**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 20-F**

 

| **o**      | **REGISTRATION****STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                       |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                           |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                           |
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                           |
|       | **For the fiscal year ended December  31, 2002**                                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                           |
| **OR**     |
|       |                                                                                                                                                                                                                                                                                                                           |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                  |
|       |                                                                                                                                                                                                                                                                                                                           |
|       | **For the transition period from                           to                         ** |

 

**Commissionfile number 1-15028**

 

**CHINA UNICOM LIMITED**

(Exact Name of Registrantas Specified in Its Charter)

 

| **N/A**                                                                                                 |   | **Hong Kong**                                    |
|---------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|
| (Translation of  Registrant’s Name Into English)                                                   |   | (Jurisdiction of  Incorporation or Organization) |
|                                                                                                    |   |                                             |
| **No.  133A, Xidan North Street  Xicheng District****Beijing  100032, People’s Republic of China** |
| (Address  of Principal Executive Offices)                                                               |

 

Securities registered orto be registered pursuant to Section 12(b) of the Act:

 

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

 

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

 

Securities registered orto be registered pursuant to Section 12(g) of the Act:

 

**None**(Title of class)

 

Securitiesfor which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

**None**(Title of Class)

 

Indicate the number of outstanding shares of each ofthe issuer’s classes of capital or common stock as of the close of the periodcovered by the annual report.

 

12,552,996,070 OrdinaryShares as of December 31, 2002.

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes   ý      No   o

 

Indicate by check mark which financial statement itemthe registrant has elected to follow.

 

Item 17  o         Item 18  ý

 

 

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**TABLE OFCONTENTS**

 
|                                           | **Page**                                                                                      |
|------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **Note  Regarding Forward-looking Statements** | i                                                                                             |
| **Certain Definitions**                        | ii                                                                                            |
| **PART I**                                     | 1                                                                                             |
|                                           | Item  1.  Identity of Directors, Senior  Management and Advisers                         | 1 |
|                                           | Item  2.  Offer Statistics and Expected  Timetable                                       | 1 |
|                                           | Item  3.  Key Information                                                                | 1 |
|                                           | Item  4.  Information on the Company                                                     | 13 |
|                                           | Item  5.  Operating and Financial Review and  Prospects                                  | 52 |
|                                           | Item 6.   Directors, Senior Management and Employees                                     | 79 |
|                                           | Item  7.  Major Shareholders and Related  Party Transactions                             | 86 |
|                                           | Item  8.  Financial Information                                                          | 96 |
|                                           | Item  9.  The Offer and Listing                                                          | 96 |
|                                           | Item  10.  Additional Information                                                        | 97 |
|                                           | Item  11.  Quantitative and Qualitative  Disclosures About Market Risks                  | 107 |
|                                           | Item  12.  Description of Securities Other than  Equity Securities                       | 108 |
|                                           | Item  13.  Defaults, Dividend Arrearages and  Delinquencies                              | 108 |
|                                           | Item  14.  Material Modifications to the  Rights of Security Holders and Use of Proceeds | 108 |
|                                           | Item  15.  Controls and Procedures                                                       | 108 |
|                                           | Item  16A.  Audit Committee Financial Expert                                             | 109 |
|                                           | Item  16B.  Code of Ethics                                                               | 109 |
|                                           | Item  16C.  Principal Accountant Fees and  Services                                      | 109 |
|                                           | Item  16D.  Exemptions from the Listing  Standards for Audit Committees                  | 109 |
| **PART II**                                    | 109                                                                                           |
|                                           | Item  17.  Financial Statements                                                          | 109 |
|                                           | Item  18.  Financial Statements                                                          | 109 |
|                                           | Item  19.  Exhibits                                                                      | 109 |

 

i

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**NOTEREGARDING FORWARD-LOOKING STATEMENTS**

 

This annual report for the year ended December 31,2002 contains forward-looking statements that are, by their nature, subject tosignificant risks and uncertainties. Such forward-looking statements include, without limitation, ourstrategy and future plan, our capital expenditure plan, our future businesscondition and financial results, our abilities to expand network capacity andincrease network efficiency, our ability to develop new technology applicationsand offer new services, our ability to stabilize our paging business anddevelop and market new value-added paging services, the advantages of codedivision multiple access, or CDMA, technology and our ability to realize suchadvantages 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, and future regulatory and other developments in the Chinesetelecommunications industry.

 

Such forward-looking statements reflect our currentviews with respect to future events. Actual results may differ materially from information contained in theforward-looking statements as a result of a number of factors, including,without limitation, any changes in the regulatory policies of the Ministry ofInformation Industry, or MII, and other relevant government authorities inChina, the effects of competition on the demand and price of our telecommunicationsservices, any changes in telecommunications and related technology andapplications based on such technology, and changes in political, economic,legal and social conditions in China including the Chinese government’spolicies with respect to economic growth, foreign exchange, foreign investmentand entry by foreign companies into China’s telecommunications market.  In addition, our future network expansionand other capital expenditure and development plans are dependent on numerousfactors, including the availability of adequate financing on acceptable terms,the adequacy of currently available spectrum or availability of additionalspectrum and the adequate and timely supply of equipment when required.  Please also see the “Risk Factors” sectionunder Item 3.

 

**CERTAIN DEFINITIONS**

** **

As used in this annual report, references to “us”,“we”, the “Company” and “Unicom” are to China Unicom Limited.  Unless the context otherwise requires, thesereferences include all of our subsidiaries. In respect of any time prior to our incorporation, references to “us”,“we” and “Unicom” are to the telecommunications businesses in which ourpredecessors were engaged and which were subsequently assumed by us.  All references to “Unicom Group” are toChina United Telecommunications Corporation, our indirect controllingshareholder.  Unless the contextotherwise requires, these references include all of its subsidiaries, includingus and our subsidiaries.  Please alsosee “A. History and Development of the Company – Restructuring and Acquisitionof Unicom New Century” under Item 4 for our current shareholding structure.

 

ii

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**PART I**

 

**Item 1****.  Identity ofDirectors, Senior Management and Advisers**

 

Not Applicable.

 

**Item 2****.  OfferStatistics and Expected Timetable**

## ** **

Not Applicable.

 

**Item 3****.  KeyInformation**

 

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

 

The following table presents our selected consolidatedincome statement data for the years ended December 31, 1998, 1999, 2000,2001 and 2002 and our selected consolidated balance sheet data as of December31, 1998, 1999, 2000, 2001 and 2002. The selected consolidated balance sheet data as of December 31, 2001 and2002 and income statement and cash flow data for the years endedDecember 31, 2000, 2001 and 2002 have been derived from our auditedconsolidated financial statements included in this annual report.  The selected consolidated balance sheet dataas of December 31, 1998, 1999 and 2000 and income statement and cash flow datafor the years ended December 31, 1998 and 1999 have been derived from ouraudited consolidated financial statements that are not included in this annualreport.  The financial statements forperiods prior to our restructuring and initial public offering in 2000 reflecthistorical results of operations and financial positions of the businesses thatwere transferred to us from Unicom Group in 2000 in contemplation of ourinitial public offering.

 

Our financial statements are prepared in accordancewith generally accepted accounting principles in Hong Kong, or Hong Kong GAAP,which differs in certain material respects from generally accepted accountingprinciples in the United States, or US GAAP. In accordance with Hong Kong GAAP, we adopted the purchase method toaccount for our acquisition of certain cellular businesses and assets in nineprovinces, municipalities and autonomous regions in China, which assets andbusinesses were first transferred to Unicom New Century TelecommunicationsCorporation Limited, or Unicom New Century, a newly established subsidiary ofUnicom Group.  The acquisition becameeffective on December 31, 2002, as described in “History and Development of theCompany – Restructuring and Acquisition of Unicom New Century” under Item4.  Accordingly, our consolidated incomestatements and, except as otherwise noted, all other Hong Kong GAAP financialinformation presented in this annual report do not include the operatingresults of these acquired businesses. Under the purchase method, our consolidated balance sheet as ofDecember 31, 2002 includes the financial position of Unicom NewCentury.  In contrast, under US GAAP,our acquisition would be accounted for as a transfer of entities under commoncontrol, retroactively restated for all periods presented on a combined basisas if the acquisition had been in effect since inception, whereby relatedassets and liabilities of the acquired businesses would be accounted for athistorical cost and the results of operations of the acquired businesses wouldbe included in the consolidated financial statements for earliest periodpresented.  See Note 41 to theconsolidated financial statements included in this annual report for a summaryof the principal differences between Hong Kong GAAP and US GAAP that have asignificant effect on our financial statements.

 

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|                                                                                                                             |   | **As of or for the year ended December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                             |   | **1998**                                     |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2002** |   |
|                                                                                                                             |   | **RMB**                                      |   | **RMB** |   | **RMB** |   | **RMB** |   | **RMB** |   | **US$ (1)** |   |
|                                                                                                                             |   | **(in millions, except per share numbers)**  |   |
| **Income Statement Data:**                                                                                                       |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Hong Kong GAAP:                                                                                                                  |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Revenue:                                                                                                                         |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Cellular                                                                                                                         |   | 2,126                                        |   | 5,314 |   | 12,188 |   | 20,505 |   | 30,613 |   | 3,698 |   |
| GSM                                                                                                                              |   | 2,126                                        |   | 5,314 |   | 12,188 |   | 20,505 |   | 27,388 |   | 3,308 |   |
| CDMA                                                                                                                             |   | —                                       |   | — |   | — |   | — |   | 3,225 |   | 390 |   |
| Long distance                                                                                                                    |   | —                                       |   | — |   | 556 |   | 1,489 |   | 2,766 |   | 334 |   |
| Data and Internet                                                                                                                |   | —                                       |   | 79 |   | 540 |   | 1,820 |   | 2,793 |   | 337 |   |
| Paging                                                                                                                           |   | 8,423                                        |   | 9,047 |   | 8,483 |   | 4,342 |   | 2,161 |   | 261 |   |
| Total service  revenue                                                                                                           |   | 10,549                                       |   | 14,440 |   | 21,767 |   | 28,156 |   | 38,333 |   | 4,630 |   |
| Sales of  telecommunications products                                                                                            |   | 3,480                                        |   | 3,010 |   | 1,925 |   | 1,237 |   | 2,244 |   | 271 |   |
| Total revenue                                                                                                                    |   | 14,029                                       |   | 17,450 |   | 23,692 |   | 29,393 |   | 40,577 |   | 4,901 |   |
| Operating expenses                                                                                                               |   | (12,677                                      | )      | (14,634 | ) | (18,470 | ) | (24,129 | ) | (33,253 | ) | (4,016 | ) |
| Operating income                                                                                                                 |   | 1,352                                        |   | 2,816 |   | 5,222 |   | 5,264 |   | 7,324 |   | 885 |   |
| Income before taxation and minority interests                                                                                    |   | 875                                          |   | 1,759 |   | 4,482 |   | 5,463 |   | 6,303 |   | 761 |   |
| Net income                                                                                                                       |   | 372                                          |   | 839 |   | 3,234 |   | 4,457 |   | 4,566 |   | 551 |   |
| –Basic net income per share (2)                                                                                             |   | 0.038                                        |   | 0.086 |   | 0.289 |   | 0.355 |   | 0.364 |   | 0.044 |   |
| –Number of shares outstanding for basic net income per share (in  thousands) (2)                                            |   | 9,725,000                                    |   | 9,725,000 |   | 11,208,224 |   | 12,552,996 |   | 12,552,996 |   | 12,552,996 |   |
| –Diluted net income per share (2)                                                                                           |   | —                                       |   | — |   | 0.288 |   | 0.355 |   | 0.364 |   | 0.044 |   |
| –Number of shares outstanding for diluted net income per share (in  thousands) (2)                                          |   | 9,725,000                                    |   | 9,725,000 |   | 11,219,679 |   | 12,552,996 |   | 12,552,996 |   | 12,552,996 |   |
| –Basic net income per ADS (3)                                                                                               |   | 0.383                                        |   | 0.863 |   | 2.885 |   | 3.550 |   | 3.637 |   | 0.439 |   |
| –Number ADS outstanding for basic net income per share (in thousands)  (2)                                                  |   | 972,500                                      |   | 972,500 |   | 1,120,822 |   | 1,255,300 |   | 1,255,300 |   | 1,255,300 |   |
| –Diluted net income per ADS (3)                                                                                             |   | —                                       |   | — |   | 2.882 |   | 3.550 |   | 3.637 |   | 0.439 |   |
| –Number ADS outstanding for diluted net income per share (in  thousands) (2)                                                |   | 972,500                                      |   | 972,500 |   | 1,121,968 |   | 1,255,300 |   | 1,255,300 |   | 1,255,300 |   |
|                                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| US GAAP (Restated) (4):                                                                                                          |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                                                                                                                    |   | —                                       |   | — |   | 25,082 |   | 34,850 |   | 49,773 |   | 6,011 |   |
| Operating income                                                                                                                 |   | —                                       |   | — |   | 5,330 |   | 6,591 |   | 8,740 |   | 1,056 |   |
| Income from continuing operations before extraordinary items and  cumulative effect of change in accounting policy               |   | —                                       |   | — |   | 4,031 |   | 5,074 |   | 5,189 |   | 627 |   |
| Extraordinary item (loss arising from termination of  China-China-foreign arrangements)                                          |   | —                                       |   | — |   | 2,072 |   | — |   | — |   | — |   |
| Cumulative effect of change in accounting policy (transitional  adjustment of goodwill impairment upon the adoption of SFAS 142) |   | —                                       |   | — |   | — |   | — |   | 42 |   | 5 |   |
| Net income                                                                                                                       |   | —                                       |   | — |   | 1,959 |   | 5,074 |   | 5,147 |   | 622 |   |
| –Basic net income per share after extraordinary item and cumulative  effect of change in accounting policy (2)              |   | —                                       |   | — |   | 0.17 |   | 0.40 |   | 0.41 |   | 0.050 |   |
| –Basic net income per ADS after extraordinary item and cumulative  effect of change in accounting policy (3)                |   | —                                       |   | — |   | 1.75 |   | 4.04 |   | 4.10 |   | 0.495 |   |
| –Basic net income per share before extraordinary item and cumulative  effect of change in accounting policy (2)             |   | —                                       |   | — |   | 0.36 |   | 0.40 |   | 0.41 |   | 0.050 |   |
| –Basic net income per ADS before extraordinary item and cumulative  effect of change in accounting policy (3)               |   | —                                       |   | — |   | 3.60 |   | 4.04 |   | 4.13 |   | 0.499 |   |
|                                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                                                                                          |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Hong Kong GAAP:                                                                                                                  |   |                                         |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                        |   | 4,337                                        |   | 6,002 |   | 44,717 |   | 18,413 |   | 14,433 |   | 1,743 |   |
| Property, plan and equipment, net                                                                                                |   | 19,853                                       |   | 33,227 |   | 52,864 |   | 75,748 |   | 107,487 |   | 12,982 |   |
| Total assets                                                                                                                     |   | 30,156                                       |   | 45,366 |   | 112,829 |   | 127,905 |   | 149,223 |   | 18,022 |   |
| Net assets                                                                                                                       |   | 8,924                                        |   | 11,069 |   | 58,108 |   | 62,511 |   | 66,814 |   | 8,069 |   |
| Short-term debt and current portion of other long-term debt                                                                      |   | 2,276                                        |   | 7,894 |   | 8,501 |   | 7,933 |   | 15,330 |   | 1,851 |   |
| Obligation under finance lease – current portion                                                                            |   | —                                       |   | — |   | — |   | 8,151 |   | 16,793 |   | 2,028 |   |
| Obligation under finance lease – non-current portion                                                                        |   | —                                       |   | — |   | — |   | 100,757 |   | 101,302 |   | 12,235 |   |

 

2

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| Other long-term debt                                 |   | 9,,372 |   | 12,234  |   | 27,151  |   | 36,337  |   | 37,686  |   | 4,551  |   |
|------------------------------------------------------|--------|--------|--------|---------|--------|---------|--------|---------|--------|---------|--------|--------|--------|
| Shareholders’ equity                            |   | 6,408  |   | 8,538   |   | 57,224  |   | 61,681  |   | 66,247  |   | 8,001  |   |
|                                                 |   |   |   |    |   |    |   |    |   |    |   |   |   |
| US GAAP (restated) (4):                              |   |   |   |    |   |    |   |    |   |    |   |   |   |
| Property, plant and equipment, net                   |   | — |   | —  |   | —  |   | 96,220  |   | 107,311 |   | 12,960 |   |
| Total assets                                         |   | — |   | —  |   | —  |   | 154,172 |   | 150,566 |   | 18,184 |   |
| Obligation under finance lease - current portion     |   | — |   | —  |   | —  |   | 8,151   |   | 16,793  |   | 2,028  |   |
| Obligation under finance lease - non-current portion |   | — |   | —  |   | —  |   | 100,757 |   | 101,302 |   | 12,235 |   |
| Other long-term debt                                 |   | — |   | —  |   | —  |   | 51,733  |   | 37,686  |   | 4,551  |   |
| Shareholders’ equity                            |   | — |   | —  |   | —  |   | 61,783  |   | 63,717  |   | 7,695  |   |
|                                                 |   |   |   |    |   |    |   |    |   |    |   |   |   |
| **Other Financial Data:**                            |   |   |   |    |   |    |   |    |   |    |   |   |   |
|                                                 |   |   |   |    |   |    |   |    |   |    |   |   |   |
| Hong Kong GAAP:                                      |   |   |   |    |   |    |   |    |   |    |   |   |   |
| Net cash provided by operating activities            |   | 3,454  |   | 4,511   |   | 9,344   |   | 11,078  |   | 13,054  |   | 1,577  |   |
| Net cash used in investing activities                |   | (8,402 | )      | (13,930 | )      | (30,551 | )      | (46,125 | )      | (5,166  | )      | (624   | )      |
| Net cash provided by (used in) financing activities  |   | 7,788  |   | 11,084  |   | 59, 921 |   | 8,743   |   | (11,868 | )      | (1,433 | )      |
|                                                 |   |   |   |    |   |    |   |    |   |    |   |   |   |
| US GAAP (Restated) (4):                              |   |   |   |    |   |    |   |    |   |    |   |   |   |
| Net cash provided by operating activities            |   | — |   | —  |   | 10,133  |   | 14,630  |   | 16,962  |   | 2,049  |   |
| Net cash used in investing activities                |   | — |   | —  |   | (37,884 | )      | (58,134 | )      | (7,253  | )      | (876   | )      |
| Net cash provided by (used in) financing activities  |   | — |   | —  |   | 67,090  |   | 16,989  |   | (14,584 | )      | (1,762 | )      |

 

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(1)                                  Thetranslations of RMB into US dollars have been made at the rate of RMB 8.2800****to US$1.00, the noon buying rate in NewYork City for cable transfers in RMB as certified for customs purposes by theFederal Reserve Bank of New York on December 31, 2002.  The translations are solely for the convenienceof the reader.

(2)                                  SeeNotes 15****and 41 to theconsolidated financial statements included in this annual report on how basicand diluted net income per share are calculated under Hong Kong GAAP and USGAAP, respectively.

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

(4)                                  TheUS GAAP amounts as of December 31, 2002 and 2001 and for each of the years inthe three-year period ended December 31, 2002 are presented as if theacquisition of Unicom New Century had been in existence since the beginning ofthe earliest period presented.

 

**Historical Exchange Rates Information**

 

We publish our financial statements in Renminbi, orRMB, the legal tender currency in the People’s Republic of China.  In this annual report, references to “USdollars” or “US$” are to United States dollars and references to “Hong Kongdollars”, “HK dollars” or “HK$” are to Hong Kong dollars.  Solely for the convenience of the reader,this annual report contains translations of certain RMB and Hong Kong dollaramounts into US dollar amounts and vice versa at specified rates.  These translations should not be construedas representations that the RMB or Hong Kong dollar amounts actually representsuch US dollar amounts or could be converted into US dollar amounts at therates indicated or at all.  Unlessotherwise stated, the translations of RMB and Hong Kong dollars into US dollarsand vice versa have been made at the rate of RMB 8.2800 to US$1.00 andHK$7.7988 to US$1.00, the noon buying rates in New York City for cabletransfers payable in RMB or Hong Kong dollars as certified for customs purposesby the Federal Reserve Bank of New York on December 31, 2002.

 

The noon buying rates on June 17, 2003 were RMB 8.2768 to US$1.00 and HK$ 7.7990****to US$1.00, respectively. The average noon buying rates for 1998, 1999, 2000, 2001 and 2002 wereRMB 8.2969, RMB 8.2785, RMB 8.2784, RMB 8.2772 and RMB 8.2800,respectively, to US$1.00, and HK$ 7.7465, HK$ 7.7599, HK$ 7.7936, HK$ 7.7996and HK$ 7.7988, respectively, to US$1.00, calculated as the average of the noonbuying rates on the 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:

 

3

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| **Period**    |   | **High**               |       | **Low**                |   | **High** |   | **Low** |   |
|---------------|--------|------------------------|------------|------------------------|--------|----------|--------|---------|--------|
|          |   | **(RMB per  US$1.00)** |       | **(HK$ per  US$1.00)** |   |
|          |   |                   |       |                   |   |     |   |    |   |
| December 2002 |   | 8.2800                 | ** ** | 8.2771                 |   | 7.7992   |   | 7.7980  |   |
| January 2003  |   | 8.2800                 |       | 8.2766                 |   | 7.8001   |   | 7.7988  |   |
| February 2003 |   | 8.2800                 |       | 8.2768                 |   | 7.8000   |   | 7.7989  |   |
| March 2003    |   | 8.2776                 |       | 8.2770                 |   | 7.7995   |   | 7.7987  |   |
| April 2003    |   | 8.2774                 |       | 8.2769                 |   | 7.7998   |   | 7.7991  |   |
| May 2003      |   | 8.2771                 |       | 8.2768                 |   | 7.7995   |   | 7.7985  |   |

 

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

 

Not applicable.

 

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

 

Not applicable.

 

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

 

**Risks Relating to Our Business**

 

***Our cellular businesses face intense competition from ChinaMobile Communications Corporation, or China Mobile, China TelecommunicationsCorporation, or China Telecom, and China Netcom Group, or China Netcom.  Such competition may result in slowersubscriber growth, lower tariffs and higher customer acquisition costs for us,which would adversely affect our results of operations, financial condition andgrowth prospects.***

 

Our cellular businesses face intense competition fromChina Mobile.  China Mobile is thelargest cellular operator in China and in our cellular service areas and hascompetitive advantages over us in customer base, overall network coverage andquality, financial resources, network management and technical expertise andbrand recognition.  We are experiencingintense competition from China Mobile in many of our cellular service areas,and such competition may continue and further intensify.  In particular, continued price competitionbetween China Mobile and us in many service areas has accelerated the declineof the average revenue per user per month, or ARPU, of our cellular services,and adversely affected our profitability.

 

In addition, our cellular services also compete withthe wireless local telecommunications services of China Telecom and ChinaNetcom, known as “Little Smart” services, that are based on their fixed linenetworks and primarily utilize the personal handyphone system, or PHS,technology.  They are offered asextensions of fixed line services and carry significantly lower tariffs thancellular services.  The “Little Smart”services were previously offered primarily in small- to medium-sized cities,but have been introduced in most major cities nationwide in 2003.  According to public reports, these serviceshave attracted over 10 million users in China and their subscriber base iscontinuing to grow quickly.

 

Increased competition from the cellular services ofChina Mobile and the “Little Smart” services of China Telecom and China Netcommay lead to slower subscriber growth, lower usage of our services, continuedprice pressure and higher costs of customer acquisition, which would adverselyaffect our results of operations, financial condition and growth prospects.

 

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***Our new CDMA services may fail to gain broader marketacceptance and achieve profitability in the near term.***

 

We launched our CDMA services in January 2002 andintroduced CDMA 1X wireless data services in March 2003.  Prior to the introduction of our CDMAservices, digital cellular services in China were mostly based on the globalsystem for mobile communications, or GSM, technology, which continues to be thedominant cellular technology in China. CDMA cellular services compete with GSM services for cellularsubscribers, who are generally more familiar with GSM technology and may bereluctant to switch to CDMA cellular services because of the need to obtain anew CDMA handset and phone number.  Theinitial launch of our CDMA services was significantly hindered by a lack ofhandset variety and supply and high handset prices.  As of March 31, 2003, the total number of our CDMA subscribershas reached 8.03 million in our service areas. Nevertheless, CDMA technologyand services have yet to gain broader market acceptance in China and whetherour CDMA business can achieve profitability in the near term remainsuncertain.  In addition, as Unicom Grouponly began to construct CDMA networks in 2001, the present coverage of CDMAnetworks may not be as extensive in some areas as the coverage of existing GSMnetworks, including those of our competitor, China Mobile.  CDMA services are also perceived to havelimitations in international roaming due to the lack of CDMA networks in manycountries.

 

Whether our CDMA services can gain broader marketacceptance or achieve profitability in the near term will continue to besubject to a number of uncertainties, including:

 

•                                          whethera sufficient quantity and variety of high-quality, attractive CDMA handsetswill be available at affordable prices to meet the demand of consumers,

 

•                                          whetherthe CDMA networks have sufficient coverage to provide quality servicesnecessary to attract our targeted customers,

 

•                                          whetherwe can timely and effectively develop and offer a variety of high-speedwireless data services that utilize the upgraded CDMA 1X network to attract ourtargeted customers, and

 

•                                          whetherwe can effectively promote our CDMA services and successfully execute ourstrategy of focusing on mid- to high-end cellular subscribers, while alsoserving the mass market.

 

As a result of these uncertainties, our CDMA cellularservices may not attract cellular subscribers in sufficient numbers and ofsufficient quality and the growth and profitability of such services and ouroverall business results of operation and financial condition, may be adverselyaffected.

 

***In order to accelerate the growth of our CDMA business, weoffer CDMA handset rental programs, which will increase our operating expensesand may adversely affect our profitability.***

 

In order to accelerate the development of the CDMAbusiness and subscriber growth during the product introduction period, we begancertain CDMA handset rental programs in the second half of 2002.  Under those programs, CDMA handsets wereprovided to the subscribers for their use at no additional cost to them duringthe specified contract periods as long as such subscribers agreed to incur aminimum amount of service fees during the contract period.  If such subscribers fulfill the minimumcontract spending amounts by the end of the contract period, they will not be obligedto repay the remaining costs of the CDMA handsets.  In addition, to secure contract performance, these subscriberswere required under their contracts to (1) prepay certain non-refundableamounts of service fees or deposits, (2) maintain a bank deposit in one ofseveral designated commercial banks to secure their minimum contract amounts,or (3)

 

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provide a guarantor who will compensate us for any loss in the event ofthe subscriber’s non-performance of related contractual obligations.  The cost of the handsets provided tosubscribers under these programs were deferred, to the extent recoverable, andamortized over the contract periods to match the actual or minimum contractspending amounts.  As of December 31,2002, amortization of such costs amounted to approximately RMB 1,390million and the carrying amount of such costs amounted to RMB 4,170million for our wholly-owned operating subsidiary, China Unicom CorporationLimited, or CUCL.  We have started togradually reduce the use of such programs in 2003.  These promotional programs tend to increase our operatingexpenses and require us to maintain an inventory of CDMA handsets with theassociated inventory risk.  We have alsoexperienced a small amount of bad debt from some CDMA subscribers under thoseprograms due to inadequate credit control or contract enforcement. In addition,some of those subscribers may terminate our CDMA services at the end of theircontract periods and increase our churn rate. As a result, although the use ofthese handset rental programs has accelerated the growth of our CDMA business,it may adversely affect the profitability of our CDMA business and our overallresults of operations.

 

***Our CDMA services, to some extent, may compete with andadversely affect our GSM services.***

 

Most of our current cellular service users subscribeto cellular services based on the GSM standard.  We target our new CDMA service offerings to mid- to high-endcellular subscribers, while also serving the mass market. At the same time, ourGSM cellular services have attracted mostly mid- and low-end cellularsubscribers.  To the extent we cannoteffectively coordinate the development of the two services, our CDMA cellularservices may compete with our GSM services for subscribers.  Most of our CDMA subscribers weresubscribers to the GSM cellular services of our main competitor or are newusers of cellular services, but some of our CDMA subscribers were subscribersof our GSM services.  The CDMA businessmay also compete for our management, financial, human and other resourcesotherwise allocated to our GSM cellular services.  Our inability to effectively coordinate the development of ourCDMA and GSM services or obtain adequate resources for both our GSM and CDMAcellular services may adversely affect the growth and profitability of thesebusinesses and our results of operations, financial condition and growthprospects.

 

***Our long distance, data and Internet businesses remainrelatively small, and competition from China Telecom and China Netcom mayadversely affect our growth and profitability in these businesses.***

 

The Chinese governmentseparated the fixed line incumbent China Telecom into two companies in 2002.The southern company retained the name of China Telecom and assets andbusinesses in 21 provinces in southern and western China.  The northern company retained assets andbusinesses in 10 provinces in northern China and merged with China NetcomCorporation Ltd., or CNCL, and Jitong Network Communications Company Limited,or Jitong, to form China Netcom.  ChinaTelecom and China Netcom currently hold a dominant market position in thecircuit switched long distance telephony and data services markets in China intheir respective service areas.  Theyare also the dominant providers of Internet protocol telephony, or IPtelephony, and Internet access services in China.  Together they operate the primary public switched telephonenetwork, or PSTN, in China and provide primary local telephony services throughoutChina.  They also operate the largestdata, Internet, broadband access and transmission networks in China.  China Telecom and China Netcom havecompetitive advantages over us in customer base, financial resources, networkcoverage and “last-mile” access, technical expertise andbrand recognition.  The growth of ourlong distance, data and Internet businesses has been hindered by our lack of“last-mile” access and local phone number resources.  Competition from China Telecom and China Netcom may continue toadversely affect the growth and profitability of our long distance, data andInternet businesses and consequently our overall results of operations,financial condition and growth prospects.

 

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***New entrants in the telecommunications industry in China mayfurther intensify industry competition and adversely affect our results ofoperations.***

 

The Chinese government has taken various measuressince the mid-1990s to encourage competition in the telecommunicationsindustry.  For example, it authorizedCNCL and Jitong to offer IP telephony, data and Internet services.  It also authorized China RailwaysCommunications Limited, or China Railcom, to provide a broad range of fixedline telecommunications services.  Therestructuring of the fixed-line incumbent China Telecom is another step takenby the government to increase competition in the telecommunications industryand has resulted in two strong nationwide competitors for us in fixed lineservices.  In addition, the governmentmay grant additional telecommunications service licenses in the future,including additional licenses to provide cellular services.

 

After its accession to the World Trade Organization,or WTO, in December 2001, China has promulgated the Administrative Regulationson Telecommunications Companies with Foreign Investment, implementing itscommitments to the WTO.  Thosecommitments include the gradual reduction of foreign ownership restrictions inthe telecommunications industry and the step-by-step opening of thetelecommunications market in China to foreign operators.  When the government licenses additionaltelecommunications service providers in the future, licensees may includeoperators with foreign investment. Foreign-invested operators entering intoChina’s telecommunications market may have competitive advantages over us infinancial resources, network management and technical expertise.

 

Increased competition from new entrants in China’stelecommunications services industry could impede the growth of our businesses,further increase competition for skilled and experienced employees, result inor exacerbate price competition and increase our customer acquisition costs andother operating expenses, and thereby adversely affect our results ofoperations, financial condition and growth prospects.

 

***If the Chinese government terminates or materially reducesthe preferential treatment available to us in terms of pricing flexibility andthe ability to offer a comprehensive range of telecommunications services, ourcompetitiveness may be adversely affected.***

 

We continue to enjoy some preferential treatment fromthe Chinese government that is intended to enhance our competitiveness and helpus compete with the incumbent operators. We are permitted to set our cellular service tariffs at levels of up to10% below the state tariff rates and adopt circuit switched long distancetariffs that are different from the state guidance rates upon approval by theMII.  This pricing flexibility has helpedus capture a significant number of cellular and long distance subscribers byallowing us to market our services at rates below those of our majorcompetitors.  In addition, we arepermitted to offer a comprehensive range of telecommunications services inChina, including cellular and fixed line services, which represents anothercompetitive advantage over the incumbent cellular and fixed lineoperators.  The deregulation of thetelecommunications industry in China has lessened some of those competitive advantageswe had.  For example, the introductionof various package service plans and other promotional programs by us and ourcompetitors has, to some extent, reduced our ability to offer tariffs that arelower than those offered by incumbent operators or made our price advantagesless obvious to subscribers compared to previous tariff schemes that werelargely based on simple per-minute charges. As we continue to increase our competitiveness and the Chinese governmentfurther deregulates the telecommunications industry, the Chinese government mayreduce or terminate the preferential treatment extended to us, in which eventour competitiveness may be adversely affected and our results of operations,financial condition and growth prospects may be adversely affected.

 

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***Failure or inability to continue to expand and upgrade ournetworks timely and effectively could hinder our growth.***

 

The growth of our businesses depends on whether we areable to continue to expand the coverage and capacity of our networks, upgradethe technology and improve the quality of our networks in a timely andeffective manner.  Rapid growth of ourcellular subscribers in some of our cellular service areas had in the pastresulted in our reaching or exceeding our existing network capacity, whichlimited our subscriber growth in those areas. In addition, although we have built nationwide networks for our longdistance, data and Internet services, the ability to attract corporate customersfor those services often depends on our ability to construct metropolitan areanetworks and local access networks connecting these customers and their officeswith our networks.  We also need tocontinue to improve the quality of our existing networks in order to enhancethe quality of our services.  Ourability to expand and improve our networks is subject to a number ofuncertainties, including our ability to achieve the following on a timely basisand on acceptable terms:

 

•                                          obtainadequate financing,

•                                          retainexperienced management and technical personnel,

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

•                                          enterinto interconnection and other arrangements with other operators, and

•                                          obtainadequate network equipment and software.

 

Difficulties we may encounter in expanding andupgrading our networks, if not adequately resolved on a timely basis, couldadversely affect our results of operations, financial condition and growthprospects.

 

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

 

The effective provision of our cellular, long distancetelephony and other services requires the interconnection between our networksand the networks of China Telecom, China Netcom, China Mobile and otheroperators.  In particular, we do nothave direct connectivity with the premises of most of our long distance, dataand Internet services customers and obtain access through the local networks ofChina Telecom and China Netcom.  Anydisruption of existing interconnection arrangements or any significant changeof their terms, as a result of natural events, accidents, or for regulatory,technological, competitive or other reasons, could lead to temporary servicedisruptions and increased costs that can seriously jeopardize our operationsand adversely affect our growth and profitability.  Difficulties in the execution of new interconnection arrangementson a timely basis and on acceptable terms, including the inability to promptlyestablish additional interconnection links or increase interconnectionbandwidths as required, could also adversely affect our operations, growth andprofitability.

 

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

 

Unicom Group indirectly controls an aggregate of77.47% of our issued share capital.  Asour controlling shareholder, it is able to influence our major businessdecisions through its control of our board of directors.  The interests of Unicom Group as ourcontrolling shareholder could conflict with the interests of the other holders ofour shares and ADSs.  Most of our executivedirectors and executive officers also serve as directors or executive officersof Unicom Group.  In addition, ouroperations depend on a number of services provided by Unicom Group.  It leases to us, on an exclusive basis,capacity on the CDMA network located in our cellular service areas, provides uswith access to international gateways, supplies us with SIM cards and callingcards and provides equipment procurement services to us.  In addition, Unicom

 

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Group and we provide a number of services to each other, includinginterconnection and roaming services, sales agency and collection services,leasing of transmission line capacity and provision of premises.  See “Relationship with Unicom Group” underItem 7 of this annual report.  Theinterests of Unicom Group and our interests in these transactions may differand Unicom Group may cause us to make decisions that conflict with theinterests of our other shareholders.

 

***The internal reorganization of Unicom Group in preparationfor the A Share offering has created a two-step voting mechanism that willrequire the approval of the minority shareholders of both our Company and the AShare Company for significant connected transactions between us and Unicom Group.***

 

In October 2002, Unicom Group completed an internalreorganization of its shareholding in our company and the initial publicoffering in China of the ordinary shares, or A Shares, of its newly establishedsubsidiary, China United Telecommunications Corporation Limited, or A ShareCompany.  As part of this restructuring,a portion of Unicom Group’s indirect shareholding in our company wastransferred to the A Share Company, whose business is limited to indirectlyholding the equity interest of our company without any other direct businessoperations.  A voting mechanism wasestablished to allow public shareholders of the A Share Company to indirectlyparticipate in our shareholders’ meetings and a two-step voting mechanism wasestablished for the approval of connected transactions.  See “Further Restructuring of Unicom Groupand Initial Public Offering of the A Share Company in 2002” under Item 4below.  As a result, significantconnected transactions between us or our subsidiaries and Unicom Group or itssubsidiaries will require the separate approval of the independent minorityshareholders *both* of our companyand of the A Share Company.  Connectedtransactions approved by our independent minority shareholders neverthelesscannot proceed if they are not approved by the independent minorityshareholders of the A Share Company. This adds another necessary step of approval process for thosetransactions.

 

***Unicom Group operates paging businesses that may competewith our paging businesses.***

 

Unicom Group holds a controlling interest in anationwide paging company, Unicom Paging Limited, or Unicom Paging, which isseparate from the nationwide paging business operated by our wholly ownedsubsidiary Guoxin Paging Corporation Ltd., or Guoxin Paging.  We integrated some of the management andoperations of Guoxin Paging with those of Unicom Paging in 2001 in order tofacilitate resource sharing and reduce competition between the two pagingcompanies.  Prior to such integration,Unicom Paging has been marketing its services under the marketing name ofUnicom Paging.  After the integration,Guoxin Paging and Unicom Paging jointly market their services under themarketing name of Unicom Paging and share some management and sales andmarketing personnel.  Their networks andservice offerings remain separate from each other and they otherwise remainseparate businesses.  Unicom Paging maycontinue to compete with Guoxin Paging, which may adversely affect theprofitability of our paging business.

 

***Changes in telecommunications technology and technologicalstandards may render our technologies obsolete or inadequate and require us tosubstantially increase capital investments to upgrade our networks andtechnologies.***

 

The telecommunications industry in China and elsewherein the world is subject to rapid and significant changes in technology andtechnological standards.  Such changesmay render our networks and systems obsolete or inadequate.  As a result of such changes, we may need tomake significant changes to existing networks and infrastructure or build newnetworks, which may require substantial capital expenditures.  We may need to fund such capitalexpenditures through external financing, which may not be available on acceptableterms or at all.  If we are unable to respondon a timely basis to rapid technological

 

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change, as a result of inability to obtain financing, unavailability ofnecessary equipment or technology or other difficulties, our competitiveposition, growth and profitability may be adversely affected.  In addition, we cannot assure you that ourinvestment in new technologies will generate an acceptable rate of return andwill not adversely affect our results of operations, financial position andgrowth prospects.

 

***We expect to have significant capital expenditurerequirements in the future, and our inability to fund these requirements mayadversely affect our growth and profitability.***

 

We expect to require approximately RMB 20.06****billion for capital expenditure in 2003and otherwise may have significant liquidity needs in the future.  As of December 31, 2002, the sum of ourlong-term and short-term interest bearing debt exceeded the amount of our cashand cash equivalents and short-term bank deposits by RMB 33.76billion.  See “Liquidity and CapitalResources — Capital Expenditures” under Item 5.  In the future we may be unable to obtain the necessary financingon a timely basis and on acceptable terms, and our failure to do so mayadversely affect our financial position, competitive position, growth andprofitability.  Our ability to obtainacceptable financing at any time may depend on a number of factors, including:

 

•                                          ourfinancial condition and results of operations,

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

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

•                                          ourability to obtain any required government approvals.

 

At present we rely principally on loans from bankslocated in China, and can make no assurances as to the continued availabilityof loans from such banks in the future.

 

***Actual or perceived health risks associated with the use ofmobile devices could impair our ability to retain and attract customers, reducecellular service usage or result in litigation.***

 

Concerns have been expressed in some countries thatthe electromagnetic signals emitted by wireless telephone handsets and basestations may pose health risks at exposure levels below existing guidelinelevels, and interfere with the operation of electronic equipment.  In addition, cellular operators have beensubject to lawsuits alleging various health consequences as a result ofcellular handset usage or proximity to base stations or seeking protective orremedial measures.  While we are notaware that such health risks have been substantiated, there can be no assurancethat the actual, or perceived, risks associated with the transmission ofelectromagnetic signals will not impair our ability to retain customers andattract new customers, reduce cellular service usage or result in litigation.

 

**Risks Relating to the OverallTelecommunications Industry in China**

 

***New regulations or regulatory changes relating totelecommunications tariffs and other matters may adversely affect our resultsof operations.***

 

The Chinese government currently regulates manyaspects of the telecommunications industry in China.  Deregulation of the telecommunications industry or changes inregulations and policies and uncertainties with respect to theirimplementation, including any regulatory measures relating to calling-party-paysarrangements or other tariff adjustments, universal service obligations, usagefees for numbers or frequency resources or standards of interconnectionsettlement, could significantly affect our results of operations, financialcondition and growth prospects.  Forexample, in 2001 the government deregulated the tariffs for IP telephonyservices, leading to significant tariff decline for international long distancetelephony services via IP telephony. Further, the “Little Smart” services of China Telecom and China Netcom,which were previously offered primarily in small- to medium-sized cities, havebeen

 

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introduced in most major cities nationwide.  If the Chinese government deregulates or reduces state tariffrates applicable to some of our services or modify other regulations of thetelecommunications industry in China, our results of operations and financialcondition could be adversely affected.

 

***The cellular communications sector in China may not sustainits pace of rapid growth and the paging sector may continue to decline, whichmay adversely affect the growth and profitability of our business.***

 

The telecommunications industry in China hasexperienced rapid growth in the last several years, especially in the cellularcommunications sector.  The total numberof cellular subscribers in China increased from 43.2 million at the end of 1999to 207 million by December 31, 2002, representing a compound annual growth rateof 68.6%.  Cellular penetrationincreased from 3.4% to 15.9% nationwide during the same period.  The rapid rate of growth in cellularsubscribers may slow down as cellular penetration continues to increase in ourcellular service areas.  In addition,average revenue per user per month, or ARPU, for the cellular communicationsmarket in China continued to decline. For example, ARPU of our GSM subscribers declined from RMB 86.3 in2001 to RMB 69.0 in 2002.

 

The total number of paging subscribers in China havedeclined since 2000.  We continue to bethe dominant paging service provider in China. The total number of our paging subscribers, however, decreased from 32.9million at the end of 2001 to 17.7 million at the end of 2002.  Our total paging revenue in 2002 declined by 31.9% from that in2001.

 

Any slow-down in the growth in China’s cellularcommunications sector or further decline in the paging sector may adverselyaffect the growth and profitability of our businesses.  In 2001 we recorded provision for impairmentof assets of RMB0.63 billion in our paging business.  The write-down reflects our assessment of the difference betweenthe carrying amount of our paging assets and the recoverable value of theseassets.  Even though we did not makefurther provisions for the impairment loss of our paging assets in 2002, we mayhave to make such impairment provisions again in the future, which willadversely affect our net income.  See“Critical Accounting Policies – Impairment of Assets” under Item 5.

