |       |             |       |             |       |
| Prepaid rental                                                       |       | 233,461          |       | 277,999          |       |
| Deposits and  prepayments                                            |       | 1,633,199        |       | 1,351,022        |       |
| Interest  receivables                                                |       | 4,872            |       | 1,414            |       |
| Advances to  employees                                               |       | 164,495          |       | 164,386          |       |
| Deferred  customer acquisition costs of contractual CDMA subscribers |       | 535,521          |       | 860,225          |       |
| Others                                                               |       | 584,762          |       | 404,668          |       |
|                                                                 |       |             |       |             |       |
|                                                                 |       | 3,156,310        |       | 3,059,714        |       |

 

***(e)******         ******Payablesand Accrued Liabilities***

 
| ** **                                         | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|----------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                         | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                                               |       |             |       |             |       |
| Payables to  contractors and equipment suppliers   |       | 11,811,532       |       | 10,592,518       |       |
| Accrued expenses                                   |       | 1,418,034        |       | 1,355,183        |       |
| Payables to  telecommunications products suppliers |       | 1,352,307        |       | 1,772,693        |       |
| Customer  deposits                                 |       | 1,199,532        |       | 1,370,015        |       |
| Salary and  welfare payables                       |       | 494,794          |       | 465,154          |       |
| Amounts due to Service Providers/Content Providers |       | 369,330          |       | 573,804          |       |
| Other                                              |       | 481,584          |       | 656,382          |       |
|                                               |       |             |       |             |       |
|                                               |       | 17,127,113       |       | 16,785,749       |       |

 

F - 95

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***(f)******           ******Long-termBank Loans***

 
| ** **                  | ** ** | **Interest rate and final maturity**                                                                                                        | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | ** **                                                                                                                                  | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                        |       |                                                                                                                                        |       |             |       |             |       |
| RMB denominated  bank loans |       | Fixed interest  rate ranging from 4.78% to 5.73% (2003: 4.44% to 5.76%) per annum with  maturity through 2010 (2003: maturity through 2009) |       |             |       |             |       |
| • secured              |       |                                                                                                                                        |       | 10,622,366       |       | 6,804,566        |       |
| • unsecured            |       |                                                                                                                                        |       | 26,994,612       |       | 20,487,127       |       |
|                        |       |                                                                                                                                        |       |             |       |             |       |
|                        |       |                                                                                                                                        |       | 37,616,978       |       | 27,291,693       |       |
|                        |       |                                                                                                                                        |       |             |       |             |       |
| USD denominated  bank loans |       | Floating  interest rate of USD LIBOR plus interest margin of 0.28% to 0.44% per annum with maturity through 2010                            |       | 5,793,690        |       | 9,931,800        |       |
|                        |       |                                                                                                                                        |       |             |       |             |       |
|                        |       |                                                                                                                                        |       | 43,410,668       |       | 37,223,493       |       |
| Less: Current  portion      |       |                                                                                                                                        |       | (7,197,877       | )          | (11,086,305      | )          |
|                        |       |                                                                                                                                        |       |             |       |             |       |
|                        |       |                                                                                                                                        |       | 36,212,791       |       | 26,137,188       |       |

 

Therepayment schedule of the long-term bank loans was as follows:

 
| ** **                                       | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| Balances due:                                    |       |             |       |             |       |
| • 2004                                      |       | 7,197,877        |       | —           |       |
| • 2005                                      |       | 15,549,832       |       | 11,086,305       |       |
| • 2006                                      |       | 11,700,060       |       | 10,226,776       |       |
| • 2007                                      |       | 3,020,930        |       | 10,439,494       |       |
| • 2008                                      |       | 4,116,570        |       | 2,639,490        |       |
| • 2009                                      |       | 1,825,399        |       | 1,013,808        |       |
| • Thereafter                                |       | —           |       | 1,817,620        |       |
|                                             |       |             |       |             |       |
|                                             |       | 43,410,668       |       | 37,223,493       |       |
| Less: Portion  classified as current liabilities |       | (7,197,877       | )          | (11,086,305      | )          |
|                                             |       |             |       |             |       |
|                                             |       | 36,212,791       |       | 26,137,188       |       |

 