 

**Risks Relating to the MacroeconomicCondition of the People’s Republic of China**

 

***Risks from the recent outbreak of severe acute respiratorysyndrome in various parts of mainland China, Hong Kong and elsewhere.***

 

Since early 2003, mainland China, Hong Kong andcertain other countries, largely in Asia, have been experiencing an outbreak ofa new and highly contagious form of atypical pneumonia, now known as severeacute respiratory syndrome, or SARS. This outbreak has resulted in significant disruption to the lifestylesof the affected population and business and economic activity generally in theaffected areas.  Areas in mainland Chinathat have been affected include areas where we have substantial business andmanagement operations.  Although theoutbreak is now generally under control in China, we cannot predict at thistime whether the situation may again deteriorate or the extent of its effect onour business and operations.  We cannotassure you that this outbreak, particularly if the situation worsens, will notsignificantly disrupt our staffing or otherwise generally disrupt ouroperations, result in higher operating expenses for us, severely restrict thelevel of economic activity generally, or otherwise adversely affect ourservices and usage levels of our services in affected areas, all of which mayresult in a material adverse effect on our business and prospects.

 

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***Fluctuations in the value of the Renminbi could adverselyaffect our share price and profitability.***

 

Although the exchange rate between Renminbi and USdollars has been stable, the exchange rate of the Renminbi may become volatileagainst the US dollar or other currencies in the future.  Substantially all of our revenues andoperating expenses are denominated in Renminbi, while a small portion of ourequipment purchases and other capital expenditures are denominated in foreigncurrencies.  Any devaluation of the Renminbicould adversely affect the value in foreign currency terms of cash flowgenerated from our operations or any dividends payable on our shares and ADSs,and therefore the price of our shares and ADSs.  Any future Renminbi devaluations could also increase ourequipment acquisition costs and operating expenses, thereby adversely affectingour profitability.

 

***If the Chinese government revises the current regulationsthat allow a foreign investment enterprise to pay foreign exchange in currentaccount transactions, our subsidiaries’ ability to satisfy their foreignexchange obligations and pay dividends to us in foreign currencies may berestricted.***

 

The ability of our wholly owned operatingsubsidiaries, CUCL and Unicom New Century, to satisfy their foreign exchangeobligations and to pay dividends to us depends on existing and future foreignexchange regulations in China.  TheRenminbi is currently convertible by foreign investment enterprises in China tosettle transactions under the current account, which include trade and servicerelated foreign exchange transactions and payments of dividends and interest onforeign loans.  Renminbi currentlycannot be freely converted without regulatory approval for transactions underthe capital account, which include outbound foreign investment and principalpayments on foreign loans.  CUCL andUnicom New Century, which hold substantially all of our assets and throughwhich we conduct substantially all of our business, are foreign investmententerprises in China.  This statusallows them to purchase foreign exchange at designated foreign exchange banksfor settlement of current account transactions without the approval of theState Administration for Foreign Exchange. However, the relevant Chinese government authorities may in the futureimpose limitation on the ability of foreign investment enterprises to purchaseforeign exchange to satisfy their foreign exchange obligations or to paydividends in the future.  In that event,our subsidiaries’ ability to satisfy their foreign exchange obligations and paydividends to us in foreign currencies may be restricted.

 

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

 

Our wholly owned operating subsidiaries, CUCL andUnicom New Century, are organized under the laws of China and are generallysubject to laws and regulations applicable to foreign investment enterprises inChina.  The Chinese legal system is acivil law system based on written statutes. Unlike common law systems, it is a system in which decided legal casesmay be cited for reference but have little precedential value.  Since 1979, the Chinese government haspromulgated laws and regulations dealing with economic matters such as foreigninvestment, corporate organization and governance, commerce, taxation andtrade.  However, because these laws andregulations are relatively new, and because of the limited volume of publishedcases and their non-binding nature, interpretation and enforcement of theselaws and regulations involve uncertainties. Therefore, the Chinese legal system may not afford the same legalprotection available to investors in the United States or elsewhere.

 

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**Item 4****.  Informationon the Company**

## ** **

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

 

**Industry Restructuring and Grant ofNew Licenses**

 

Since 1993, the Chinese government has implemented anumber of measures to restructure and introduce competition in thetelecommunications industry.  Prior toJune 1994, China Telecom was the sole provider of telecommunications servicesin China.  In June 1994, Unicom Groupwas established in accordance with the State Council’s approval to introducecompetition in the telecommunications industry.  Since then, the Chinese government has approved Jitong and CNCLto provide IP telephony, Internet and data services.  It has also approved China Railcom to provide mosttelecommunications services other than cellular services.

 

In 1999, the State Council approved a plan torestructure the former China Telecom along four business lines: fixed line,cellular, paging and satellite communications. As a result of the restructuring, China Telecom retained the fixed line,data and Internet businesses, while China Mobile assumed the cellular businesspreviously operated by China Telecom. In 2002, the Chinese government further separated China Telecom into twocompanies, with the southern company retaining the name of China Telecom andassets and businesses in 21 provinces in southern and western China and thenorthern company retaining assets and businesses in 10 provinces in northernChina and merging with CNCL and Jitong to form China Netcom.  As a result of the Chinese government’sefforts to introduce competition in the telecommunications industry, there iscurrently more than one service provider in most of the sectors within thetelecommunications industry.

 

**History of Unicom Group**

 

As part of its efforts to introduce orderlycompetition to the telecommunications sector in China, the State Council approvedthe establishment of Unicom Group in December 1993 and authorized it to buildand operate cellular networks and local and long distance networks.  Unicom Group first developed a nationwidecellular network using GSM technology and a nationwide long distance telephonynetwork.

 

In May 1997, the State Council granted approval toUnicom Group to provide data services. The MII licensed Unicom Group to begin to provide Internet services inJuly 1999 and IP telephony services on a trial basis in 12 cities in April 1999and on a nationwide basis in March 2000. Unicom Group also offers local telephony services in the municipalitiesof Chengdu, Chongqing and Tianjin.  Itoffers satellite transmission services through its subsidiary, China UnitedTelecommunications Satellite Communication Co. Ltd., or Unisat.

 

In July 1999, in accordance with a State Councilresolution, the MII and the Ministry of Finance approved the transfer of all ofChina Telecom’s 99.67% ownership interest in Guoxin Paging to Unicom Group.  Guoxin Paging operated nationwide andregional paging networks.  Unicom Groupalso developed a nationwide paging business through its subsidiary UnicomPaging.

 

**China****-China****-Foreign Arrangementsof Unicom Group**

 

Following its formation, Unicom Group commencedcooperation with foreign companies to develop its nationwide cellularnetwork.  A financing structure widelyknown as China-China-foreign, orCCF, arrangements, was developed and used by Unicom Group and its foreignpartners.  Under a typical CCF structure,the foreign partner first established a joint venture with a Chineseenterprise.  The joint venture thenprovided financing and technical support to a project of Unicom Group through aproject 

 

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cooperation contract.  Inreturn, the joint venture obtained the right to receive a percentage of thecash flow generated by the project for a fixed number of years.  Altogether, Unicom Group adopted this CCFstructure for more than 40 projects in a number of provinces andmunicipalities.

 

In August 1999, the MII officially announced that theCCF structure had contravened existing Chinese government policies andregulations and required that all CCF cooperation contracts be rectified andterminated.  All CCF contracts relatedto GSM cellular networks in our service areas have been terminated.

 

As part of the termination of CCF contracts by UnicomGroup, other parties to the CCF contracts received cash payments in an amountrepresenting their original funding plus an agreed amount of compensation.  In addition, we granted some of theseparties or their designees warrants to purchase our shares.  The aggregate number of shares issuable uponexercise of these warrants was approximately 313 million shares.  The exercise period for all warrantsterminated on June 22, 2001 and none was exercised prior to termination of theexercise period.

 

**The Restructuring of Unicom Group andOur Initial Public Offering in 2000**

 

We are a company limited by shares incorporated under theCompanies Ordinance of Hong Kong on February 8, 2000.  Our registered office is at 75th Floor, The Center, 99 Queen’sRoad Central, Hong Kong (telephone number: 852-2126-2018).  Our principal executive offices are locatedat No. 133A, Xidan North Street, Xicheng District, Beijing 100032, China(telephone number:  8610-6650-5588).

 

Under a reorganization agreement, dated April 21,2000, between Unicom Group and CUCL, Unicom Group transferred to CUCL all ofits assets, rights and liabilities in connection with the followingtelecommunications businesses:

 

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

 

•                                          its99.67% shareholding interest in Guoxin,

 

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

 

•                                          itsnationwide data and Internet businesses.

 

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

 

We subsequently purchased the remaining 0.33% interestin Guoxin from its minority shareholders, raising our ownership interest inGuoxin to 100%.

 

In June 2000, we successfully completed our initialpublic offering of shares, or IPO, raising approximately US$5.65 billion.  Upon completion of our IPO, our sharesbecame listed and traded on the Hong Kong Stock Exchange and ADSs representingour shares became listed and traded on the New York Stock Exchange.

 

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**Further Restructuring of Unicom Groupand Initial Public Offering of the A Share Company in 2002**

 

After our IPO, Unicom BVI, which was a wholly-ownedsubsidiary of China Unicom (Hong Kong) Group Limited, or Unicom HK, awholly-owned subsidiary of Unicom Group, directly held 77.47% of ouroutstanding shares.  In October 2002,Unicom Group completed an internal restructuring of its shareholding in ourcompany.  Unicom HK transferred thetotal issued capital of Unicom BVI held by it to Unicom Group and Unicom BVIbecame a direct wholly-owned subsidiary of Unicom Group.   Unicom Group then transferred 51% of itsequity interest in Unicom BVI to the A Share Company, a newly establishedholding company and subsidiary of Unicom Group.  The A Share Company’s business is limited to indirectly holdingthe equity interest of our company without any other direct businessoperations.

 

Following the restructuring, Unicom Group successfullycompleted the IPO of the A Shares of the A Share Company in mainland China andthe listing of the A Shares on the Shanghai Stock Exchange.  After the IPO of the A Share Company, the AShare Company transferred all of its net offering proceeds to Unicom Group inreturn for an additional 22.84% equity interest in Unicom BVI.  Unicom Group currently holds a 74.62% equityinterest in the A Share Company.  The AShare Company in turn holds 73.84% of the total equity interest in Unicom BVI,with the remaining 26.16% held directly by Unicom Group.  Unicom BVI continues to hold 77.47% of ouroutstanding shares and Unicom Group remains our ultimate controllingshareholder.  See also “Restructuringand Acquisition of Unicom New Century” below for the current shareholdingstructure of our company.

 

In accordance with the articles of association of theA Share Company and Unicom BVI, before Unicom BVI votes on a certain proposalat our shareholders’ meeting, the A Share Company must first convene its shareholders’meeting to consider the same proposal and has the right to direct Unicom BVI tovote the shares in our company indirectly held by the A Share Company throughUnicom BVI.  Unicom Group can similarlydirect the voting in respect of its direct equity interest in Unicom BVI.  This mechanism for voting is designed toallow public shareholders of the A Share Company to indirectly participate inour shareholders’ meeting.

 

The voting mechanism described above, however, willnot apply to the approval process for any connected transactions between us orour subsidiaries and Unicom Group or its subsidiaries, on which Unicom BVI willnot be permitted to vote under the Listing Rules of the Hong Kong StockExchange.  Instead, our significantconnected transactions would require the separate approvals of the publicshareholders both of our company and of the A Share Company.  According to the two-step votingarrangements 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) and the A Share Company or Unicom BVI.  This agreement would contain the following terms:

 

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

 

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

 

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The initial agreement will constitute a connectedtransaction of the A Share Company and, if certain thresholds are met, willrequire the approval of the minority shareholders of the A Share Company underthe rules of the Shanghai Stock Exchange. The further agreement would be entered into by the A Share Company orUnicom BVI and us or our subsidiaries, and would provide for the transfer ofall rights and obligations of the A Share Company or Unicom BVI under theinitial agreement to us or our subsidiaries. The further agreement will constitute a connected transaction of ourcompany and, if certain thresholds are met, will require the approval of ourminority shareholders under the listing rules of the Hong Kong StockExchange.  This two-step structure willbe used in all future connected transactions between us and Unicom Group and willeffectively require the separate approvals of the minority shareholders both ofour company and of the A Share Company for such connected transactions.

 

**Restructuring and Acquisition ofUnicom New Century**

 

On December 31, 2002, we successfully completed theacquisition from Unicom Group of Unicom New Century, which holds cellulartelecommunications businesses (including GSM assets and businesses and CDMAbusinesses) in nine provinces, autonomous regions and municipalities in China,including Jilin, Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces,Guangxi Zhuang Autonomous Region, Xinjiang Uygur Autonomous Region andChongqing municipality.  The totalpurchase price was HK$4,523,181,304 (approximately RMB4.8 billion), payable incash.  The transaction was approved inaccordance with the two-step approach outlined above.  It was completed on December 31, 2002.  The acquired businesses are held through Unicom New Century.

 

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Set forth below is our shareholding structure andprincipal operating subsidiaries after the completion of the acquisition.

 

 

**Our Relationship with Unicom Group**

 

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

 

•                                          itscellular networks in the remaining nine provinces that are outside of ourcurrent cellular service areas,

 

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

 

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•                                          thesatellite transmission networks operated through Unisat, and

 

•                                          thepaging networks operated through Unicom Paging.

 

Unicom Group holds the licenses required for ourtelecommunications businesses and we derive our rights to operate ourbusinesses from our status as a majority owned subsidiary of Unicom Group.  Under the respective reorganizationagreements entered into by CUCL and Unicom New Century with Unicom Groupreferred to above, Unicom Group undertook to hold and maintain all licensesreceived from the MII in connection with our businesses solely for our benefitduring the term of the licenses and at no cost to us.  In addition, Unicom Group undertook to take all actions necessaryto obtain and maintain for our benefit such governmental licenses or approvalsas we shall require to continue to operate our businesses.  Unicom Group also agreed not to engage inany business which competes with our businesses except for the then-existingcompeting businesses of Unicom Group and to grant us a right of first refusalin relation to any government authorization, license or permit, or otherbusiness opportunity to develop any new telecommunications technology, productor service.  Finally, Unicom Group alsogave us an undertaking not to seek an overseas listing for any of itsbusinesses or the businesses of its subsidiaries in which we are engaged or mayengage in the future, except through us.

 

In connection with the restructuring of Unicom Groupand the acquisition of Unicom New Century, we entered into a number ofagreements with Unicom Group pursuant to the two-step process described in“Further Restructuring of Unicom Group and the Initial Public Offering of AShares” above.  These includearrangements for interconnection and roaming services between thetelecommunications networks owned by us and Unicom Group and for the provisionor sharing of telecommunications and ancillary services and facilities betweenus and Unicom Group.  Unicom Group 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.  See“Related Party Transactions” under Item 7.

 

Unicom Group has constructed new nationwide cellularnetworks based on CDMA technology. The first phase of the construction wascompleted at the end of 2001.   We haveentered into lease agreements with Unicom Group to lease a portion of thenetwork capacity and started to offer CDMA cellular services on an exclusivebasis in our cellular service areas in early 2002.  In March 2003, Unicom Group substantially completed the secondphase of the CDMA network construction, which included the upgrade of thenetwork to CDMA 1X technology.  Wirelessdata services that utilize CDMA 1X technology have been introduced on a trialbasis in all major cities in our service areas.  Unicom Group operates its CDMA networks outside of our cellularservice areas.  We also have an optionto acquire the CDMA networks from Unicom Group.

 

**Capital Expenditures and Divestitures**

 

See “Liquidity and Capital Resources — CapitalExpenditures” under Item 5 for information concerning our principal capitalexpenditures for the previous three years and those planned for 2003.  We have not undertaken any significantdivestitures.

 

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

 

**General**

 

We are an integrated telecommunications operator in China, offering a wide range of telecommunications services,including cellular, international anddomestic long distance, data, Internet and paging services.

 

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Prior to the acquisition ofUnicom New Century on December 31, 2002, we offered cellular communications servicesbased on both GSM and CDMA technologies in 12 provinces inChina through our wholly-owned operating subsidiary CUCL.  Afterthe acquisition, our cellular service area encompassed a total of 21 provinces.   See“A.  History and Development of theCompany – Restructuring and Acquisition of Unicom New Century” above and“B.  Business Overview – CellularServices – Cellular Services of Unicom New Century and of the Combined Group”below under this Item 4.

 

We had a total of 38.62 million GSM cellularsubscribers in the cellular service areas of CUCL at the end of 2002, representing a 42.9% increase from 27.03 millionsubscribers at the end of 2001.  We are one of the two cellular serviceproviders in our cellular service areas. During 2002, weincreased our market share from 28.5% to32.6% in the cellular service areas of CUCL, attracting approximately 43.6% of net subscriber additions inthose service areas.  Our GSM cellularbusiness is our largest business, having contributed 69.3% of our totaloperating revenue in the year ended December 31, 2002. We began to offer CDMA services in January 2002 and had approximately4.49 million subscribers in the cellular service areas of CUCL as of December31, 2002.

 

We provide traditional circuit switched and IPtelephony international and domestic long distance, data and Internet servicesnationwide in China.  All of theseservices were launched in 2000, with the exception of our IP telephony longdistance service, which was launched in 1999. These businesses currently represent a relatively small, but growing,portion of our overall business.  Ourlong distance, data and Internet businesses contributed 13.7% of our totaloperating revenue in 2002,compared to 11.3% in 2001. Outgoing circuit switched and IP telephony long distance calls totaled 6.37 billion and 6.88 billion minutes, respectively,in 2002, compared to 2.72 billion and 3.69 billion minutes, respectively,in 2001. Our market shareincreased from approximately 7.7% in2001 to 11.6% in terms of total outgoing long distance call minutes in2002. Our incoming international long distance calls (includingincoming calls from Hong Kong, Macau and Taiwan) totaled 1.47 billion minutesin 2002.

 

Our data and Internet business expanded rapidly in 2002.  Total leased bandwidth of our data servicesincreased from 826x2 Mbps in 2001 to 1466x2 Mbps in 2002, and our Internetsubscribers reached 7.29 million.  Weare the largest paging operator in China with 17.68 million paging subscribers atthe end of 2002.

 

Our fiber optic transmission network continued to expand in 2002.  As of December 31, 2002, the total cablelength of our transmission network reached 486,000 km, including 110,000km for our backbone transmission network, representing an increase of 46% and 41%, respectively, from the end of 2001.

 

**Recent Developments**

 

As of March 31, 2003, the total number of our GSMsubscribers in all of our cellular service areas, including those of CUCL andUnicom New Century, has increased to 56.88 million, including 30.85 millionpost-paid subscribers and 26.03 million pre-paid subscribers.  As of March 31, 2003, we also had a total of8.03 million subscribers to our CDMA services. Average MOU for GSM services in the combined service areas of CUCL andUnicom New Century were 164.0 minutes for the three months ended March 31,2003.  Average MOU for CDMA services inthe combined service areas of CUCL and Unicom New Century were 348.3 minutesfor the three months ended May 31, 2003. ARPU for GSM services in the combined service areas of CUCL and UnicomNew Century was RMB 60.6 for the three months ended March 31, 2003.  ARPU for CDMA services in the combinedservice areas of CUCL and Unicom New Century was RMB 157.9 for the threemonths ended March 31, 2003.

 

For the three months ended March 31, 2003,outgoing circuit switched long distance calls totaled 15.76 billionminutes, including 15.43 billion minutes of domestic long distance calls and0.32 billion

 

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minutes of international long distance calls (including calls to HongKong, Macau and Taiwan).  Outgoing IPtelephony long distance calls totaled 23.93 billion minutes for the first threemonths of 2003, including 23.54** **billionminutes of domestic long distance calls and 0.39 billion minutes ofinternational long distance calls (including calls to Hong Kong, Macau andTaiwan).

 

As of March 31, 2003, our Internet subscribers reached8.05 million, and the total number of our paging subscribers declined to15.25****million.

 

**Cellular Services**

 

Our cellular business is our largest business, withour GSM and CDMA businesses together having contributed 78.3% of our totaloperating revenue in 2002.  Prior to the acquisition of Unicom NewCentury, we offered cellular services in Guangdong, Jiangsu, Zhejiang, Fujian,Liaoning, Shandong, Anhui, Hebei and Hubei provinces and Beijing, Shanghai andTianjin municipalities.  These cellular service areas covermost of the coastal areas in China.  They hosted approximately 64.0% of China’stotal cellular subscriber population at the end of 2002 and are economically more developed and generally moreprosperous than other areas in China.  After the acquisition of Unicom NewCentury, effective on December 31, 2002, our cellular service areas expanded toinclude Jilin, Heilongjiang, Jiangxi, Henan, Shaanxi and Sichuan provinces,Guangxi Zhuang and Xinjiang Uygur Autonomous Regions, and Chongqingmunicipality.  These areas hostedapproximately 23.3% of China’s total cellular subscriber population at the endof 2002.  See “A. History and Development of the Company – Restructuring andAcquisition of Unicom New Century” above and “B. Business Overview – CellularServices – Cellular Services of Unicom New Century and of the Combined Group”below under this Item 4.

 

We offer both GSM and CDMA cellular services.  We began to offer GSM cellular services in1995 and currently most of our existing cellular users subscribe to our GSMcellular services.  Beginning inJanuary 2002, we began to offer CDMA cellular services.  After a trial period of three months, welaunched our CDMA services in April 2002.  InMarch 2003, we introduced wireless data services that utilize CDMA 1Xtechnology on a trial basis in selected provincial capitals and majorcities.  We have positioned our CDMAservices as high quality, premium services that target mid- to high-endcellular subscribers, while also servicing mid- to low-end subscribers.  Our GSM services target mid- to low-end subscribers.  We also offer GSM international roamingservices in conjunction with 118 operators in 67 countries and regions and CDMAinternational roaming services in conjunction with seven operators in sevencountries and regions.

 

We also offer a number of other value-addedservices to our cellular subscribers, including caller identification, callwaiting, call forwarding and voice mail services.  We are also developing cellular virtual private network services,known as cellular VPN services.

 

***GSM Cellular Services***

 

We centrally plan and oversee our provincial GSM cellular businesses, which areoperated by provincial branches of our operating subsidiaries, CUCL and, after the acquisition, Unicom NewCentury.  We centrally manage thekey aspects of network construction such as network planning and design andselection of major equipment.  We alsocentrally devise the overall business strategies to be carried out by theprovincial operating branches.

 

We have significantly expanded the coverage andcapacity of our GSM networks, and enhanced the quality of our networks through optimization andimproved network management.Our GSM cellular networks reach all cities, county centers, major highways andrailways in our cellular service areas. We continue to selectively deploy GSM systems that operate in the 1800MHz frequency band in high-density population centers to supplement our GSMnetworks operating in the 900 MHz frequency band.  In

 

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addition, we continue to focus on optimizing our existing networks,increasing indoor coverage and improving network management.

 

*Post-paidServices and Pre-paid Services*

 

We offer two main categories of GSM cellularservices:  post-paid and pre-paidservices that target different consumer segments.  We began to offer pre-paid servicesin 1999.  Generally, we promote ourpre-paid services to migrant population and temporary residents as well as low-endsubscribers and target our post-paid services at long-term residents and mid-endsubscribers in our cellular service areas.

 

To subscribe for our post-paid services, a customergenerally needs to produce proof of local residency or a guarantee from a localresident and sign a service contract.  Apost-paid subscriber pays 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.

 

To subscribe for our pre-paid services, a customersimply purchases a SIM card with a pre-paid amount of service charges.  The customer can add to the pre-paid balanceby purchasing recharge cards.  A customerof pre-paid services does not need to register with us.  Pre-paid services are therefore moresuitable than post-paid services for migrant population and temporary residentsin a cellular service area.  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 and Unicom Group provide pre-paid services underthe service brand of “Ru Yi Tong”. These services are generally supported by intelligent networks built byUnicom Group and us.  The intelligentnetworks enable us to offer nationwide roaming services and monitor in realtime the account balance of pre-paid subscribers.  We also offer pre-paid servicesin some service areas that are based on the local billing systems and use localservice brands.

 

*Subscribersand Usage*

 

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

 
|                                                   |   | **CUCL only,  as of or for the  year ended December 31,** |   | **Unicom New  Century only,  as of or for the  year ended  December 31,** |   | **CUCL and  Unicom New  Century,  as of or for the  three months  ended March 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------|--------|
|                                                   |   | **2000**                                                  |   | **2001**                                                                       |   | **2002**                                                                                 |   | **2002** |   | **2003** |   |
| Number of  subscribers (in thousands)                  |   | 12,772                                                    |   | 27,033                                                                         |   | 38,623                                                                                   |   | 14,843 |   | 56,879 |   |
| Post-paid                                              |   | 10,601                                                    |   | 16,489                                                                         |   | 18,679                                                                                   |   | 11,040 |   | 30,846 |   |
| Pre-paid                                               |   | 2,171                                                     |   | 10,544                                                                         |   | 19,944                                                                                   |   | 3,802 |   | 26,033 |   |
| Estimated market  share in our service areas (1)       |   | 22.7                                                      | %      | 28.5                                                                           | %      | 32.6                                                                                     | %      | — |   | — |   |
| Average churn  rate (2)                                |   | 9.5                                                       | %      | 16.3                                                                           | %      | 14.6                                                                                     | %      | 17.9 | % | — |   |
| Average minutes  of usage per subscriber per month (3) |   | 179.5                                                     |   | 161.2                                                                          |   | 155.8                                                                                    |   | 191.4 |   | 164.0 |   |
| Average revenue  per subscriber per month (in RMB) (4) |   | 124.3                                                     |   | 86.3                                                                           |   | 69.0                                                                                     |   | 67.1 |   | 60.6 |   |

 

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

 

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(2)                    Average churnrate is the rate of subscriber disconnections from our GSM cellular network,which we have determined by dividing the sum of voluntary and involuntarydeactivations during the period by the average of the number of our GSMsubscribers during the period.

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

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

 

*SubscriberIncrease:*  Oursubscriber count continued to grow rapidly. As of December 31, 2002, the total number of subscribers in the cellularservice areas of CUCL increased to 38.62 million, including 18.68 millionpost-paid subscribers and 19.94 million pre-paid subscribers.  Our share of the cellular market in terms oftotal cellular subscribers in the cellular service areas of CUCL grew from 7.1%as of the end of 1998 to 32.6% as of December 31, 2002.  We attracted 43.6% of the net cellular****subscriber additions in those serviceareas during 2002.  We believe that thisgrowth was attributable to a number of factors, including:

 

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

•                                          continuedimprovement in the quality and coverage of our GSM networks and services,

•                                          increasedbrand awareness,

•                                          flexibleand effective marketing, sales and distribution,

•                                          competitivepricing of our services, and

•                                          improvedcustomer care and service and our continuing focus on customer service.

 

*Pre-paidSubscribers:*  The rateof increase in our pre-paid subscribers continues to exceed the rate ofincrease in our post-paid subscribers. As of December 31, 2002, we had 19.94 million pre-paidsubscribers in the cellular service areas of CUCL, representing 51.6% of ourtotal subscriber base, up from 39.0% at the end of 2001.  Pre-paid subscribers represented 81.1% of our net subscriber additionsin the cellular service areas of CUCL during 2002.

 

*MOU andARPU:*  Our totalminutes of usage, or MOU, and average revenue per subscriber per month, orARPU, were 61.85 billion minutes and RMB69.0, respectively, in 2002.  Our average MOU per subscriber per month, oraverage MOU, and ARPU continued to decline in 2002 as the cellular penetrationin our cellular service areas increased. The decline in ARPU was attributable to an increased percentage of pre-paidsubscribers who generally have lower ARPUs, the decline in MOU, and intensifiedmarket competition and regional promotional activities that led to a decline ineffective tariffs.  Our pre-paidsubscribers in general have lower MOUs and ARPUs compared to our post-paidsubscribers.  For the year endedDecember 31, 2002, the average MOU and ARPU were 92.3 minutes and RMB54.1,respectively, for our pre-paid subscribers, compared to 212.0 minutes and RMB82.2,respectively, for our post-paid subscribers.

 

*ChurnRate:*  For the yearended December 31, 2002, our churn rate decreased from 16.3% in 2001 to14.6%.  Our calculation of churn ratereflects those subscribers who switch to services of other operators and thosewhose services we disconnect as a result of account inactivity or paymentdelinquency.  It also reflected thosewho switch between our post-paid and pre-paid servicesexcept for, in the case of 2002, those we were able to identify as havingswitched to one of our other services (including our CDMA services).

 

The Chinese government eliminated connection fees in2001 and, as competition continues to intensify, our churn rate fromsubscribers voluntarily discontinuing our services may increase in thefuture.  The churn rate for our pre-paidservices is generally higher than that for our post-paid services because ofthe migrant and 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.

 

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*PaymentDelinquency:*  Webelieve payment delinquency in general is not a serious problem for post-paidservices in most of our cellular service areas, though delinquency may increasewith increased cellular penetration and addition of more lower-end users.  As of December 31, 2002, thedelinquency ratio for GSM cellular services in the cellular service areas ofCUCL, calculated as the amount of provision for doubtful debt divided byrevenue from GSM cellular services, is 2.9%, compared to 2.5% at the end of2001.  In some of our cellular serviceareas we require our post-paid subscribers to deposit service charges andmaintain a certain level of account balances with us or with commercial banksthat collect service fees for us.  Weclassify the creditworthiness of our subscribers into various levels and haveadopted other credit control measures. We also closely manage payment delinquencies through confirmation ofcustomer address and other registration information, advance notification ofinadequate deposits, close monitoring of call patterns and account balances andprompt termination of services.

 

*Tariffs*

 

Generally we charge our post-paid cellular subscribersthe following categories of tariffs: basic monthly fees, usage charges for both incoming and outgoing calls,roaming charges, long-distance call charges and charges for value-addedservices.  Pre-paidsubscribers do not pay monthly fees but pay higher per-minute usage and roamingcharges.

 

The cellular tariffs are subject to regulation byvarious government authorities, including the MII, the State Development andReform Commission and provincial price regulatory authorities.  The following table summarizes the presentstate guidance tariff rates for 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                   |   |

 

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*Source:*  MII.

 

Intense competition in some cellular service areas hasresulted in tariff discounts and service promotions offered by both us and ourmain competitor from time to time, which may lower effective tariffs.  These discounts and promotions have takenmany forms, including promotional tariff rates, free call minutes, off-peakdiscounts or discounts for high-usage subscribers and package service planswith fixed monthly fees.  See “RisksRelating to the Telecommunications Industry in China – New regulations orregulatory changes relating to telecommunications tariffs and other matters mayadversely affect our results of operations” under Item 3.

 

We have introduced a number of package service plansin several cellular service areas. Under these plans, subscribers pay a fixed monthly fee for a specifiednumber of call minutes.  The plans varyin the level of the fixed monthly fee, the number of specified call minutes andthe tariff rates for call minutes 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.

 

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In 1997, the Chinese government granted uspreferential treatment by allowing us to reduce our tariffs by up to 10% belowthe state guidance tariff rates.  In thepast, this preferential treatment has helped us capture a significant number ofcellular subscribers by allowing us to market our cellular services atdiscounted rates.  As we and ourcompetitor, China Mobile, introduced various package service plans and other promotionalprograms, the tariff structure has become more complex.  While we continue to maintain tariff levelsthat are generally lower than those of our main competitor, the more complextariff structure has, to some extent, made our price advantages less obvious tosubscribers compared to previous tariff schemes that were largely based onsimple per-minute charges.

 

***CDMA Cellular Services***

 

Our controlling shareholder, Unicom Group, currentlyhas the exclusive license to offer CDMA cellular services in China.  It has constructed CDMA networks nationwide.  It completed construction of the initialphase of its CDMA network at the end of 2001. We, including Unicom New Century, have leased capacity on the networkand operate the CDMA network in our cellular service areas.  After a trial period of three months, weformally launched our CDMA services in April 2002 that target mid- to high-endcellular subscribers.  In March 2003,Unicom Group substantially completed the second phase of the CDMA networkconstruction, which included the upgrade of the network to CDMA 1Xtechnology.  Wireless data services thatutilize CDMA 1X technology have been introduced on a trial basis in provincialcapitals and major cities.

 

*UnicomGroup’s Construction of CDMA Networks*

 

In May 2001, through its subsidiary Unicom HorizonMobile Telecommunications Co. Ltd., or Unicom Horizon, Unicom Group awardedsupply contracts to a number of foreign and domestic equipment suppliers, andbegan to build CDMA networks nationwide. The networks are expected to be expanded in phases.  The number and size of each phase willdepend upon actual and forecast CDMA subscriber growth and anticipated capacityrequirements.  In the first phase of theconstruction, which was completed by the end of 2001, the networksachieved a nationwide coverage of approximately 330 cities in China, witha total capacity of 15.81 million subscribers.  The portion of this network within the cellular service areas ofCUCL and Unicom New Century has a total capacity of approximately9.80 million subscribers and 3.74 million subscribers, respectively.

 

Through a competitive bidding process, Unicom Groupwas able to obtain highly attractive terms for its CDMA equipment supplycontracts.  The construction of thefirst phase of its CDMA networks utilized to a significant extent the existingGSM infrastructure, such as base stations, switching centers and transmissioncapacity.

 

In March 2003, Unicom Group substantially completedthe second phase of the CDMA network construction, which included the upgradeof the network to CDMA 1X technology. The second phase of the construction also added capacity for 20.03million additional subscribers, bringing the total capacity of the nationwideCDMA networks to approximately 35.84 million subscribers.  The portion of the CDMA networks within thecombined cellular service areas of CUCL and Unicom New Century has a capacityof approximately 30.22 million subscribers.  In addition, the second phase of the construction focused onimproving the depth of network coverage, by deepening coverage to the level ofalmost all of the county-level towns and cities and increasing indoor coverage.

 

*OurLease of CDMA Networks from Unicom Group*

 

Our wholly owned operating subsidiary, CUCL, enteredinto a lease agreement with Unicom Group and its subsidiary Unicom Horizon,dated November 22, 2001, which sets forth the principal terms

 

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of the network capacity leasing arrangement between us and UnicomGroup.  Our newly-acquired subsidiary,Unicom New Century, has also entered into a lease agreement with Unicom Groupand Unicom Horizon on similar terms and conditions.  We lease network capacity from Unicom Group and operate theseCDMA networks in our cellular service areas on an exclusive basis and receiveall revenue generated from the operation. We may terminate the lease arrangement upon giving at least six months’prior notice to Unicom Group.

 

The term of both leases is for an initial period ofone year, commencing in January 2002, and may be renewed for further one-yearterms at our option.  We leased networkcapacity in our cellular service areas on a quarterly basis during the firstyear and, thereafter, will lease network capacity on an annual basis, with theability to request different lease capacity for each such quarterly or annualleasing period.  We have leased capacityfor 10****million and 4 million subscribers in the cellularservice areas of CUCL and Unicom New Century, respectively, for the first half of 2003.

 

Under these leasing arrangements, we are required tomake quarterly lease payments to Unicom Group for the actual amount of networkcapacity we lease.  The lease fee ischarged on a per line basis and determined so as to enable Unicom Group to recoverits total investment in constructing the network in seven years, if the fullnetwork capacity is leased, together with a rate of return on its investment of8%.  To the extent that we have notleased or do not lease in the future the full capacity of the CDMA network inthe particular period, we do not have to compensate Unicom Group for unusedcapacities not leased by us.  Thequarterly lease fee for the first phase of the CDMA networks in the cellularservice areas of CUCL was RMB 56.4 per subscriber line leased in 2002.  The quarterly lease fee for the second phaseof the CDMA network in the combined cellular service areas of CUCL and UnicomNew Century is RMB 56.4 per subscriber line leased, subject to our finalverification of the network construction cost of Unicom Group.  Once determined, the pre-line lease fee isfixed throughout the lease period.

 

In addition to leasing network capacity, we will alsohave the option, exercisable at any time during the lease period and for anadditional year thereafter, but not later than seven years following thecommencement of the lease, to purchase the CDMA network in our cellular serviceareas.  The acquisition price will benegotiated between Unicom Group and us. It will be based on the determination of an independent asset appraiserin accordance with applicable PRC laws and regulations and take into accountthe then prevailing market conditions and other factors.  However, the purchase price will not exceedan amount which will, taking into account all lease fee payments made by us toUnicom Horizon and lease fee discounts as a result of delay of delivery, enableUnicom Horizon to recover its total network construction costs, together withan internal rate of return of 8%.  Theexercise of the purchase option will be subject to the relevant provisions ofthe listing rules of the Hong Kong Stock Exchange governing connectedtransactions, including approvals of our minority shareholders.  Also see “Related Party Transactions —Leasing of CDMA Network Capacity” under Item 7.

 

*Services*

 

The CDMA services we offer in our cellular serviceareas include basic voice, wireless data and value added services such as callforwarding and voicemail, caller identity display and SMS services.  In addition to post-paid CDMA services, wehave launched on a trial basis pre-paid CDMA services in selected areas in May2003.  We have started trial operationsof CDMA 1X networks in all of the major cities in our cellular serviceareas.  We offer CDMA 1X wireless dataservices under a uniform service brand of “U-Max.”

 

*SubscriberBase*

 

As of December 31, 2002, our total CDMA subscriberbase in the cellular service areas of CUCL reached 4.49 million.  We believe the rapid growth in our CDMAsubscriber base was primarily attributable to:

 

25

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

 

•                                          increasedbrand awareness, and

 

•                                          ourproactive promotions and marketing efforts.

 

*MOU,ARPU and Churn Rate*

 

In 2002, MOU and ARPU forour CDMA services were 5.90 billion minutes and RMB 172.3, respectively.  Average MOU for our CDMA services was 315.5minutes, 48.8% higher than the average MOU of 212.0 minutes for GSM post-paidservices, while our CDMA ARPU was 109.6% higher than the ARPU of RMB 82.2 forour post-paid GSM subscribers.

 

The churn rate for ourCDMA services was 0.96% in 2002, significantly lower than the 14.6% churn ratefor our GSM services, primarily because our CDMA services were introduced in2002 and subscribers who took advantage of our handset rental programs werestill within their contract period and required to incur certain minimumexpenditures each month.  Loss of CDMAsubscribers was primarily attributable to the termination of services bysubscribers of the Great Wall network, which was a trial CDMA network formerlyoperated by China Telecom and the Chinese army and transferred to us by thegovernment.

 

*Tariffsand Promotion*

 

The tariff rates for our CDMA services are generallythe state guidance rates for cellular services without the 10% discount we arepermitted to adopt for GSM services. However, we have adopted other promotional programs.

 

The initial launch of our CDMA services was significantlyhindered by a lack of handset variety and supply and high handset prices,partly due to inadequate commitment from CDMA handset suppliers.  In order to secure a greater commitment fromthose suppliers, we and Unicom Group purchased CDMA handsets from severalsuppliers through Unicom Guomai Communications Co., Ltd., or Guomai, a companylisted on the Shanghai Stock Exchange and our 58.88% indirectly-ownedsubsidiary.  See “Related PartyTransactions — Other Related Party Transactions” under Item 7.  In addition, to accelerate the growth in ourCDMA subscriber base, webegan offering special handset promotional packages in the second half of 2002.Under these handset promotional packages, CDMA mobile handsets were given tocertain CDMA subscribers for their use at no additional cost during specifiedcontract periods, ranging from 6 months to 2 years. In return, subscribers were required to incur aminimum amount of service fees during the contract period. If the contractualsubscribers can fulfill the minimum contract spending amounts, they will notneed to repay the remaining costs of the CDMA handsets. To secure contractperformance, these subscribers were also required to (1) prepay certainnon-refundable amounts of service fees or deposits, (2) maintain a bank depositin designated commercial banks to secure their minimum contract amounts, or (3)provide a guarantor who will compensate us for any loss in the event of thesubscribers’ non-performance of contract obligations.

 

Although the cost of handset promotional packagesremained high in the beginning of 2003, such cost declined from the amountincurred in 2002.  We plan to furtherreduce the use of handset promotional packages in the remainder of 2003 andsubstitute them with alternative promotional programs.  We also continue to expand the distributionnetwork for our CDMA services.

 

26

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See “Risk Factors — Risks Relating to Our Business —Our new CDMA services may fail to gain broader market acceptance and achieveprofitability in the near term under Item 3.

 

***Wireless Data Services***

 

We began to offer SMS services in 2000.  SMS volume has been increasing rapidly.  A total number of 6.8 billion short messageswere transmitted by GSM subscribers and 0.38 billion short messages by our CDMAsubscribers (including 0.15 billion short messages in the month of December2002 alone) in the cellular service areas of CUCL in 2002.  We continue to promote the use of SMS as aconvenient and cost effective method of business and personalcommunication.  We have interconnectedthe SMS platform of our GSM network with the SMS platforms of our CDMA networkand China Mobile’s GSM network.

 

On August 1, 2001, Unicom Group and we launched ournationwide GSM wireless data services under the service brand of“Uni-Info”.  The Uni-Info services arepresently based on a nationwide wireless information services platform.  Uni-Info offers avariety 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 number of national andregional content providers that supply our subscribers with Uni-Infoservices.  We have designed a feestructure under which we earn transmission fees from the use of our servicesand generally retain a certain percentage of application fees charged bycontent providers that we collect for them. In most cellular service areas, we charge the sender a transmission feeof RMB 0.10 for each message sent and there is no charge for receivingmessages.

 

We also leverage our position as an integratedtelecommunications provider to offer other value-added services.  We offer value-added services such as “Paging-CellularInterlink” and “Unicom Assistant” that utilize the resources of both ourcellular business and our paging business. The Paging-Cellular Interlink service allows a user to receive messagesregarding cellular calls on the pager and to receive paging messages on thecellular handset.  The Unicom Assistantservice utilizes our paging call center resources to provide varioussecretarial services.  In addition, weoffer e-mail services to our cellular subscribers that allowthem to use their cellular phone numbers as their email addresses and receivefree notifications of new email messages on their cellular phones for a fixedmonthly fee.

 

In March 2003, we launched CDMA 1X wireless dataservices on a trial basis in selected cities under the service brand of“U-Max”, which can enable much higher data transmission rates than the GPRSservices offered by our main competitor. Our CDMA 1X wireless data services include information downloads,financial services and broadband services.

 

We have tested the general packet radio service, orGPRS, technology in several cities. Unicom Group and we are also cooperating with Qualcomm to explore thepotential of upgrading our GSM networks with CDMA 1X technology rather thanGPRS technology.  We will continue toexplore and monitor the market potential of the GPRS and other wireless datatechnologies as they develop in China.

 

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

 

*UnicomNew Century*

 

Effective December 31, 2002, we acquired the GSM cellularassets and businesses and CDMA businesses of Unicom New Century from UnicomGroup.  See “History and Development ofthe Company — Restructuring and Acquisition of Unicom New Century” under thisItem 4.