Asof December 31, 2004, long-term bank loans denominated in RMB were secured by the following:

 

(i)           Approximately RMB6,805 million (2003:RMB10,622   million) of long-term bank loans were securedby the future service fee revenue to be generated by the cellular operations ofthe relevant branches. Included in these long-term bank loans, approximatelyRMB2,824 million (2003: RMB3,600 million) was also guaranteed by Unicom Group;

 

(ii)        ApproximatelyRMB3,955 million (2003: RMB8,004 million) oflong-term bank loans were guaranteed by Unicom Group; and

 

(iii)     ApproximatelyRMB26 million (2003: RMB50 million) oflong-term bank loans were secured by restricted bank deposit.

 

F - 96

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***(g)******        ******RelatedParty Transactions***

* *
| ** **                                                           | ** ** | **2002**         | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                           | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
| **Transactions  with Unicom Group and its subsidiaries:**            |       |             |       |             |       |             |       |
| Interconnection  and roaming revenues                                |       | 34,167           |       | 155,464          |       | 212,292          |       |
| Interconnection  and roaming charges                                 |       | 50,132           |       | 47,615           |       | 56,171           |       |
| Charge for  cellular subscriber value-added service                  |       | —           |       | —           |       | 858,778          |       |
| Charge for  customer services                                        |       | —           |       | —           |       | 524,718          |       |
| Charge for  cellular subscriber value-added service by UNISK         |       | —           |       | —           |       | 4,228            |       |
| Rental charges  for premises, equipment and facilities               |       | 21,601           |       | 17,936           |       | 25,528           |       |
| Rental income  for premises and facilities                           |       | —           |       | —           |       | 19,475           |       |
| Constructed  capacity related cost of CDMA network                   |       | —           |       | —           |       | 305,903          |       |
| Revenue for  leasing of transmission line capacity                   |       | 12,557           |       | 10,717           |       | 24,822           |       |
| Sales of CDMA  handsets                                              |       | 6,129            |       | 23,484           |       | —           |       |
| Purchase of CDMA  handsets                                           |       | —           |       | —           |       | 14,655           |       |
| Charges for the  international gateway services                      |       | 15,626           |       | 8,631            |       | 17,062           |       |
| Leasing of  satellite transmission capacity                          |       | 35,153           |       | 26,400           |       | 14,152           |       |
| Purchase of  telecom cards                                           |       | 1,391,811        |       | 1,326,641        |       | 1,087,498        |       |
| CDMA network  capacity lease rental                                  |       | 1,299,286        |       | 3,909,148        |       | 6,588,926        |       |
| Agency fee  incurred for subscriber development                      |       | —           |       | —           |       | 9,054            |       |
| Agency fee  incurred for procurement of telecommunications equipment |       | 19,634           |       | 20,705           |       | 17,759           |       |
| Rental for the  PRC corporate office                                 |       | 7,598            |       | —           |       | —           |       |
| Sales of  telecommunications equipment                               |       | 16,088           |       | —           |       | —           |       |

 

Detaildescription of the nature and terms of the related party transactions are setforth in Note 31 of thisfinancial statement.

 

**Movement of significant provisions**

 

(a)          Provisionfor deferred taxation valuation allowance was analyzed as follows:

 
| ** **                  | ** ** | **200****2**     | ** ** | **200****3**     | ** ** | **200****4**     | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                        |       |             |       |             |       |             |       |
| Balance, beginning  of year |       | 107,299          |       | 107,299          |       | —           |       |
| Provision for  the year     |       | —           |       | —           |       | —           |       |
| Disposal of New  Guoxin     |       | —           |       | (107,299         | )          | —           |       |
|                        |       |             |       |             |       |             |       |
| Balance, end of  year       |       | 107,299          |       | —           |       | —           |       |

 

(b)         Provisionfor doubtful debts was analyzed as follows:

 
| ** **                  | ** ** | **2002**         | ** ** | **2003**         | ** ** | **200****4**     | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** | **RMB’000** | ** ** |
|                        |       |             |       |             |       |             |       |
| Balance, beginning  of year |       | 1,378,799        |       | 1,901,752        |       | 3,498,305        |       |
| Provision for  the year     |       | 1,392,909        |       | 2,019,470        |       | 2,191,780        |       |
| Written-off for  the year   |       | (869,956         | )          | (358,253         | )          | (1,756,578       | )          |
| Disposal of New  Guoxin     |       | —           |       | (64,664          | )          | —           |       |
|                        |       |             |       |             |       |             |       |
| Balance, end of  year       |       | 1,901,752        |       | 3,498,305        |       | 3,933,507        |       |

 

F - 97

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(c)          Other thanthose described in the above notes, there was no other significant movement ofprovisions for the years ended December 31, 2002, 2003 and 2004.