 

27

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As of December 31, 2002, the total number of GSM andCDMA cellular subscribers in the nine provinces covered by Unicom New Centurywas 16.59 million, including 14.84 million GSM subscribers and 1.75 millionCDMA subscribers.  Unicom New Century’smarket share of total cellular subscribers in its service areas was 34.4% as ofDecember 31, 2002, and its average market share of net subscriber additions inthese areas was 44.0%.  The SMS volumefor GSM and CDMA services totaled 1.84 billion messages in 2002 in theseservice areas.

 

*GSM Business. *Asof December 31, 2002, there were 14.84 million GSM subscribers in Unicom NewCentury’s service areas, an increase of 55.2% from 9.563 million at the end of2001.  Out of the total GSM subscribersin these areas, post-paid subscribers accounted for 11.04 million, an increaseof 45.3% from 7.60 million at the end of 2001, and pre-paid subscribersaccounted for 3.80 million, as compared to 1.962 million in 2001. Theproportion of pre-paid subscribers increased from 20.5% at the end of 2001 to25.6% at the end of 2002. The MOU for GSM subscribers amounted to 28.32 billionminutes, an 86.1% increase from 15.22 billion minutes in 2001.

 

In 2002, averageMOU for Unicom New Century’s GSM business was 191.4 minutes, an increase of4.8% from 182.6 minutes in 2001. Post-paid average MOU was 220.0 minutes andpre-paid average MOU was 99.6 minutes. ARPU for the GSM business was RMB67.1, a decline of 15.5% from RMB79.4in 2001. Post-paid ARPU was RMB72.7, while pre-paid ARPU was RMB49.2.

 

*CDMA Business. *Asof December 31, 2002, there were 1.75 million CDMA subscribers in Unicom NewCentury’s service areas.  MOU for CDMAsubscribers amounted to 2.37 billion minutes in 2002.  Average MOU was 364.4 minutes, 65.6% higher than the 220.0minutes for post-paid GSM subscribers in these service areas.  ARPU was RMB187.9, 158.5% higher than theRMB72.7 for post-paid GSM subscribers.

 

*CombinedBusinesses of CUCL and Unicom New Century*

 

As of December 31,2002, there were 59.71 million cellular subscribers in the combined serviceareas of CUCL and Unicom New Century, of which GSM subscribers accounted for53.47 million and CDMA subscribers accounted for 6.25 million.  Our average market share of total****cellular subscribers in the combined service areas was 33.1% as ofDecember 31, 2002, and our average market share of net subscriber additions inthe combined service areas was 43.7%. The SMS volume for GSM and CDMA services in these areas totaled 9.02billion messages in 2002.

 

*GSMBusiness.*   As ofDecember 31, 2002, there were 53.47 million GSM subscribers in the combinedservice areas, an increase of 46.1% from 36.60 million at the end of 2001. Ofthe total number of GSM subscribers, post-paid subscribers accounted for 29.72million, an increase of 23.4% from 24.09 million at the end of 2001, andpre-paid subscribers rose from 12.51 million at the end of 2001 to 23.75million in 2002, representing an increase of 89.8%.  The proportion of pre-paid subscribers increased from 34.2% atthe end of 2001 to 44.4% at the end of 2002. MOU for GSM subscribers amounted to 90.16 billion minutes in 2002, anincrease of 68.4% from 53.54 billion minutes in 2001.  Average MOU in the combined service areas was 165.5 minutes andAPRU was RMB67.3 in 2002.

 

*CDMA Business. *Asof December 31, 2002, there were 6.25 million CDMA subscribers in the combinedservice areas of CUCL and Unicom New Century. MOU for CDMA subscribers amounted to 8.28 billion minutes, while averageMOU was 328.1 minutes.  ARPU for the combinedservice areas of CUCL and Unicom New Century was RMB172.2.

 

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**Long Distance, Data and InternetService***s*

 

We offer international and domestic long distanceservices in China based on both the traditional circuit switched telephonystandard and the IP telephony standard. Our long distance services are based on our advanced, uniform nationwidenetwork system.  We leverage our abilityto bundle our long distance services with a broad range of services to targetdifferent customer segments.  We havealso developed a nationwide video-conferencing network that reaches over 300cities.  We launched our data andInternet services throughout China in 2000. Similar to our long distance services, our data and Internet servicesare supported by our advanced, unified nationwide network system.

 

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

 
|                                |   | **As of or for the year ended December 31,** |   |
|-------------------------------------|--------|----------------------------------------------|--------|
|                                |   | **2000**                                     |   | **2001** |   | **2002** |   |
|                                |   | **(in  billions of minutes)**                |   |
| Circuit switched  telephony:        |   |                                         |   |   |   |   |   |
| Domestic                            |   | 0.23                                         |   | 2.64 |   | 6.23 |   |
| International                       |   | 0.01                                         |   | 0.08 |   | 0.14 |   |
| Total                               |   | 0.24                                         |   | 2.72 |   | 6.37 |   |
| IP telephony:                       |   |                                         |   |   |   |   |   |
| Domestic                            |   | 0.62                                         |   | 3.52 |   | 6.75 |   |
| International                       |   | 0.07                                         |   | 0.17 |   | 0.13 |   |
| Total                               |   | 0.69                                         |   | 3.69 |   | 6.88 |   |
| Data Services                       |   |                                         |   |   |   |   |   |
| Customer ports                      |   | 273                                          |   | 802 | ** ** | 2,876 | ** ** |
| Internet  Services                  |   |                                         |   |   |   |   |   |
| Dial-up  subscribers (in thousands) |   | 415                                          |   | 3,540 |   | 7,269 |   |
| Dedicated access  subscribers       |   | 377                                          |   | 4,555 |   | 22,596 |   |

 

***Circuit Switched Telephony Services***

 

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

 

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

 

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|                                                     |   | **As of or for the year ended on December 31,** |   |
|----------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                     |   | **2001**                                             |   | **2002** |   |
| Number of cities  reached                                |   | 304                                                  |   | 329 |   |
| Number of  customers (in million)                        |   | 4.53                                                 |   | 21.83 |   |
| Minutes of  outgoing long distance calls (in billion)    |   | 2.72                                                 |   | 6.37 |   |
| Market share of  outgoing long distance call minutes (1) |   | 4.30                                                 | %      | 11.45 | % |
| Minutes of  incoming international calls (in billion)    |   | 1.16                                                 |   | 1.31 |   |

 

----

(1)          *Source*: MII.  In calculating market share in 2001 and 2002, the total minutesof outgoing long distance calls include ours and those of the incumbentoperators.

 

Tariff rates for circuit switched long distancetelephony services of incumbent fixed line operators are set by the Chinesegovernment.  Other fixed line operators,including us, can adopt tariffs that are different from the state tariff ratesupon approval by the MII as long as they do not offer services at tariff ratesbelow cost.  Effective on February 21,2001, the government adjusted the state tariff rates of a number oftelecommunications services, including circuit switched long distance telephonyservices.  The following table setsforth the state tariff rates for circuit switched long distance telephonyservices before and after such adjustment and our present tariff rates:

** **
|                                           |   | **State Tariff Rates (RMB) (1)(2)** |   |                                      |   |
|------------------------------------------------|--------|-------------------------------------|--------|-------------------------------------------|--------|
|                                           |   | **Before  Adjustment**              |   | **After Adjustment**                      |   | **Our Tariff Rates (1)** |   |
| Circuit Switched  Domestic Long Distance:      |   |                                |   |                                      |   |   |   |
| Intra-provincial  less than 300 km             |   | 0.50 per minute                     |   | Unified flat rate of 0.07 per six seconds |   | 0.06 per six seconds |   |
| Intra-provincial  more than 300 km             |   | 0.60 per minute                     |   |                                      |   |   |   |
| Inter-provincial  less than 800 km             |   | 0.80 per minute                     |   |                                      |   |   |   |
| Inter-provincial  more than 800 km             |   | 1.00 per minute                     |   |                                      |   |   |   |
|                                           |   |                                |   |                                      |   |   |   |
| Circuit Switched  International Long Distance: |   |                                |   |                                      |   |   |   |
| To Hong Kong,  Taiwan and Macau                |   | 5.00 per minute                     |   | 0.20 per 6 seconds                        |   | 0.18 per six seconds |   |
| To all other  international destinations       |   | 5.30-15.00 per minute               |   | 0.80 per 6 seconds                        |   | 0.72 per six seconds |   |

 

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(1)          Discount rates may applyto calls made during off-peak hour, which are set by operators.  For example, we offer discount rates of RMB0.03 or 0.04 per six seconds for domestic long distance calls made duringdifferent off-peak hours.

(2)          *Source*: MII.

 

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

 

***IP Telephony Services***

 

We offer domestic and international long distance IPtelephony services based on a manageable IP network configuration to enhanceservice quality.  The following tablesets forth selected information about our IP telephony services for the periodsindicated.

 

30

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|                                                  |   | **As of or for the year ended  December 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                  |   | **2000**                                      |   | **2001** |   | **2002** |   |
| Number of cities  reached                             |   | 231                                           |   | 320 |   | 337 |   |
| Minutes of  outgoing IP telephony calls (in billion)  |   | 0.69                                          |   | 3.69 |   | 6.88 |   |
| Market share of  outgoing IP calls minutes (1)        |   | 23.2                                          | %      | 18.2 | % | 11.7 | % |
| Minutes of  incoming international calls (in billion) |   | 0.05                                          |   | 0.07 |   | 0.16 |   |

 

----

(1)*Source:*MII.

 

The government in February 2001 ceased regulatorycontrol of tariffs for IP telephony long distance calls and allowed operatorsto set their own rates.  Most providersof IP telephony services, including us, significantly lowered theirinternational long distance tariffs shortly after the tariffs werederegulated.  The following table setsforth the state guidance tariff rates for IP telephony long distance callsbefore the tariff adjustment and our present tariff rates for our IP telephonyservices using the “17910” access code.

 
|                                      |   | **State Tariff Rates (RMB)(1)  Before Adjustment** |   | **Our Tariff Rates (RMB)  After Adjustments** |   |
|-------------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------------|--------|
| IP Telephony  Domestic Long Distance      |   | 0.30 per minute                                    |   | 0.30 per minute                               |   |
| IP Telephony  International Long Distance |   |                                               |   |                                          |   |
| To Hong Kong,  Taiwan Macau               |   | 2.5 per minute                                     |   | 1.5 per minute                                |   |
| To U.S.  Canada                      |   | 4.8 per minute                                     |   | 2.6 per minute                                |   |
| To other  international destinations      |   | 4.8 per minute                                     |   | 3.6 per minute                                |   |

 

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(1)* Source:*  MII.

 

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

 

***Data Services***

 

We presently provide data services in 297 cities inChina.  We target high volume businessor government users of integrated voice, data and video communications andoffer them data services as part of our bundled offerings of long distance,data and Internet services.  As ofDecember 31, 2002, the total leased bandwidth of our data services was1466 x 2 Mbps.

 

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

 

•                                          Framerelay, or FR, services, which provide cost effective data communicationsservices linking remote business sites using FR technology, and

 

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

 

We provide data services through an advanced, unifiednationwide network system, the backbone of which is our advanced nationwidefiber optic transmission network.  Thisnetwork is the second largest

 

31

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fiber optic transmission network in China.  We have also built metropolitan area networks in many****cities throughout China.  These networks provide local transmissioncapacity for our different services. See “— Networks — Transmission Network”.

 

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

 

Our charges for FR services include up-front chargesfor installation materials and testing, a monthly port fee and a monthlycircuit fee.  Our tariff charges aregenerally offered at a 10% discount from the state guidance tariffs.  The following tables set forth state tariffrates for monthly port fees and monthly circuit fees for data services ofselected bandwidths and selected distance categories.

 
|          |   | **State Tariff Rates (RMB per month)** |   |
|---------------|--------|----------------------------------------|--------|
|          |   | **Port Fee**                           |   | **Circuit Fee** |   |
| **Bandwidth** |   |                                   |   | **Local  (intra-district)** |   | **Domestic long  distance** |   | **International long distance  (outside of Asia)** |   |
| 64kbps        |   | 260                                    |   | 550 |   | 1,700 |   | 14,600 |   |
| 256kbps       |   | 400                                    |   | 800 |   | 2,200 |   | 19,600 |   |
| 512kbps       |   | 500                                    |   | 1,000 |   | 2,500 |   | 23,100 |   |
| 2Mbps         |   | 1,000                                  |   | 1,500 |   | 4,000 |   | 39,000 |   |

 

We market our data services to institutional customersthrough our dedicated teams and our sales agents.

 

***Internet Services***

 

We offer the following Internet services:

 

•                                          DedicatedInternet Access.  We began to offerbusiness customers high speed Internet access through dedicated lines in2000.  As of December 31, 2002, we had atotal of 22,596 subscribers for dedicated Internet access.  We bundle 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 offer dial-upInternet access services to customers in 2000. As of December 31, 2002, the total number of our dial-upsubscribers increased to 7.27 million.

 

•                                          Uni-InfoServices.  Our Internet Servicesdivision manages the content of Uni-Info wireless data services and operates anationwide wireless information services platform.

 

•              Others.   Other Internet services we offer includethe “Ruyi” e-mail service that allows cellular subscribers to use theircellular phone numbers as e-mail addresses. We also provide co-location, web hosting and other Internet data center,or IDC, services.  Principal customersfor our IDC services are Internet service providers, other businesses and governmentagencies.

 

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

 
|                                                                      |   | **As of December 31,** |   |
|---------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                      |   | **2000**               |   | **2001** |   | **2002** |   |
| Number of cities  reached by our Internet access services                 |   | 220                    |   | 255 |   | 305 |   |
| Number of  subscribers of dedicated Internet access services              |   | 377                    |   | 4,555 |   | 22,596 |   |
| Number of  subscribers of dial-up Internet access services (in thousands) |   | 415                    |   | 3,540 |   | 7,269 |   |
| Market share of  Internet subscribers(1)                                  |   | 2.6%                   |   | 9.7% |   | 14.7% |   |

 

----

(1)           *Source*: MII.

 

Our tariff charges for dial-up access include anetwork usage fee that varies from RMB 1.8 to 2.7 per hour for localaccess under different service plans and a fixed telecommunications fee ofRMB 0.02 per minute.  In addition,a monthly fee may also apply depending on the service plan.  The fixed telecommunications charge is basedon the relevant tariff for the particular type and bandwidth of leased lines****used to access the Internet.  The following table summarizes the monthlynetwork usage fees for selected bandwidths denoted as “R”.

 
|                    |   | **Network usage fees (RMB per month)** |   |
|-------------------------|--------|----------------------------------------|--------|
| R<64Kbps             |   | 2,700-3,600                            |   |
| 128Kbps<R<256Kbps |   | 4,800-6,600                            |   |
| 1024Kbps<R<2Mbps  |   | 18,000-27,000                          |   |
| 20Mbps<R<34Mbps   |   | 165,900-195,200                        |   |
| 45Mbps<R<100Mbps  |   | 428,400-504,000                        |   |

 

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

 

***Leased Line Services***

 

We began to lease transmission lines to large businesscustomers and other telecommunications operators in 2000.  Our leased line services provide customerswith dedicated digital links directly connecting customer sites.  As of December 31, 2002, we had a totalleased bandwidth of an equivalent of 8472 x 2 Mbps circuits, representing a260.5% increase from 2350 x 2 Mbps circuits at the end of 2001.

 

Leased line tariffs are primarily based on the bandwidthsof the lines leased and the distance of transmission.  The following table sets forth state tariff rates for monthlyfees of selected types and bandwidths of leased lines and selected distancecategories:

 

33

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

 

----

*Source:* MII.

 

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

 

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

 

We have substantially completed the construction ofour nationwide transmission network. See “— Networks — Transmission Network”.  We have started to offer some network elements such as opticfibers or fiber channels for lease to other telecommunications operators or corporatecustomers.

 

**Paging Services**

 

We are the largest paging operator in China.  While the market for traditional pagingservices in China has experienced, and is continuing to experience, significantdeclines due to a switch to cellular services, we believe that we havecompetitive advantages over other paging operators in China in terms ofsubscriber base, brand name, network quality and coverage and our ability tooffer nationwide roaming services and value added services.

 

*Subscribersand ARPU*

 

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

 
|                                                  |   | **As of or for the year ended December 31,** |   |
|-------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                  |   | **2000**                                     |   | **2001** |   | **2002** |   |
| Paging  subscribers (in million)                      |   | 44.5                                         |   | 32.91 |   | 17.68 |   |
| Average revenue  per subscriber per month (in RMB)(1) |   | 15.3                                         |   | 9.4 |   | 7.3 |   |

 

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(1)          Average revenue persubscriber per month is calculated by dividing the sum of paging servicesrevenue during the relevant period by the average of the number of subscribersduring the period and dividing the result by the number of months in theperiod.

 

In 2002, the total number of our paging subscribersdeclined by 46.3% from 32.91 million as of December 31, 2001 to 17.68 millionas of December 31, 2002.  The declinewas mostly attributable to paging subscribers switching to cellular services or“Little Smart” services of China Telecom and China Netcom.  The churn rate of our paging servicesincreased from 57.6% in 2001 to 66.3% in 2002. In 2002,

 

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our ARPU decreased to RMB7.3 from RMB9.4 in 2001.  The main reason for this decrease was thedecline in tariffs caused by continuing intense competition in the pagingsector.

 

We have transformed our paging network into anintegrated information platform that allows us to offer bundled cellular-pagingservices.  We plan to develop additionalvalue-added services that utilize the Network and human resources of our pagingbusiness.

 

*Tariffs*

 

The Telecommunications Regulation promulgated in 2000officially ceased government tariff regulation on paging services.  Operators are now allowed to set their owntariff rates.  The tariff rates in someof our paging service areas have declined significantly over the last severalyears.

 

*Value-AddedServices that Utilize Paging Resources*

 

We offer a range of paging-basedwireless information services, including stock quotes, flight information,weather and news.  We offer servicesthat integrate our paging networks with the short messaging platform of ourcellular networks.  For example, ourintegrated paging and short messaging service, Paging-Cellular Interlink,encourages paging users who are transitioning to cellular services to continueto use our paging services and to select our cellular services over those of ourcompetitor.  Other integrated paging andcellular services include Unicom Assistant services.  We continue to leverage our paging subscriber base and offerincentives to those paging subscribers who are switching to cellular servicesto become our cellular subscribers.

 

*Integrationof the Operations of Guoxin Paging with Unicom Paging*

 

Unicom Group holds a controlling interest in anationwide paging company operating under the marketing name of “UnicomPaging”.  We operated our pagingbusiness through Guoxin Paging under the former marketing name of “UnicomGuoxin Paging”.  As of December 31,2002, Unicom Paging, the second largest paging operator in China, had 1.04million paging subscribers, while Guoxin Paging, the dominant paging operatorin China, had 17.68 million paging subscribers.  Unicom Paging has a nationwide paging network and competes withGuoxin Paging in many service areas.  Inorder to facilitate resource sharing and reduce competition between the twopaging companies, we integrated some of the management and operations of GuoxinPaging with those of Unicom Paging in 2001. After the integration, Guoxin Paging and Unicom Paging jointly markettheir services under the marketing name of Unicom Paging and share somemanagement and sales and marketing personnel. Their networks and service offerings remain separate from each other andthey otherwise remain separate businesses.

 

**Interconnection and RoamingArrangements**

 

***Interconnection***

 

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

 

Unicom Group’s cellular networks, our cellularnetworks and our long distance networks interconnect with the public switchedtelephone networks of China Telecom, China Netcom and China

 

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Railcom.  Unicom Group’scellular networks and our cellular networks also interconnect with ChinaMobile’s cellular networks.  OurInternet network interconnects with the Internet networks of China Telecom andChina Netcom.  We continue to encountersome difficulties in the execution of our interconnection arrangements with otheroperators in some service areas.

 

In March 2001, the MII issued regulations relating tosettlement between telecommunication networks. These new regulations contain provisions regarding revenue sharingmethods and settlement mechanisms for interconnection arrangements between usand other operators.  Theseinterconnection arrangements under the new regulations are described in “—Regulatory and Related Matters — Interconnection Arrangements” under Item 4.

 

Unicom Group supplementedand updated its previous interconnection arrangements with China Telecom andChina Mobile with the following agreements in 2001 and 2002.  In addition, Unicom Group entered into anagreement with China Telecom and China Netcom on April 23, 2002 that governsthe continuation and division of rights and obligations under Unicom Group’sprior interconnection agreement with the old China Telecom.

 

•                                          Frameworkinterconnection and settlement agreement between Unicom Group and ChinaTelecom, dated September 30, 2001.

 

•                                          Interconnectionand settlement agreement between Unicom Group and China Telecom relating to theinterconnection between Unicom Group’s cellular networks and China Telecom’stelecommunications networks, including its local fixed line telephony networks,domestic long distance telephony networks, international telephony networks andIP telephony network, dated September 30, 2001.

 

•                                          Interconnectionand settlement agreements between Unicom Group and China Mobile relating to theinterconnection between Unicom Group’s telecommunications networks and ChinaMobile’s telecommunications networks and Unicom Group’s GSM and CDMA networksand China Mobile’s GSM networks, both dated November 14, 2001.

 

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

 

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

 

•                                          Interconnectionagreement between Unicom Group and CNCL relating to the interconnection ofUnicom Group’s local fixed line telephony networks and CNCL’s Internet backbonenetworks, dated November 13, 2001.

 

•                                          Interconnectionand settlement agreement between Unicom Group and CNCL relating to theinterconnection of Unicom Group’s cellular networks and local fixed linetelephony networks and CNCL’s IP telephony networks, dated November 22, 2001.

 

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

 

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•                                          Interconnectionand settlement agreement between Unicom Group and China Railcom relating to theinterconnection 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.

 

•                                          Supplementalagreement between Unicom Group and China Railcom, which allows each party tooffer its long distance telephony services and IP telephony services to thecellular or local telephony service subscribers of the other party, dated April23, 2003.

 

***Roaming***

 

We have entered into roaming arrangements with UnicomGroup.  In addition, as of December 31,2002, our cellular subscribers can roam on cellular networks in Europe, NorthAmerica and other Asian countries and regions through Unicom Group’sinternational roaming agreements with 118 GSM operators in 67 countriesand regions and seven CDMA operators in seven countries and regions.  Unicom Group has agreed to arrange for us toparticipate in its future international roaming arrangements.

 

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

 

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

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

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

 

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

 

**Networks**

 

We operate an advanced network system to support ourintegrated operations.  The backbone ofthe system is a nationwide fiber optic transmission network, which serves asthe common platform for our cellular, long distance, data, Internet and pagingnetworks.  In addition, we continue todevelop management and network support systems to enhance the quality andreliability of our networks and improve our customer service and operating efficiency.  We utilize a relatively centralized network

 

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planning and equipment selection process, which ensures uniformnationwide design and network compatibility.

 

***Transmission Network***

 

We operate an advanced nationwide fiber optictransmission network.  As of December31, 2002, our fiber optic transmission network reached 330 cities with a totalcable length of 486,000 km, of which long-distancefiber optic transmission network accounted for 110,000 km.

 

Our fiber optic transmissionnetwork is designed for broadband capacity with superior security andreliability, which deploys:

 

•                                          bi-directionalsynchronous digital hierarchy, or SDH, architecture with two- or four-fiberring, a self-healingsystem that allows for instantaneous rerouting and minimizes down time in theevent of a fiber cut; and

 

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

 

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

 

Concurrent with the construction and expansion of ourdomestic backbone transmission network, we also seek to expand ourinternational bandwidth.  In 2000, weparticipated in a trans-pacific submarine cable project known as the AsiaPacific Cable Network No. 2 Project (APCN 2). We have obtained 30x155 Mbps capacity by the end of 2002.  This network connects major countries andregions in eastern Asia and southeastern Asia, and can be linked to NorthAmerica through Japan.

 

We are also building metropolitan area networks inmany cities throughout China.  Thesenetworks provide local transmission capacity that supports our differentservices.

 

***Cellular Networks***

 

A cellular network consists of:

 

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

 

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

 

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

 

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

 

We own most of the GSM cellular transmission networkat the local and provincial level.  Welease a portion of our inter-provincial transmission capacity for our cellularnetworks as well as the CDMA

 

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cellular transmission network. We also use our own backbone fiber optic transmission network to providetransmission capacity for our cellular networks.  We continue to focus on the management and operation of ourcellular networks.

 

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

 
|                                                       |   | **As of December 31,** |   |
|------------------------------------------------------------|--------|------------------------|--------|
|                                                       |   | **2000**               |   | **2001** |   | **2002** |   |
| Network  subscriber capacity (in thousands of subscribers) |   | 19,184                 |   | 37,464 |   | 42,675 |   |
| Base stations                                              |   | 14,346                 |   | 27,877 |   | 31,221 |   |
| Base station  controllers                                  |   | 532                    |   | 800 |   | 838 |   |
| Mobile switching  centers                                  |   | 180                    |   | 259 |   | 279 |   |

 

Currently our GSM cellular network mainly operates at900 MHz.  We have deployed GSMtechnology that operates at 1800 MHz in some major metropolitan areas tosupplement the capacity of our existing cellular network.  We have the right to use 6 x 2 MHz ofspectrum in the 900 MHz frequency band and 10 x 2 MHz in the 1800 MHz frequencyband for our GSM network.  In 2002, wecontinued to optimize our GSM cellular network and improve indoor coverage.

 

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

 

*CDMACellular Networks. *UnicomGroup completed the construction of the first phase of its nationwide CDMAnetwork at the end of 2001.  We haveleased a portion of the capacity of its network in our cellular service areasand have the exclusive right to operate its network in those areas.  The CDMA networks share some of theinfrastructures of the existing GSM network, such as base stations, mobileswitching centers and transmission capacity. The first phase of the CDMA network has a total capacity of 9.80 millionsubscribers in the service areas of CUCL and 3.74 million subscribers in theservice areas of Unicom New Century. The second phase of construction was substantially completed by March2003 with an additional capacity of 20.03 million subscribers nationwide.  We have the right to use 10x2 MHz ofspectrum in the 800 MHz frequency band for our CDMA services.  In March 2003, Unicom Group substantiallycompleted the second phase of the CDMA network construction, which included theupgrade of the network to CDMA 1X technology. The CDMA networks constructed in the second phase did not share as muchinfrastructure with the GSM network. Wireless data services that utilize CDMA 1X technology were introducedon a trial basis in major cities in our cellular service areas in March 2003.

 

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

 

We significantly expanded the coverage of our longdistance, data and Internet networks in 2001. By the end of 2002, our circuit switched long distance network reached329 cities, while the coverage of our Internet networks, including our IP telephonynetworks, expanded to 337 cities throughout China.

 

*LongDistance Network.*  Ourcircuit switched long distance network is based on a flat architecture withonly three layers.  It also uses thelatest switching technology.  Our longdistance network is supported by a nationwide billing system and an intelligentnetwork.  Our cellular subscribers canaccess these services directly through our cellular networks, but our othercustomers typically access our long distance 

 

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telephony, IP telephony and Internet services through the publicswitched telephone networks of China Telecom and China Netcom.

 

*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 alsoprioritize applications that least tolerate time delay, such as telephony andvideo, over less time-sensitive applications such as e-mails and file transfer.

 

*InternetNetwork.*  Our Internetnetwork, called Uninet, is also centrally designed and has a nationwide uniformarchitecture.  It is supported by anationwide, advanced billing system that facilitates roaming access anddelivery of virtual ISP services and other value added services.

 

*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 citiesthroughout China.  We focus theconstruction of our access networks on linking major office buildings to ourmetropolitan area transmission networks. We have linked over 26,000****major office buildings throughout China toour networks as of December 31, 2002. We rely mainly on fiber optic cables to link office buildings to ournetworks and have received permission to offer narrow-band wireless access atthe 3.5 GHz frequency band in several cities on a trial basis.

 

***Paging Networks***

 

Our paging network system is comprised of a nationalpaging network, provincial paging networks and local paging networks.  Most of our subscribers belong to provincialor local networks.  We own most of thetransmission lines used for our paging network and lease some transmissionlines.  We have been allocated sevenfrequency points by the MII for our national network and various spectrum usagerights for our provincial and local networks, all in the 150 MHz and 280 MHzfrequency bands.

 

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

 

We have developed various management and networksupport systems to support our various networks.  Our customer service, billing and settlement systems areintegrated into a single system.  Inaddition, we are developing an integrated information and management system,which includes office automation system, professional management system and enterpriseresource planning systems.

 

**Marketing,Sales and Distribution**

 

We centrally plan our nationwide marketing and salesstrategies, but the implementation of these strategies is carried out at theprovincial level by operating branches tailored to their specific markets.

 

***Marketing***

 

We focus on developing a superior brand image for ourcompany that conveys our strengths in high quality services, nationwidecoverage, integrated offerings, advanced technology and customer focus.  We market all of our services under theChina Unicom brand name.  Our servicecenters are designed to showcase our company and promote our products andservices to our customers.

 

*GSMservices:*  We tailorour GSM service to different GSM market segments with our post-paid andpre-paid services.  We continue tooptimize our networks, improve service quality and introduce new 

 

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value added services to attract post-paid subscribers and, at the sametime, address the lower-end market with pre-paid services.

 

*CDMAservices:*  We promoteour CDMA services as high quality, “green” and premium services and targetthese services at mid- to high-end cellular subscribers.  We focus on promoting the advantages of CDMAtechnology, including better voice quality, better security, lower handsetradio transmitting power and, in the case of CDMA 1X services, high datatransmission rates.  We seek toimplement innovative marketing strategies in order to accelerate the growth ofour CDMA services.  We also market thisnew service as part of our effort to build our overall brand image.

 

*Longdistance, data and Internet services:*  For high usage customers, such as financialinstitutions, large corporations and government entities and other Internetservice providers, we focus on providing them with integrated andcost-effective solutions that bundle circuit switched long distance, data anddedicated Internet access services.  Forresidential customers, we focus on distributing calling cards for our circuitswitched and IP telephony services and our Internet dial-up services.

 

*PagingServices:*  We focus onthe profitability of our paging business and intend to further promotepaging-based information, cellular-paging bundled services and othervalue-added services.  We promote ourinformation services by tailoring them to the requirements of specific customersegments.

 

***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 bundled solutions and priority services to these institutionalcustomers.  For individual customers, weconduct our sales through our own service centers and the retail outlets ofindependent sales agents.

 

*DistributionNetwork:* We havedeveloped a nationwide distribution network of tens of thousands of servicecenters and retail outlets, of which only a small portion are owned by us andthe others are owned by independent agents or distributors.  These service centers and retail outletsdistribute our cellular, long distance, data, Internet and paging services.  We rely on a multi-level distribution systemin many service areas, in which our top-level distributors further distributeto lower level distributors and sales agents. We have also established direct sales teams at various levels to conductone-on-one sales to targeted customers. In addition, we have established cooperative relationships with banks,insurance companies and other institutions with extensive information onpotential customers to market and distribute our services.  We have also bundled our services with theproducts of handset vendors in order to encourage the vendors to sell ourservices in their retail stores.

 

*StrategicCooperation with China Post:* Our controlling shareholder, Unicom Group, entered into a strategiccooperation agreement with China Post in February 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.

 

*ServiceBundling and Cross-Marketing:*  A key element of our sales and distribution strategy is topromote our strengths as a provider of a broad range of integratedservices.  This strategy is implementedby our service centers and independent sales agents, which distribute andsupport our various product 

 

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offerings.  For example, theycross-sell our long distance services to our cellular subscribers and ourintegrated paging and SMS services to our cellular and paging customers.

 

**CustomerService**

 

We have adopted a variety of measures to tailor ourcustomer services to the requirements of different customer segments andcontinue to improve the satisfaction level of our customers.  We established and continue to improvecustomer service networks, standardized the items and procedures of ourservices, and adopted uniform service standards.  In addition, we continue to improve management of customerservice operations and strengthen the training of customer servicerepresentatives.

 

Our customer care and service centers in each servicearea can be accessed by our customers by dialing a nationwide hotline number“1001”.  The hotline provides one-stopservice for all of our service offerings, including service inquiry, billinginquiry, payment and recharge, customer complaint, service initiation andtermination, as well as payment reminder services.  We provide priority services to institutional customers andhigh-usage individual customers, such as designated customer representatives,delivery services and periodic visits. We are committed to providing prompt responses to customer inquiries andrequire customer service representatives who first received customer inquiriesto follow through internally until satisfactory responses are provided to theinquiring customers.

 

**Billingand Collection**

 

We are able to leverage on our strengths as anintegrated service provider to offer integrated billing and collectionservices.  For example, we provide ourbusiness customers a single bill covering multiple services for ease ofpayment.  We also integrate the billingsystems for different services and distribute unified recharge cards that canbe used to recharge various pre-paid services, including pre-paid cellularservices, long distance telephony services and Internet dial-up services.

 

*CellularServices:*  Generally,we require individual GSM and CDMA subscribers to settle their accounts on amonthly basis.  Many of our post-paidcellular subscribers pre-deposit their service charges with us or commercialbanks or China Post that collect payment for us.  We offer a certain level of credit to these subscribers in someservice areas.  Subscribers may pay inperson at our service centers, retail outlets of our sales agents, branches ofChina Post, or by direct debit at some commercial banks.  We generally disable a post-paid subscriberfrom making outgoing calls if the account is more than 30 days overdue and terminatethe account if it is overdue for more than three months after that.  Payment delinquency generally does not occurfor our pre-paid services.

 

*LongDistance, Data and Internet Services:*  We adopt different payment methods fordifferent customer segments.  Weregister business customers and some residential customers, establish creditlimits for them and require them to settle their account balances on a monthlybasis.  We have established a nationalsettlement center and three regional billing centers for our long distanceservices.  We also distribute pre-paidcards for circuit switched long distance services, IP telephony services andInternet services.

 

*PagingServices:*  Wegenerally require our paging subscribers to pre-pay the monthly fees for atleast one month.  We generally suspend asubscriber’s service if the subscriber does not renew the service upon theexpiration of the prepaid period and terminate the account if it is overdue formore than three months.

 

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**Researchand Development**

 

We have established a new product development centerin 2001, which focuses on developing new services and supporting our variousbusiness segments.  Main projects of theproduct development center in 2002 include those relating to:

 

•                                          ournationwide CDMA intelligent network, including technologies that would enablenationwide CDMA VPN services,

 

•                                          CDMA1X technology and wireless data services, and

 

•                                          other1X-related technologies, including the use of 1X technology to upgrade GSMnetworks.

 

**Competition**

 

***Cellular Competition***

 

Our main competitor in the cellular communicationsbusiness is China Mobile.  China Mobilecontinues to have competitive advantages over us in brand name, market share,financial resources and network management experiences.  To compete against China Mobile, we continueto optimize our GSM networks, enhance network quality, develop value-addedservices and improve customer service, and leverage our pricingflexibility.  We also seek to leverageour position as a fully integrated telecommunications operator and bundle ourcellular services with other services, provide convenience to customers andfully utilize the resources of our Internet business in the development andmanagement of our wireless data services. In addition, we target our CDMA services at mid- to high-end cellularsubscribers and leverage the advantages of CDMA technology to increase servicequality and improve brand image.

 

Our cellular services also compete with the wirelesslocal communications services of China Telecom and China Netcom, known as“Little Smart”, which are based on their fixed line networks and primarilyutilize PHS technology.  These serviceswere previously offered primarily in small- to medium-sized cities, but havebeen introduced in most major cities nationwide.  The “Little Smart” services reportedly have attracted over 10million subscribers in China and compete with us mostly in the lower end of thecellular market.  Although many cellularusers use “Little Smart” services as a supplement, rather than an alternative,to their existing cellular services, the availability of “Little Smart”services has reduced the overall usage volume of our cellular services.  The main advantage of “Little Smart”services is their lower tariff rates. However, they generally have limited network coverage and roamingcapability.

 

Since the launch of our CDMA cellular services in2002, we have pursued a policy of coordinated development of our GSM and CDMAcellular businesses.  While our GSMcellular business focuses on the mass-market, our CDMA services primarilytargets mid- and high-end customers while serving low-end users at the sametime.  Accordingly, usage fees andpackage service plans for our CDMA cellular services are generally higher thanthose for our GSM cellular services.  In2002, a majority of CDMA new subscriber additions are either users migratingfrom the GSM services of our competitor or first-time cellular users,reflecting the differentiated customer segmentation of our two cellularservices.

 

***Long Distance Telephony Competition***

 

The Chinese government restructured the fixed lineincumbent China Telecom in 2002. Pursuant to the restructuring, the telecommunications assets of theformer China Telecom in 10 northern provinces in 

 

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China were split off in May 2002 and merged with CNCL and Jitong toform China Netcom.  China Telecomretained the telecommunications assets in the remaining 21 provinces and thebrand name of “China Telecom.”  Currently,both China Netcom and China Telecom provide fixed line telecommunicationsservices.  In addition, China Railcom isalso licensed to provide circuit switched long distance services in China andlaunched its long distance services in China in 2001.

 

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

 

We started to provide circuit switched long distancetelephony services in 2000 and reached a market share of 11.5% in terms oftotal outgoing long distance call minutes in 2002.  Since our network has been constructed recently and is equippedwith the latest technology and advanced features, it enables us to offer avariety of high-quality services.  Ourlong distance telephony services are also supported by a centralized billing system.  Our services are hindered by our lack offixed line telephone number resources.

 

Our IP telephony services currently face intensecompetition from China Telecom, China Mobile and China Netcom.  Currently, China Telecom and China Netcomare the market leaders in their respective service areas.  The MII deregulated the tariffs of thismarket in 2001 and international long distance telephony rates fellsignificantly afterwards.

 

***Data and Internet Competition***

 

China Telecom and China Netcom are our majorcompetitors in the data services business in their respective serviceareas.  While there are many retailInternet service providers in China, China Telecom and China Netcom haveleading positions in the Internet access market and are the largest wholesaleInternet service providers in their respective serviced areas.  However, the separation of the fixed lineincumbent China Telecom into China Telecom and China Netcom in 2002 has servedto enhance our competitive advantage. Our data and Internet networks have nationwide access, which offers convenienceand flexibility to our institutional customers, whereas the respective networksof China Telecom and China Netcom only extend to their respective serviceareas.  We recently obtained theapproval to operate and franchise a nationwide chain of Internet cafes.

 

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

 

***Paging Competition***

 

Competition in the paging industry in China isextremely intense, resulting in significant price decreases over the lastseveral years.  We are the dominantpaging operator in China.  The rest ofthe paging services market in China is comprised of hundreds of paging serviceproviders, each with a small individual market share.  In addition, cellular communications services increasinglycompete with, and substitute, paging services. We believe that we have a competitive advantage over our competitors inthe paging 

 

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industry because we have a dominant market position, an advanced pagingnetwork, the broadest coverage in China, a well recognized brand name andcomprehensive customer services coverage. We continue to optimize our paging networks and improve service qualityand efficiency.  We are also activelypursuing new customers through bundling paging services with our otherservices, such as Paging-Cellular Interlink, Unicom Assistant and other callcenter services.  See “B.  Business Overview – Cellular Services – GSMCellular Services – Wireless Data and Other Value-Added Services” under thisItem 4.

 

**Trademarks**

 

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

 

**Regulatory and Related Matters**

 

The telecommunications industry in China is subject toa high degree of government regulation. The primary regulatory authority of the Chinese telecommunicationsindustry is the MII, which since March 1998 has assumed responsibility for thetelecommunications regulatory functions previously performed by the former MPTand the State Radio Regulatory Commission. The State Council, the State Development and Reform Commission (theformer State Development Planning Commission), the Ministry of Commerce(formerly, the Ministry of Foreign Trade and Economic Cooperation) and othergovernmental authorities also maintain regulatory responsibilities over certainaspects of the Chinese telecommunications industry.

 

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

 

•                                          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 a TelecommunicationsAdministration Bureau in each province, which is mainly responsible forenforcement of telecommunications policies and regulations in that province.

 

The MII is in the process of drafting a telecommunicationslaw that, once adopted by the National People’s Congress, will become the basictelecommunications statute and provide the principal legal framework fortelecommunications regulations in China. It is currently uncertain when the law will be adopted and becomeeffective.

 

45

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*TelecommunicationsRegulations*

 

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

 

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

 

*Entryinto the Industry*

 

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

 

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

 

•                                          Forfixed line services:

 

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

 

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

 

46

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(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 an additional 14 cities; foreign ownership shallbe no more than 35%;

 

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

 

(4)                                  Withinfive years after accession: there will be no geographic restriction.

 

The MII has promulgated Measures on the Administrationof Telecommunication Business Licenses, which took effect on January 1,2002.  Those rules apply to theapplication for, examination and approval of, telecommunications businesslicenses in China.

 

*Spectrumand Network Number Resources*

 

The MII allocates all telecommunications-relatedfrequencies, including those used in cellular, paging and microwave operations.  The 800 MHZ, 900 MHZ and 1,800 MHZ frequencybands have been reserved for mobile cellular applications and parts of the 150MHZ and 280 MHZ frequency bands have been reserved for paging applications.  The frequency assigned to a licensee may notbe leased or transferred without obtaining the approval of the MII.

 

The relevant government authorities notified us of anincrease in spectrum usage fees in May 2002. Prior to the increase,  spectrumusage fees for GSM networks were charged at the rate of RMB1 million perMHz of frequency (upward and downward frequencies are aggregately charged asone MHz of frequency) while CDMA networks were not subject to the payment ofany spectrum usage fees.  From July 1,2002, the standard spectrum usage fees for GSM networks and CDMA networks willbe charged 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 usagefees between Unicom Group and us based on the number of subscribers remainsunchanged.

 

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

 

47

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*TariffSetting and Price Controls*

 

The levels and categories of our current tariffs aresubject to regulation by various government authorities, including the MII, theState Development and Reform Commission (the former State Development andPlanning Commission), and, at the local level, the relevant provincialTelecommunications Administration Bureaus and price regulatory authorities.  Under the Telecommunications Regulations,telecommunications tariffs are categorized into state-fixed tariffs,state-guidance tariffs and market-based tariffs.  For example, there are state-guidance tariffs for cellularservices, fixed line telephony services and leased lines services that are setjointly by the MII and the State Development and Reform Commission.  Tariffs for telecommunications serviceswhere adequate competition has already developed may be set by the serviceproviders as market-based tariffs.  In1997, the Chinese government granted us preferential treatment by allowing usto vary our cellular tariffs by up to 10% from the state-guidance rates.

 

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

 

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

 

*InterconnectionArrangements*

 

In 1999, the MII issued provisional regulations oninterconnection and settlement arrangements. These regulations contain specific provisions regarding, among otherthings, revenue sharing methods and settlement mechanisms and interconnectionagreements among telecommunications service providers.  The Telecommunication Regulations reaffirmedthe obligations of dominant telecommunications operators in China to provideinterconnection with other operators.

 

The MII adjusted the interconnection revenue sharingand settlement arrangements, effective retroactively from March 21, 2001.  We have entered into interconnection andsettlement agreements with China Telecom, China Netcom, China Mobile and ChinaRailcom that implemented the regulatory requirements.

 

The following table sets forth our interconnectionrevenue sharing and settlement arrangements with fixed line operators and ChinaMobile for local calls before and after the regulatory adjustment in 2001.

** **
| **Network from  which calls originated**             |   | **Network at  which calls terminated**               |   | **Old Settlement  Arrangement**                                                                                                              |   | **New Settlement Arrangement**                                                                                                                         |
|------------------------------------------------------|--------|------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                 |   |                                                 |   |                                                                                                                                         |   |                                                                                                                                                   |
| Unicom’s cellular network                       |   | Fixed line operators’ public fixed line network |   | (1)  Unicom  collects the cellular usage charge from its subscribers  (2)  Unicom pays RMB0.05 per minute to  fixed line operators |   | (1)  Unicom  collects the local cellular usage charge from its subscribers  (2)  Unicom pays RMB0.006 per 6  seconds to fixed line operators |
|                                                 |   |                                                 |   |                                                                                                                                         |   |                                                                                                                                                   |
| Fixed line operators’ public fixed line network |   | Unicom’s cellular network                       |   | No revenue sharing or settlement                                                                                                             |   | No revenue sharing or settlement                                                                                                                       |

 

48

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| **Network from  which calls originated** |   | **Network at  which calls terminated** |   | **Old Settlement  Arrangement**  |   | **New Settlement Arrangement**   |
|------------------------------------------|--------|----------------------------------------|--------|----------------------------------|--------|----------------------------------|
|                                     |   |                                   |   |                             |   |                             |
| Unicom’s cellular network           |   | China Mobile’s cellular network   |   | No revenue sharing or settlement |   | No revenue sharing or settlement |
|                                     |   |                                   |   |                             |   |                             |
| China Mobile’s cellular network     |   | Unicom’s cellular network         |   | No revenue sharing or settlement |   | No revenue sharing or settlement |

 

 

The following table sets forth our interconnectionrevenue sharing and settlement arrangement with fixed line operators and ChinaMobile for domestic long distance calls before and after the regulatoryadjustment in 2001.

 
| **Network from  which calls originated**                        |   | **Network at  which calls terminated**                                                                                            |   | **Old Settlement  Arrangement**                                                                                                                                                                                                                                                                 |   | **New Settlement Arrangement**                                                                                                                                                                                                                                                                                |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                          |
| 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 from its subscribers  (2)  Unicom keeps RMB0.14 per minute  and pays the rest to fixed line operators                                                                                                                         |   | (1)  Unicom  collects the domestic long distance tariff and local cal tariff from its  subscribers  (2)  Unicom keeps RMB0.006 per 6  seconds and pays the rest of the domestic long distance tariff to fixed line  operators                                                                       |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                          |
| Fixed line operators’  public fixed line network at area A |   | Unicom’s cellular network  at area B (through Unicom’s transmission line)                                               |   | (1)  Fixed line operators collect the domestic  long distance tariff  (2) Fixed line operators keep RMB0.14 per minute from their subscribers  and pay the rest to Unicom                                                                                                             |   | (1)  Fixed line operators collect the domestic  long distance tariff from their subscribers.(2)  Fixed line operators keep RMB0.006 per 6 seconds and pay the  rest to Unicom                                                                                                                       |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                          |
| Fixed line operators’  public fixed line network at area A |   | Fixed line operators’  public fixed line network at area B, if through the long distance network of  Unicom                  |   | (1)  Fixed line operators on the originating  end collect the domestic long distance tariff from their subscribers(2)  Fixed line operators keep RMB0.14 per minute and pay the rest  to Unicom(3)   No settlement between Unicom and fixed line operators on the receiving  end |   | (1)  Fixed line operators on the originating  end collect the domestic long distance tariff from their subscribers(2)  Fixed line operators keep RMB0.006 per 6 seconds and pay the  rest to Unicom(3)   Unicom then pays RMB0.006 per 6 seconds to fixed line operators on the  receiving end |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                          |
| Unicom’s cellular network  at area A                       |   | China Mobile’s cellular  network at area B (through China Mobile’s transmission line)                                   |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers(2)  Unicom keeps RMB0.14 per minute and pays the rest to China  Mobile                                                                                                             |   | (1)  Unicom collects the domestic long distance  tariff and local call tariff from its subscribers(2)  Unicom keeps RMB0.006 per 6 seconds and pays the rest of the  domestic long distance tariff to China Mobile                                                                                  |
|                                                            |   |                                                                                                                              |   |                                                                                                                                                                                                                                                                                            |   |                                                                                                                                                                                                                                                                                                          |
| China Mobile’s cellular  network at area A                 |   | Unicom’s cellular network  at area B (through Unicom’s transmission line)                                               |   | (1)  China Mobile collects the domestic long  distance tariff and local call tariff from its subscribers(2)  China Mobile keeps RMB0.14 per minute and pays the rest to  Unicom                                                                                                       |   | (1)  China Mobile collects the domestic long  distance tariff and local call tariff from its subscribers(2)  China Mobile keeps RMB0.006 per 6 seconds and pays the rest of  the domestic long distance tariff to Unicom                                                                            |

 

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The following table sets forth our interconnectionrevenue sharing and settlement arrangement with fixed line operators forinternational long distance calls through their international gateways beforeand after the regulatory adjustment in 2001.

 
| **Type of calls**                                  |   | **Old Settlement Arrangements**                                                                                                                                                                                                                     |   | **New Settlement Arrangements**                                                                                                                                                                                                                                                                                                          |
|----------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                               |   |                                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                     |
| Outgoing calls from Unicom’s cellular network |   | (1)  Unicom  collects the international long distance tariff and local call tariff from its  subscribers  (2)  Unicom keeps RMB0.20 per minute  and pays over the rest of the international long distance tariff to fixed  line operators |   | (1) Unicom collects the international long distance  tariff and local call  tariff from its subscribers  (2) Unicom keeps RMB0.006 or RMB0.054 per 6 seconds (depending on whether  through Unicom’s domestic long distance transmission line) and pays the rest  of the international long distance tariff to fixed line operators |
|                                               |   |                                                                                                                                                                                                                                                |   |                                                                                                                                                                                                                                                                                                                                     |
| Incoming calls to Unicom’s cellular network   |   | (1)  Unicom  receives RMB0.63 or RMB0.07 per minute from fixed line operators (depending  on whether through Unicom’s domestic long distance transmission line)                                                                           |   | (1)  Unicom  receives RMB0.054 or RMB0.006 per 6 seconds from fixed line operators  (depending on whether through Unicom’s domestic long distance transmission  line)                                                                                                                                                          |

 

The following table sets forth our interconnectionrevenue sharing and settlement arrangements with fixed line operators for IPtelephony long distance calls through our network before and after theregulating adjustment in 2001.

 
| **Network from which  calls originated**                             |   | **Network at which calls  terminated**                                                                          |   | **Old Settlement  Arrangement**  |   | **New Settlement  Arrangement**                                                                                                                                                                                                                                                  |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                 |   |                                                                                                            |   |                             |   |                                                                                                                                                                                                                                                                             |
| Unicom’s cellular network at area A                             |   | Fixed line operators’ public fixed line network at  area B (if through Unicom’s IP telephony network) |   | No revenue sharing or settlement |   | (1)  Unicom  collects the IP telephony long distance charges and local call tariff from its  subscribers  (2)  Unicom pays RMB0.006 per  6 seconds to fixed line operators on the receiving end                                                                   |
|                                                                 |   |                                                                                                            |   |                             |   |                                                                                                                                                                                                                                                                             |
| Fixed line operators’ public fixed line network at  area A |   | Fixed line operators’ public fixed line network at  area B (if through Unicom’s IP telephony network) |   | No revenue sharing or settlement |   | (1)  Unicom  collects the IP telephony long distance charges from its subscribers  (2)  Unicom pays RMB0.006 per  6 seconds to fixed line operators on the receiving end  (3)  No settlement between Unicom and  fixed line operators on the originating end |

 

*TechnicalStandards*

 

The MII sets industry technical standards for theChinese telecommunications industry. Most of the standards set by the MII conform to the standardsrecommended by the International Telecommunications Union and otherinternational telecommunications standards organizations.  In cases where the MII has not set certainindustry technical standards, we set our own enterprise technical 

 

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standards.  The MII alsorequires all network operators in China to purchase only telecommunicationsequipment certified by the MII, including cellular and paging equipment, radioequipment and interconnection terminal equipment.

 

*UniversalServices*

 

Under the Telecommunications Regulations,telecommunications service providers in China are required to fulfill universalservice obligations in accordance with relevant regulations to be promulgatedby the Chinese government, and the MII has been authorized to delineate thescope of its universal service obligations. The MII may also select universal service providers through a tenderingprocess.  The MII, together with thefinance and pricing authorities, is also responsible for formulatingadministrative rules relating to the establishment of a universal service fundand compensation schemes for universal services.  These rules have not yet been promulgated and there are currentlyno specific regulatory requirements relating to the provision of universalservices in China.

 

*CapitalInvestment*

 

To ensure the orderly development oftelecommunications infrastructure and services in China, the State Council hasauthorized the MII to approve any plan to establish a nationwidetelecommunications network or a network involving a total capital investment ofRMB50 million to RMB200 million.  TheState Council has also authorized the State Development and Reform Commissionand the State Economic and Trade Commission to exercise responsibility over theapproval of specific aspects of such investment projects.  Approval from the State Council is requiredfor any investment project with a total capital investment in excess of RMB200million.   Unicom Group is authorized toapprove any project with a total investment of less than RMB 50 million, whichis equivalent to the approval level delegated to provincial government andministry authorities.

 

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

 

We are incorporated in Hong Kong and are 77.47%indirectly owned by the Unicom Group and 22.53% owned by public shareholders asof the date of this annual report.  Setforth below are details of our significant subsidiaries:

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

 

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

**          Held through ourwholly-owned subsidiary CUCL.

 

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

 

Our principal executive offices are located inBeijing.  We also maintain executiveoffices in Hong Kong.  We own and leasea large number of offices, retail outlets, equipment rooms and base stationsthroughout China.  For some of thoseproperties we own, we have not obtained land use rights certificates or 

 

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building ownership certificates. In some cases, we have not entered into formal lease agreements with thelessors or the lessors do not possess requisite title certificates.  We believe that it is unlikely that we wouldbe denied our right to use a large number of these properties at any giventime.  Our controlling shareholder,Unicom Group, has agreed to indemnify us against any loss or damages incurredby us that are caused by or arising from any challenge of, or interferencewith, our right to use these properties.

 

**Item5.  Operating and Financial Review andProspects**

## ** **

You should read the following discussion and analysistogether with the selected financial data set forth in Item 3 and theconsolidated financial statements included in this annual report.  The financial statements have been preparedin accordance with Hong Kong GAAP, which differs in a number of materialrespects from US GAAP.  Note 41****to the consolidated financial statementssummarizes the significant differences between Hong Kong GAAP and US GAAP asthey relate to our financial statements and provides a reconciliation to USGAAP of our net income and shareholders’ equity.

 

Under Hong Kong GAAP, we have adopted the purchasemethod to account for our acquisition of Unicom New Century, which becameeffective on December 31, 2002 under the acquisition agreement.  Under the purchase method, the results ofoperations and financial condition of the acquired entity are included in theconsolidated financial statements of the acquiring entity from the date of theacquisition.  Since the effective date of theacquisition was December 31, 2002, our consolidated financial statementsincluded in this annual report do not include the results of operations ofUnicom New Century.  Ourconsolidated balance sheet as of December 31, 2002 includes the financialposition of Unicom New Century, with the difference between the cost of theacquisition and the fair value of the identifiable assets and liabilitiesacquired being recognized as goodwill, which is amortized on a straight linebasis over its beneficial life of 20 years.

 

Under US GAAP, the acquisition has been accounted foras a transfer of businesses under common control.  Under this method the acquired assets and liabilities have beenaccounted for at their historical cost under US GAAP and the consolidatedfinancial statements for all periods presented have been retroactively restatedas if the acquired entity had always been part of the acquirer.  This method is reflected in the significant differences between Hong KongGAAP and US GAAP provided in Note 41 to our consolidated financialstatements.

 

***Overview***

 

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

 

•                                          GSMcellular service in seventeen provinces and four municipalities (nine provincesand three municipalities prior to the acquisition of Unicom New Century);

 

•                                          CDMAcellular service in seventeen provinces and four municipalities (nine provincesand three municipalities prior to the acquisition of Unicom New Century);

 

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

 

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

 

•                                          Pagingservices nationwide in China.

 

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The table below sets forth operating revenue from ourmajor businesses and the respective percentage of our total operating revenuein 2000, 2001 and 2002.

 
|                                    |   | **For the year ended December 31,** |   |
|-----------------------------------------|--------|-------------------------------------|--------|
|                                    |   | **2000**                            |   | **2001** |   | **2002** |   |
|                                    |   | **RMB in millions**                 |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   |
| Total revenue                           |   | 23,692                              |   | 100.0% |   | 29,393 |   | 100.0% |   | 40,577 |   | 100.0% |   |
| Total service  revenue                  |   | 21,767                              |   | 91.9% |   | 28,156 |   | 95.8% |   | 38,333 |   | 94.5% |   |
| GSM                                     |   | 12,188                              |   | 51.5% |   | 20,505 |   | 69.8% |   | 27,388 |   | 67.5% |   |
| CDMA                                    |   | —                              |   | — |   | — |   | — |   | 3,225 |   | 8.0% |   |
| Long distance  revenue                  |   | 556                                 |   | 2.3% |   | 1,489 |   | 5.1% |   | 2,766 |   | 6.8% |   |
| Data and  Internet revenue              |   | 540                                 |   | 2.3% |   | 1,820 |   | 6.2% |   | 2,793 |   | 6.9% |   |
| Paging                                  |   | 8,483                               |   | 35.8% |   | 4,342 |   | 14.7% |   | 2,161 |   | 5.3% |   |
| Sales from  telecommunications products |   | 1,925                               |   | 8.1% |   | 1,237 |   | 4.2% |   | 2,244 |   | 5.5% |   |

 

Our service revenue comes primarily from thefollowing:

 

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

 

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

 

•                                          Connectionfees are one time activation fees charged to our GSM cellular and pagingsubscribers prior to July, 2001 (no longer charged since then).  We recognize connection fee revenue uponactivation of service under Hong Kong GAAP.

 

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

 

•                                          Leasedline rental revenue from leases of transmission lines on our networks to UnicomGroup, business customers and other telecommunications carriers in thePRC.  We recognize leased line rentalrevenue on a straight-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 prepaid 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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We receive revenue from sales of telecommunicationsproducts, including handsets and accessories, SIM cards for our GSM service,UIM cards for our CDMA service and pagers. We recognize revenues from sales of telecommunications products uponpassage of title to the buyer.  Ourrevenue from sales of telecommunications products in 2002 include sales of RMB488 million of CDMA handsets by our indirect, non-wholly owned subsidiary,Guomai, to Unicom Group.  We believethat the selling price to Unicom Group reflects fair market value and is notlower than the price for sales by Guomai to independent third parties.  See Note 33 to our consolidated financialstatements.  Since Guomai is asubsidiary of Guoxin Paging, these revenues are recognized in our pagingsegment.

 

Along with the rapid growth of China’stelecommunications industry, particularly in the cellular communicationssector, our total operating revenue increased at an annual compound rate of30.9% between 2000and 2002.  This increase was primarily the result ofthe continued growth in revenue of our cellular business, including the growth of our CDMA service since its introduction in2002, as well as the strong growth of our long distance, data andInternet services.  Our paging revenuehas declined over this periodas China’s paging market has declined.  We believe that the growth of ourcellular businesses and our long distance, data and Internet businesses haveresulted in developments in our revenue structure that reflect our strategy oftargeting high growth, high margin areas of China’s telecommunications industry.  Service revenue from our cellular businessesas a percentage of total operating revenue increased from 51.5%****in2000 to****75.5%****in2002.  Service revenue from longdistance, data and Internet businesses increased to 13.7% of operating revenuein 2002, from 4.6% of our total operating revenuein 2000.  At the same time, service revenue from ourpaging business as a percentage of total operating revenue decreased from 35.8%in 2000 to 5.3% in 2002. We aim to further leverage our position as an integrated telecommunicationsoperator in order to continue to drive the growth of our GSM and CDMA cellular businesses and long distance, data and Internet businesses.

 

The following table sets forth our major operatingexpense items and operating income,****bothin terms of amount and as a percentage of total operating revenue in 2000,2001and 2002.

 
|                                        |   | **For the year ended December 31,** |   |
|---------------------------------------------|--------|-------------------------------------|--------|
|                                        |   | **2000**                            |   | **2001** |   | **2002** |   |
|                                        |   | **RMB in  millions**                |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   | **RMB in  millions** |   | **% of Total  Operating  Revenue** |   |
|                                        |   |                                |   |   |   |   |   |   |   |   |   |   |   |
| Total Operating  Revenue                    |   | 23,692                              |   | 100.0% |   | 29,393 |   | 100.0% |   | 40,577 |   | 100.0% |   |
| Total Operating  Expenses                   |   | 18,470                              |   | 78.0% |   | 24,129 |   | 82.1% |   | 33,253 |   | 82.0% |   |
| Leased line and  network capacities         |   | 1,158                               |   | 4.9% |   | 853 |   | 2.9% |   | 1,583 |   | 3.9% |   |
| Interconnection  charges                    |   | 1,380                               |   | 5.8% |   | 2,073 |   | 7.1% |   | 3,230 |   | 8.0% |   |
| Depreciation and  amortization              |   | 5,734                               |   | 24.2% |   | 8,262 |   | 28.1% |   | 11,256 |   | 27.7% |   |
| Personnel                                   |   | 1,770                               |   | 7.5% |   | 2,487 |   | 8.5% |   | 3,335 |   | 8.2% |   |
| Selling and  marketing                      |   | 2,492                               |   | 10.5% |   | 3,613 |   | 12.2% |   | 5,981 |   | 14.8% |   |
| General,  administrative and other expenses |   | 3,743                               |   | 15.8% |   | 5,499 |   | 18.7% |   | 5,632 |   | 13.9% |   |
| Cost of  telecommunications products sold   |   | 2,193                               |   | 9.3% |   | 1,342 |   | 4.6% |   | 2,236 |   | 5.5% |   |
| Operating income                            |   | 5,222                               |   | 22.0% |   | 5,264 |   | 17.9% |   | 7,324 |   | 18.0% |   |

 

Our major operating expenses include the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

•                                          Costsof telecommunications products sold.

 

As a percentage of total operating revenue, totaloperating expenses stayed approximately the same, at 82.0% in 2002 as comparedwith 82.1% in 2001. ** **We continue to aim to strengthenmanagement, integrate our businesses and control costs to achieve greateroverall efficiency.

 

For the first three monthsof 2003, our total unaudited revenue was RMB 15.98****billion, including RMB 10.02****billion from GSMcellular services, RMB 3.41 billionfrom CDMA cellular services, RMB 0.50 billion from long distance services, RMB 0.81 billion from dataand Internet services, RMB 0.37 billion from paging services and RMB 0.87 billion from sale oftelecommunications products.

 

***Acquisition of Unicom New Century***

 

On December 31, 2002, we acquired Unicom New Century for cash,which held the GSM cellular assets and businesses and CDMA cellular businessesin eight provinces and one municipality of Unicom Group.  The acquisition further expands our cellularbusinesses in terms of the size of the cellular markets we serve, the number ofour cellular subscribers and the usage of our cellular services.  Under the purchase method of accounting forthis transaction, in accordance with Hong Kong GAAP, our consolidated financialstatements incorporate the results of operations of Unicom New Century onlyfrom the date of the acquisition.  Sincethe effective date of the acquisition was December 31, 2002, our consolidatedfinancial statements included in this annual report do not include the resultsof operations of Unicom New Century, but do include the financial position ofUnicom New Century as of December 31, 2002. We expect the acquisition to have a material impact on our overallresults of operations going forward.

 

Under US GAAP, the acquisition is accounted for as a transfer ofbusinesses under common control.  Underthis method, the acquired assets and liabilities are accounted for at theirhistorical cost under US GAAP and the consolidated financial statements preparedunder US GAAP for all periods presented are retroactively restated as if theacquired entity had always been part of the acquirer since inception.

 

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The following are certain summary consolidated results ofoperational information for the years ended December 31, 2000, 2001 and 2002and financial position information as of December 31, 2001 and 2002 for us andUnicom New Century, as separate entities and on a combined basis after theacquisition, prepared under US GAAP. The financial information prepared under US GAAP reflectretroactive restatement for the acquisition and reconciliation for otherdifferences from Hong Kong GAAP to US GAAP.

 
|                                            |   | **Unicom****(before  acquisition of  Unicom New  Century)** |       | **Unicom New  Century** |       | **Elimination**  |       | **Unicom  (after  acquisition of  Unicom New  Century)** |       |
|-------------------------------------------------|--------|-------------------------------------------------------------|------------|-------------------------|------------|------------------|------------|----------------------------------------------------------|------------|
|                                            |   | **RMB’000**                                            |       | **RMB’000**        |       | **RMB’000** |       | **RMB’000**                                         |       |
|                                            |   |                                                        | ** ** |                    | ** ** |             | ** ** |                                                     | ** ** |
| **For/as  of the year ended December 31, 2002** |   |                                                        | ** ** |                    | ** ** |             | ** ** |                                                     | ** ** |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Results of  operations:                         |   |                                                        |       |                    |       |             |       |                                                     |       |
| Operating revenue                               |   | 40,243,016                                                  |       | 11,560,705              |       | (2,031,068       | )          | 49,772,653                                               |       |
| Net income                                      |   | 4,499,286                                                   |       | 651,326                 |       | (3,318           | )          | 5,147,294                                                |       |
| Basic earnings  per share (RMB)                 |   | 0.36                                                        |       | —                  |       | —           |       | 0.41                                                     |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Financial  position:                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Non-current  assets                             |   | 93,000,469                                                  |       | 26,152,900              |       | —           |       | 119,153,369                                              |       |
| Current assets                                  |   | 27,418,354                                                  |       | 4,819,732               |       | (825,599         | )          | 31,412,487                                               |       |
| Total assets                                    |   | 120,418,823                                                 |       | 30,972,632              |       | (825,599         | )          | 150,565,856                                              |       |
| Non-current  liabilities                        |   | 25,448,161                                                  |       | 16,224,990              |       | —           |       | 41,673,151                                               |       |
| Current  liabilities                            |   | 33,434,846                                                  |       | 11,996,877              |       | (822,281         | )          | 44,609,442                                               |       |
| Total  liabilities                              |   | 58,883,007                                                  |       | 28,221,867              |       | (822,281         | )          | 86,282,593                                               |       |
| Minority  interests                             |   | 566,257                                                     |       | —                  |       | —           |       | 566,257                                                  |       |
| Net assets                                      |   | 60,969,559                                                  |       | 2,750,765               |       | (3,318           | )          | 63,717,006                                               |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| **For/as  of the year ended December 31, 2001** |   |                                                        |       |                    |       |             |       |                                                     |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Results of  operations:                         |   |                                                        |       |                    |       |             |       |                                                     |       |
| Operating  revenue                              |   | 28,847,088                                                  |       | 6,755,481               |       | (752,780         | )          | 34,849,789                                               |       |
| Net income                                      |   | 4,722,432                                                   |       | 351,889                 |       | —           |       | 5,074,321                                                |       |
| Basic earnings  per share (RMB)                 |   | 0.38                                                        |       | —                  |       | —           |       | 0.40                                                     |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Financial  position:                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Non-current  assets                             |   | 80,297,612                                                  |       | 21,671,682              |       | —           |       | 101,969,294                                              |       |
| Current assets                                  |   | 49,957,870                                                  |       | 2,938,724               |       | (694,274         | )          | 52,202,320                                               |       |
| Total assets                                    |   | 130,255,482                                                 |       | 24,610,406              |       | (694,274         | )          | 154,171,614                                              |       |
| Non-current  liabilities                        |   | 39,257,465                                                  |       | 16,017,811              |       | —           |       | 55,275,276                                               |       |
| Current  liabilities                            |   | 28,916,871                                                  |       | 8,061,039               |       | (694,274         | )          | 36,283,636                                               |       |
| Total  liabilities                              |   | 68,174,336                                                  |       | 24,078,850              |       | (694,274         | )          | 91,558,912                                               |       |
| Minority  interests                             |   | 829,405                                                     |       | —                  |       | —           |       | 829,405                                                  |       |
| Net assets                                      |   | 61,251,741                                                  |       | 531,556                 |       | —           |       | 61,783,297                                               |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| **For  the year ended December 31, 2000**       |   |                                                        |       |                    |       |             |       |                                                     |       |
|                                            |   |                                                        |       |                    |       |             |       |                                                     |       |
| Results of  operations:                         |   |                                                        |       |                    |       |             |       |                                                     |       |
| Operating  revenue                              |   | 22,776,156                                                  |       | 2,831,151               |       | (525,161         | )          | 25,082,146                                               |       |
| Net income                                      |   | 2,181,329                                                   |       | (222,817                | )          | —           |       | 1,958,512                                                |       |
| Basic earnings  per share (RMB)                 |   | 0.19                                                        |       | —                  |       | —           |       | 0.17                                                     |       |

 

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***Critical Accounting Policies***

 

The preparation of our financial statements and thisannual report requires us to make estimates and assumptions that affect thereported and disclosed amounts of assets and liabilities, including contingentassets and liabilities, as at the relevant dates and revenue and expenses forthe relevant periods.  We haveidentified the accounting policies and estimates below as critical to ourbusiness operations and an understanding of our results of operations andfinancial position.  The impact and anyassociated risks related to these policies on our business operations arediscussed throughout this Item 5 where such policies affect our reported andexpected financial results.  For adiscussion of the application of these and other accounting policies, see Notes3 and 41 to our consolidated financial statements included in this annual report.  There can be no assurance that actualresults will not differ from those estimates and assumptions.

 

**Deferralof CDMA Customer Acquisition Costs**

 

We have been operating the CDMA business since thebeginning of 2002.  In order toaccelerate the development of the CDMA business and subscriber growth, we haveoffered certain promotional packages since the second half of that year.  As part of the contractual arrangements withcertain CDMA contractual subscribers under these special promotional packages,CDMA mobile phone handsets were provided to the subscribers for their use at noadditional cost to them during the specified contract periods, which range from6 months to 2 years.  In return, thesubscribers are required to incur a minimum amount of service fees during thecontract period.  If the contractualsubscribers can fulfill the minimum contract spending amounts by the end of thecontract period, they will not be obliged to repay the remaining costs of theCDMA handsets given for their use.  In addition,to secure contract performance, these subscribers are required under theircontracts to (1) prepay certain non-refundable amounts of service fees ordeposits, (2) maintain a bank deposit in one of several designated commercialbanks to secure their minimum contract amounts, or (3) provide a guarantor whowill compensate us for any loss in the event of the subscriber’snon-performance of related contractual obligations.

 

We consider the costs of the handsets provided tosubscribers under these promotional packages as part of the deferred customeracquisition costs for the development of these new CDMA contractualsubscribers.  Such customer acquisitioncosts are deferred, to the extent recoverable, and amortized over the contractperiods to match the actual or minimum contract spending amounts, whichever arehigher.  The details of the amortizationcharges (recorded under “selling and marketing” expenses) for 2002 and carryingamounts of such deferred customer acquisition costs as at year-end under differenttypes of promotional packages for CUCL are set out below (expressed in millions ofRenminbi):

 
|                                                                                                                 |   | **Promotion Packages**                |   |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                 |   | **Service fee  received in  advance** |   | **Deposit  received** |   | **Bank  deposit********(Restricted)** |   | **Bank  deposit********(Non-  Restricted)** |   | **Guarantee****d****by  government** |   | **Guarantee****d****by****corporations** |   | **Guarantee****d****by****individuals** |   | **Total** |   |
| Amortization of deferred customer acquisition costs of CDMA  contractual subscribers in 2002                         |   | 490                                   |   | 50 |   | 40 |   | 20 |   | 30 |   | 420 |   | 340 |   | 1,390 |   |
| Balances of unamortized deferred customer acquisition costs of  CDMA contractual subscribers as at December 31, 2002 |   | 1,870                                 |   | 90 |   | 130 |   | 90 |   | 150 |   | 1,320 |   | 520 |   | 4,170 |   |

 

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Note:  As atDecember 31, 2002, there were approximately RMB1,985 million of service feereceived in advance, RMB102 million of deposit received and RMB443 million ofrestricted bank deposits for purposes of ensuring subscriber usage commitmentsand recovery of handset costs.

 

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In addition, in connection with the preparation and reconciliationof our financial statements in accordance with US GAAP, the results ofoperation for Unicom New Century have been reflected in the consolidatedfinancial statements under US GAAP for all periods presented as if theacquisition took place since inception. Detailsof deferred customer acquisitions costs, by different promotion packageslaunched by Unicom New Century (expressed in millions of Renminbi):

** **
|                                                                                                                 |   | **Promotion Packages**                |   |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                 |   | **Service fee  received in  advance** |   | **Deposit  received** |   | **Bank  deposit********(Restricted)** |   | **Bank  deposit********(Non-  Restricted)** |   | **Guarantee****d****by  government** |   | **Guarantee****d****by****corporations** |   | **Guarantee****d****by****individuals** |   | **Total** |   |
| Amortization of deferred customer acquisition costs of CDMA  contractual subscribers in 2002                         |   | 210                                   |   | 50 |   | 80 |   | — |   | — |   | 90 |   | 310 |   | 740 |   |
| Balances of unamortized deferred customer acquisition costs of  CDMA contractual subscribers as at December 31, 2002 |   | 670                                   |   | 70 |   | 370 |   | — |   | — |   | 580 |   | 130 |   | 1,820 |   |

 

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Note:  As atDecember 31, 2002, there were approximately RMB640 million of service feereceived in advance, RMB48 million of deposits received and RMB621 million ofrestricted bank deposit for purposes of ensuring subscriber usage commitmentsand recovery of handset costs.

 

We determined our accounting policy of deferringcustomer acquisition costs of certain CDMA contractual subscribers after acareful evaluation of relevant specific facts and circumstances, and believethat the capitalization of such costs appropriately matches the futurecontractual revenues due to (1) the high ARPUs and low churn, default or baddebt rates of these subscribers in 2002; (2) our established procedures and therelative low cost of enforcement of contracts in default; and (3) the existenceof specified contract periods with minimum contract spending amounts andbuilt-in contractual safeguarding measures such as non-refundable prepayments,bank deposits, and guarantees received, as well as penalty clauses imposed onsubscribers.

 

Therefore, we believe that the deferred handset costsare recoverable from future revenue to be derived from these promotionalpackages, and the capitalization and amortization of these customer acquisitioncosts of certain CDMA contractual subscribers to match with future revenue isan appropriate accounting policy. Furthermore, we continuously assess and evaluate the recoverability ofthese deferred costs, based on the historical subscriber churn rate and theestimated default rate. Based on our current assessment and evaluation, webelieve that no significant recoverability problem existed on the carryingamounts of deferred customer acquisition costs as at December 31, 2002.

 

We have made the above recoverability assessmentsusing estimates and assumptions based on the current legal and operatingenvironment, in terms of the subscribers’ contract performance and otherinformation currently available to us. Actual results may differ significantly from our current estimates andassumptions.  If the situation changessignificantly in the future, we may need to write down certain non-recoverabledeferred customer acquisition costs of certain CDMA contractual subscribersbased on conditions at that time.

 

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**Lease of CDMA Network Capacity**

 

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

 

In addition, on December 31, 2002, we acquired all theequity interests of Unicom New Century, which operates GSM and CDMA cellularbusinesses in eight provinces and one municipality in the PRC. Unicom NewCentury has also entered into a CDMA lease agreement with Unicom Group andUnicom Horizon on similar terms and conditions.  This lease also became effective on January 8, 2002.  This lease agreement and our existing leaseagreement will be referred to as the CDMA Lease Agreements.

 

According to the terms of the CDMA Lease Agreements,the initial lease period is for one year, renewable for additional one-yearterms at our own option.  In January2003, we renewed the CDMA Lease Agreements for an additional one-year term.

 

We are required to assess the appropriate leaseclassification related to these CDMA network assets at the inception of thelease term in order to ascertain the proper accounting for each reportingperiod. Factors and related implications we have considered include whether wehave the risks and rewards of ownership of these assets.  We have considered whether the existence ofthe purchase option and the annual renewal options, combined with the relatedeconomic penalties, have caused us to take on risks and rewards similar tothose that an owner of these assets would bear.

 

Unicom Horizon has the legal ownership of the CDMAnetwork, is directly responsible for the planning, financing and constructionof the CDMA network, and directly enters into all contracts with suppliers andconstructors.  We believe we only bearthe operational risks of our CDMA business during the relevant leasing periodsand are free from any ownership risks of the CDMA network.  According to the terms of the CDMA LeaseAgreements, our initial lease period is only one year, with renewal foradditional one-year terms at our own option. We have the option to determine whether we will renew and continue thelease, and if we decide to renew, how much capacity we will lease.  We also have the option to decide whether wewill exercise the purchase option based on the future operating performance andmarket environment of the CDMA business subject to approvals obtained from our independent minorityshareholders.  Accordingly, if the CDMAbusiness turns out to be unsuccessful, we have no obligation to continue thelease of any of the CDMA network capacity or to exercise the purchase option.  Or, we could continue to lease nominalcapacity in order to ensure that nobody else takes possession of the assets tocompete with us in our service areas.

 

In general, the classification of leases is dependenton whether the risks and rewards of ownership of lease assets restsubstantially with the lessor or the lessee. Leases that substantially transfer to the lessee all the risks andrewards of ownership of lease assets are accounted for as finance leases; andleases where substantially all the risks and rewards of ownership of leaseassets remain with the lessor are accounted for as operating leases.  When performing this assessment, weconsidered a number of factors above that required significant judgment.

 

From the inception of the CDMA Lease Agreements, therehas been a high degree of uncertainty related to the market condition andoperating results of the CDMA business. It remains highly uncertain whether we will continue to lease thenetwork in the future.  Even if we doso, we are unable to estimate the future network capacity we would lease.  We are also unable to determine whether ornot we will eventually exercise the purchase option.  Given these uncertainties and due to the fact that the risksassociated with the 

 

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ownership of assets substantially remain with Unicom Group and UnicomHorizon, we account for the leases of CDMA network capacity as operating leasesfor the initial lease periods, estimated to be three years, so as to reflectthe respective rights and obligations of the parties to the leasearrangements.  At the end of the leaseterm, as defined under GAAP, we will reassess the appropriate classificationbased on the relevant facts and circumstances available at that time.

 

Under the above policy, only the operating leaseexpense has been recorded in our income statement since the commencement ofCDMA network capacity leasing, whereas the liability and value of theunderlying asset is not reflected on the balance sheet.  For the year ended December 31, 2002, werecorded lease expense of approximately RMB 890 million for leasingin the first phase of the CDMA network capacity in the service areas of CUCL.

 

**Impairment of Assets**

 

As of the end of each year, we conduct a full reviewof various information to identify indications that the carrying values of ourproperty, plant and equipment, construction-in-progress, goodwill, investmentin securities and investments in associates may be impaired.  If such an indication exists, we will alsoestimate the related asset’s recoverable amount.  To the extent that the estimated recoverable amount of an assetis lower than its carrying amount, an impairment loss is recognized in theincome statement.  The information usedto identify indications of impairment and assess any impairment loss might besubjective in nature and the interpretation and application of such informationrequires judgment, the result of which directly affects whether an impairmentassessment is performed and the amount of any impairment loss as at any givenbalance sheet date.

 

In 2001, our paging business in certain provincesexperienced a decline in revenue and an increase in loss of subscribers, whichled to an operating loss.  As a result,the carrying amounts of certain assets (including telecommunications equipmentand goodwill related to the business) of our paging businesses exceeded theirvalues in use, and provision for impairment loss of these assets was madeaccordingly, for and as of the year ended December 31, 2001, to properlyreflect their recoverable amounts. Value in use was determined based on the expected discounted future netcash flows generated from the continuing use of the paging assets.  In estimating the discounted future net cashflows, we made certain key assumptions, including the appropriate discount rateadopted, utilization of the assets, the period covered by the cash flow forecast, the impact of thecontinuous decline of the traditional paging business, the incremental cashflows from new paging businesses and the adoption of cost reduction plans.  All these assumptions and estimations arebased on historical trends adjusted for the current market situation (includingthe physical conditions of these assets) and our forecast of the futuredevelopment of new paging businesses, commensurate with the risksinvolved.  Changes in any of theseassumptions could result in a material change to future estimates of therecoverable value of these assets. Consequently, based on these assumptions and our best estimates, werecorded impairment losses of paging assets for the year ended December 31,2001 amounting to approximately RMB633 million.

 

In 2002, our paging business continued to experience adecline, at a faster rate than in 2001, in revenue and loss of subscribers andagain led to an operating loss.  Thecontinued decline in our paging business was due to decline in the traditional paging business, while new value-added paging businesseswere still at their initial development stage.  We have conducted a review forimpairment of our paging assets based on these developments, using the abovedescribed methodology and criteria, including assumptions and estimates updatedfor current circumstances and experience.  From this review, we believe, based on the totality of relevantfactors, including the future prospects for revenue and earnings fromnew value-added paging businesses, the estimated recoverable amount of ourpaging assets is not lower than their carrying amounts, which is RMB4.19 billion in telecommunications equipment and RMB 1.02 

 

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million in goodwill as of December 31, 2002.  Consequently, we have not made any impairment provision for andas of the year ended December 31, 2002.

 

Since we made our assessment based on estimates andassumptions as described above, actual developments in the future may differfrom our current belief.  As a result,to the extent our assumptions and estimations differ significantly from actualevents and circumstances, we may need to make additional impairment provisionsin the future.

 

**Provision for Doubtful Debts**

 

Accounts receivables are stated at cost, lessprovision for doubtful debts.  Weevaluate specific accounts receivable where there are indications that the receivablemay 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.  We make such estimates based on our pastexperience, historical collection patterns, subscribers’ credit worthiness andcollection trends.

 

If circumstances change (e.g. due to factors includingdevelopments in our business and the external market environment), we may needto re-evaluate our policies on doubtful debts, and make additional provisionsin the future.

 

**Income Tax and Deferred Taxation**

 

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

 

Deferred taxation is provided for under the liabilitymethod, at the current tax rate, in respect of temporary differences betweenincome as computed for taxation purposes and income as stated in our incomestatement, except where it is considered probable that no liability will ariseor no tax asset will crystallize in the foreseeable future.  A deferred tax asset is not recognizedunless we expect related benefits to crystallize in the foreseeable future.

 

In the preparation of our financial statements, weestimate our income tax provision and deferred taxation in accordance with theprevailing tax rules and regulations, any special approvals obtained fromrelevant tax authorities and any preferential tax treatment to which we areentitled in each location or jurisdiction in which we operate.  This process involves an estimation made byus about our current tax exposure together with an assessment of temporary differencesresulting from different treatment of items for tax and accounting purposes inorder to determine the amount of tax provisions for the period.  We believe we have recorded adequate taxprovisions 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 taxcomponents include interests on loans from CCF joint ventures, loss arisingfrom terminations of CCF arrangements, income tax on advances from subscribersand prepaid telephone cards, impairment provisions for plant, property andequipment and other long-lived assets, provisions for doubtful debts andwrite-down of inventory to net realizable value and additional depreciationdeductible for tax purpose.  Due to theeffects of these temporary differences on income tax, we have recorded deferredtax assets amounting to RMB1.33 billion and RMB1.58 billion as of December 31,2002 and 2001, respectively.  Deferredtax assets are recognized based on our belief, from our estimates andassumptions, that they will be recovered from taxable income from continuingoperations in the foreseeable future.

 

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

 

***Operating Results***

 

**Year Ended December 31, 2002 Compared to Year Ended December31, 2001**

 

In 2002, ouroperating revenue continued to increase rapidly, by 38.0% from RMB 29.39 billion in 2001 to RMB40.58 billion in 2002. This growth was principally due to continued growth from our GSMcellular business, as well as the introduction and growth of our CDMA cellularbusiness.  Our cellular businesses continued to increase in their percentagecontribution to our business.  Our longdistance and data and Internet businesses also continued to grow quickly interms of operating revenues and in their contribution to our business.

 

Due to factors discussed below, in2002 our operating expenses grew 37.8%. As a result our operating income increased by 39.1%to RMB7.32 billion, while our operating margin remained steady at 18.0%, ascompared with 17.9% in 2001.  Operatingmargin in our GSM cellular business improved slightly, from 26.3% in 2001 to27.2% in 2002.  Our CDMA businessrecorded an operating loss for its first year, but operating results in thesecond half of 2002 showed improvement from the first half as that businesscontinued to develop.  In ourlong distance business, operating income increased 4.9% in 2002 and operatingmargin, while remaining high at 29.5% in 2002, decreased from 41.4% in2001.  In our data and Internetbusinesses, continued rapid growth in operating revenues, together with oursuccessful efforts to control growth in operating expense, resulted inimprovement from an operating loss in 2001 to an operating profit in 2002.  Ourtraditional paging business continued to decline, and despite our focus on costcutting and development of new value-added paging services, it stillexperienced an operating loss in 2002.

 

Our net income in2002 increased by 2.5% to RMB 4.57 billion, at a slower growth rate thanthe growth rate of our operating revenue and operating income, for reasons asdiscussed below.

 

***Operating Revenue***

 

Operating revenuefrom our GSM cellular business grew rapidly and continued to be the major forcebehind our total operating revenue growth, contributing over half ofsuch growth in 2002.  Our CDMA business, introduced in January2002, reached RMB 3.65 billion in operating revenue in 2002, contributing 32.6% of our total operating revenue growth in that year. ** **Operating revenues from our GSMand CDMA cellular businesses represented 69.3% and 9.0%, respectively, and78.3% together, of our total operating revenue in 2002, as compared with 72.5%for our GSM business in 2001.  Operatingrevenues from our long distance and data and Internet businesses also increasedrapidly, together contributing 20.9% of our total operatingrevenue growth in 2002.  Operating revenues from our longdistance and data and Internet businesses represented 6.8% and 6.9%,respectively, of our total operating revenue in 2002, as compared with 5.1% and6.2%, respectively, in 2001.  The growthin our total operating revenue was offset by the continued significant declinein operating revenue from our paging business, which also declined as apercentage of our total operating revenue from 16.2% in 2001 to 8.0% in2002.  We believe the changes in ouroperating revenue composition reflect our focus on high growth businesses.

 

***Cellular Revenue***

 

For the reasonsdiscussed below, operating revenues from our GSM and CDMA cellular businessestogether increased by 48.9%, from RMB21.33 billion in 2001 to RMB31.76 billionin 2002.