 

**Comprehensive Statements ofincome**

 

According to SFAS No.130“Reporting of Comprehensive Income”, certain items shown as components ofcommon equity must be more prominently reported in a separate statement ascomponents of comprehensive income. For the years ended December 31, 2002, 2003and 2004, apart from the net income, there wasno other comprehensive income which should be included in the statement ofcomprehensive income.

 

**Shareoption scheme**

 

As disclosed in Note 30, information relating to the share options outstandingunder the amended Pre-Global Offering Share Option Scheme and Share OptionScheme as of December 31, 2002, 2003 and 2004 is as follows:

 
| ** **                     | ** ** | **2002**                 | ** ** | **2003**                               | ** ** | **2004**                 | ** ** |
|--------------------------------|------------|--------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise  price** | ** ** |
| ** **                     | ** ** | ** **               | ** ** | **HK$**                                | ** ** | ** **               | ** ** | **HK$** | ** ** | ** ** | ** ** | **HK$** | ** ** |
|                           |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Outstanding, beginning of year |       | 33,840,600               |       | 15.42                                  |       | 69,868,600               |       | 10.66 |   | 172,367,400 |   | 6.72 |   |
| Granted during the year        |       | 36,028,000               |       | 6.18                                   |       | 105,956,000              |       | 4.30 |   | 113,322,000 |   | 5.92 |   |
| Exercised during the year      |       | —                   |       | —                                 |       | (176,000                 | )          | 6.18 |   | (10,320,000 | ) | 5.85 |   |
| Cancelled during the year      |       | —                   |       | —                                 |       | (3,281,200               | )          | 12.26 |   | (1,306,000 | ) | 4.30 |   |
|                           |       |                     |       |                                   |       |                     |       |   |   |   |   |   |   |
| Outstanding, end of year       |       | 69,868,600               |       | 10.66                                  |       | 172,367,400              |       | 6.72 |   | 274,063,400 |   | 6.45 |   |

 

As of December 31, 2004, 87,611,360 share options (2002: 33,840,600 shareoptions; 2003: 45,947,320 share options)were exercisable and the weighted average exercise price was HK$8.69 (2002: HK$15.42; 2003: HK$12.65). Also, as ofDecember 31, 2004, weighted average remainingcontractual life of the options outstanding was approximately 4.9 years (2002: approximately 6.5 years; 2003:approximately 5.5 years).

 

The SFAS 123 method ofaccounting is based on several assumptions and should not be viewed asindicative of the operation of the Company in future periods.  The estimated fair value of each option granted to theemployees of the Group on the date of grant is estimated to be HK$2.48 ,HK$1.26 and HK$1.54 for 2002, 2003 and 2004respectively, using the Black-Scholes option pricingmethod with the assumptions as follows:

 
| ** **                    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Estimated fair value (in HK$) |       | HK$      | 2.48       |     | HK$        | 1.26     |       | HK$ | 1.54 |   |
| Risk free interest rate       |       | 3        | %          | 3        | %          | 3        | %          |
| Expected life (in years)      |       | 5        |       | 3        |       | 3        |       |
| Expected dividend yield       |       | 0        | %          | 2        | %          | 2        | %          |
| Volatility                    |       | 41       | %          | 35       | %          | 40       | %          |
|                               |            |          |            |          |            |          |            |  |  |  |

 

F - 98

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Hadthe compensation costs for the plans been determined based on the estimatedfair value at the grant dates for awards under the plans consistent with themethod of SFAS 123, the Group’s net income and earnings per share under US GAAPon a pro forma basis for the years ended December 31, 2002, 2003 and 2004 aredisclosed in the aforementioned Note (I).

 

F - 99

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