 

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*GSM Cellular Business *Operating revenuefrom our GSM cellular business increased by 31.8%, from RMB 21.33 billionin 2001 to RMB 28.11 billion in 2002, primarily due to a 42.9% increase inour subscriber base, from 27.03 million at the end of 2001 to 38.62 million atthe end of 2002, and continued growth in total usage, as well as growth inrevenue from value-added services.  As aresult of continuing cellular penetration expansion, an increase in theproportion of low-usage subscribers among new subscribers, an increased numberof pre-paid subscribers, and increasing market competition negatively affectingeffective pricing, ARPU from this business declined 20.0%, from RMB 86.3in 2001 to RMB 69.0 in 2002. Post-paid ARPU decreased by 13.3%, from RMB 94.8 in 2001 toRMB 82.2 in 2002, while pre-paid ARPU decreased by 14.7%, fromRMB 63.4 in 2001 to RMB 54.1 in 2002.  Average MOU decreased 3.3%, from 161.2 in 2001 to 155.8 in2002.  These rates of decline wereslower in 2002 than in 2001.  (Theforegoing operational statistics do not include the effects of the acquisitionof Unicom New Century.)

 

Revenue from pre-paid GSM cellular service was RMB10.08 billion in 2002, a 145.9% increase from RMB4.10 billion in 2001.  Revenue from pre-paid services accounted for35.9% of the service revenue from our GSM cellular business in 2002, anincrease from 20.5% of the total service revenue from cellular business in2001.  Pre-paid subscribers accountedfor 66.6% of our new customers in 2002, compared to 58.7% in 2001.

 

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

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

 

Due to the growth in total usage of our GSM cellularservices and the increasing proportion of pre-paid cellular subscribers (who donot pay monthly fees), usage fees for GSM cellular services increased by 35.7%,from RMB14.94 billion in 2001 to RMB20.27 billion in 2002, and represented74.0% of total GSM service revenue in 2002, as compared with 72.8% in2001.  For the same reasons, monthlyfees for GSM cellular services increased by 13.9%, from RMB3.66 billion in 2001to RMB4.17 billion in 2002, and represented 15.2% of total GSM service revenue in2002, as compared with 17.9% in2001.  Interconnection revenue increasedby 35.5%, from RMB1.26 billionin 2001 to RMB1.71 billion in 2002, and as a percentage of total GSM cellularservice revenue, stayed roughly the same at 6.2%.  The increase ininterconnection revenue resulted from rapid growth in incoming traffic fromother networks as cellular coverage and subscriber bases continued to expand.

 

While continuing to meet the diverse needs of ourcustomers in the mass market, our GSM cellular business aims to actively pursuemid- to high-end customers through the development and promotion of value-addedservices.  Revenue from our GSMvalue-added cellular services increased six-fold, from RMB0.14 billion in 2001to RMB0.84 billion in 2002.  Its shareof total GSM service revenue increased from 0.7% in 2001 to 3.1% in 2002.  Of the total revenue from GSM value-addedcellular services, revenue 

 

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from short messaging services increased 4.6 times from RMB0.10 billionin 2001 to RMB0.46 billion in 2002, and its share of total GSM service revenuegrew from 0.5% in 2001 to 1.7% in 2002. Revenue from value-added services contributed significantly to theincrease of our total GSM cellular revenue and, we believe, will continue toenhance our competitiveness in this business.

 

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

 

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

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

 

CDMA usage fees reached RMB2.23 billion in 2002,representing 69.3%of CDMA service revenue, while CDMA monthly fees reached RMB0.71 billion,representing 22.2% of CDMAservice revenue.  Service revenue as apercentage of operating revenue from CDMA cellular business increased from78.0% in the first half of 2002 to 88.4% for the year ended 2002. At the sametime, revenue from sales of telecommunications products as a percentage of operatingrevenue from CDMA cellular business decreased from 22.0% in the first half of2002 to 11.6% for the year ended 2002.

 

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

 

Operating revenue from our long distance and data andInternet businesses reached RMB5.58 billion, an increase of 68.6% from2001.  We believe the rapid growth inour long distance and data and Internet businesses demonstrates our positivelong-term development outlook as an integrated telecommunications operator.

 

*LongDistance Business.** *Operatingrevenue from our traditional circuit switched long distance business increasedby 86.7%, from RMB1.49 billionin 2001 to RMB2.78 billion in 2002, as our nationwide long distance coverageexpanded and interconnection improved.

 

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*Data and Internet Business.** *We fully leveraged our competitive advantages as anintegrated telecommunications operator and, by using our uniform and advancedintegrated data communication platform, we continued to effectively expand theusage of our IP telephony services (both domestic and international) while alsofocusing on the development of value-added data services such as FR, ATM andVPN services.  At the same time, weactively pursued the development of integrated data, voice and video connectionservices.  As a result of these efforts,operating revenue from our data and IP telephony services increased 40.6% fromRMB1.55 billion in 2001 to RMB2.18 billion in 2002.

 

Operating revenue from our Internet business increasedfrom RMB0.27 billion in 2001 to RMB0.62 in 2002, an increase of 129.6%.  This growth resulted from our efforts tocontinue to develop dedicated and dial-up connection services, and also exploreother markets according to demand, such as VPN/VPDN, IDC, in-bound andout-bound international roaming and actively developed mobile Internetbusinesses, such as “Ruyi”mailboxes, short message download and mobile payment.

 

***Paging Revenue***

 

Paging operating revenue declined 31.9%, from RMB 4.76billion in 2001 to RMB3.24 billion in 2002. Paging service revenue (excluding sales of paging-relatedtelecommunications products) declined 50.2%, from RMB4.34 billion in 2001 toRMB2.16 billion in 2002.  This declinewas due to continued decline in the traditional paging business, while new value-added paging businesses were still at their initialdevelopment stage.  We have continued tofocus on developing new value-added paging businesses, including by leveragingour other services and overall strengths as an integrated telecommunicationsoperator.  Operating revenues fromvalued-added services grew 241.7%, from RMB 0.12 billion in 2001 to RMB 0.41billion in 2002 (including inter-segment revenues from other businesssegments).

 

In accordance with the terms of a CDMA handsetprocurement framework agreement between Unicom Group and Guomai, an indirect,non-wholly-owned subsidiary of our company, Unicom Group agreed to purchaseCDMA handsets through Guomai in an effort to accelerate the growth of the CDMAhandset market and CDMA services. This connected transaction resulted in anincrease of revenue from sales of telecommunication products from RMB0.42billion in 2001 to RMB1.08 billion in 2002. This revenue is recorded in thepaging segment as Guomai is a subsidiary of Guoxin Paging.

 

***Operating Expenses***

 

Our operating expenses increased by RMB9.12 billion,or 37.8%, to RMB33.25 billion in 2002 from RMB24.13 billion in 2001.  As discussed below, a 36.2% increase indepreciation and amortization expenses, though not as fast as the increase inour total operation revenue, was the single biggest factor in the increase inoperating expenses.  In addition, due tothe launch of our CDMA business, selling and marketing expenses (which includethe amortized portion of deferred customer acquisition costs under specialpromotional packages with certain CDMA contractual subscribers), leased linesand network capacities expenses (which include the expenses from the CDMAnetwork leases) and cost of telecommunication equipment sales (which includesthe costs of CDMA handsets sold) all increased faster than our operatingrevenue in 2002.  Nevertheless, due toour focus on tightening cost control, increasing operational efficiency fromeconomies of scale and sharing of networks, businesses, subscribers and salesresources, our operating expenses as a percentage of total revenue stayedroughly the same at 82.0% in 2002, as compared with 82.1% in 2001.  We will continue to focus on cost controland optimization of our expense structure in order to ensure continued growthin earnings.

 

The table below illustrates the major expense itemsfrom 2000, 2001 and 2002 and their respective share of total operating revenue.

 

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|                                       |   | **For the year ended  December 31,** |   |
|--------------------------------------------|--------|--------------------------------------|--------|
|                                       |   | **2000**                             |   | **2001** |   | **2002** |   |
|                                       |   | **RMB in****million**                |   | **%****of********Total  Revenue** |   | **RMB in****million** |   | **%****of********Total  Revenue** |   | **RMB in  million** |   | **%****of********Total  Revenue** |   |
| Total Operating Expenses                   |   | 18,470                               |   | 78.0% |   | 24,129 |   | 82.1% |   | 33,253 |   | 82.0% |   |
| Leased lines and network capacities        |   | 1,158                                |   | 4.9% |   | 853 |   | 2.9% |   | 1,583 |   | 3.9% |   |
| Interconnection charges                    |   | 1,380                                |   | 5.8% |   | 2,073 |   | 7.1% |   | 3,230 |   | 8.0% |   |
| Depreciation and amortization              |   | 5,734                                |   | 24.2% |   | 8,262 |   | 28.1% |   | 11,256 |   | 27.7% |   |
| Personnel                                  |   | 1,770                                |   | 7.5% |   | 2,487 |   | 8.5% |   | 3,335 |   | 8.2% |   |
| Selling and marketing                      |   | 2,492                                |   | 10.5% |   | 3,613 |   | 12.2% |   | 5,981 |   | 14.8% |   |
| General, administrative and other expenses |   | 3,743                                |   | 15.8% |   | 5,499 |   | 18.7% |   | 5,632 |   | 13.9% |   |
| Cost of telecommunications products sold   |   | 2,193                                |   | 9.3% |   | 1,342 |   | 4.6% |   | 2,236 |   | 5.55% |   |

 

*Leased**Lines and**Network**Capacities.*  We effectively reduced our leased linesexpenses by extending and optimizing our nationwide fiber optic network andimproving the allocation and coordination of network resources.  However, as a result of the additional leaseexpense of RMB0.89 billion incurred in connection with the lease of CDMAnetwork capacities from UnicomGroup beginning in January 2002, our leased lines and network capacitiesexpense increased by 85.5%, from RMB0.85 billion in 2001 to RMB1.58 billion in2002.  Leased lines and networkcapacities expense as a percentage of total operating expenses increased from2.9% in 2001 to 3.9% in 2002.** **The foregoing factors, as well asdecreased paging service volumes, resulted in a 55.7% decrease in leased lineexpenses in our paging business, from RMB0.31 billion in 2001 to RMB0.14billion in 2002.

 

*InterconnectionCharges.* Interconnection charges increased by 55.8%, from RMB2.07 billion in 2001 to RMB3.23 billion in 2002,primarily due to growth of such expense in our cellular businesses, includingfrom the launch of our CDMA cellular business, as well as in our long distancebusiness.  The growth in this expensewas primarily due to the growth of our service volumes in these businesses,including from the expansion of our networks and our subscriber base, and as aresult, increased interconnection traffic volume.  Interconnection charges as a percentage of total operatingrevenue increased from 7.1% in 2001 to 8.0% in 2002.

 

*Depreciationand Amortization.* Depreciation and amortization expenses increased by RMB3.0 billion, or36.2%, from RMB8.26 billion in 2001 to RMB11.26 billion in 2002.  The increase in depreciation andamortization expenses constituted 32.9% of the RMB9.12 billion total increasein our operating expenses, making this expense the biggest factor in theincrease in total operating expenses. Rising depreciation and amortization expenses resulted from expandednetwork capacity, primarily in connection with the development of the GSM cellularbusiness, and further growth in overall assets.  The share of depreciation and amortization expenses as apercentage of total operating revenue decreased from 28.1% in 2001 to 27.7% in2002.

 

*Personnel. *Despite the consistent andrapid growth of our various business segments, we have emphasized efficient andrational allocation of human resources and fully utilized incentive basedemployee compensation.  Through ourcompensation structure, which is tied to both individual performance and ourfinancial results, we are able to promote competition, retain and attracttalented employees and make our company more dynamic, and thus steadily raiseour productivity.  As of the end of2002, we employed 29,332 employees, a decrease of 2.1% from 29,973 at the endof 2001.  Our personnel expenses wereRMB3.34 billion in 2002, constituting 8.2% of total operating revenue, adecrease from 8.5% in 2001.  Personnelcosts in our paging business declined by 40.8%, from RMB0.94 billion in 2001 toRMB0.56 billion in 2002, reflecting a decreased number of employees in thebusiness.  Such employees 

 

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were in many cases redeployed to our other growing businesses, toimprove customer service and otherwise address the personnel needs of suchbusinesses.  This increase in personnelat such businesses was a factor, in the increased personnel costs in thosebusinesses in 2002.

 

*Sellingand Marketing.* Selling and marketing expenses increased by RMB2.37 billion, or 65.5%,from RMB3.61 billion in 2001 to RMB5.98 billion in 2002.  The increase in selling and marketingexpenses constituted 26.0% of the RMB9.12 billion total increase in ouroperating expenses, making this expense the second biggest factor in theincrease in total operating expenses. Selling and marketing expenses as a percentage of total operatingrevenue increased from 12.2% in 2001 to 14.8% in 2002, mainly due to thecontinued growth in the customer base of our various business segments, whichconsequently increased our commission payments to sales agents, and marketingexpenditures in connection with the promotion for our CDMA cellularbusiness.  Of the total amount of theincrease in selling and marketing expenses, RMB1.39 billion were amortizationexpenses related to the customer acquisition costs of certain CDMA contractualsubscribers.

 

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

 

*General,Administrative and Other Expenses.*  Primarily as a result of cost cutting in our declining pagingbusiness, as well as our strict control of administrative expenses in ourcellular businesses, our general, administrative and other expenses increasedby only 2.4%, from RMB5.50 billion in 2001 to RMB5.63 billion in 2002.  As a percentage of total operating revenue,general, administrative and other expenses decreased from 18.7% in 2001 to13.9% in 2002.

 

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

 

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

 

*Cost ofTelecommunications Products Sold.*  The cost of telecommunications products sold increased by 66.6%,from RMB1.34 billion in 2001 to RMB2.24 billion in 2002, mainly due to our entryinto the CDMA handset sales market in connection with our launch of the CDMAservices since January 2002.  Thesecosts of telecommunications products related to the CDMA handsets that weresold independently, without any service contract promotions.

 

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***Operating Income***

 

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

 

*GSMCellular Business.*  Inour GSM cellular business, operating income increased by 36.0%, from RMB5.61billion in 2001 to RMB7.64 billion in 2002, reflecting the 31.8% growth inoperating revenue, as well as our efforts to control operating expenses, whichincreased 30.3%.  Our operating marginin our GSM cellular business increased from 26.3% in 2001 to 27.2% in 2002

 

*CDMACellular Business.*  Weincurred an operating loss of RMB0.99 billion in 2002 for our CDMAbusiness.  We incurred an operating lossof RMB0.60 billion for the first six months of 2002 and an operating loss ofRMB0.39 billion in the second half of 2002, reflecting improving performance asthat business continued to develop from its launch in January 2002.

 

*LongDistance Business.*  Inour long distance business, although operating revenue grew 47.0% in 2002,operating income increased 4.9%, from RMB0.97 billion in 2001 to RMB1.02 billionin 2002, primarily because of faster increases in interconnection expenses,sales and marketing expenses and general and administrative expenses.  As a result, our operating margin in ourlong distance business, while remaining high at 29.6% in 2002, decreased from41.4% in 2001.

 

*Dataand Internet Business.* In our data and Internet businesses, we had an operating profit ofRMB0.38 billion in 2002, as compared to an operating loss of RMB0.27 billion in2001.  This resulted from the continuedrapid growth, at 58.2%, in operating revenues in this business, together withour successful efforts to control operating expenses, which grew 24.3%.

 

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

 

***Net Income***

 

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

 

*Income**Tax.*  Our income tax increased from RMB1.04billion in 2001 to RMB1.75 billion in 2002. Our effective tax rates in 2001 and2002 were 19.1% and 27.8%, respectively. The higher effective tax rate in 2002, as compared with 2001, was due tothe greater proportion, in income before tax for 2001, represented by interestincome from short term bank deposits in Hong Kong (largely proceeds from ourinitial public offering), which was not subject to income tax in 2001.

 

*Net**Income.*  For reasons analyzed in the abovediscussion, our net income grew by 2.5%, from RMB4.46 billion in 2001 toRMB4.57 billion in 2002. Earnings per share rose by 2.5%, from RMB0.355 in 2001to RMB0.364 in 2002.

 

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***Impact of Differences between Hong KongGAAP and US GAAP***

 

In addition to the above management discussion andanalysis of our results of the operation under Hong Kong GAAP between the yearsended December 31, 2002 and 2001, in connection with the preparation andreconciliation of our consolidated financial statements in accordance with USGAAP, we believe the following significant accounting differences between HongKong GAAP and US GAAP would have a significant impact on our managementdiscussion and analysis of the results of our operation between the years endedDecember 31, 2002 and 2001 under US GAAP. See also Note 41 to the consolidated financial statements for a completesummary of all significant accounting differences between Hong Kong GAAP and USGAAP that are relevant to us.

 

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

 

In addition, under Hong Kong GAAP, we recognizedupfront non-refundable revenue, such as connection fee, when received uponcompletion 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.

 

Under Hong Kong GAAP, goodwill is amortized over theexpected economic lives of the acquired businesses. Under US GAAP, upon theadoption of Statements of Financial Accounting Standards No. 142 “Goodwill andOther Intangible Assets” (“SFAS 142”) by us on January 1, 2002, we no longeramortize goodwill but, rather, assess the goodwill of each identified reportingunit for impairment annually.  Theadoption of SFAS 142 has resulted in a cumulative effect of accounting changeof RMB 42,175,000 (net of tax impact in the amount of RMB 20,773,000) on January 1, 2002 andhas been reflected in our condensed consolidated statement of income for theyear ended December 31, 2002 under US GAAP.

 

Other than the above, there are no major materialdifferences between Hong Kong GAAP and US GAAP that would have a significantimpact on the discussion and analysis of our results of operations between theyears ended December 31, 2002 and 2001. Taking into account the operatingresults of the above and operating results of the acquired business, ourcombined operating revenue under US GAAP increase from RMB34.85 billion in 2001to RMB49.77billion in 2002, representing an increased of 42.8%. Our net income under USGAAP increased slightly (by 1.4%) from RMB5.07 billion in 2001 to RMB5.15billion in 2002.

 

**YearEnded December 31, 2001 Compared to Year Ended December 31, 2000**

 

Total revenue increased by 24.1%, from RMB23.69billion in 2000 to RMB29.39 billion in 2001. Our service revenue increased by 29.3%, from RMB21.77 billion in 2000 toRMB28.16 billion in 2001, and the share of service revenue in total revenueincreased from 91.9% in 2000 to 95.8% in 2001. Net income increased by 37.8%, from RMB3.23 billion in 2000 to RMB4.46billion in 2001, and basic net income per share increased from RMB0.289 in 2000 to RMB0.355 in 2001.

 

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***Operating Revenue***

 

Our operating revenue increased by 24.1%, fromRMB23.69 billion in 2000 to RMB29.39 billion in 2001, primarily due to therapid growth in our GSM cellular business and our long distance and data andInternet businesses.  Operating revenuefrom our GSM cellular business increased its contribution to our operatingrevenue to 72.5% in 2001, from 54.4% in 2000. Growth in these areas more than offset a 51% decline in revenues fromour paging business.

 

***Cellular Revenue***

 

Our GSM cellular business continued to record rapidgrowth in 2001.  Operating revenue fromour GSM cellular business grew by 65.5%, from RMB12.88 billion in 2000 toRMB21.33 in 2001, primarily due to an 111.7% increase in our subscriber base,from 12.77 million at the end of 2000 to 27.03 million at the end of 2001, andcontinued growth in total usage.  As aresult of expanding market penetration, an increase in the proportion oflow-usage subscribers among new subscribers, an increase in pre-paidsubscribers, discontinuation of connection fees, the reduction of long distancetariffs and increasing market competition negatively affecting effectivepricing, ARPU of our GSM cellular subscribers decreased by 30.6% from RMB124.30in 2000 to RMB86.30 in 2001.  ARPU forpost-paid customers decreased by 26.5%, from RMB129.0 in 2000 to RMB94.80 in2001.  ARPU for pre-paid customersdecreased by 15.6%, from RMB75.10 in 2000 to RMB63.40 in 2001.  Average minutes of usage, or MOU, persubscriber per month decreased 10.2%, from 179.5 in 2000 to 161.2 in 2001.

 

Revenue from pre-paid GSM cellular service was RMB4.10billion in 2001, a 530.8% increase from RMB0.65 billion in 2000.  Revenue from pre-paid services accounted for20.5% of the service revenue from our GSM cellular business in 2001, anincrease from 5.3% of the total service revenue from cellular business in2000.  Pre-paid subscribers accounted for58.7% of our new customers in 2001, compared to 24.3% in 2000.

 

Service revenue from our GSM cellular businessincreased by 68.2%, from RMB12.19 billion in 2000 to RMB20.51 billion in 2001.

 

*UsageFee*.  Usage feerevenue from our GSM cellular business increased by 81.9%, from RMB8.21 billionin 2000 to RMB14.94 billion in 2001. The increase was primarily due to the increase in the number of cellularsubscribers.  Usage fees accounted for72.8% of the total service revenue from our GSM cellular business (whichexcludes sales of cellular telecommunication products) in 2001, as comparedwith 67.4% in 2000.  The increase inusage fees as a percentage of service revenue reflected the growth of ourpre-paid service, which has higher airtime charges but no monthly fees, andalso the discontinuation of connection fees in 2001.

 

*MonthlyFee*.  Revenue frommonthly fees for GSM cellular service increased by 47.8%, from RMB2.48 billionin 2000 to RMB3.66 billion in 2001, primarily due to an increase in the numberof cellular subscribers.  Revenue frommonthly fees grew at a slower rate than the overall growth rate of our GSMsubscriber base, however, due to the increase in proportion of pre-paidsubscribers.  Revenue from monthly feesaccounted for 17.9% of the total service revenue from our GSM cellular businessin 2001, a decrease from 20.3% in 2000, also reflecting the increase inpre-paid subscribers.

 

*ConnectionFee*.  Revenue from GSMcellular connection fees decreased from RMB0.52 billion in 2000 to RMB0.2 billionin 2001, accounting for 1.0% of total service revenue from our GSM cellularbusiness in 2001, compared to 4.2% in 2000. The decline resulted from the discontinuation of connection fees on July1, 2001, as required by new regulations that became effective on that date.

 

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*InterconnectionRevenue*.  Revenue frominterconnection fees increased by 67.5%, from RMB0.75 billion in 2000 toRMB1.26 billion in 2001, primarily due to an increase in incoming calls fromother networks as a result of the expansion of our GSM cellular networkcoverage and subscriber base.

 

*OtherRevenue.*  Otherrevenues increased by 92.8% in 2001, from RMB 0.23 billion in 2000 to RMB0.44billion in 2001, primarily reflecting the expansion of our value-addedservices.

 

*Salesof Cellular-Related Telecommunications Products*.  Revenue from sales of GSM cellular-relatedtelecommunications products, primarily SIM cards and handsets, increased by17.9%, from RMB0.70 billion in 2000 to RMB0.82 billion in 2001.  The increase resulted primarily fromincreased sales of SIM cards resulting from the increase in new GSM cellularsubscribers.  The increase was offset inpart by lower average selling prices of SIM cards.

 

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

 

We expanded our networkcoverage and capacity for long distance, data and Internet services in2001.  These businesses have beendeveloping into important sources of revenue for us.  Total operating revenue from long distance, data and Internet businesseswas RMB3.31 billion in 2001, 3.0 times the RMB 1.10 billion in operatingrevenue from such businesses in 2000. This increase was primarily attributable to the expansion of ournationwide network coverage and increased subscribers, resulting in an increasein total usage.  Our long distance, dataand Internet business also provided transmission capacity to our cellularbusiness and the related inter-segment revenue increased 2.6 times, fromRMB0.46 billion in 2000 to RMB1.17 billion in 2001.

 

*LongDistance Business*. Operating revenue from our traditional circuit switched long distancebusiness increased by 167.6%,from RMB0.56 billion in 2000 to RMB1.49 billion in 2001.  The increase in revenue from these services,which were launched in 2000, reflected the expansion of our nationwide networkcoverage, improved interconnection and increased cooperation withtelecommunication operators overseas.

 

*Dataand IP Telephony Business*. Operating revenue from data and IP telephony services increased by 229.2%, from RMB0.48 billion in 2000 toRMB1.55 billion in 2001.  The increasereflected continued growth in usage of our domestic and international IPservices as we improved the network coverage and communication quality of IPtelephony and promoted usage through various marketing initiatives.  Data revenue expanded as we furtherdeveloped value-added, managed data services, including FR, ATM and VPNservices.  We also strengthened retailsales of telephone cards.  We sell IPtelephony services mainly in the form of pre-paid calling cards. We recognizerevenue from IP telephony services when pre-paid minutes are actually used.

 

Operating revenue from Internet services increased by3.6 times, from RMB59 million in 2000 to RMB270 million in 2001.  The increase resulted from expanded use ofthese services in 2001.

 

***Paging Revenue***

 

Operating revenue from our paging business decreasedby 51.0%, from RMB9.71 billion in 2000 to RMB4.76 billion in 2001.  Revenue from paging services (which excludessales of pagers) decreased by 48.8%, from RMB8.48 billion in 2000 to RMB4.34billion in 2001.  The decrease in pagingbusiness revenue resulted primarily from negative growth in the paging industryoverall, as customers continued to switch from paging services to cellular andother telecommunications services, and from decreasing tariffs due to increasedcompetition.  The decrease alsoreflected our continued exiting of the unprofitable pager sales business.

 

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*MonthlyFee*.  Our revenue frompaging services was primarily from monthly fees, representing 95.4% of thetotal service revenue from the paging business in 2001.  Our revenue from monthly fees decreased by48.2%, from RMB7.99 billion in 2000 to RMB4.14 in 2001, as a result of thedecline in paging subscribers primarily, and also of tariffs.

 

*OtherRevenue*.  Otherrevenue from our paging business included wireless messaging service fees,paging number selection fees and other value-added service fees, as well ascommissions from the sales of cellular services for Unicom Group.  Other revenues decreased from RMB0.42billion in 2000 to RMB0.20 billion in 2001, excluding the inter-companycommission revenue of RMB14 million from the distribution of our own cellularservices.

 

*Salesof Paging-Related Telecommunications Products.*  Revenue from the sales of pagers decreasedby 66.0%, from RMB1.23 billion in 2000 to RMB0.42 billion in 2001, primarilydue to our gradually exiting the unprofitable pager sales business.  The percentage of pager sales revenue as atotal of our total paging revenue decreased from 12.4% in 2000 to 8.6%in 2001.

 

***Operating Expenses***

 

Total operating expenses increased by 30.6%, fromRMB18.47 billion in 2000 to RMB24.13 billion in 2001.  Operating expenses increased at a faster rate than totaloperating revenues, which increased by 24.1% in 2001.  As a percentage of total operating revenue, total operatingexpenses increased from 78.0% in 2000 to 82.1% in 2001.  The increase in operating expenses primarilyreflected increased fixed costs, rising selling and marketing expenses in anincreasingly competitive environment and a provision for impairment of pagingassets.

 

*LeasedLine*.  Total leasedline expenses decreased by 26.3%, from RMB1.16 billion in 2000 to RMB0.85billion in 2001, notwithstanding the significant growth in our overall businessvolume.  Measured as a percentage oftotal operating revenue, leased line expenses decreased from 4.9% in 2000 to2.9% in 2001. ** **The decrease in our leased line expenses was the resultof lower leased line tariffs as well as our efforts to extend and optimize ournationwide optical fiber network, utilize our own transmission network andimprove allocation and coordination of our network resources.  As a result of these factors, leased lineexpenses in our GSM cellular business decreased by 8.1%, from RMB0.58 billion in 2000 to RMB0.53 billion in 2001.  The foregoing factors, as well as decreasedpaging service volumes, resulted in a 59.5% decrease in leased line expenses in our paging business, fromRMB0.76 billion in 2000 to RMB0.31 billion in 2001, which was a majorcontributor to the decrease in our leased line expenses.  Leased line expenses in our long distance,data and Internet businesses increased by 57.0%, from RMB0.27 billion in 2000 to RMB0.43 billion in 2001,which resulted primarily from increased service volumes.

 

*InterconnectionCharges*.  Due to theexpansion of our network, increases in subscribers and interconnection trafficand adjustments to interconnection methods and standards, interconnectionexpenses increased by 50.2%, from RMB1.38 billion in 2000 to RMB2.07 billion in2001.  As a percentage of totaloperating revenue, interconnection expenses increased from 5.8% in 2000 to 7.1%in 2001.  Interconnection expenses forour GSM cellular business increased by 73.1%, from RMB1.27 billion in 2000 toRMB2.20 billion in 2001. Interconnection expenses for our long distance, data and Internetbusiness increased by 5.7 times, from RMB0.11 billion in 2000 to RMB0.63billion in 2001, primarily as the result of an increase in interconnection feesin our expanding long distance business. In accordance with new regulations that became effective in March 2001,our IP telephony business began interconnection settlements with other domesticoperators in March 2001, resulting in an additional expense of RMB0.12 billion.

 

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*Depreciationand Amortization*. Depreciation and amortization expenses increased by 44.1%, from RMB5.73billion in 2000 to RMB8.26 billion in 2001. Depreciation and amortization as apercentage of total operating revenue increased from 24.2% in 2000 to 28.1% in2001.  The increase in depreciation andamortization expenses was the largest factor contributing to our increase inoperating expenses in 2001, accounting for 44.7% of the total increase in ouroperating expenses of RMB5.66 billion. The increase in depreciation and amortization expenses was primarily theresult of an increase in capital expenditures, in particular the furtherexpansion of our cellular and long distance, data and Internet networks, whichled to an increase in total fixed assets. Depreciation and amortization expenses in our GSM cellular businessincreased by 54.1%, from RMB3.61 billion in 2000 to RMB5.56 billion in2001.  Depreciation and amortizationexpenses in our long distance, data and Internet business increased 3.1 times,from RMB0.30 billion in 2000 to RMB0.95 billion in 2001.

 

*Personnel*.  Despite the growth of our business in 2001,we aimed to control the increase in personnel costs by increasing theproductivity of our work force. We employed 29,973 employees at the end of2001, a decrease of 15.4% from 35,432 employees at the end of 2000.  Personnel costs increased by 40.7% in 2001,from RMB1.77 billion in 2000 to RMB2.49 billion in 2001.  Personnel costs as a percentage of totaloperating revenue increased from 7.5% in 2000 to 8.5% in 2001.  The increase in personnel costs resultedfrom our reform of our compensation structure in order to adapt to a changingcompetitive human resources market, promote competition for positions withinour company and provide incentives to employees.  Our compensation structure is tied both to individual performanceand to company performance.  Personnelcosts in our GSM cellular business increased 3.1 times, from RMB0.36 billion in2000 to RMB1.11 billion in 2001. Personnel costs in our paging business declined by 31%, from RMB1.35billion in 2000 to RMB0.94 billion in 2001, reflecting a decreased number ofemployees in the business.  Personnelcosts in our long distance, data and Internet business increased by 8.2 timesfrom RMB0.05 billion in 2000 to RMB0.41 billion in 2001.

 

*Sellingand Marketing*. Selling and marketing expenses increased by 45%, from RMB2.49 billion in2000 to RMB3.61 billion in 2001. Selling and marketing expenses as a percentage of total operatingrevenue increased from 10.5% in 2000 to 12.2% in 2001.  Overall growth in selling and marketingexpenses primarily reflected increased sales commissions paid, resulting fromthe expansion of our businesses and growth in new subscribers, as well asincrease in our churn rate.  Increasedselling and marketing expenses also reflected increased expenditure on marketdevelopment and promotion of new products. Sales commissions increased by 59.2%, from RMB1.74 billion in 2000 toRMB2.82 billion in 2001.  Advertisingand promotion expenses increased by 9.9%, to RMB0.79 billion.  Sales and marketing expenses in our GSMcellular business increased by 74.3%, from RMB1.43 billion in 2000 to RMB2.49billion in 2001.  Sales and marketingexpenses in our long distance, data and Internet business increased by 141.0%,from RMB0.29 billion in 2000 to RMB0.71 billion in 2001.  The increase in sales and marketing expenseswas partially offset by a 49.8% decrease in such expenses in our pagingbusiness, from RMB0.95 billion in 2000 to RMB0.48 billion in 2001.

 

*General,Administrative and Other Expenses*.  General, administrative and other expenses increased by 46.9%,from RMB3.74 billion in 2000 to RMB 5.50 billion in 2001.  As a percentage of total operating revenue,general and administrative expenses increased from 15.8% in 2000 to 18.7% in2001.  The increase in general,administrative and other expenses predominantly reflected increases in travel,entertainment and meeting expenses, administrative and management expenses anda provision for impairment of paging assets.

 

Provision for doubtful debts increased 21.6%, fromRMB0.44 billion in 2000 to RMB0.54 billion in 2001, mainly as a result ofrevenue growth.  Provision for doubtfuldebts increased at a slower rate than the 24.1% increase in total revenues andthe 29.3% increase in service revenues, reflecting our continuing efforts totighten control over bad debt by improving user credit management and enhancingour billing and

 

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payment systems.  Provision fordoubtful debts as a percentage of total services revenue decreased from 2.0% in2000 to 1.9% in 2001.  Provision fordoubtful debts in our GSM cellular business increased 45.8%, from RMB0.36billion in 2000 to RMB0.52 billion in 2001. Provision for doubtful debts decreased as a percentage of total GSMcellular services revenue, from 2.9% in 2000 to 2.5% in 2001.

 

In 2001 we recorded a provision for impairment ofassets of RMB0.63 billion in our paging business.  The provision reflected our assessment that the book value ofpaging assets, including communications equipment and goodwill relating to ourpaging business, exceeded the recoverable value of such assets as determinedaccording to the discounted future cash flow method.  This discrepancy reflected the decrease in paging revenue,decline in number of customers and operating losses in some of the provinces inwhich our paging business operates.  Thewrite-down reflects our assessment of the difference between the book-value ofour paging assets and the recoverable value of these assets.  This assessment required us to make certainassumptions regarding the discount rate and the period of cash flow, andincluded our assessment of factors including churn rates, average monthly usagefees, additional cash flows from new customers and the impact of future costchanges.

 

*Cost ofTelecommunications Products Sold*.  Costs of telecommunication products sold decreased by 38.8%, fromRMB2.19 billion in 2000 to RMB1.34 billion in 2001, primarily due to ourwithdrawal from the sale of pagers. Pager sales decreased from RMB1.81 billion in 2000 to RMB0.55 billion in2001.

 

***Net Income***

 

*OperatingIncome*.  Totaloperating revenue and total service revenue in 2001 compared to 2000 increasedby 24.1% and 29.3%, respectively, while operating expenses increased by 30.6%in the same period.  Operating incomeincreased by 0.8%, from RMB5.22 billion in 2000 to RMB5.26 billion in2001.  Operating income from ourcellular business grew by 61.0%, from RMB3.49 billion in 2000 to RMB5.61billion in 2001.  Operating income fromour long distance business grew by 98%, from RMB0.49 billion in 2000 to RMB0.97billion in 2001.   Our data and Internetbusiness recorded an operating loss of RMB0.27 billion in 2001, as comparedwith an operating loss of RMB0.12 billion in 2000, as we continued to developthat business.  The growth in operatingincome from our GSM cellular business and our long distance business waslargely offset by a decline in operating income from our paging business, whichhad an operating loss of RMB0.97 billion, compared to operating income ofRMB1.38 billion in 2000.  Our operatingmargin decreased from 22.0% in 2000 to 17.9% in 2001.

 

*FinancialIncome and Expenses.* Interest income increased 19.9%, from RMB1.75 billion in 2000 to RMB2.10billion in 2001, primarily due to interest revenue from short-term bankdeposits of proceeds of our initial public offering in June 2000.  Interest expenses increased by 40.9%, fromRMB1.35 billion in 2000 to RMB1.91 billion in 2001, due to an increase in bankloans, which were primarily to finance our network build-out.  Interest-bearing debt increased fromRMB35.65 billion at the end of 2000 to RMB44.27 billion at the end of2001.  After adjusting for foreignexchange losses and gains, which were not significant, net financial income wasRMB0.18 billion in 2001, a 54.6% decrease from RMB0.40 billion in 2000.

 

*IncomeTax*.  Income taxexpenses decreased from RMB1.10 billion in 2000 to RMB1.04 billion in2001.  Our effective tax rate in 2001was 19.1%, compared to an effective tax rate of 24.7% in 2000.  The prevailing statutory income tax rate inChina, applicable to us, is 33%.  Oureffective tax rate in 2001 was lower than 33% because a large portion ofinterest income, arising from proceeds of our initial public offering depositedat banks in Hong Kong, was not subject to income tax.

 

*NetIncome*.  Net incomeincreased by 37.8%, fromRMB3.23 billion in 2000 to RMB4.46 in 2001. Basic net income per share increased by 22.8% in 2001, from RMB0.289 in2000 to RMB0.355 in 2001.

 

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Net income margin increased from 13.7% in 2000 to 15.2% in 2001.  These increases primarily reflected theabsence in 2001 of extraordinary losses from the termination of CCFarrangements, which were present in 2000.

 

***Impact of Differences between Hong Kong GAAP and US GAAP***

 

In addition to the above management discussion and analysis of ourresults of operations under Hong Kong GAAP between the years ended December 31,2001 and 2000, in connection with the preparation and reconciliation ofour consolidated financial statements in accordance with US GAAP, we believethe following significant accounting differences between Hong Kong GAAP and USGAAP would have a significant impact on our management discussion and analysisof our results of operations between the years ended December 31, 2001 and 2000under US GAAP.  See also Note 41 to theconsolidated financial statements for a complete summary of all significantaccounting differences between Hong Kong GAAP and US GAAP that are relevant tous.

 

Under Hong Kong GAAP, the acquisitions of Unicom New Century on December 31, 2002 has been accounted forunder the purchase method. Accordingly,the acquired results of operations have been incorporated into our operatingresults only from the date ofacquisition. In contrast, under US GAAP, our acquisition of Unicom New Century has been accountedfor as a transfer of businesses under common 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 the acquiredentity had always been part of the acquirer.

 

Under Hong Kong GAAP,we recognized upfront non-refundablerevenue, such as connection fee, when received upon completion of activation services.Under US GAAP, this upfrontnon-refundable revenue and the related direct incremental costs incurred aredeferred and recognized over the estimated customer service periods.

 

Under Hong Kong GAAP, goodwill is reviewedperiodically in order to assess whether the recoverable amount has declinedbelow the carrying amounts based on the future cash flows generated by theassets discounted to their present value. Under US GAAP, prior to January 1, 2002, recoverability of an asset tobe held and used is evaluated by a comparison of the carrying amount of theasset to future undiscounted net cash flows expected to be generated by theasset. If such asset is considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetexceeds the fair value of the asset, which is determined based on the estimatedfuture discounted net cash flows expected to be generated by the asset held forcontinued use.  As a result, impairmentprovision for goodwill recognized under US GAAP was lower than that recognizedunder Hong Kong GAAP by RMB 62,948,000 for the year ended December 31, 2001.

 

Under Hong Kong GAAP, loss arising from thetermination of CCF arrangements is accounted for as an operating loss whichreduces our income from continuous operations. Under US GAAP, the amounts wereclassified as an extraordinary item.  Inaddition, under Hong Kong GAAP, share warrants granted to the joint ventures ortheir designees were accounted as part of the compensation for terminations ofCCF arrangements which did not result in an expense. Under US GAAP, anadditional charge of RMB1.13 billion (before considering the related taximpact) was recorded by us to the statement of income to properly account forthe fair value of the share warrants granted.

 

Other than theabove, there are no major material differences between Hong KongGAAP and US GAAP thatwould have a significant impact on the discussion and analysis of the resultsof our operation between the years ended December 31, 2001 and 2000. Takinginto account the operating results of the acquired business, our combinedoperating revenue under US GAAP increased from RMB25.08 billion in

 

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2000 to RMB34.85 billion in2001, representing an increase of 38.9%. Our net income under US GAAP increasedby 159.1% from RMB1.96 billion in 2000 to RMB5.07 billion in 2001.

 

*Liquidity and Capital Resources*

 

***Working Capital and Cash Flows***

 

As of the end of 2002, we had RMB14.43 billion of cashand cash equivalents and RMB4.82 billion of short-term bank deposits.  As of the end of 2002, we had negativeworking capital (current assets minus current liabilities), compared to positiveworking capital of RMB21.04 billion at the end of 2001.  The decrease in working capital resultedprimarily from (i) the repayment of long-term bank loans using our short-termbank deposits, (ii) the cash payment for the acquisition of Unicom New Centuryand (iii) significant cash outlay in connection with the development of theCDMA business and CDMA handsets promotional programs.  We believe that we will have access to financing, in particularbank financing in the PRC and elsewhere, which together with net cash inflowsfrom operations will be sufficient to fund our capital and liquidity needs.

 

The following table sets forth cash inflows andoutflows in 2000, 2001 and 2002.

 
|                                                     |   | **For the year ended December 31,** |   |
|----------------------------------------------------------|--------|-------------------------------------|--------|
|                                                     |   | **2000**                            |   | **2001** |   | **2002** |   |
|                                                     |   | **(RMB in  millions)**              |   |
| Net cash inflows  from operating activities              |   | 9,344                               |   | 11,078 | ** ** | 13,054 | ** ** |
| Net cash  outflows from investing activities             |   | (30,551                             | )      | (46,125 | ) | (5,166 | ) |
| Net cash  (outflows) inflows before financing activities |   | (21,207                             | )      | (35,047 | ) | 7,888 |   |
| Net cash inflows  (outflows) from financing activities   |   | 59,921                              |   | 8,743 |   | (11,868 | ) |
| Net increase  (decrease) in cash and cash equivalents    |   | 38,714                              |   | (26,304 | ) | (3,980 | ) |

 

Net cash inflows from operating activities increasedby 17.8%, from RMB11.08 billion in 2001 to RMB13.05****billion in 2002, mainly reflecting the growth in ourbusiness.  Net cash inflows fromoperations increased from RMB13.25 billion in 2001 to RMB15.68 billion in2002.  This increase was partiallyoffset by an increase in net cash outflows from returns on investments andservicing of finance and taxation, to RMB2.62 billion in 2002, from RMB2.17billion in 2001.  This increase inoutflows in 2002 principally reflected net interest paid of RMB 1.27 billion in2002, as compared with net interest received of RMB0.03 billion in 2001, whichwas partially offset by a decrease of RMB0.85 billion in PRC income tax paid in2002 as compared with 2001.

 

Net cash outflows from investing activities wereRMB5.17 billion in 2002, compared to net cash outflows of RMB46.13 billion in2001.  This decrease in net cashoutflows from investing activities in 2002 primarily reflected an RMB20.10billion decrease in short-term bank deposits in 2002, as compared with anRMB17.08 billion increase in 2001 and the net cash effects from the purchase ofUnicom New Century, partially offset by a decrease in purchases of property,plant and equipment.

 

Net cash inflows from financing activities were anoutflow of RMB11.87 billion in 2002, compared to an inflow of RMB8.74 billionin 2001, resulting primarily from repayment of RMB19.93 billion in long-termbank loans in 2002, as compared with RMB 0.77 billion in 2001, and a decreasein amounts due to Unicom Group in 2002, as compared with an increase in 2001.

 

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***Indebtedness and Capital Structure***

 

The following table sets forth the amount of cash,assets, short-term and long-term debt, equity as well as debt-to-assets anddebt-to-equity ratios as of the end of 2000, 2001 and 2002.

 
|                                                   |   | **As of  December 31,**                    |   |
|--------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                   |   | **2000**                                   |   | **2001** |   | **2002** |   |
|                                                   |   | **(RMB in  millions, except percentages)** |   |
| Cash and cash  equivalent and short-term bank deposits |   | 52,556                                     |   | 43,335 | ** ** | 19,259 | ** ** |
| Total assets                                           |   | 112,829                                    |   | 127,905 |   | 149,223 |   |
| Short-term debt                                        |   | 8,501                                      |   | 7,933 |   | 15,330 |   |
| Long-term debt                                         |   | 27,151                                     |   | 36,337 |   | 37,686 |   |
| Minority  interests                                    |   | 883                                        |   | 829 |   | 566 |   |
| Shareholders’  equity                             |   | 57,224                                     |   | 61,681 |   | 66,247 |   |
| Debt-to-assets  ratio(1)                               |   | 39.0                                       | %      | 42.2 | % | 44.7 | % |
| Debt-to-equity  ratio(2)                               |   | 63.9                                       | %      | 73.1 | % | 80.9 | % |

 

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

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

 

Our debt-to-assets ratio increased from 42.2% at theend of 2001 to 44.7% at the end of 2002. Our debt-to-equity ratio increased from 73.1% at the end of 2001 to80.9% at the end of 2002.  The sum ofour long-term and short-term interest bearing debt exceeded the amount of ourcash and cash equivalents and short-term bank deposits by RMB33.76****billion as of December 31, 2002.  We continue to seek to optimize our capitalstructure, develop multiple financing sources and reduce overall financingcosts.

 

Outstanding short-term and long-term bank loans, allof which are RMB-denominated, increased from RMB44.27 billion at the end of2001 to RMB53.02 billion at the end of 2002. Our long-term bank loans generally bear floating interest rates that rangedfrom 4.54% to 6.24% per annum in 2002 with maturity through 2008.  The loan agreements do not include financialperformance or other covenants which materially restrict our operations orthose of CUCL or Unicom New Century, our principal operating subsidiaries inChina.  As of December 31, 2002,short-term bank loans of approximately RMB 463 million and long-term bank loansof approximately RMB 9.16****billionwere guaranteed by Unicom Group.

 

***Contractual Obligations and Commercial Commitments***

 

The following tables set forth the amount of ouroutstanding contractual cash obligations as of December 31, 2002.  

 
|                          |   | **Payments Due by Period (RMB in millions)** |   |
|-------------------------------|--------|----------------------------------------------|--------|
| **Contractual Obligations**   |   | **Total**                                    |   | **Due in  2003** |   | **Due in  2004** |   | **Due in  2005** |   | **Due in  2006** |   | **Due in  2007** |   | **Due after  2007** |   |
| Long-term bank  Loans(1)      |   | 43,145                                       |   | 5,460 |   | 4,826 |   | 22,039 |   | 8,047 |   | 2,494 |   | 279 |   |
| Finance lease  obligations(2) |   | 118                                          |   | 17 |   | 8 |   | 7 |   | 7 |   | 6 |   | 73 |   |
| Capital  Commitments(3)       |   | 8,898                                        |   | 8,898 |   | — |   | — |   | — |   | — |   | — |   |
| Other  Commitments(3)(5)      |   | 870                                          |   | 870 |   | — |   | — |   | — |   | — |   | — |   |
| Operating  Leases(3)(4)       |   | 6,177                                        |   | 3,632 |   | 464 |   | 385 |   | 304 |   | 261 |   | 1,131 |   |
| Total  obligations            |   | 59,208                                       |   | 18,877 |   | 5,298 |   | 22,431 |   | 8,358 |   | 2,761 |   | 1,483 |   |

 

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(1)     See consolidated financial statements, Note28 “Long-term Bank Loans”.

 

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(2)     See consolidated financial statements, Note29 “Obligations Under Finance Leases”.

(3)     See consolidated financial statements, Note37 “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 and Unicom New Century, in our cellular service areas.  See “Critical Accounting Policies 3⁄4Lease of CDMA Network Capacity”; “Business Overview 3⁄4Cellular Services 3⁄4 CDMA Cellular Services -Our Leasing of CDMA Networks from Unicom Group” under Items 4, “MajorShareholders and Related Party Transactions 3⁄4Related Party Transactions - Leasing of CDMANetwork Capacity” under Item 7 and Note 37(b) “Contingencies and commitments 3⁄4Operating Lease Commitment” to the consolidated financial statements fordetails.

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

 

***Capital Expenditures***

 

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

 
|                              |   | **Year Ended December 31,** |   |
|-----------------------------------|--------|-----------------------------|--------|
|                              |   | **2000**                    |   | **2001** |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   |
|                              |   | **(RMB in billions)**       |   |
| GSM cellular(1)                   |   | 17.28                       |   | 20.78 |   | 7.90 |   | 5.11 |   | 4.16 |   | 5.16 |   |
| Long distance,  date and Internet |   | 5.71                        |   | 7.33 |   | 1.94 |   | 2.49 |   | 2.00 |   | 2.00 |   |
| Transmission  network(2)          |   | —                      |   | — |   | 4.65 |   | 6.24 |   | 6.00 |   | 5.00 |   |
| Paging                            |   | 2.19                        |   | 0.55 |   | 0.21 |   | 0.11 |   | 0.10 |   | 0.09 |   |
| Others(3)                         |   | —                      |   | 2.59 |   | 4.24 |   | 6.11 |   | 6.09 |   | 5.20 |   |
| Total                             |   | 25.18                       |   | 31.25 |   | 18.94 |   | 20.06 |   | 18.35 |   | 17.45 |   |

 

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(1)               The capitalexpenditures for 2000 to 2002 reflect capital expenditures for our cellularbusiness in 12 provinces, municipalities and autonomous regions operated byCUCL; while capital expenditures for 2003 to 2005 represent 21 provinces,municipalities and autonomous regions, including the nine provinces,municipalities and autonomous regions operated by Unicom New Century which we acquiredat the end of 2002.

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

(3)               Other expendituresrepresent investment in telecom equipment buildings, supporting systems andmiscellaneous items.

 

Capital expenditures in 2002 totaled RMB18.94 billion.  Capitalexpenditures attributable to the GSM cellular business, the long distance, dataand Internet businesses, the paging business, the transmission network andother projects were RMB7.90 billion, RMB1.94 billion, RMB0.21 billion andRMB4.65 billion, respectively. Expenditures for other projects were mainly related to the set up of thebilling, customer service and information system, office building, operationalmaintenance and research and development.

 

Projected capitalexpenditures for 2003 is RMB20.06 billion (RMB17.98 billion for the cellularbusiness of CUCL and RMB2.08 billion for the cellular business of Unicom NewCentury), which will mainly focus on obtaining positive cash flow through theimprovement of the GSM network, value-added business and supporting systems,supporting infrastructure for services, information systems and certaintargeted areas with high investment returns.

 

We expect to fund our capital expenditure needs with acombination of cash generated from operating activities, capital marketfinancing and short-term and long-term bank loans.  See “Risk Factors – Risks Relating to Our Business – We expect tohave significant capital expenditure requirements in the future, and our inabilityto fund these requirements may adversely affect our growth and profitability”under Item 3.

 

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**US GAAP Reconciliation**

 

Our consolidated financial statements are prepared inaccordance with Hong Kong GAAP, which differs in certain material respects fromUS GAAP.  Significant differences relateprimarily to the effect of the acquisition of Unicom New Century, treatments ofthe upfront non-refundable revenue and the related direct incremental costs,employees’ housing benefits, reevaluation of properties performed in connectionwith the reorganization, impairment of long-lived assets and goodwill, deferredtaxation, treatment of the grant of share warrants for the terminations of CCFarrangements in 2000, additional disclosure requirement for share optionsscheme and measurement of costs in investment in equity securities.  Reconciliation between Hong Kong GAAP and USGAAP which affect our net income and shareholders’ equity arising from theaforementioned differences are included in Note 41 to the consolidatedfinancial statements included in this annual report.  In addition, condensed consolidated financial statements under USGAAP, including condensed consolidated statements of income, changes in shareholders’equity and cash flows information, as well as condensed consolidated balancesheet information and other additional financial information which have beenrestated for relevant periods presented to reflect the impact of the effects ofthe acquisition of Unicom New Century are included in Note 41 to theconsolidated financial statements presented in this annual report.

 

**Item6.  Dir****ectors, Senior Management and Employees**

 

***A.******                                    Directorsand Senior Management***

 

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

** **
| **Name**             |   | **Age** |   | **Position**                                                                     |   |
|----------------------|--------|---------|--------|----------------------------------------------------------------------------------|--------|
| Yang Xianzu          |   | 63      |   | Chairman of the Board of Directors; Executive  Director; Chief Executive Officer |   |
| Wang Jianzhou        |   | 54      |   | Executive Director; President                                                    |   |
| Shi Cuiming          |   | 63      |   | Executive Director; Executive Vice President                                     |   |
| William Lo Wing  Yan |   | 42      |   | Executive Director; Vice President                                               |   |
| Ye Fengping          |   | 39      |   | Executive Director; Vice President                                               |   |
| Ge Lei               |   | 63      |   | Non-Executive Director                                                           |   |
| Lee Hon Chiu         |   | 74      |   | Independent Non-Executive Director                                               |   |
| Wu Jinglian          |   | 73      |   | Independent Non-Executive Director                                               |   |
| Craig O. McCaw       |   | 53      |   | Independent Non-Executive Director                                               |   |
| Shan Weijian         |   | 49      |   | Independent Non-Executive Director                                               |   |
| C. James Judson      |   | 58      |   | Alternate Director to Craig O. McCaw                                             |   |
| Liu Yunjie           |   | 60      |   | Vice President                                                                   |   |

 

Yang Xianzu was appointed in April 2000 as anExecutive Director and subsequently became the Chairman of the Board ofDirectors and Chief Executive Officer of our company responsible for ouroverall management. Mr. Yang, a senior engineer, graduated in 1965 from theDepartment of Telephone and Telegraph at the Wuhan College of Posts andTelecommunications. From 1983 to 1990, Mr. Yang served as Deputy DirectorGeneral of the Posts and Telecommunications Administration of Hubei Provinceand as Director General of the Posts and Telecommunications Administration ofHenan Province. From 1990 to 

 

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early 1999, Mr. Yang served as Vice Minister of the Ministry of Postsand Telecommunications, or the MPT, and later as Vice Minister of MII.  In these capacities, Mr. Yang was involvedin the strategic management of Unicom Group. Since 1999, Mr. Yang has served as Chairman of the Board of Directorsand President of Unicom Group and was re-appointed as the Chairman in February2001. With thirty-seven years of experience in the telecommunications industryin China, Mr. Yang has extensive knowledge about telecommunications operations,as well as extensive leadership and management experience.

 

Wang Jianzhou was appointed in April 2000 as an Executive Director andsubsequently became our President responsible for our day-to-day management andoperations. Mr. Wang, a professor-level senior engineer, graduated in 1985 fromthe Department of Management Engineering at Zhejiang University with a master’sdegree. From 1992 to 1996, Mr. Wang served as Deputy Director General and laterDirector General of the Posts and Telecommunications Bureau of Hangzhou Cityand as Deputy Director General of the Posts and Telecommunications of ZhejiangProvince. From 1996, Mr. Wang served as Director General of the Department ofPlanning and Construction of the MPT and later as Director General of theDepartment of General Planning of the MII. In these capacities, Mr. Wang wasinvolved in the strategic management of Unicom Group. Since February 1999, Mr.Wang has served as Director and Executive Vice President of Unicom Group andwas appointed as President in February 2001. With many years of experience inthe telecommunications industry in China, Mr. Wang has extensive knowledge andexperience in telecommunications operations and management.

 

Shi Cuiming was appointed in April 2000 as an Executive Director andsubsequently became our Executive Vice President. Mr. Shi assists the Chairmanof the Board of Directors and the President in managing day-to-day operationsand is also responsible for finance. Mr. Shi, a senior economist, graduated in1963 from the Department of Management Engineering at the Beijing University ofPosts and Telecommunications. From 1981 to 1987, Mr. Shi served as DeputyDirector of Postal Economic Research of the MPT and as Deputy Director Generalof the Bureau of Finance of the MPT. From 1987 to 1997, Mr. Shi served asDirector General of the Bureau of Finance, Director General of the Departmentof Operations and Finance and Director General of the Department of Finance ofthe MPT. From 1997 to early 1999, Mr. Shi served as Chairman of the Board ofDirectors of China Telecom (Hong Kong) Group Limited and Chairman of the Boardof Directors of China Telecom (Hong Kong) Limited. Since early 1999, Mr. Shihas served as Director and Vice President of Unicom Group and was re-appointedas Director of Unicom Group in September 2000. With thirty-nine years of experiencein the telecommunications industry in China, Mr. Shi has extensive knowledgeand experience in telecommunications operations and management.

 

William Lo Wing Yan was appointed in July 2002 as anExecutive Director and Vice President of our company.  Mr. Lo assists the President in handling investor relations andissues relating to international co-operation. Mr. Lo graduated from Cambridge University in 1987, with a PhD degree inGenetic Engineering. From 1988 to 1990, Mr. Lo was a management consultant withMcKinsey & Company. From 1994 to1998, Mr. Lo was the Founding ManagingDirector of Hongkong Telecom’s wholly-owned subsidiary, Hongkong Telecom IMSLimited.  From 1998 to 1999, Mr. Loserved as Chief Executive Officer of Citibank’s Global Consumer BankingBusiness for Hong Kong and Macau. Mr. Lo is at present the non-executiveChairman of WPP Greater China and also serves as a non-executive director onthe board of a number of publicly listed companies in Hong Kong, includingSoftbank Investment International Ltd, Capital Publications Ltd and PanoramaInternational Holdings Ltd. Mr. Lo has extensive work experience and managementexpertise in the areas of information technology, telecommunications andbanking industry.

 

Ye Fengping 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 fromNanjing Posts and Telecommunications Institution in 1984, with a major inTelecommunications Engineering. From 1984 to 1998, Mr. Ye worked for theShenzhen Posts and 

 

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Telecommunications Bureau and onceserved as Deputy Department Head in the Materials Management Department andGeneral Manager of the Materials Supply Company of the Bureau. From 1998 to2000, Mr. Ye worked for the Shenzhen Telecommunications Bureau as Chief of theCorporate Development Department. Mr. Ye joined China Unicom in March 2000 asDeputy General Manager and later General Manager of China Unicom CorporationLimited’s Shenzhen Branch. He also served as Deputy General Manager of ChinaUnicom Corporation Limited’s Guangdong Branch and General Manager of the Salesand Marketing Department of Unicom Group. Mr. Ye has eighteen years ofexperience in the telecommunications industry and extensive experience inmarketing planning and management.

 

Ge Lei was appointed in April 2000 as a Non-Executive Director of ourcompany. Mr. Ge is a senior engineer and graduated from the TelecommunicationsEngineering Department at the Beijing University of Posts andTelecommunications in 1962. From 1974 to 1988, he held numerous positions,including Chief of the Telecommunications Bureau of the MPT, Deputy Director ofthe Equipment Maintenance Bureau, Chairman of the Department of ManagementEngineering of the Beijing University of Posts and Telecommunications, DeputyDirector of the Planning Institute of the MPT and the Deputy Director of thePlanning Bureau of the MPT. From 1988 to 1998, he served as the Director of thePlanning Department of the MPT, Director of the Education Department of theMPT, and Director of the Telecommunications Administrative Department of theMPT. From 1998 to 2001, Mr. Ge was the Chairman and general manager of GuoxinPaging Corporation Limited. In February 2000, he was appointed as a Director ofUnicom Group. With forty years of experience in the telecommunications industryin China, Mr. Ge has extensive expertise and management experience in thetelecommunications industry.

 

Lee Hon Chiu was appointed in April 2000 as an Independent Non-ExecutiveDirector of our company. Mr. Lee is also Chairman of the Council of the ChineseUniversity of Hong Kong and a non-executive director of The Hong Kong &China Gas Company Limited. Mr. Lee obtained a Bachelor of Science degree inElectrical Engineering from the Massachusetts Institute of Technology in 1952and a Master of Science degree in Electronics from Stanford University in 1953.

 

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

 

Craig O. McCaw was appointed in May 2000 as a Non-Executive Director of ourcompany, and subsequently became an Independent Non-Executive Director on June16, 2002. Mr. McCaw is Chairman and Chief Executive Officer of Eagle RiverInvestments LLC, a private company that makes strategic investments in telecommunicationsventures, and a director of Nextel Communications, Inc., as well as theChairman of its executive committee. He is also the Chairman of the boards ofTeledesic Corporation and ICO Global Communications Limited.  Mr. McCaw established McCaw CellularCommunications, Inc. and XO Communications, Inc.  Mr. McCaw has actively participated in both cellular and cabletelevision trade associations over the years and is a member by Presidentialappointment of the United States National Security Telecommunications AdvisoryCommittee.  Mr. McCaw graduated fromStanford University in 1973.

 

C. James Judson was appointed in March 2001 as an Alternate Director to Craig O.McCaw.  Mr. Judson is a Senior Lawyerwith Davis Wright Tremaine, a Seattle-based law firm with twelve offices 

 

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worldwide. Mr. Judson was VicePresident and General Counsel of Eagle River, Inc. and is a member of EagleRiver Investments, LLC, a Kirkland-based venture capital fund formed by CraigO. McCaw to focus on investment opportunities in communications. Mr. Judsonalso serves on the boards of Port Blakely Tree Farms, LP, Garrett and RingInc., The Joshua Green Corporation, and Airbiquity, Inc. Mr. Judson attendedStanford University, graduating in 1966 with a Bachelor of Arts degree (*cum laude*). Subsequently, Mr. Judsongraduated from Stanford University Law School with a Juris Doctor degree. Whilein law school, he was the Executive Editor of the Stanford Law Review.

 

Shan Weijian was appointedin May 2003 as an Independent Non-Executive Director.  Mr. Shan is Managing Director of Newbridge Capital.  Mr. Shan serves on the boards of Bank ofChina (Hong Kong), Korea First Bank, Taiwan Cement Corporation International,Baoshan Iron and Steel, among others. Before joining Newbridge, Mr. Shan was a Managing Director at J.P.Morgan.  Prior to J.P. Morgan, he was aprofessor at the Wharton School of University of Pennsylvania.  His earlier employers include the WorldBank, Grahman and James, a law firm based in San Francisco, and BeijingUniversity of International Business and Economics.  Mr. Shan holdsa Ph.D. from the University of California-Berkeley.

 

Liu Yunjie was appointed in May 2000 as our Chief Engineer and VicePresident. Mr. Liu assists the President in managing the technology andoperations relating to fixed and data communications services.  Mr. Liu, a senior engineer, graduated fromthe Department of Applied Physics at Beijing University in 1968. From 1983 to1995, Mr. Liu served as Deputy Director General and later Director General ofthe Institute of Data of the MPT.  From1995 to 1998, Mr. Liu served as Deputy Director General of the DirectorateGeneral of Telecommunications and as Director General of the Bureau of DataCommunications of the MPT.  Mr. Liu wasalso President of the Institute of Postal Science Research and Planning of theMPT from 1998 to 1999. Since April 1999, Mr. Liu has served as the ChiefEngineer and later Vice President of Unicom Group.  Mr. Liu has more than thirty years of experience in managementand business operations in the telecommunications industry, with expertise indata communications technology.

 

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

 

The aggregate compensation paid by us to our directorsand executive officers as a group in 2002 was approximately RMB****16.50****million,including retirement and other benefits. Each ofour executive directors and executive officers enters into a bonus agreementwith us that ties the amount of bonus the director or officer will receive at theend of a year to our operating results of the year and the job performance ofthe director or officer.  Some ofour directors and executive directors also hold options to purchase shares inour company.  See “E.  Share Ownership” below for detailed descriptionsof our share option schemes and options granted to our directors and executiveofficers.

 

***C.******                                    BoardPractices***

 

**General**

 

Pursuant to our Articles of Association, at eachannual general meeting, one-third of our directors retire from office by rotationexcept for any director holding office as Chairman or Chief ExecutiveOfficer.  The retiring Directors areeligible for re-election.  If anyvacancy is not filled at the annual general meeting, the retiring directorshall be deemed re-elected.  The Boardmay at any time appoint a new director to fill a vacancy or as an additionaldirector.  The Board may also appointand remove our executive officers.  Eachof our directors other than C. James Judson, William Lo Wing Yan, Ye Fengpingand Shan Weijian was appointed in 2000. Mr. Judson was appointed as an alternate director to our independentnon-executive director Craig O. McCaw in March 2001.  Mr. Lo was appointed as an Executive Director and Vice Presidentin July 2002.  Mr. Ye was appointed asan Executive Director and Vice President in January 2003.

 

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Mr. Shan was appointed as an Independent Non-Executive Director in May2003.  Mr. Shi Cuiming, Mr. Li Zhengmaoand Mr. Ge Lei were re-appointed as directors in June 2001.  Mr. Wang Jianzhou, Mr. Lee Hon Chiu and Mr.Wu Jinglian were re-appointed as directors in May 2002.  Mr. Li Zhengmao and Mr. Tan Xinghui resignedas Executive Directors and Vice Presidents in June 2002 and January 2003,respectively.  No benefits are payableto our directors or executive officers upon termination of their service withus in accordance with the provisions of their service agreement.

 

**Audit Committee**

 

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

 

•                                          consideringthe appointment, resignation and removal of our external auditor and theauditor’s fees;

 

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

 

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

 

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

 

•                                          reviewingthe relevant reports concerning our internal controls and procedures.

 

The Board of Directorsrecently approved certain amendments to the duties of the audit committee,including strengthening of responsibilities in the following areas:

 

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

 

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

 

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

 

The members of theaudit committee are Lee Hon Chiu, Wu Jinglian and Ge Lei.

 

**Remuneration Committee**

 

The remunerationcommittee meets regularly to consider human resources issues, issuance of shareoptions and other matters relating to compensation.  In particular, the remuneration committee makes recommendations tothe Board on executive compensation. The primary duties of the remuneration committee are to make recommendationsto the board regarding the remuneration structure of the executive directorsand to determine specific remuneration packages for the executive directors onbehalf of the board. The remuneration committee is also responsible foroperating our employee share option scheme and any other incentive scheme asthey apply to the executive directors, including determining the granting of 

 

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options to executive directors. The members of the remuneration committee are Wu Jing Lian, Lee Hon Chiuand Ge Lei.

 

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

 

As of December 31, 2002,we had 38,250****employees, including29,332 employees of CUCL, which was similar to the 29,973 employees of CUCL atthe end of 2001.  These employees areclassified by function as follows:

** **
| **By Function**                                 |   | **Number of  Employees** |   | **By Business Segment** |   | **Number of  Employees** |       |
|-------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|--------------------------|------------|
| Management and  administration                  |   | 6,463                    |   | Cellular                |   | 24,734                   | ** ** |
| Other general  administration                   |   | 7,537                    |   | GSM                     |   | 20,977                   |       |
| Marketing and  sales                            |   | 6,651                    |   | CDMA                    |   | 3,757                    |       |
| Technical,  engineering and network maintenance |   | 14,726                   |   | Long distance           |   | 2,847                    | ** ** |
| Retail and  customer service                    |   | 2,472                    |   | Data                    |   | 3,239                    |       |
| General support                                 |   | 401                      |   | Internet                |   | 1,454                    |       |
| Total:                                          |   | 38,250                   |   | Paging                  |   | 5,976                    |       |
|                                            |   |                     |   |                    |   |                     |       |
|                                            |   |                     |   | Total:                  |   | 38,250                   |       |

 

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

 

As of May 31, 2003, ourdirectors and executive officers as a group own approximately 60,000****shares in Unicom, or less than 0.001% ofour issued and outstanding share capital. The table below sets forth the number of our shares held by ourdirectors and executive officers. Shares owned by our directors and executive officers do not carry votingrights different from our other issued shares.

** **
| **Name**        |   | **Number of Shares**   |   | **% of Outstanding Shares** |   |
|-----------------|--------|------------------------|--------|-----------------------------|--------|
| Shi Cuiming     |   | 30,000 ordinary shares |   | Less than 1%                |   |
| Tan Xinghui     |   | 20,000 ordinary shares |   | Less than 1%                |   |
| C. James Judson |   | 1,000 ADSs*            |   | Less than 1%                |   |

 

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*  *Each ADS represents 10 ordinary shares of HK$0.10 each.*

 

Our directors andexecutive officers as a group hold options for 7,890,400 shares, or less than0.1% of our issued and outstanding share capital, including the following optionsgranted under our pre-global offering share option scheme and share optionscheme:

 

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*Options granted under the shareoption scheme*

* *
| **Name**              |   | **Number of  Shares Covered** |   | **Expiration Date** |   | **Exercise Price** |   | **Consideration  Paid** |   |
|-----------------------|--------|-------------------------------|--------|---------------------|--------|--------------------|--------|-------------------------|--------|
| Yang Xianzu           |   | 526,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 526,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Wang Jianzhou         |   | 420,000                       |   | July 9, 2009        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 420,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Shi Cuiming           |   | 396,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 396,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Ge Lei                |   | 292,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Wu Jinglian           |   | 292,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Craig O. McCaw        |   | 292,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Tan Xinghui           |   | 292,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Lo Wing Yan,  William |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Ye Fengping           |   | 132,000                       |   | July 9, 2008        |   | HK$6.18            |   | HK$1.00                 |   |
|                  |   | 204,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |
|                  |   |                          |   |                |   |               |   |                    |   |
| Shan Weijian          |   | 292,000                       |   | May 20, 2009        |   | HK$4.30            |   | HK$1.00                 |   |

* *

*Options granted under the pre-globaloffering share option scheme*

* *
| **Name**      |   | **Number of  Shares Covered** |   | **Expiration Date** |   | **Subscription  Price** |   | **Consideration Paid** |   |
|---------------|--------|-------------------------------|--------|---------------------|--------|-------------------------|--------|------------------------|--------|
| Yang Xianzu   |   | 525,000                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |
|          |   |                          |   |                |   |                    |   |                   |   |
| Wang Jianzhou |   | 396,200                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |
|          |   |                          |   |                |   |                    |   |                   |   |
| Shi Cuiming   |   | 396,200                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |
|          |   |                          |   |                |   |                    |   |                   |   |
| Ge Lei        |   | 292,600                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |
|          |   |                          |   |                |   |                    |   |                   |   |
| Tan Xinghui   |   | 204,400                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |
|          |   |                          |   |                |   |                    |   |                   |   |
| Ye Fengping   |   | 136,000                       |   | June 22, 2010       |   | HK$15.42                |   | HK$1.00                |   |

 

**Stock Incentive Schemes**

 

We retained acompensation consulting firm to help us design stock incentive schemes thatalign the interests of our management and employees with those of ourshareholders and link their compensation with our operating results and shareperformance.

 

*ShareOption Scheme.*  Wealso adopted a share option scheme on June 1, 2000 and amended the scheme onMay 13, 2002.  The amended schemeprovides for the grant of options to our employees, including executivedirectors and non-executive directors. Any grant of share options to a “connected person” (as defined in the HongKong Listing Rules) of Unicom requires approval by our independentnon-executive directors, excluding any independent non-executive director whois the grantee of the option.

 

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We plan to grant options****that cover a total number of ordinary shares not exceeding10% of the total number of our issued and outstanding shares as of May 13,2002.  The option period commences onany date after the date on which an option is offered, but may not exceed 10years from the offer date.  Thesubscription price of a share in respect of any particular option granted underthis share option scheme will be determined by our board of directors in itsdiscretion at the grant date, which shall be no less than the higher of: (i) thenominal value of the shares; (ii) the closing price of the shares on theHong Kong Stock Exchange on the grant date in respect of such option; and(iii) the average closing price of the shares on the Hong Kong StockExchange for the five trading days immediately preceding the grant date.  As of May 31,****2003, we granted options for a total of 148,504,000 shares to10 directors and around 2,500 other employees.

 

*Pre-GlobalOffering Share Option Scheme.*  We adopted a pre-global offering share option scheme on June 1,2000.  Options for an aggregate of27,116,600 shares have been granted to directors under the pre-global offeringshare option scheme and we do not expect to grant further options under thisscheme.  On May 13, 2002, this scheme was amended along with the amendment of theshare option scheme described above. The amended terms of the pre-global offering share option scheme aresubstantially the same as the share option scheme, except for the following:

 

•                  Thesubscription price of a share in respect of any particular option granted underthe pre-global offering share option scheme is HK$15.42, the offer price in theHong Kong public offering portion of our initial public offering, excludingbrokerage fees and transaction levy.

 

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

 

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

 

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

 

As of the date of thisannual report, our controlling shareholder, Unicom Group, through its 26.16%direct interest in Unicom BVI, and its majority-owned subsidiary, China UnitedTelecommunications Corporation Limited, which in turn holds 73.84% of UnicomBVI, beneficially owned 9,725,000,020 shares of Unicom, or 77.47% of our totaloutstanding shares.  See “History andDevelopment of the Company — Further Restructuring of Unicom Group and InitialPublic Offering of the A Share Company in 2002” under Item 4 above.** **UnicomGroup is controlled by the Ministry of Finance and a group of approximatelyfifteen companies, 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 of May 31, 2003, mostof our record shareholders were located outside of the United States.  In addition, as of May 31, 2003, therewere approximately 15.9 million ADSs outstanding, each representing 10 sharesand together representing 1.3% of our total outstanding shares or 5.6% of ourtotal outstanding shares not held by our controlling shareholder.

 

***B.******                                    RelatedParty Transactions***

 

Principal transactionbetween us and our controlling shareholder, Unicom Group, include the followingcategories:

 

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

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

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

 

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

•                                          mutualprovision of premises between Unicom Group and us;

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

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

•                                          otherrelated party transactions.

 

**Agreements Relating to theRestructuring in Connection with Our Initial Public Offering**

 

***The Reorganization Agreement***

 

In connection with therestructuring, our wholly owned subsidiary, CUCL, entered into a reorganizationagreement with Unicom Group dated April 21, 2000.  This agreement includes the following terms:

 

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

 

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

 

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

 

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

 

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

 

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

 

•                                          notto engage in any business which competes with our businesses except for thebusiness of Unicom Paging and cellular telephony services based on CDMA technology;

 

•                                          inrelation to our paging business:

 

•                                          inthe management of Unicom Paging and Guoxin, to treat Guoxin no less favorablythan Unicom Paging;

 

•                                          notto expand Unicom Paging’s existing coverage to new geographical areas;

 

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•                                          togive Guoxin the first right to develop any new paging-related technologies andservices;

 

•                                          notto provide financial resources or assistance to Unicom Paging which are notequally provided to Guoxin; and

 

•                                          toensure that Unicom Paging products and services are differentiated from Guoxinproducts in the marketplace;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***Equity Transfer Agreement***

 

In connection with the restructuring, we, UnicomGroup, China Unicom (Hong Kong) Group Limited and China Unicom (BVI) Limitedentered into an equity transfer agreement, dated April 21, 2000.  This agreement includes the following terms:

 

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

 

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

 

(c)                                  UnicomGroup’s and our agreement that:

 

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•                                          weshall be entitled to apply in Hong Kong, Macau, Taiwan and in all places outsideof China for all trademarks incorporating the word Unicom in English andChinese and the Unicom logo; and

 

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

 

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

 

***Trademark Agreement***

 

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

 

CUCL entered into a service agreement with UnicomPaging on August 1, 2001.  Under theterms of the agreement, both agree to license its own trademarks and logos to each other on equitable termsand free of charge.

 

**Agreements relating to theRestructuring in connection with Acquisition of Unicom New Century from UnicomGroup**

 

***The Reorganization Agreement***

 

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

 

(a)                                  UnicomGroup’s agreement to transfer to Unicom New Century the assets and liabilitiesattributable to the businesses as described under Item 4, “Information on theCompany — History and Development of the Company — Restructuring andAcquisition of Unicom New Century”,

 

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

 

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

 

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

 

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

 

•                                          notto engage in any business which competes with our businesses except for theexisting competing businesses of Unicom Group (including, without limitation,the business of Unicom Paging).

 

***Conditional Sale and Purchase Agreement***

 

In connection with the restructuring, we and UnicomBVI entered into a conditional sale and purchase agreement, dated November 20,2002.  This agreement includes thefollowing terms:

 

(a)                                  UnicomBVI’s agreement to transfer all of its equity interest in Unicom New CenturyBVI to us;

 

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

 

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

 

**Provision of OngoingTelecommunications and Ancillary Services by Unicom Group to Us**

 

***Leasing of Satellite Transmission Capacity***

 

We lease satellite transmission capacity from a 60.25%owned subsidiary of Unicom Group.  Weuse this capacity to supplement our long distance network.

 

That subsidiary of Unicom Group and CUCL entered intoa satellite transmission channel leasing agreement, dated May 25, 2000.  Under this agreement, CUCL is entitled tolease for itself and on behalf of Guoxin satellite transmission capacity fromUnicom Group.

 

Payments for leasing of satellite transmissioncapacity will be calculated on the basis of tariffs set by the MII.  We will pay the minimum applicable tarifffor the relevant volume and duration less a discount of up to 10%.  The discount will not be less than thatoffered to any third party leasing similar transmission capacity.  The total leasing charges for satellitetransmission capacity for 2002 was approximately RMB35.15****million.

 

***Supply of International Gateway Services***

 

Unicom Group provides us with access to internationalconnections for our international long distance service through itsinternational gateways.  CUCL and UnicomGroup entered into a services agreement, dated May 25, 2000, which was renewedat the end of 2002.  Under the servicesagreement, Unicom Group agrees to supply international gateway services to usfor an initial term of three years, renewable at CUCL’s option.  Unicom Group has undertaken not to supplyinternational gateway services to third parties.  The charge for these services are based on Unicom Group’s cost ofoperation and maintenance of the international gateway facilities, includingdepreciation, plus a margin of 10% over cost. We retain all revenues generated by our international long distanceservice.  Total charges for the supplyof international gateway services in 2002 was approximately RMB15.63****million.

 

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***Supply of SIM Cards, IP Telephony Cards and RechargeableCalling Cards***

 

Through its subsidiary, Unicom Xingye, Unicom Groupagreed to supply SIM cards, UIM cards, IP telephony cards and rechargeablecalling cards to CUCL for an initial term of three years, renewable at CUCL’soption.  Charges for the supply of thesecards are based on the actual cost incurred by Unicom Xingye in supplying thecards plus a margin over cost to be agreed upon from time to time, but in anycase not to exceed 20%, subject to specified volume discounts.  Under the services agreement, prices andvolumes will be reviewed by the parties on an annual basis.

 

In connection with the acquisition of Unicom NewCentury, Unicom Group has also agreed to supply SIM cards, UIM cards, IPtelephony cards and rechargeable calling cards to Unicom New Century throughUnicom Xingye, for a period of one year from the completion of the acquisition.  The terms of the agreements with respect toUnicom New Century are similar to those with respect to CUCL.

 

Total charges for the supply of SIM cards, IPtelephony cards and rechargeable calling cards for 2002 was approximately RMB877.22****million.

 

***Equipment Procurement Services***

 

Prior to the restructuring, Unicom Import and ExportCo. Ltd., a 96.8% owned subsidiary of Unicom Group, handled most procurement offoreign and domestic telecommunications equipment and other materials requiredfor construction of Unicom Group’s networks. CUCL may continue to use Unicom Group’s procuring service at the rateof:

 

•                                          0.7%of the contract value in the case of imported equipment, or

 

•                                          0.5%of the contract value in the case of domestic equipment.

 

In connection with the acquisition of Unicom NewCentury, Unicom Group has also agreed to provide equipment procurement servicesto Unicom New Century through Unicom Import and Export Co. Ltd.  The terms of the agreements with respect toUnicom New Century are similar to those with respect to CUCL.

 

Our total payment to Unicom Group for equipmentprocurement services for 2002 was approximately RMB 13.99****million.

 

**Mutual Provision of OngoingTelecommunications and Ancillary Services and Facilities**

 

***Interconnection Arrangements and Roaming Arrangements***

 

Our cellular and long distance networks interconnectwith Unicom Group’s cellular and long distance networks. The services agreementbetween CUCL and Unicom Group provides for their interconnectionarrangements.  These arrangements willbe for an initial term of three years, renewable at CUCL’s option.  Interconnection settlement between UnicomGroup’s networks and our networks is 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 is based on either the relevant standardsestablished by the MII or an internal settlement arrangement applied by UnicomGroup prior to the restructuring, whichever is more favorable to us.  The internal settlement arrangement, whichis based on the parties’ respective internal costs of providing this service,is currently more favorable to us than the settlement arrangement prescribed bythe MII.  We have also entered intosimilar interconnection arrangements with Unicom Group for our CDMA services.

 

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In connection with the acquisition of Unicom NewCentury, Unicom Group and Unicom New Century have entered into similararrangements for the interconnection of Unicom New Century’s GSM and CDMAcellular networks and Unicom Group’s GSM and CDMA cellular and fixed linenetworks, for a period of one year from the completion of the acquisition.  The terms of the arrangements with respectto Unicom New Century are similar to those with respect to CUCL.

 

We and Unicom Group provide roaming services to eachother.  In addition, we make our longdistance network available to Unicom Group in its implementation of its roamingarrangements with other operators. These roaming arrangements are governed by the services agreementbetween CUCL and Unicom Group for an initial term of three years, renewable atCUCL’s option.  Charges for theseroaming services between us and Unicom Group are based on our respectiveinternal costs of providing these services, and will be on no less favorableterms than those available to any third party. We receive 50% of Unicom Group’s roaming revenue from third partyoperators for calls using our long distance network.  We have also entered into similar roaming arrangements withUnicom Group for our CDMA services in relation to the CDMA networks outside ofour cellular service areas.

 

In connection with the acquisition of Unicom NewCentury, Unicom Group and Unicom New Century have entered into similararrangements for the provision of roaming services to their respective GSM andCDMA cellular subscribers, for a period of one year from the completion of theacquisition.  The terms of theagreements with respect to Unicom New Century are similar to those with respectto CUCL.

 

Interconnection and roaming revenue andinterconnection and roaming expense derived from these arrangements with UnicomGroup for 2002 was approximately RMB 1,680****millionand approximately RMB 331.18****million,respectively.

 

***Leasing of Transmission Line Capacity***

 

CUCL and Unicom Group lease fixed-line transmissioncapacity from each other.  Under ourservices agreement, this arrangement will be for an initial term of threeyears, renewable at CUCL’s option. Lease charges are based on tariffs stipulated by the MII from time totime less a discount of up to 10%.  Thediscount given by CUCL to Unicom Group must not be more than what CUCL offersto other third party lessees for a similar lease.  When new tariffs are adopted by the MII, the discount rate willbe reviewed.  Net leasing fee paid by uswas RMB566.52****million for 2002.

 

**Mutual Provision of Premises**

** **

***Beijing Head Office Lease***

 

Prior to October 2002, we leased our Beijing headoffice premises from Unicom Xingye.  Thelease for such premises was terminated in September 2002.  We moved into our own head office premisesin October 2002 and leased a portion of such premises to Unicom Group.  Our lease with Unicom Group will expire atthe end of 2003 and will be renewable at Unicom Group’s option.

 

***Mutual Provision of Premises***

 

Unicom Group and we provide to each other premisesfrom time to time pursuant to services agreements between Unicom Group and eachof CUCL and Unicom New Century.  Otherthan premises leased from third parties, the rental rates in each case arebased on the lower of depreciation costs and market prices for similar premisesin that locality, but CUCL and Unicom New Century may charge Unicom Groupmarket rates for premises leased to Unicom Group.  In cases where the premises were leased from a third party, therental is the amount payable in the head lease.  In the case of shared premises, the 

 

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price is split in proportion to the respective areas occupied by theparties.  Total charges for premisesleased by Unicom Group to us for 2002 were RMB17.82****million.

 

**Leasing of CDMA Network Capacity**

*** ***

***Lease of CDMA Network Capacity***

 

Our wholly-owned subsidiary, CUCL, entered into alease agreement with Unicom Group and its subsidiary Unicom Horizon, pursuantto which Unicom Horizon agreed to lease to CUCL capacity on its CDMA network inCUCL’s cellular service areas.  Thisleasing arrangement has been approved by our minority shareholders at anextraordinary shareholders’ meeting.  Wehave the exclusive right to operate the CDMA network in CUCL’s serviceareas.  The initial term of the lease isone year, renewable each year at CUCL’s option.  The lease commenced in January 2002.

 

Unicom New Century had been leasing CDMA networkcapacity in its service areas from Unicom Horizon since January 2002.  In connection with the restructuring inpreparation for the acquisition of Unicom New Century, this leasing arrangementwas restructured in two steps.  A ShareCompany, Unicom Group and Unicom Horizon first entered into a CDMA leaseagreement on November 20, 2002.  A ShareCompany then transferred all of its rights and obligations under this leaseagreement to Unicom New Century.  Thesetransactions have been approved by the minority shareholders of the A ShareCompany and our minority shareholders. Pursuant to these agreements, Unicom Horizon agreed to lease to UnicomNew Century capacity on its CDMA network in Unicom New Century’s cellularservice areas.  We have the exclusiveright to operate the CDMA network in these service areas.  The initial term of the lease is one year,renewable at Unicom New Century’s option. The provisions of the CDMA leasing agreements with respect to Unicom NewCentury are similar to those with respect to CUCL’s CDMA lease.  Our total lease payment in 2002 wasRMB891.90 million.

 

We renewed our CDMA leases for an additional year inJanuary 2003.  Under the leasingarrangements, Unicom Horizon agreed to plan, finance and construct the CDMAnetwork, including the procurement of all equipment, and ensure that the CDMAnetwork is constructed in accordance with the detailed specifications andtimetable agreed between Unicom Horizon and us.  All payments, costs, expenses and amounts paid or incurred byUnicom Horizon that are directly attributable to the construction of the CDMAnetwork form the total network construction cost, which is used in calculatingthe lease fee payable by us, including:

 

•                                          construction,installation and equipment procurement costs and expenses,

•                                          surveyand design costs,

•                                          investmentin technology, software and other intangible assets,

•                                          insurancepremiums and capitalized interest on loans,

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

•                                          allcosts incurred in relation to any upgrade of technology.

 

The network construction cost should be verified and appropriatedocumentation must be provided to us or our auditors for verification.  The lease fee is calculated so as to enableUnicom Horizon to recover its total network construction cost within 7 years,together with an internal rate of return of 8%.

 

We are responsible for the operation, management andmaintenance of the CDMA network in accordance with the relevant requirements ofthe lease agreement and have the exclusive right to provide CDMA services inour cellular service areas.  Alloperating revenue, including airtime charges, monthly 

 

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subscription fees, interconnection charges, income from sales of UIMcards and handsets and other income generated from or in connection with theoperation of the CDMA network belong to us.

 

In addition to the capacity that we agreed to lease inthe first term, subject to giving not less than 180 days’ prior notice toUnicom Horizon, we may request to lease additional capacity.  Unicom Horizon is required to ensure thatall capacity which we have so requested is supplied by the due date of deliveryof the capacity, provided that, unless otherwise agreed, Unicom Horizon willnot be obliged to expand the CDMA network beyond the first phase.  We may not reduce the amount of capacityleased during the initial one-year lease term. However, subject to providing not less than 180 days’ prior writtennotice to or with the prior written consent of Unicom Horizon, we may reducethe amount of capacity leased for any additional lease term, provided that wemust lease all capacity which it has requested or otherwise committed to leasefor at least one year following the date of delivery or renewal of the lease ofsuch capacity.

 

Subject to certain exceptions, including delay causedby a force majeure event, a material breach of the lease agreement by us orcompliance with applicable laws and regulations, if any capacity is not readyfor operational service by the relevant delivery date, then Unicom Horizonshall be liable to provide a delay discount to us, equal to the daily lease feein respect of the relevant capacity multiplied by the number of days of delay,which shall be credited against future lease fee payments.

 

We have the option to purchase the CDMA network, whichmay be exercised at any time during the initial lease term or any additionallease term of the lease and within one year thereafter.  The acquisition price will be negotiatedbetween Unicom Horizon and us, based on the appraised value of the CDMA networkdetermined by an independent assets appraiser in accordance with applicable PRClaws and regulations and taking account of prevailing market conditions andother factors, provided that it will not exceed such price as would, takinginto account all lease fee payments made by us to Unicom Horizon and all delaydiscounts of lease fee, enable Unicom Horizon to recover its total networkconstruction cost, together with an internal rate of return on its investmentof 8%.  The exercise of the purchaseoption will be subject to the relevant provisions of the listing rules of HongKong Stock Exchanges governing connected transactions.  Title to the CDMA network assets will remainvested in Unicom Horizon until the CDMA network assets are transferred to usfollowing exercise of the purchase option.

 

In consideration of our entering into the leasingarrangements, Unicom Group has unconditionally and irrevocably guaranteed thedue and punctual performance by Unicom Horizon of its obligations under thelease agreements.  Unicom Group has alsoagreed to indemnify us for any loss suffered as a result of any defect in anyof the equipment or any loss caused by any negligence, default, act or omissionof Unicom Horizon or Unicom Group under the lease agreement or in connectionwith the CDMA network.  The aggregate liabilityof Unicom Group for any claim shall not exceed the total amount of lease feepayments made to Unicom Horizon or, where the purchase option has beenexercised, the total purchase price paid for the CDMA network.  The guarantee and indemnity provided byUnicom Group under the lease agreement will continue in force until theexpiration of the lease agreement.

 

We may terminate the lease by not less than 180 days’prior written notice, with effect from the end of any additional term.  In addition, Unicom Group or we mayterminate the lease if the other commits any continuing or material breach ofthe lease agreement.  Unicom Group orUnicom Horizon is not otherwise permitted to terminate the lease.

 

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***CDMA Interconnection and Roaming Arrangements***

 

In connection with the CDMA network capacity leaseagreement, our operating subsidiary, CUCL, has entered into a servicesagreement with Unicom Group with respect to interconnection and roamingarrangements.  Unicom New Century hasentered into similar arrangements with Unicom Group.

 

*Interconnectionarrangements.*  Our GSMand CDMA cellular and fixed line networks and Unicom Group’s GSM and CDMAcellular and fixed line networks interconnect with each other.

 

Interconnection settlement between Unicom Group’snetworks and our networks is based on relevant standards established from timeto time by the MII.  However, in thecase of calls between cellular subscribers in different provinces, settlementis based on either the relevant standards established by the MII from time totime or an agreed settlement arrangement between us and Unicom Group.  We are able to choose the more favorablearrangement.  The agreed settlementarrangement, which is based on the parties’ respective internal costs ofproviding this service, is currently more favorable to us than the settlementarrangement prescribed by the MII.

 

*Roamingarrangements.*  We andUnicom Group provide roaming services to each other’s CDMA cellular subscriberswithin its respective service areas.  Inaddition, we make our long distance network available to Unicom Group to enableUnicom Group to give effect to its roaming arrangements with third partyoperators.

 

Charges for these services between us and Unicom Groupare based on our respective internal costs of providing these services, and areon no less favorable terms than those available to any independent thirdparty.  We are paid 50% of the roamingrevenue received by Unicom Group from third party operators for making our longdistance network available to Unicom Group to give effect to its roamingarrangements with third party operators.

 

**Guarantee of Our Bank Loans by UnicomGroup and Short-Term Loans from Unicom Group**

 

As of December 31, 2002, short-term bank loans ofapproximately RMB463****million andlong-term bank loans of approximately RMB9.164 million of our operatingsubsidiaries were guaranteed by Unicom Group. Such guarantees were provided for our benefit without any cost to us.

 

Short-term loans from Unicom Group represent loansprovided by Unicom Group to various branches of Unicom New Century to financethe operation of their cellular businesses. Unicom Group borrowed the funds for such loans from banks at an interestrate of 4.54%.  All of these loans wereunsecured.  As of December 31, 2002,RMB724****million of such loansremain outstanding.

 

**Other Related Party Transactions**

 

We and Unicom Group have agreed to purchase CDMAhandsets from several suppliers in April 2002. These purchases are made through Guomai, a company listed on theShanghai Stock Exchange and our 58.88% indirectly owned subsidiary.  Under the arrangements between Guomai and usand between Guomai and Unicom Group, Guomai will purchase CDMA handsets fromvarious suppliers in types and quantities as we and Unicom Group specify insupply notices from time to time over a seven-month period beginning in May2002.  It will then re-sell suchhandsets to us and Unicom Group and distribute them to recipients designated byUnicom Group and us.  The purchase priceshall be payable by us or Unicom Group to Guomai within seven business days ofthe delivery of the handsets to the designated recipients.  The purchase price is negotiated on an arm’slength basis and depends on Guomai’s purchase cost and reasonable expenses indistributing the handsets to designated recipients, but in any event thepurchase 

 

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price will not be lower than the price at which such CDMA handsets aresold by Guomai to independent third parties. The total amount of sales of CDMA handsets by Guomai to Unicom Group wasRMB487.85 million.

 

***C.******                                    Interestsof Experts and Counsel***

 

Not applicable.

 

**Item 8****.  FinancialInformation**

 

See Item 18, “Financial Statements”.

 

**Legal Proceedings**

 

We are not involved in any material litigation,arbitration or administrative proceedings. So far as we are aware, no such litigation, arbitration oradministrative proceedings are pending or threatened.

 

**Policy on Dividend Distribution**

 

For the first time since our establishment on February8, 2000, our board of directors declared dividends in the amount of RMB 0.10per share on April 2, 2003.  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****.  The Offerand Listing**

 

**Market Price Information**

 

Our American depositary shares, each representing 10ordinary shares, are listed and traded on the New York Stock Exchange.  Our ordinary shares are listed and traded onthe Hong Kong Stock Exchange.  The NewYork Stock Exchange and the Hong Kong Stock Exchange are the principal tradingmarkets for our ADSs and ordinary shares, which are not listed on any otherexchanges in or outside the United States.

 

The high and low closing prices of our ordinary shareson the Hong Kong Stock Exchange and of our ADSs on the New York Stock Exchangesince listing are as follows:

 
|                         |   | **Price per Ordinary Share (HK$)** |   | **Price per ADS (US$)** |   |
|------------------------------|--------|------------------------------------|--------|-------------------------|--------|
|                         |   | **High**                           |   | **Low**                 |   | **High** |   | **Low** |   |
| Annual:                      |   |                               |   |                    |   |   |   |   |   |
| 2000(1)                      |   | 21.45                              |   | 10.95                   |   | 28.25 |   | 14.06 |   |
| 2001                         |   | 14.00                              |   | 7.10                    |   | 18.00 |   | 9.00 |   |
| 2002                         |   | 8.90                               |   | 4.15                    |   | 11.54 |   | 5.35 |   |
| Quarterly:                   |   |                               |   |                    |   |   |   |   |   |
| First Quarter,  2001         |   | 13.65                              |   | 8.25                    |   | 18.00 |   | 10.70 |   |
| Second Quarter,  2001        |   | 13.75                              |   | 7.85                    |   | 17.77 |   | 10.15 |   |
| Third Quarter,  2001         |   | 14.00                              |   | 7.55                    |   | 18.00 |   | 9.85 |   |
| Fourth Quarter,  2001        |   | 9.40                               |   | 7.10                    |   | 12.16 |   | 9.00 |   |
| First Quarter,  2002         |   | 8.90                               |   | 7.20                    |   | 11.54 |   | 9.10 |   |
| Second Quarter,  2002        |   | 7.85                               |   | 5.95                    |   | 10.34 |   | 7.70 |   |
| Third Quarter, 2002          |   | 6.25                               |   | 4.70                    |   | 8.19 |   | 5.91 |   |
| Fourth Quarter,  2002        |   | 6.25                               |   | 4.15                    |   | 7.91 |   | 5.35 |   |
| First Quarter,  2003         |   | 6.00                               |   | 4.25                    |   | 7.72 |   | 5.40 |   |
| Monthly:                     |   |                               |   |                    |   |   |   |   |   |
| January 2003                 |   | 6.00                               |   | 5.35                    |   | 7.72 |   | 6.88 |   |
| February 2003                |   | 5.55                               |   | 4.73                    |   | 7.04 |   | 6.15 |   |
| March 2003                   |   | 4.95                               |   | 4.25                    |   | 6.30 |   | 5.40 |   |
| April 2003                   |   | 4.53                               |   | 3.90                    |   | 5.76 |   | 5.02 |   |
| May 2003                     |   | 4.48                               |   | 4.18                    |   | 6.14 |   | 5.20 |   |
| June 2003  (through June 16) |   | 5.40                               |   | 4.90                    |   | 7.09 |   | 6.26 |   |

 

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(1)                                  CommencingJune 22, 2000 in respect of the shares traded on the Hong Kong Stock Exchangeand June 21, 2000 in respect of the ADSs traded on the New York StockExchange.

 

**Item 10****.  AdditionalInformation**

 

***A.******                                    ShareCapital***

 

Not applicable.

 

***B.******                                    Memorandumand Articles of Association***

 

**General**

 

Under our Memorandum of Association, we have thecapacity, rights, powers, liabilities and privileges of a natural person.  The following is a summary of selectedprovisions of our Articles of Association:

 

**Directors**

** **

***Material Interests and Voting***

 

A director shall not vote (or be counted in thequorum) on any resolution of our board of directors in respect of any contractor arrangement or proposal in which he is, to his knowledge, materiallyinterested, and if he shall do so, his vote shall not be counted, but thisprohibition does not apply to any contract, arrangement or other proposal foror concerning:

 

•                                          thegiving of any security or indemnity either (a) to the director in respect ofmoney lent or obligations incurred by him at the request of or for the benefitof Unicom or any of its subsidiaries or (b) to a third party in respect of adebt or obligation of Unicom or any of its subsidiaries for which the directorhas himself assumed responsibility or guaranteed or secured in whole or inpart;

 

•                                          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 is aparticipant in the underwriting or sub-underwriting of the offer;

 

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•                                          anyother company in which the director is interested as an officer or shareholderor in which the director is beneficially interested in shares of that company,provided that he, together with any of his associates (as defined in the HongKong Stock Exchange Listing Rules) is not beneficially interested in 5% or moreof (a) the issued shares of any class of such company (or of any third companythrough which his interest is derived) or (b) the voting rights attached tosuch issued shares or securities;

 

•                                          thebenefit of employees of Unicom or any of its subsidiaries including (a) theadoption, modification or operation of any employees share scheme under whichthe director may benefit or (b) the adoption, modification or operation of apension fund or retirement, death or disability benefits scheme which relatesboth to directors and employees of Unicom or any of its subsidiaries and doesnot provide in respect of the director as such any privilege or advantage notgenerally accorded to the class of persons to which such scheme or fundrelates;

 

•                                          anycontract or arrangement in which the director is interested in the same manneras other holders of shares or debentures or other securities of Unicom byvirtue only of his interest in shares or debentures or other securities ofUnicom.

 

***Remuneration and Pensions***

 

The directors of Unicom are entitled to receive by wayof remuneration for their services such sum as is from time to time determinedby Unicom in general meeting.  The directorsare also entitled to be repaid all traveling, hotel and other expensesreasonably incurred by them in or about the performance of their duties asdirectors.  The board of directors maygrant special remuneration to any director who performs services which in theopinion of the board are outside the scope of the ordinary duties of adirector.

 

The board may establish and maintain any contributoryor non-contributory pension or superannuation funds for the benefit of, or givedonations, gratuities, pensions, allowances or emoluments to, any persons (a)who are or were at any time in the employment or service of Unicom, or of anycompany which is a subsidiary of Unicom, or is allied or associated with Unicomor with any such subsidiary company, or (b) who are or were at any timedirectors or officers of Unicom or of any such other company above, and holdingor who have held any salaried employment or office in Unicom or such othercompany, and the wives, widows, families and dependants of any such persons andmay make payments for or towards the insurance of any such persons.  Any director holding any such employment oroffice is entitled to participate in, and retain for his own benefit, any suchdonation, gratuity, pension, allowance or emolument.

 

***Borrowing Powers***

 

The directors may exercise all the powers of Unicom toborrow money and to mortgage or charge all or any part of the undertaking,property and assets (present and future) and uncalled capital of Unicom and toissue debentures, debenture stocks, bonds and other securities, whetheroutright or as collateral security for any debt, liability or obligation ofUnicom or of any third party.

 

***Qualification of Directors***

 

A director of Unicom is not required to hold anyqualification shares.  No person is requiredto vacate office or be ineligible for re-election or reappointment as adirector, and no person is ineligible for appointment as a director, by reasononly of his having attained any particular age.

 

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***Rotation of Directors***

 

At every annual general meeting, one-third of thedirectors for the time being, or, if the number is not three or a multiple ofthree, then the number nearest one-third, shall retire from office by rotationexcept for any director holding office as Chairman or Chief ExecutiveOfficer.  The directors to retire inevery year shall be those who have been longest in office since their lastelection.  The retiring directors shallbe eligible for re-election.

 

**Rights Attached to Ordinary Shares**

 

***Voting Rights***

 

Under the Companies Ordinance, any action to be takenby the shareholders in a general meeting requires the affirmative vote ofeither an ordinary or a special resolution passed at the meeting.  An ordinary resolution is one passed by themajority of such shareholders as are entitled to, and do, vote in person or byproxy at a general meeting.  A specialresolution is one passed by not less than three-quarters of such shareholdersas are entitled to, and do, vote in person or by proxy at a generalmeeting.  Most shareholders decisionsare passed by ordinary resolutions. However, the Companies Ordinance and our articles of associationstipulate that certain matters may only be passed by special resolutions.

 

Subject to any special rights, privileges orrestrictions as to voting that may from time to time be attached to any classor classes of shares, at any general meeting a resolution put to the vote ofthe meeting shall be decided on a show of hands unless a poll is 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 a show of hands, every individual shareholder whois present in person and every corporate shareholder who is present by a representativeduly authorized under section 115 of the Companies Ordinance has one vote.

 

On a poll, every shareholder present in person or, ifthe shareholder is a corporation, by duly authorized representative, or byproxy has one vote for every share of which he or she is the shareholder whichis fully paid up or credited as fully paid up. However, no amount paid up or credited as paid up on a share in advanceof calls or installments is treated for the foregoing purposes as paid up onthe share.

 

Any action to be taken by the shareholders requiresthe affirmative vote of a majority of the shares at a meeting ofshareholders.  There are no cumulativevoting rights.  Accordingly, the holdersof a majority of the shares voting for the election of directors can elect allthe directors if they choose to do so.

 

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***Issue of Shares***

 

Under the Companies Ordinance, our board of directorsmay, without prior approval of our shareholders, offer to issue new shares toexisting shareholders proportionately according to their shareholdings.  Our board of directors may not offer toissue new shares in any other manner without the prior approval of ourshareholders in a general meeting.  Anysuch approval given in a general meeting will continue in force until theconclusion of the following annual general meeting or the expiration of theperiod within which the next annual general meeting is required by law to beheld or when revoked or varied by an ordinary resolution of our shareholders ina general meeting, whichever comes first. If such approval is given, the unissued shares shall be at the disposalof our board of directors, which may offer, allot, grant options over or otherwisedispose of them to such persons, at such times and for such consideration andupon such terms and conditions as our board of directors may determine.

 

In accordance with the Listing Rules of the Hong KongStock Exchange, any such approval given by the shareholders must be limited toshares with an aggregate nominal value not exceeding 20 per cent of theaggregate nominal value of our share capital in issue plus the aggregatenominal amount of share capital repurchased by us since the granting of suchapproval.

 

***Dividends***

 

Subject to the Companies Ordinance and as set out inour articles of association, our shareholders in a general meeting may fromtime to time by ordinary resolution declare dividends to be paid to ourshareholders according to their rights and interests in the profits availablefor distribution, but no dividend shall be declared in excess of the amountrecommended by our board of directors.

 

In addition to any dividends declared in a generalmeeting upon the recommendation of the board of directors, our board ofdirectors may from time to time declare and pay to our shareholders suchinterim dividends as appear to our board of directors to be justified by ourfinancial position.  Our board ofdirectors may also pay any fixed dividend which is payable on any of our shareson any other dates, whenever our financial position, in the opinion of ourboard of directors, justifies such payments.

 

All dividends or bonuses unclaimed for one year afterhaving become payable may be invested or otherwise made use of by the board forthe benefit of Unicom until claimed. All dividends or bonuses unclaimed for six years after having beendeclared may be forfeited by the board and will revert to Unicom.

 

***Winding Up***

 

If we are wound up, the surplus assets remaining afterpayment to all creditors shall be divided among the shareholders in proportionto the capital paid up on the shares held by them, subject to the rights of theholders of any shares which may be issued on special terms or conditions.

 

If we are wound up, the liquidator may, with thesanction of a special resolution, divide among our shareholders in specie or inkind the whole or any part of our assets or vest any part of our assets intrustees upon such trusts for the benefit of our shareholders or any of them asthe resolution shall provide.

 

***Miscellaneous***

 

Shareholders are not entitled to any redemptionrights, conversion rights or preemptive rights on the transfer of ordinaryshares.

 

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The transfer agent and registrar for the shares isHong Kong Registrars Limited, 19th Floor, Hopewell Centre, 183 Queen’s RoadEast, Hong Kong.

 

***Modification of Rights***

 

Subject to the Companies Ordinance, any of the rightsfrom time to time attaching to any class of shares may, subject to the provisionsof the Companies Ordinance, be varied or abrogated with the consent in writingof the holders of not less than three-fourths of the issued shares of thatclass or with the sanction of a special resolution passed at a separate generalmeeting of the holders of shares of that class.  The provisions of our Articles of Association relating to generalmeetings apply to such separate general meetings, except that the necessaryquorum is not less than two persons holding or representing by proxy one-thirdin nominal value of the issued shares of that class, and that any holder of theshares of the class present in person or by proxy may demand a poll.

 

**Annual General and ExtraordinaryGeneral Meetings**

 

We must hold in each year a general meeting as ourannual general meeting in addition to any other meetings in that year.  The annual general meeting is held at suchtime (within a period of not more than fifteen months, or such longer period asthe Registrar of Companies of Hong Kong may authorize in writing, after theholding of the last preceding annual general meeting) and place as may bedetermined by the Directors.  All othergeneral meetings are called extraordinary general meetings.  The Directors may call an extraordinarygeneral meeting at any time or upon request in accordance with the Hong KongCompanies Ordinance.

 

Subject to the CompaniesOrdinance, an annual general meeting and a meeting called for the passing of aspecial resolution can be called by not less than twenty-one days’ notice inwriting, and any other general meeting can be called by not less than fourteendays’ notice in writing.  The noticemust specify the place, date and time of meeting, and, in the case of specialbusiness, the general nature of that business.

 

**Limitations on Rights to OwnSecurities**

 

There are no limitations on the rights to ownsecurities, including the rights of non-resident or foreign shareholders tohold or exercise voting rights on the securities, imposed by Hong Kong law orby our Memorandum of Association or our Articles of Association.

 

**Changes in Capital**

 

We may exercise any powers conferred or permitted bythe Companies Ordinance to purchase or otherwise acquire our own shares andwarrants at any price or to give, directly or indirectly, by means of a loan, guarantee,the provision of security or otherwise, financial assistance for the purpose ofor in connection with a purchase made by any person of any shares or warrantsin Unicom.  If we purchase or otherwiseacquire our own shares or warrants, neither we nor our board of directors willbe required to select the shares or warrants to be purchased or otherwiseacquired ratably or in any other particular manner as between the holders ofshares or warrants of the same class or as between them and the holders ofshares or warrants of any other class or in accordance with the rights as todividends or capital conferred by any class of shares; provided, however,purchases not made through the market or by tender shall be limited to amaximum price and if purchases are by tender, tender shall be available to allshareholders alike.  Any such purchaseor other acquisition or financial assistance must be made or given inaccordance with any relevant rules or regulations issued by the Hong Kong StockExchange or the Securities and Futures Commission of Hong Kong.

 

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We in general meeting may, from time to time, byordinary resolution increase our authorized share capital by the creation ofnew shares, and prescribe the amount of new capital and number of newshares.  We may from time to time byordinary resolution:

 

•                                          consolidateand divide all or any of our share capital into shares of a larger amount thanour existing shares;

 

•                                          divideour shares into several classes and attach to them any preferential, deferred,qualified or special rights, privileges or conditions;

 

•                                          cancelany shares which at the date of the passing of the resolution have not beentaken or agreed to be taken by any person, and diminish the amount of our sharecapital by the amount of the shares so canceled;

 

•                                          sub-divideour shares or any to them into shares of a smaller amount than is fixed by ourMemorandum of Association, subject nevertheless to the provisions of theCompanies Ordinance; and

 

•                                          makeprovision for the issue and allotment of shares which do not carry any votingrights.

 

***C.******                                    MaterialContracts***

 

In addition to contracts we have entered into with ourcontrolling shareholder, Unicom Group, or its subsidiaries, as described in“Related Party Transactions” under Item 7, Unicom Group, we or our subsidiarieshave entered into the following contracts that are not in the ordinary courseof business within the two years preceding the date of this annual report thatare or may be material:

 

•                                          Ourshare option schemes, as described in “Item 6. Directors, Senior Management and Employees – E. Share Ownership  –Stock Incentive Schemes”.

 

•                                          Networkcapacity lease agreements for CDMA network capacity, see “Item 7.  Major Shareholders and Related PartyTransactions – B. Related Party Transactions — Leasing of CDMANetwork Capacity”.

 

***D.******                                    ExchangeControls***

 

The ability of our operating subsidiaries, CUCL andUnicom New Century, to satisfy their respective foreign exchange obligationsand to pay dividends to us depends on existing and future exchange controlregulations in China.  The Renminbi iscurrently convertible under the current account, which includes trade andservice related foreign exchange transactions. Renminbi currently cannot be converted under the capital account, whichincludes foreign direct investment. CUCL and Unicom New Century, our wholly-owned subsidiaries that holdsubstantially all of our assets, are both foreign investment enterprises.  The foreign investment enterprise status willallow these subsidiaries to purchase foreign exchange at designated foreignexchange banks for settlement of current account transactions without theapproval of the State Administration for Foreign Exchange.  These current account transactions include paymentof dividends.  However, the relevantChinese government authorities may in the future limit or eliminate theauthorizations for a foreign investment enterprise to retain its foreignexchange to satisfy its foreign exchange obligations or to pay dividends in thefuture.  Furthermore, certain foreignexchange transactions of these subsidiaries under the capital account stillrequire approvals from the State Administration for Foreign Exchange.  This requirement affects our subsidiaries’ability to obtain foreign exchange through equity financing, including by meansof capital contributions from us.

 

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Under existing Hong Kong law, (i) there are no foreignexchange controls or other laws which restrict the import or export of capitaland which would affect the availability of cash and cash equivalents for ouruse, (ii) there are no foreign exchange controls or other laws, decrees orregulations that affect the remittance of interest, dividends or other paymentson our outstanding debt and equity securities to U.S. residents and (iii) thereare no limitations on the rights of non-resident or foreign owners to hold ourdebt or equity securities.

 

***E.******                                    Taxation***

 

The taxation of income and capital gains of holders ofordinary shares or ADSs is subject to the laws and practices of Hong Kong andof jurisdictions in which holders of ordinary shares or ADSs are resident orotherwise subject to tax.  The followingsummary of certain relevant taxation provisions is based on current law andpractice, is subject to change and does not constitute legal or taxadvice.  The discussion does not dealwith all possible tax consequences relating to an investment in the ordinaryshares or ADSs.  In particular, thediscussion does not address the tax consequences under state, local and otherlaws, such as non-Hong Kong and non-U.S. federal laws.  The discussion isbased upon laws and relevant interpretations in effect as of the date of thisannual report.  There is no reciprocal taxtreaty in effect between Hong Kong and the United States.

 

**Hong Kong**

 

***Tax on Dividends***

 

Under the current practices of the Hong Kong InlandRevenue Department, no tax is payable in Hong Kong in connection with dividendspaid by us.

 

***Profits***

 

No tax is imposed in Hong Kong in respect of capitalgains from the sale of property, such as the shares and ADSs.  Trading gains from the sale of property bypersons carrying on a trade, profession or business in Hong Kong where suchgains are derived from or arise in Hong Kong from such trade, profession orbusiness will be chargeable to Hong Kong profits tax which is currently imposedat the rate of 16% on corporations and at a maximum rate of 15% onindividuals.  Gains from sales of theshares effected on the Hong Kong Stock Exchange will be considered to bederived from or arise in Hong Kong. Liability for Hong Kong profits tax would thus arise in respect oftrading gains from sales of shares or ADSs realized by persons carrying on abusiness of trading or dealing in securities in Hong Kong.

 

***Stamp Duty***

 

Hong Kong stamp duty, currently charged at the rate ofHK$1.00 per HK$1,000 or part thereof on the higher of the consideration for orthe value of the shares, will be payable by the purchaser on every purchase andby the seller on every sale of shares. For example, a total of HK$2.00 per HK$1,000 or part thereof iscurrently payable on a typical sale and purchase transaction involving shares.  In addition, a fixed duty of HK$5 iscurrently payable on any instrument of transfer of shares.

 

The withdrawal of shares upon the surrender of ADRs,and the issuance of ADRs upon the deposit of shares, will also attract stampduty at the rate described above for sale and purchase transactions unless suchwithdrawal or deposit does not result in a change in the beneficial ownershipof the shares under Hong Kong law.  Theissuance of the ADRs upon the deposit of shares issued directly to The Bank ofNew York, as depositary of the ADSs, or for the account of The Bank of New Yorkdoes not attract stamp duty.  No HongKong stamp duty is payable upon the transfer of ADSs outside Hong Kong.

 

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***Estate Duty***

 

The shares are Hong Kong property under Hong Kong law,and accordingly such shares may be subject to estate duty on the death of thebeneficial owner of such shares, regardless of the place of the owner’sresidence, citizenship or domicile.  Wecannot assure you that the Hong Kong Inland Revenue Department will not treatthe ADSs as Hong Kong property that may be subject to estate duty on the deathof the beneficial owner of the ADS even if the ADRs evidencing such ADSs arelocated outside Hong Kong at the date of such death.  Hong Kong estate duty is imposed on a progressive scale from 5%to 15%.  The rate of and the thresholdfor estate duty has, in the past, been adjusted on a fairly regular basis.  No estate duty is payable when the aggregatevalue of the dutiable estate does not exceed HK$7.5 million, and the maximumrate of duty of 15% applies when the aggregate value of the dutiable estateexceeds HK$10.5 million.  The rates andthresholds stated here apply to the estate of persons who died after April 1,1998.

 

**United States**

 

***United States Federal Income Taxation***

 

This section describes the material United Statesfederal income tax consequences of owning shares or ADSs.  It applies to you only if you hold yourshares or ADSs as capital assets for tax purposes.  This section does not apply to you if you are a member of aspecial class of holders subject to special rules, including:

 

•                                          adealer in securities,

•                                          atrader in securities that elects to use a mark-to-market method of accountingfor your securities holdings,

•                                          atax-exempt organization,

•                                          aninsurance company,

•                                          aperson liable for alternative minimum tax,

•                                          aperson that actually or constructively owns 10% or more of our voting stock,

•                                          aperson that holds shares or ADSs that are a hedge or that are hedged againstcurrency risks or as part of a straddle or a conversion transaction, or

•                                          aperson whose functional currency is not the U.S. dollar.

 

This section is based on the Internal Revenue Code of1986, as amended, its legislative history, existing and proposed regulations,published rulings and court decisions, all as currently in effect.  These laws are subject to change, possiblyon a retroactive basis.  In addition,this section is based in part upon the representations of the Depositary andthe assumption that each obligation in the deposit agreement and any relatedagreement will be performed in accordance with its terms.

 

You are a U.S. holder if you are a beneficial owner ofshares or ADSs and you are:

 

•                                          acitizen or resident of the United States,

•                                          acorporation organized under the laws of the United States or any States,

•                                          anestate whose income is subject to United States federal income tax regardlessof its source, or

•                                          atrust if a United States court can exercise primary supervision over thetrust’s administration and one or more United States persons are authorized tocontrol all substantial decisions of the trust.

 

You should consult your own tax advisor regarding theUnited States federal, state and local tax consequences of owning and disposingof shares and ADSs in your particular circumstances.

 

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This discussion addresses only United States federalincome taxation.

 

In general, and taking into account the earlierassumptions, for United States federal income tax purposes, if you hold ADRsevidencing ADSs, you will be treated as the owner of the shares represented bythose ADSs.  Exchanges of shares forADSs, and ADSs for shares, generally will not be subject to United Statesfederal income tax.

 

***Taxation of Dividends***

 

Under the United States federal income tax laws, andsubject to the passive foreign investment company, or PFIC, rules discussedbelow, if you are a U.S. holder, the gross amount of any dividend we pay out ofour current or accumulated earnings and profits (as determined for United Statesfederal income tax purposes) is subject to United States federal taxation.  If you are a noncorporate U.S. holder,dividends paid to you after December 31, 2002 and before January 1, 2009 thatconstitute qualified dividend income will be taxable to you at a maximum taxrate of 15% provided that you hold the shares or ADSs for more than 60 daysduring the 120-day period beginning 60 days before the ex-dividend date andmeet other holding period requirements. Dividends we pay with respect to the shares or ADSs will be qualifieddividend income provided that, in the year that you receive the dividend, theshares or ADSs are readily tradable on an established securities market in theUnited States.

 

The dividend is taxable to you when you, in the caseof shares, or the Depositary, in the case of ADSs, receive the dividend,actually or constructively.  Thedividend will not be eligible for the dividends-received deduction generallyallowed to United States corporations in respect of dividends received fromother United States corporations.  Theamount of the dividend distribution that you must include in your income as aU.S. holder will be the U.S. dollar value of the Hong Kong Dollar paymentsmade, determined at the spot Hong Kong/U.S. dollar rate on the date thedividend distribution is includible in your income, regardless of whether thepayment is in fact converted into U.S. dollars.  Generally, any gain or loss resulting from currency exchangefluctuations during the period from the date you include the dividend paymentin income to the date you convert the payment into U.S. dollars will be treatedas ordinary income or loss and will not be eligible for the special tax rateapplicable to qualified dividend income. The gain or loss generally will be income or loss from sources withinthe United States for foreign tax credit limitation purposes.  Distributions in excess of current andaccumulated earnings and profits, as determined for United States federalincome tax purposes, will be treated as a non-taxable return of capital to theextent of your basis in the shares or ADSs and thereafter as capital gain.

 

Special rules apply in determining the foreign taxcredit limitation with respect to dividends that are subject to the maximum 15%tax rate.  Dividends will be income fromsources outside the United States, but generally will be “passive income” or“financial services income” which is treated separately from other types ofincome for purposes of computing the foreign tax credit allowable to you.

 

***Taxation of Capital Gains***

 

Subject to the passive foreign investment companyrules discussed below, if you are a U.S. holder and you sell or otherwisedispose of your shares or ADSs, you will recognize capital gain or loss forUnited States federal income tax purposes equal to the difference between theU.S. dollar value of the amount that you realize and your tax basis, determinedin U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder that is recognized on orafter May 6, 2003 and before January 1, 2009 is generally taxed at a maximumrate of 15% where the property is held more than one year.  The gain or loss will generally be income orloss from sources within the United States for foreign tax credit limitationpurposes.  Your ability to deductcapital losses is subject to limitations. Any Hong Kong stamp duty that 

 

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you pay will not be a creditable tax for United States federal incometax purposes, but you may be able to deduct such stamp duty subject tolimitations under the Code.

 

***Passive Foreign Investment Company Rules***.  We believe that we should not be treated asa passive 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 aU.S. holder, we will be a passive foreign investment company with respect toyou if for any taxable year in which you held our ADSs or shares:

 

•                                          atleast 75% of our gross income for the taxable year is passive income, or

•                                          atleast 50% of the value, determined on the basis of a quarterly average, of ourassets is attributable to assets that produce or are held for the production ofpassive income.

 

Passive income generally includes dividends, interest,royalties, and rents, but not including certain rents and royalties derived inthe active conduct of a trade or business, annuities, gains from assets thatproduce passive income.  If a foreigncorporation owns directly or indirectly at least 25% by value of the stock ofanother corporation, the foreign corporation is treated for purposes of thepassive foreign investment company tests as owning its proportionate share ofthe assets of the other corporation, and as receiving directly itsproportionate share of the other corporation’s income.

 

If we are treated as a passive foreign investmentcompany, and you are a U.S. holder that does not make a mark-to-marketelection, as described below, you will be subject to special rules with respectto:

 

•                                          anygain you realize on the sale or other disposition of your shares or ADSs and

 

•                                          anyexcess distribution that we make to you. Generally, any distributions to you during a single taxable year thatare greater than 125% of the average annual distributions received by you inrespect of the shares or ADSs during the three preceding taxable years or, ifshorter, your holding period for the shares or ADSs.

 

Under these rules:

 

•                                          thegain or excess distribution will be allocated ratably over your holding periodfor the shares or ADSs,

 

•                                          theamount allocated to the taxable year in which you realized the gain or excessdistribution will be taxed as ordinary income,

 

•                                          theamount allocated to each prior year, with certain exceptions, will be taxed atthe highest tax rate in effect for that year, and

 

•                                          theinterest charge generally applicable to underpayments of tax will be imposed inrespect of the tax attributable to each such year.

 

Special rules apply for calculating the amount of theforeign tax credit with respect to excess distributions by a passive foreigninvestment company.

 

If you own shares or ADSs in a passive foreigninvestment company that are treated as marketable stock, you may make amark-to-market election.  If you makethis election, you will not be subject to the passive foreign investmentcompany rules described above.  Instead,in general, you will include as 

 

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ordinary income each year the excess, if any, of the fair market valueof your shares or ADSs at the end of the taxable year over your adjusted basisin your shares or ADSs.  You will alsobe allowed to take an ordinary loss in respect of the excess, if any, of theadjusted basis of your shares or ADSs over their fair market value at the endof the taxable year (but only to the extent of the net amount of previouslyincluded income 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 sale of your shares orADSs will be taxed as ordinary income.

 

If you own shares or ADSs during any year that we area passive foreign investment company, you must file Internal Revenue ServiceForm 8621.

 

***F.******                                    Dividendsand Paying Agents***

 

Not applicable.

 

***G.******                                    Statementby Experts***

 

Not applicable.

 

***H.******                                   Documentson Display***

 

It is possible to read and copy documents referred toin this annual report that have been filed with the U.S.  Securities and Exchange Commission, or theSEC, at the SEC’s public reference room located at 450 Fifth Street, NW,Washington, D.C. 20549.  Please call theSEC at 1-800-SEC-0330 for further information on the public reference rooms andtheir copy charges.

 

***I.******                                        SubsidiaryInformation***

 

Not applicable.

 

**Item 11****.  Quantitativeand Qualitative Disclosures About Market Risks**

 

Our exposure to financial market risks relatesprimarily to changes in interest rates in China and currency exchange rates.

 

**Interest Rate Risk**

 

We are subject to market risks due to fluctuations ininterest rates, principally as a result of our long-term loans, most of whichbear interests at variable rates based on benchmark rates set by the People’sBank of China.  The original maturitiesof our long-term loans range from one to seven years.

 

In the event the People’s Bank of China raises therelevant interest rates, it would increase our cost of new debt and theinterest cost of our outstanding borrowings. We do not conduct hedging and interest rate swaps in connection with ourborrowings.  In addition, the fair valueof the our borrowings is the same as the carrying value since all our bank loaninterest are variable.  Our bank loansare borrowed from domestic banks at interest rates that vary in accordance withthe standard guidance interest rates announced by relevant Chinese governmentauthorities.  As a result, a significantincrease in interest rates could have a material adverse effect on ourfinancial position.

 

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The following table provides information, by maturitydate, regarding our interest-rate-sensitive financial instruments, whichconsist of variable rate short-term and long-terms debt obligation, as ofDecember 31, 2002.

 
|                                |   | **Expected Maturity Date**                             |   |
|-------------------------------------|--------|--------------------------------------------------------|--------|
|                                |   | **2003**                                               |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
|                                |   | **(RMB  equivalent in million, except interest rate)** |   |
| Variable rate  bank and other loans |   | 14,606                                                 |   | 4,826 |   | 22,039 |   | 4,047 |   | 2,494 |   | 280 |   | 52,292 |   |
|                                |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average interest  rate(1)           |   | 4.70                                                   | %      | 5.67 | % | 5.32 | % | 4.55 | % | 4.21 | % | 1.42 | % | **—** | ** ** |

 

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(1)                                  Theinterest rates for variable rate bank and other loans are calculated based onthe weighted average interest rates at the end of 2002.

 

For the year ended December 31, 2002, if the averageinterest rates for our variable rate bank and other loans had increased by 10%,we estimate that we would have incurred additional interest expenses of RMB 100 million in 2002.

 

**Exchange Rate Risk**

 

Our indebtedness and capital expenditures arepredominantly in Renminbi.  Currencyexchange rate risk exists with respect to our payables to equipment suppliersand contractors and our dividend payments to holders of ordinary shares andADSs in foreign currencies.  As ofDecember 31, 2002, approximately RMB 385 million of capital commitmentsoutstanding was authorized and contracted for in currencies other thanRenminbi.  Fluctuations in exchangerates may lead to significant fluctuations in the exposure of ourforeign-currency-denominated liabilities. We have not engaged in any foreign currency hedging activities.

 

**Item 12****.  Descriptionof Securities Other than Equity Securities**

 

Not Applicable.

 

**Item 13****.  Defaults,Dividend Arrearages and Delinquencies**

 

None.

 

**Item 14.****  MaterialModifications to the Rights of Security Holders and Use of Proceeds**

 

None.

 

**Item 15.****  Controls andProcedures**

 

**(a) *Evaluation of Disclosure Controls andProcedures***

 

Our chief executive officer and chief financialofficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rules 13a-15(c) and 15d-15(c) of the SecuritiesExchange Act of 1934) within 90 days prior to the filing of this annualreport.  They have concluded that, as ofthe date of evaluation, our disclosure controls and procedures were adequateand effective to ensure that material information relating to us and ourconsolidated subsidiaries was made known to them by others within our companyand our consolidated subsidiaries, particularly during the period in which thisannual report was being prepared.

 

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**(b) *Changes in Internal Controls***

 

There were no significant changes in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation, nor were there any significantdeficiencies or material weaknesses in these controls requiring correctiveactions.

 

**Item 16A.****  AuditCommittee Financial Expert**

 

Not applicable.

 

**Item 16B.**** Code of Ethics**

 

Not applicable.

 

**Item 16C.****  PrincipalAccountant Fees and Services**

 

Not applicable.

 

**Item 16D.****  Exemptionsfrom the Listing Standards for Audit Committees**

 

Not applicable.

 

**PARTII**

 

**Item 17. ****FinancialStatements**

 

We have elected to provide financial statements andrelated information specified in Item 18 in lieu of Item 17.

 

**Item 18.****  FinancialStatements**

 

See Index to Consolidated Financial Statements for alist of all financial statements filed as part of this annual report.

 

**Item 19.****  Exhibits**

 
| **Exhibit  Number** |   | **Description of Exhibit**                                                                                                                                                                                         |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                               |
| 1.1                 |   | Memorandum of Association of Unicom, dated January  27, 2000(1).                                                                                                                                                   |
|                |   |                                                                                                                                                                                                               |
| 1.2                 |   | Amended Articles of Association of Unicom (as  amended)(1).                                                                                                                                                        |
|                |   |                                                                                                                                                                                                               |
| 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).                                                                                                   |

 

109

----

 
| **Exhibit  Number** |   | **Description of Exhibit**                                                                                                                                                                          |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                |
| 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 Agreement  between each executive director of Unicom and Unicom(3).                                                                                                                         |
|                |   |                                                                                                                                                                                                |
| 4.9                 |   | Reorganization  Agreement between Unicom Group and Unicom New Century, dated November 18,  2002.  (English translation).                                                                       |
|                |   |                                                                                                                                                                                                |
| 4.10                |   | Form of Conditional  Sale and Purchase Agreement between Unicom BVI and our company, dated  November 20, 2002.                                                                                      |
|                |   |                                                                                                                                                                                                |
| 4.11                |   | Comprehensive Services  Agreement between Unicom Group and A Share Company, dated November 20, 2002.  (English translation).                                                                        |
|                |   |                                                                                                                                                                                                |
| 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).                    |
|                |   |                                                                                                                                                                                                |
| 4.13                |   | Form of CDMA Network  Capacity Lease Agreement among Unicom Horizon, A Share Company and Unicom  Group, dated November 20, 2002.                                                                    |
|                |   |                                                                                                                                                                                                |
| 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).                |
|                |   |                                                                                                                                                                                                |
| 8.1                 |   | List of our significant  subsidiaries.                                                                                                                                                              |

 

----

(1)          Incorporated byreference to our Registration Statement on Form F-1 (File No. 333-11938) filedwith the SEC in connection with our initial public offering in June 2000.

(2)          Incorporated byreference to the Registration Statement on Form F-6 (Filed No. 333-11952) filedwith the SEC with respect to American Depositary Shares representing our shares.

(3)          Incorporated byreference to our Annual Report on Form 20-F (File No. 1-15028) for the yearended December 31, 2000.

(4)          Incorporated byreference to our Annual Report on Form 20-F (File No. 1-15028) for the yearended December 31, 2001.

 

110

----

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 
| Date:  | June 23, 2003   |             |                                |
|--------|----------------------|------------------|-------------------------------------|
|   |                 |
|   |                 |
|   | CHINA UNICOM LIMITED |
|   |                 |
|   |                 |
|   | By:                  | /s/ YANG XIAN ZU |
|   |                 | Name:            | Yang Xian Zu                        |
|   |                 | Title:           | Chairman of the  Board of Directors |

 

111

----

 

**Certification**

 

I, Yang Xian Zu, certify that:

 

1.     I have reviewed this annual report on Form20-F of China UnicomLimited;

 

2.     Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.     Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)     Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)    Evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis annual report (the “Evaluation Date”); and

 

c)     Presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.     The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)     All significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)    Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

----

 

6.     The registrant’s other certifying officersand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date:  | June 23, 2003 |                    | /s/ YANG XIAN ZU |   |
|--------|--------------------|-------------------------|------------------|--------|
|   | Name:              | Yang Xian Zu            |
|   | Title:             | Chief Executive Officer |
|        |                    |                         |                  |        |  |

 

 

----

 

**Certification**

 

I, Shi Cuiming, certify that:

 

1.     I have reviewed this annual report on Form 20-F of China Unicom Limited;

 

2.     Based on my knowledge, this annual report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisannual report;

 

3.     Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this annual report;

 

4.     The registrant’s other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

 

a)     Designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)    Evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis annual report (the “Evaluation Date”); and

 

c)     Presented in this annual report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.     The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)     All significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)    Any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

 

----

 

6.     The registrant’s other certifying officers and I have indicatedin this annual report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  | June 23, 2003 |                               | /s/ SHI CUIMING |   |
|--------|--------------------|------------------------------------|-----------------|--------|
|   | Name:              | Shi Cuiming                        |
|   | Title:             | Executive Vice President (Finance) |
|        |                    |                                    |                 |        |  |

 

 

----

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| **CHINA UNICOM LIMITED AND ITS  SUBSIDIARIES**                                                                        |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  | **Page No.** |
| Report of Independent Public Accountants                                                                              | F-2 |
| Consolidated statements of income  for the years ended December 31, 2000, 2001 and 2002                               | F-3 |
| Consolidated statements of  comprehensive income for the years ended December 31, 2000, 2001 and 2002                 | F-4 |
| Consolidated balance sheets as of  December 31, 2001 and 2002                                                         | F-5 |
| Consolidated statements of changes  in shareholders’ equity for the years ended December 31, 2000, 2001 and 2002 | F-6 |
| Consolidated  statements of cash flows for the years ended December 31, 2000, 2001 and 2002                           | F-7 |
| Notes to  the consolidated financial statements                                                                       | F-10 |

 

----

 

**Report****of Independent Accountants**

 

**TO THE SHAREHOLDERS OFCHINA UNICOM LIMITED**

*(Incorporated in theHong Kong Special Administrative Region of the People’s Republic of China (“HongKong”)**with limitedliability)*

 

We have audited the accompanying consolidated balance sheets ofChina Unicom Limited (the “Company”) and its subsidiaries (the “Group”) as ofDecember 31, 2001 and 2002, and the related consolidated statements of income, comprehensiveincome, shareholders’ equity and cash flows for each of the years in the three-year periodendedDecember 31, 2002.  These consolidatedfinancial statements are the responsibility of the Group’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America and auditing standards established bythe Hong Kong Society of Accountants. Those standards require that we plan and perform the audits toobtain reasonable assurance about whether the consolidated financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the accompanying consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Group as of December 31, 2001 and 2002, and the results of itsoperations and its cash flows for each of the years in the three-year period ended December 31, 2002, in conformitywith generally accepted accounting principles in Hong Kong.

 

Certain accounting principles used by theGroup in preparing the accompanying consolidated financial statements conformwith generally accepted accounting principles in Hong Kong, but do not conformwith generally accepted accounting principles in the United States ofAmerica.  A description of thesignificant differences between those two standards and the effects of those differences on netincome and shareholders’ equity isset forth in Note 41 to the consolidated financial statements.

 

 

**PricewaterhouseCoopers**

*CertifiedPublic Accountants*

 

Hong Kong, April1, 2003

 

F- 2

----

 

**CHINAUNICOM LIMITED AND ITS SUBSIDIARIES**

**CONSOLIDATED STATEMENTS****OF INCOME**

**FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002**

**(Expressedin thousands, except per share data)**

 
|                                                             |   | **Note**               |       | **2000**    |       | **2001**    |       | **2002**    |       | **2002**   |       |
|------------------------------------------------------------------|--------|------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
|                                                             |   |                   |       | **RMB**     |       | **RMB**     |       | **RMB**     |       | **US$**    |       |
|                                                             |   |                   | ** ** |        | ** ** |        | ** ** |        | ** ** |       | ** ** |
| Operating Revenue (Turnover):                                    |   |                   |       |        |       |        |       |        |       |       |       |
| GSM Business                                                     |   | 4, 33, 35              |       | 12,187,804  |       | 20,505,058  |       | 27,387,925  |       | 3,307,720  |       |
| CDMA Business                                                    |   | 3(f), 4, 32(b), 33, 35 |       | —      |       | —      |       | 3,225,347   |       | 389,535    |       |
| Data and Internet Business                                       |   | 4, 33, 35              |       | 540,125     |       | 1,820,211   |       | 2,793,039   |       | 337,324    |       |
| Long Distance Business                                           |   | 4, 33, 35              |       | 556,269     |       | 1,488,733   |       | 2,765,723   |       | 334,025    |       |
| Paging Business                                                  |   | 4, 33, 35              |       | 8,483,490   |       | 4,341,824   |       | 2,161,188   |       | 261,012    |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Total service revenue                                            |   |                   |       | 21,767,688  |       | 28,155,826  |       | 38,333,222  |       | 4,629,616  |       |
| Sales of telecommunications products                             |   | 4, 33, 35              |       | 1,924,770   |       | 1,237,060   |       | 2,243,303   |       | 270,930    |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Total Operating revenue                                          |   | 4, 35                  |       | 23,692,458  |       | 29,392,886  |       | 40,576,525  |       | 4,900,546  |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Operating expenses:                                              |   |                   |       |        |       |        |       |        |       |       |       |
| Leased lines and network capacities                              |   | 5, 32(a), 33           |       | (1,158,123  | )          | (853,306    | )          | (1,583,255  | )          | (191,214   | )          |
| Interconnection charges                                          |   | 33                     |       | (1,379,465  | )          | (2,072,584  | )          | (3,229,640  | )          | (390,053   | )          |
| Depreciation and amortization                                    |   | 5                      |       | (5,734,315  | )          | (8,262,296  | )          | (11,255,724 | )          | (1,359,387 | )          |
| Personnel                                                        |   | 5                      |       | (1,769,840  | )          | (2,487,218  | )          | (3,335,218  | )          | (402,804   | )          |
| Selling and marketing                                            |   | 3(f), 5, 32(b), 33     |       | (2,492,433  | )          | (3,612,890  | )          | (5,980,948  | )          | (722,337   | )          |
| General, administrative and other expenses                       |   | 5, 6(iv), 33           |       | (3,743,063  | )          | (5,498,997  | )          | (5,631,850  | )          | (680,175   | )          |
| Cost of telecommunications products sold                         |   | 33                     |       | (2,192,938  | )          | (1,342,244  | )          | (2,236,206  | )          | (270,073   | )          |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Total operating expenses                                         |   | 6                      |       | (18,470,177 | )          | (24,129,535 | )          | (33,252,841 | )          | (4,016,043 | )          |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Operating income                                                 |   |                   |       | 5,222,281   |       | 5,263,351   |       | 7,323,684   |       | 884,503    |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Interest income                                                  |   | 5                      |       | 1,748,805   |       | 2,096,972   |       | 470,282     |       | 56,797     |       |
| Finance costs                                                    |   | 7                      |       | (1,353,746  | )          | (1,917,566  | )          | (1,474,441  | )          | (178,073   | )          |
| Loss arising from terminations of CCF  Arrangements              |   | 11                     |       | (1,193,838  | )          | —      |       | —      |       | —     |       |
| Other income (expense), net                                      |   | 5, 8                   |       | 59,229      |       | 19,831      |       | (16,359     | )          | (1,975     | )          |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Income before taxation and minority interests                    |   | 5                      |       | 4,482,731   |       | 5,462,588   |       | 6,303,166   |       | 761,252    |       |
| Taxation                                                         |   | 10                     |       | (1,104,969  | )          | (1,041,137  | )          | (1,752,346  | )          | (211,636   | )          |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Income before minority interests                                 |   |                   |       | 3,377,762   |       | 4,421,451   |       | 4,550,820   |       | 549,616    |       |
| Minority interests                                               |   |                   |       | (143,711    | )          | 35,310      |       | 15,252      |       | 1,842      |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Net income                                                       |   |                   |       | 3,234,051   |       | 4,456,761   |       | 4,566,072   |       | 551,458    |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Basic earnings per share                                         |   | 15                     |       | RMB0.289    |       | RMB0.355    |       | RMB0.364    |       | US$0.044   |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Diluted earnings per share                                       |   | 15                     |       | RMB0.288    |       | RMB0.355    |       | RMB0.364    |       | US$0.044   |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Number of shares outstanding for basic earnings (in thousands)   |   | 15                     |       | 11,208,224  |       | 12,552,996  |       | 12,552,996  |       | 12,552,996 |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Number of shares outstanding for diluted earnings (in thousands) |   | 15                     |       | 11,219,679  |       | 12,552,996  |       | 12,552,996  |       | 12,552,996 |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Basic earnings per ADS                                           |   | 15                     |       | RMB2.885    |       | RMB3.550    |       | RMB3.637    |       | US$0.439   |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Diluted earnings per ADS                                         |   | 15                     |       | RMB2.882    |       | RMB3.550    |       | RMB3.637    |       | US$0.439   |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Number of ADS outstanding for basic earnings (in thousands)      |   | 15                     |       | 1,120,822   |       | 1,255,300   |       | 1,255,300   |       | 1,255,300  |       |
|                                                             |   |                   |       |        |       |        |       |        |       |       |       |
| Number of ADS outstanding for diluted earnings (in thousands)    |   | 15                     |       | 1,121,968   |       | 1,255,300   |       | 1,255,300   |       | 1,255,300  |       |

 

Theaccompanying notes are an integral part of the financial statements.

 

F- 3

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDSTATEMENT****S OF****COMPREHENSIVE INCOME**

**FOR THEYEARS ENDED DECEMBER 31, 2000, 2001 AND 2002**

 
|                                                    |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   | **2002**         |   |
|---------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                    |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **US$’000** |   |
|                                                    |   |     |   |             |   |             |   |             |   |             |   |
| Surplus on revaluation of land use rights and buildings |   | 20       |   | 176,853          |   | —           |   | —           |   | —           |   |
|                                                    |   |     |   |             |   |             |   |             |   |             |   |
| Net gains not recognized in the statement of income     |   |     |   | 176,853          |   | —           |   | —           |   | —           |   |
|                                                    |   |     |   |             |   |             |   |             |   |             |   |
| Net income for the year                                 |   |     |   | 3,234,051        |   | 4,456,761        |   | 4,566,072        |   | 551,458          |   |
|                                                    |   |     |   |             |   |             |   |             |   |             |   |
| Total comprehensive income                              |   |     |   | 3,410,904        |   | 4,456,761        |   | 4,566,072        |   | 551,458          |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

F- 4

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**AS OFDECEMBER 31, 2001 AND 2002**

 
|                                                |   | **Note**  |   | **2001**         |   | **2002**         |   | **2002**         |   |
|-----------------------------------------------------|--------|-----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                |   |      |   | **RMB’000** |   | **RMB’000** |   | **US$’000** |   |
| **Non-current assets:**                             |   |      |   |             |   |             |   |             |   |
| Property, plant and equipment, net                  |   | 20        |   | 75,748,435       |   | 107,486,629      |   | 12,981,477       |   |
| Goodwill                                            |   | 21        |   | 43,287           |   | 2,366,219        |   | 285,776          |   |
| Other assets                                        |   | 22, 32(b) |   | 1,015,438        |   | 7,018,223        |   | 847,611          |   |
| Deferred tax assets                                 |   | 10        |   | 1,012,216        |   | 826,568          |   | 99,827           |   |
| Investment securities                               |   | 23        |   | 123,500          |   | 105,648          |   | 12,759           |   |
| Investment in associated companies                  |   | 25        |   | 4,146            |   | 3,814            |   | 461              |   |
|                                                |   |      |   |             |   |             |   |             |   |
| Total non-current assets                            |   |      |   | 77,947,022       |   | 117,807,101      |   | 14,227,911       |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Current assets:**                                 |   |      |   |             |   |             |   |             |   |
| Current portion of deferred tax assets              |   | 10        |   | 569,192          |   | 502,918          |   | 60,739           |   |
| Amounts due from related parties                    |   | 33(b)     |   | 1,430,818        |   | 1,137,847        |   | 137,421          |   |
| Amounts due from domestic carriers                  |   | 34(b)     |   | 199,460          |   | 211,462          |   | 25,539           |   |
| Prepayments and other current assets                |   | 19, 32(b) |   | 969,561          |   | 2,573,764        |   | 310,841          |   |
| Inventories                                         |   | 18        |   | 751,991          |   | 3,229,903        |   | 390,085          |   |
| Accounts receivable, net                            |   | 17        |   | 2,498,063        |   | 4,327,268        |   | 522,617          |   |
| Trading securities                                  |   | 16        |   | 203,832          |   | 173,939          |   | 21,007           |   |
| Short-term bank deposits                            |   |      |   | 24,921,943       |   | 4,825,205        |   | 582,754          |   |
| Cash and cash equivalents                           |   |      |   | 18,413,010       |   | 14,433,498       |   | 1,743,176        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| Total current assets                                |   |      |   | 49,957,870       |   | 31,415,804       |   | 3,794,179        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Current liabilities:**                            |   |      |   |             |   |             |   |             |   |
| Dividend payable                                    |   |      |   | 29,847           |   | 8,448            |   | 1,020            |   |
| Payables and accrued liabilities                    |   | 26        |   | 15,329,436       |   | 19,811,961       |   | 2,392,749        |   |
| Amounts due to Unicom Group                         |   | 33(c)     |   | 947,934          |   | 562,633          |   | 67,951           |   |
| Amounts due to related parties                      |   | 33(b)     |   | 135,724          |   | 409,663          |   | 49,476           |   |
| Amounts due to domestic carriers                    |   | 34(b)     |   | 742,366          |   | 1,123,580        |   | 135,698          |   |
| Current portion of obligations under finance leases |   | 29, 34(b) |   | 8,151            |   | 16,793           |   | 2,028            |   |
| Current portion of long-term bank loans             |   | 28        |   | 843,603          |   | 5,459,505        |   | 659,361          |   |
| Taxes payable                                       |   |      |   | 1,025,269        |   | 1,106,006        |   | 133,576          |   |
| Advances from customers                             |   |      |   | 2,765,541        |   | 6,240,225        |   | 753,650          |   |
| Short-term loans from Unicom Group                  |   | 33(d)     |   | —           |   | 724,127          |   | 87,455           |   |
| Short-term bank loans                               |   | 27        |   | 7,089,000        |   | 9,146,500        |   | 1,104,650        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| Total current liabilities                           |   |      |   | 28,916,871       |   | 44,609,441       |   | 5,387,614        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Net current assets (liabilities)**                |   |      |   | 21,040,999       |   | (13,193,637      | )      | (1,593,435       | )      |
|                                                |   |      |   |             |   |             |   |             |   |
| **Total assets less current liabilities**           |   |      |   | 98,988,021       |   | 104,613,464      |   | 12,634,476       |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Financed by:**                                    |   |      |   |             |   |             |   |             |   |
| **Shareholders’ equity:**                      |   |      |   |             |   |             |   |             |   |
| Share capital                                       |   | 30        |   | 1,331,371        |   | 1,331,371        |   | 160,794          |   |
| Share premium                                       |   |      |   | 52,482,127       |   | 52,482,127       |   | 6,338,421        |   |
| Reserves                                            |   |      |   | 826,286          |   | 1,259,535        |   | 152,118          |   |
| Retained profits                                    |   |      |   |             |   |             |   |             |   |
| Proposed final dividend                             |   | 14        |   | —           |   | 1,255,300        |   | 151,606          |   |
| Others                                              |   |      |   | 7,041,379        |   | 9,918,902        |   | 1,197,935        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Shareholders’ equity**                       |   |      |   | 61,681,163       |   | 66,247,235       |   | 8,000,874        |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Minority interests**                              |   |      |   | 829,405          |   | 566,257          |   | 68,388           |   |
|                                                |   |      |   |             |   |             |   |             |   |
| **Non-current liabilities:**                        |   |      |   |             |   |             |   |             |   |
| Long-term bank loans                                |   | 28        |   | 36,336,768       |   | 37,686,162       |   | 4,551,468        |   |
| Obligations under finance leases                    |   | 29, 34(b) |   | 100,757          |   | 101,302          |   | 12,235           |   |
| Other long-term liabilities                         |   |      |   | 39,928           |   | 12,508           |   | 1,511            |   |
|                                                |   |      |   |             |   |             |   |             |   |
| Total long-term liabilities                         |   |      |   | 36,477,453       |   | 37,799,972       |   | 4,565,214        |   |
|                                                |   |      |   |             |   |             |   |             |   |
|                                                |   |      |   | 98,988,021       |   | 104,613,464      |   | 12,634,476       |   |

 

Theaccompanying notes are an integral part of the financial statements.

 

F- 5

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**CONSOLIDATEDSTATEMENT****S OF CHANGES IN****SHAREHOLDERS’ EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2000, 2001 AND 2002**

**(Expressedin thousands of RMB)**

 
|                                                       |   | **Head office  account** |       | **Share capital** |       | **Share  premium** |       | **Revaluation  reserve** |       | **Statutory  reserve** |       | **Retained  profits** |       | **Total**  |       |
|------------------------------------------------------------|--------|--------------------------|------------|-------------------|------------|--------------------|------------|--------------------------|------------|------------------------|------------|-----------------------|------------|------------|------------|
|                                                       |   |                     | ** ** |              | ** ** |               | ** ** |                     | ** ** |                   | ** ** |                  | ** ** |       | ** ** |
| Owner’s equity at January 1, 2000                     |   | 8,538,346                |       | —            |       | —             |       | —                   |       | —                 |       | —                |       | 8,538,346  |       |
| Effect of restructuring (Note 1)                           |   | (8,538,346               | )          | 1,030,850         |       | 7,507,496          |       | —                   |       | —                 |       | —                |       | —     |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Shareholders’ equity after restructuring              |   | —                   |       | 1,030,850         |       | 7,507,496          |       | —                   |       | —                 |       | —                |       | 8,538,346  |       |
| Revaluation surplus                                        |   | —                   |       | —            |       | —             |       | 176,853                  |       | —                 |       | —                |       | 176,853    |       |
| Issue of shares, net of direct listing  expenses (Note 30) |   | —                   |       | 300,521           |       | 44,974,631         |       | —                   |       | —                 |       | —                |       | 45,275,152 |       |
| Net income for the year                                    |   | —                   |       | —            |       | —             |       | —                   |       | —                 |       | 3,234,051             |       | 3,234,051  |       |
| Appropriation to statutory reserve (Note  14)              |   | —                   |       | —            |       | —             |       | —                   |       | 424,805                |       | (424,805              | )          | —     |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Balance at December 31, 2000                               |   | —                   |       | 1,331,371         |       | 52,482,127         |       | 176,853                  |       | 424,805                |       | 2,809,246             |       | 57,224,402 |       |
| Net income for the year                                    |   |                     |       | —            |       | —             |       | —                   |       | —                 |       | 4,456,761             |       | 4,456,761  |       |
| Appropriation to statutory reserve (Note 14)               |   | —                   |       | —            |       | —             |       | —                   |       | 224,628                |       | (224,628              | )          | —     |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Balance at December 31, 2001                               |   | —                   |       | 1,331,371         |       | 52,482,127         |       | 176,853                  |       | 649,433                |       | 7,041,379             |       | 61,681,163 |       |
| Net income for the year                                    |   | —                   |       | —            |       | —             |       | —                   |       | —                 |       | 4,566,072             |       | 4,566,072  |       |
| Appropriation to statutory reserve (Note 14)               |   | —                   |       | —            |       | —             |       | —                   |       | 433,249                |       | (433,249              | )          | —     |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Balance at December 31, 2002                               |   | —                   |       | 1,331,371         |       | 52,482,127         |       | 176,853                  |       | 1,082,682              |       | 11,174,202            |       | 66,247,235 |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Representing:                                              |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| 2002 Final dividend proposed                               |   |                     |       |              |       |               |       |                     |       |                   |       | 1,255,300             |       |       |       |
| Others                                                     |   |                     |       |              |       |               |       |                     |       |                   |       | 9,918,902             |       |       |       |
|                                                       |   |                     |       |              |       |               |       |                     |       |                   |       |                  |       |       |       |
| Retained earnings as  at December 31, 2002                 |   |                     |       |              |       |               |       |                     |       |                   |       | 11,174,202            |       |       |       |

 

Theaccompanying notes are an integral part of the financial statements.

 

F- 6

----

 

**CHINAUNICOM LIMITED AND ITS SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2000, 2001 AND 2002**

 
|                                                               |   | **Note** |       | **2000**         |       | **2001**         |       | **2002**         |       | **2002**         |       |
|--------------------------------------------------------------------|--------|----------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
|                                                               |   |     |       | **RMB’000** |       | **RMB’000** |       | **RMB’000** |       | **US$’000** |       |
|                                                               |   |     | ** ** |             | ** ** |             | ** ** |             | ** ** |             | ** ** |
| **Net cash inflow from  operations**                               |   | (a)      |       | 10,228,880       |       | 13,249,360       |       | 15,675,105       |       | 1,893,129        |       |
| Interest received                                                  |   |     |       | 1,083,148        |       | 2,605,507        |       | 599,506          |       | 72,404           |       |
| Interest paid                                                      |   |     |       | (1,331,326       | )          | (2,576,822       | )          | (1,868,208       | )          | (225,629         | )          |
| Dividends received                                                 |   |     |       | 258              |       | 22,864           |       | 24,978           |       | 3,017            |       |
| Dividends paid to minority owners of  subsidiaries                 |   |     |       | (153,316         | )          | (29,377          | )          | (31,902          | )          | (3,853           | )          |
| PRC income tax paid                                                |   |     |       | (483,777         | )          | (2,193,657       | )          | (1,345,201       | )          | (162,464         | )          |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Net cash inflow from operating activities                          |   |     |       | 9,343,867        |       | 11,077,875       |       | 13,054,278       |       | 1,576,604        |       |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| **Investing activities**                                           |   |     |       |             |       |             |       |             |       |             |       |
| Purchase of property, plant and equipment                          |   |     |       | (21,352,609      | )          | (28,547,009      | )          | (21,152,102      | )          | (2,554,602       | )          |
| Sale of property, plant and equipment                              |   |     |       | —           |       | 131,692          |       | 24,552           |       | 2,965            |       |
| Purchase of minority interests                                     |   |     |       | (1,525,536       | )          | (18,537          | )          | (257,337         | )          | (31,079          | )          |
| Proceeds from disposals of associated  companies                   |   |     |       | 6,446            |       | —           |       | —           |       | —           |       |
| (Increase) decrease in short-term bank  deposits                   |   |     |       | (7,630,435       | )          | (17,083,008      | )          | 20,096,738       |       | 2,427,143        |       |
| Purchase of Unicom New Century, net of  cash acquired              |   | (c)      |       | —           |       | —           |       | (3,692,687       | )          | (445,977         | )          |
| Purchase of trading securities                                     |   |     |       | (570,905         | )          | —           |       | (14,557          | )          | (1,758           | )          |
| Sale of trading securities                                         |   |     |       | 689,463          |       | 144,976          |       | 18,865           |       | 2,278            |       |
| Purchase of investment in associated  companies                    |   |     |       | (10,696          | )          | —           |       | (2,105           | )          | (254             | )          |
| Sale of investment in associated companies                         |   |     |       | —           |       | —           |       | 4,241            |       | 512              |       |
| Purchase of investment securities                                  |   |     |       | (10,903          | )          | (21,426          | )          | —           |       | —           |       |
| Sale of investment securities                                      |   |     |       | —           |       | 5,139            |       | 35,300           |       | 4,263            |       |
| Payment for other assets                                           |   |     |       | (145,771         | )          | (736,844         | )          | (226,947         | )          | (27,409          | )          |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Net cash outflow from investing activities                         |   |     |       | (30,550,946      | )          | (46,125,017      | )          | (5,166,039       | )          | (623,918         | )          |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| **Financing activities**                                           |   |     |       |             |       |             |       |             |       |             |       |
| Proceeds from issue of ordinary shares,  net of expenses (Note 30) |   |     |       | 45,275,152       |       | —           |       | —           |       | —           |       |
| Repayment of loans from CCF joint ventures  (Note 11)              |   |     |       | (7,393,940       | )          | —           |       | —           |       | —           |       |
| Increase (decrease) in amounts due to  Unicom Group                |   |     |       | 316,430          |       | 126,137          |       | (1,393,434       | )          | (168,289         | )          |
| Proceeds from short-term bank loans                                |   |     |       | 7,697,139        |       | 11,214,388       |       | 9,623,438        |       | 1,162,251        |       |
| Proceeds from long-term bank loans                                 |   |     |       | 15,663,740       |       | 10,029,022       |       | 7,757,005        |       | 936,836          |       |
| Repayment of short-term bank loans                                 |   |     |       | (1,616,886       | )          | (11,859,205      | )          | (7,928,938       | )          | (957,601         | )          |
| Repayment of long-term bank loans                                  |   |     |       | (20,232          | )          | (766,875         | )          | (19,925,822      | )          | (2,406,500       | )          |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Net cash inflow (outflow) from financing  activities               |   |     |       | 59,921,403       |       | 8,743,467        |       | (11,867,751      | )          | (1,433,303       | )          |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Net increase (decrease) in cash and cash  equivalents              |   |     |       | 38,714,324       |       | (26,303,675      | )          | (3,979,512       | )          | (480,617         | )          |
| Cash and cash equivalents, beginning of  year                      |   |     |       | 6,002,361        |       | 44,716,685       |       | 18,413,010       |       | 2,223,793        |       |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Cash and cash equivalents, end of year                             |   |     |       | 44,716,685       |       | 18,413,010       |       | 14,433,498       |       | 1,743,176        |       |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| **Analysis of the balances  of cash and cash equivalents:**        |   |     |       |             |       |             |       |             |       |             |       |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
| Cash balance                                                       |   |     |       | 32,410           |       | 21,991           |       | 5,942            |       | 718              |       |
| Bank balance                                                       |   |     |       | 44,684,275       |       | 18,391,019       |       | 14,427,556       |       | 1,742,458        |       |
|                                                               |   |     |       |             |       |             |       |             |       |             |       |
|                                                               |   |     |       | 44,716,685       |       | 18,413,010       |       | 14,433,498       |       | 1,743,176        |       |

 

The accompanying notesare an integral part of the financial statements.

 

F- 7

----

 

a)              The reconciliation of income beforetaxation to net cash inflow from operations is as follows:

 
|                                                                                 |   | **2000**         |   | **2001**         |   | **2002**         |   | **2002**         |   |
|--------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                 |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **US$’000** |   |
|                                                                                 |   |             |   |             |   |             |   |             |   |
| Income before taxation                                                               |   | 4,482,731        |   | 5,462,588        |   | 6,303,166        |   | 761,252          |   |
| Adjustments  for:                                                                    |   |             |   |             |   |             |   |             |   |
| Depreciation  and amortization                                                       |   | 5,734,315        |   | 8,262,296        |   | 11,255,724       |   | 1,359,387        |   |
| Amortization  of deferred customer acquisition costs of contractual CDMA subscribers |   | —           |   | —           |   | 1,385,424        |   | 167,322          |   |
| Interest  income                                                                     |   | (1,748,805       | )      | (2,096,972       | )      | (470,282         | )      | (56,797          | )      |
| Interest  expense                                                                    |   | 1,353,746        |   | 1,907,148        |   | 1,456,736        |   | 175,934          |   |
| Loss  on disposal of property, plant and equipment                                   |   | 319,659          |   | 54,475           |   | 82,467           |   | 9,960            |   |
| Impairment  loss of property, plant and equipment and goodwill                       |   | —           |   | 632,511          |   | 38,797           |   | 4,686            |   |
| Provision  for doubtful debts                                                        |   | 444,831          |   | 540,954          |   | 971,989          |   | 117,390          |   |
| Share  of (income) losses from associated companies                                  |   | (258             | )      | 24,773           |   | (553             | )      | (67              | )      |
| Dividends  from investment securities                                                |   | (9,321           | )      | (22,864          | )      | (24,978          | )      | (3,017           | )      |
| Realized  gains on trading securities                                                |   | (64,956          | )      | (31,979          | )      | (1,876           | )      | (227             | )      |
| Unrealized  (gains) losses on trading securities                                     |   | (31,855          | )      | 56,576           |   | 27,461           |   | 3,317            |   |
| Realized  gains on investment securities                                             |   | —           |   | (944             | )      | (18,098          | )      | (2,186           | )      |
| Additional  provision (reversal) of impairment loss of associated companies          |   | 7,501            |   | (3,219           | )      | —           |   | —           |   |
| Realized  gains in associated companies                                              |   | —           |   | —           |   | (1,251           | )      | (151             | )      |
| Additional provision  (reversal)  of impairment loss of investment securities   |   | 6,812            |   | (12,490          | )      | 650              |   | 79               |   |
| Loss  arising from terminations of CCF Arrangements                                  |   | 1,193,838        |   | —           |   | —           |   | —           |   |
| Operating  income before working capital changes                                     |   | 11,688,238       |   | 14,772,853       |   | 21,005,376       |   | 2,536,882        |   |
| Increase  in accounts receivable                                                     |   | (993,069         | )      | (1,493,966       | )      | (2,085,863       | )      | (251,916         | )      |
| Decrease  (increase) in inventories                                                  |   | 54,717           |   | (72,302          | )      | (1,276,602       | )      | (154,179         | )      |
| Increase  in other assets                                                            |   | —           |   | —           |   | (5,478,259       | )      | (661,625         | )      |
| (Increase)/decrease  in prepayments and other current assets                         |   | (424,133         | )      | 187,565          |   | (1,142,810       | )      | (138,021         | )      |
| Decrease  in amounts due from domestic carriers                                      |   | 798,537          |   | 176,786          |   | 8,599            |   | 1,039            |   |
| (Increase)/decrease  in amounts due from related parties                             |   | (433,506         | )      | (891,497         | )      | 280,216          |   | 33,843           |   |
| (Decrease)/increase  in payables and accrued liabilities                             |   | (164,854         | )      | 872,084          |   | 1,488,449        |   | 179,764          |   |
| (Decrease)/increase  in advances from customers                                      |   | (31,970          | )      | 149,865          |   | 1,978,456        |   | 238,944          |   |
| (Decrease)/increase  in amounts due to domestic carriers                             |   | (276,355         | )      | (534,599         | )      | 221,196          |   | 26,714           |   |
| Increase  in amounts due to related parties                                          |   | 11,275           |   | 82,571           |   | 676,347          |   | 81,684           |   |
|                                                                                 |   |             |   |             |   |             |   |             |   |
| Net  cash inflow from operations                                                     |   | 10,228,880       |   | 13,249,360       |   | 15,675,105       |   | 1,893,129        |   |

 

b)             Supplemental information:

 

As the payables toequipment suppliers for construction-in-progress decreased by approximately RMB2,201 million during 2002(2000: increased byapproximately RMB3,828 million; 2001: RMB2,706 million), cash outflows for the purchase ofproperty, plant and equipment for the year amounted to approximately RMB21,152million (2000: RMB21,353 million; 2001: RMB28,547 million).

 

During 2000, long-term bankloans of approximately RMB10,502 million previously borrowed by Unicom Groupwere restructured into long-term bank loans borrowed directly by China UnicomCorporation Limited (see Note 33(d)).

 

F - 8

----

 

c)              Acquisition of Unicom New Century:

 
|                                                                              |   | **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          |   |
| Cash and cash  equivalents                                                        |   | 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        |   |

 

F - 9

----

 

**CHINA UNICOM LIMITED AND ITSSUBSIDIARIES**

**NOTES TO THE****CONSOLIDATED****FINANCIAL STATEMENTS**

**(Amounts expressed in RMB unless otherwise stated)**

 

**1.****             ****ORGANISATION ANDPRINCIPAL ACTIVITIES**

 

ChinaUnicom Limited (the “Company”) was incorporated in the Hong Kong SpecialAdministrative Region (“Hong Kong”), the People’s Republic of China (the “PRC”) on February 8, 2000. Theprincipal activities of the Company are engagedin investmentholding and the provision of GSM and CDMA cellular,data, Internet, long distance and paging services in the PRC. The Company and its subsidiariesare hereinafter referred to as the “Group”.

 

The principal businesses of the Group comprised:

 

i)                 the GSM Business (as further describedbelow);

 

ii)              the CDMA cellular businesses in the above service areas, through aleasing arrangement of CDMA network capacities from a subsidiary of UnicomGroup commenced on January 8, 2002 (the “CDMABusiness”, see Note 32);

 

iii)           the Data andInternet Business (as further describedbelow);

 

iv)          the LongDistance Business(as further described below); and

 

v)             thenationwide paging business (as further describedbelow) in the PRC.

 

The GSM business and the CDMA business arehereinafter collectively refer to as the “Cellular Business”.

 

***(a)******        ******The Restructuring and the GlobalOffering***

 

Priorto the incorporation of the Company, the paging business wascarried out by Guoxin Paging Corporation Ltd. and its subsidiaries (“Guoxin”) whereas the GSM cellular and other telecommunications businesses werecarried out by the head office and various branches of China UnitedTelecommunications Corporation (“Unicom Group”).  In preparation for a Global Offering of the Company's shares (the“Global Offering”), there hasbeen a restructuring (the “Restructuring”)as described below.

 

Priorto and following the Restructuring, Unicom Group and Guoxin were and are underthe supervision and regulation of the Ministry of Information Industry (the“MII”).  The MII is a body establishedin 1998 under the direct supervision of the State Council of the PRC to takeover the regulatory responsibility for the telecommunications industry in thePRC from its predecessor, the Ministry of Posts and Telecommunications.

 

UnicomGroup was established as a state-owned enterprise in the PRC in 1994 under theapproval of the State Council to build and operate cellular networks, fixed line local networks and fixed line domestic long distance networks in thePRC.

 

Guoxinwas a subsidiary of ChinaTelecommunications Corporation (“China Telecom”) and was established as a limited liability company inSeptember 1998, and originally operated anationwide paging business through its 31 subsidiaries in 27 provinces and 4municipalities in the PRC (the “PagingBusiness”).  After the establishment of Guoxin, the Paging business continued tooperate under the ultimate control of the MII, until June 1999 when, pursuantto a State Council decision, the 99.67% ownership interest in Guoxin held byChina Telecom was transferred to Unicom Group at no consideration.

 

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Underthe Restructuring, Unicom Group injected its entire equity interests in Guoxin, together with the following businesses, intoCUCL on April 21 2000:

 

i)                 the GSM cellular businesses in 9 provinces in the PRC, namely,Guangdong, Fujian, Anhui, Jiangsu, Zhejiang, Shandong, Liaoning, Hebei andHubei; and 3 municipalities, namely, Beijing, Shanghai and Tianjin (the “GSMBusiness”);

 

ii)              thenationwide domestic and international Internet protocol-based telephonybusinesses and the nationwide data and Internet business in major cities of thePRC (the “ Data and Internet Business”); and

 

iii)           the nationwide domestic and international long distancetelephony businesses in majorcities of the PRC (the “LongDistance Business”).

 

Subsequent to the Restructuring, the Companycompleted its Global Offering in June 2000 and an aggregate of 2,827,996,050ordinary shares were issued with listing proceeds amounted to approximatelyRMB45.3 billion, net of direct listing expenses (See Note 30). The abovebusiness under the Restructuring are hereafter collectively referred to as the“Predecessor Entities”.

 

***(b)******        ******Acquisition of Unicom New CenturyTelecommunications Corporation Limited (“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 8 provinces and 1 municipality in the PRC, namely,Sichuan, Heilongjiang, Jilin, Henan, Jiangxi, Guangxi, Xinjiang, Shannxi andChongqing.  The GSM business andrelevant net assets were previously owned and operated by various branches ofUnicom Group. Starting from 2002, Unicom New Century has started to operate theCDMA business through the leasing of CDMA network capacity from a subsidiary ofUnicom Group (see Note 32).

 

Unicom Centerarian (BVI) Limited (“UC (BVI)”) wasincorporated in the British Virgin Islands on October 23, 2002 as a wholly owned subsidiary of Unicom Group. At the same time, Unicom NewCentury (BVI) Limited(a wholly-owned subsidiary of UC (BVI), hereinafter referred to as (“UNC(BVI)”)  was incorporated in the BritishVirgin Islands on October 23, 2002. According to the restructuring plan for theacquisition of Unicom New Century and the agreement signed between Unicom Group, UC (BVI) and UNC (BVI) dated October 23, 2002, theentire issued share capital of Unicom New Century were transferred from UC (BVI) to UNC (BVI)through share exchanges.

 

Pursuant to the ordinary resolution passed by theCompany’s Directors on November 20, 2002 and extraordinary general meeting passedby the Company’s shareholders on December 23, 2002, the Company acquired theentire equity interests of UNC (BVI) by a cash consideration of RMB4.8 billionon December 31, 2002 (the “Acquisition”). Thereafter, Unicom New Century has become a subsidiary of the Company.

 

The immediate holding company of the Company is CUCL(BVI) Limited (“Unicom BVI”).  Themajority equity interests of Unicom BVI are 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 Exchange on October 9, 2002). The directors of theCompany consider Unicom Group to be the ultimate parent company.

 

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**2.****             ****BASIS OF PRE****SENTATION**

 

***(a)******        ******The Restructuring***

 

Thereorganization of Guoxin and the subsequent transfer of its ownership to UnicomGroup were completed pursuant to restructuring plans for the telecommunicationsindustry of the PRC approved by the State Council and implemented through theMII.  Prior to and following theRestructuring, both Unicom Groupand Guoxin continued to be governed bythe strategic-planning and policy-making mechanism of the State Council and theMII.  Accordingly, the reorganization ofGuoxin and the combination of Unicom Group and Guoxin are considered to be areorganization of businesses under the common control of the StateCouncil.  In addition, upon the transferof the ownership interest in Guoxin from China Telecom to Unicom Group, UnicomGroup controlled all the Predecessor Entities prior to the Restructuring andcontinued to control the Company after the Restructuring.  Accordingly, the series of combination ofthe various telecommunications businesses and the transfer of these businessesfrom Unicom Group to the Company as described in Note 1 above have beenaccounted for as a reorganization of entities under common control by usingmerger accounting as if the Group had been operating continuously in 2000.

 

Onthe basis described above, the financial statements for the year ended 31 December 2000were prepared to present the combined results of operations and cash flows ofthe Predecessor Entities, now comprising the Groupand the financial position of the Group as of 31 December 2000 as if thestate-owned interests in the Group had been held continuously by the Groupsince 1 January 2000 and the business activities had beenconducted by the Group throughout the year 2000.  Consequently, the assets, liabilities,revenues and expenses that were clearly identifiable with the businesses andoperations transferred to the Group were included attheir recorded amounts.  Other amounts for which the specificidentification method was not practical were not material and were allocatedon the following basis:

 
| **Items allocated**                                 |   | **Allocation Basis**        |   |
|-----------------------------------------------------|--------|-----------------------------|--------|
|                                                |   |                        |   |
| Salaries                                            |   | Number of employees         |   |
| Accounting and legal services                       |   | Number of employees         |   |
| Training                                            |   | Number of employees         |   |
| Retirement benefits                                 |   | Number of employees         |   |
| Rent and depreciation                               |   | Floor area                  |   |
| Other selling, general and  administrative expenses |   | Number of employees/revenue |   |

 

Managementbelieved that the above was a reasonablebasis of estimating what the Group’s expenses would have been on a stand-alonebasis.

 

***(b)******        ******The Acquisition***

 

TheAcquisition of Unicom New Century as described in Note (1) above became effectiveon December 31, 2002 when the Company gained theownership of, and control over Unicom New Century, after obtaining thenecessary government approvals on the Acquisition and making payment of thepurchase consideration on that date. The Company has adopted the purchase method of accounting to account forthis Acquisition. The net identifiableassets and liabilities acquired are recorded based on their respective fairvalues as of December 31, 2002, estimated by the Company to be approximately RMB2,544million.

 

Theresults of the subsidiary acquired are included in the consolidated statementof income from the date of acquisition. Since the effective date of theAcquisition was December 31, 2002, the consolidated financial statements didnot include the operating results of Unicom New Century, but included thefinancial position of Unicom New Century as of December 31, 2002.

 

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Thefinancial statements have been prepared under the historical cost convention except that, as disclosed in theaccounting policies below, certain land and building and investments insecurities are stated at fair value. They have been prepared in accordance with accounting principles generally accepted in Hong Kong (“HK GAAP”) issued by the Hong Kong Society of Accountants (“HKSA”).  This basis ofaccounting differs from that used in the preparationof statutory financial statements for PRC statutory reporting purposes, which werebased on the accounting principles and financialregulations applicableto enterprises established in the PRC (“PRC GAAP”).

 

Theprincipal adjustments made to conform to HK GAAP include the following:

 

•                  Reversal ofrevaluation surplus and related depreciation and amortization charges arising from the revaluation of assetsperformed by independent valuers registered in the PRC;

 

•                  Additionalaccrual for certain retirement benefits;

 

•                  Additionalprovision for certain housing benefits;

 

•                  Additional capitalizationof borrowing costs;

 

•                  Provisionfor deferred taxation on HK GAAP adjustments;

 

•                  Recognized losses arising from the termination of CCF Arrangements asone-time loss; and

 

•                  Capitalization of the direct cost associated with the Acquisition

 

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**3.****             ****PRINCIPAL ACCOUNTINGPOLICIES**

 

Theprincipal accounting policies adopted in the preparation of the financialstatements are set out as follows:

 

***(******a)******        ******Basis of preparation***

 

In the current year, the Group adoptedthefollowing Statements of Standard Accounting Practice (“SSAP”)issued by the HKSA which are effective for accountingperiods commencing on or after January 1, 2002:

 
| SSAP1 (revised)   |   | Presentation of financial statements |   |
|-------------------|--------|--------------------------------------|--------|
| SSAP11  (revised) |   | Foreign currency  translation        |   |
| SSAP15  (revised) |   | Cash flow statements                 |   |
| SSAP33            |   | Discontinuing  operation             |   |
| SSAP34  (revised) |   | Employee benefits                    |   |

 

Theimpact of the adoption of the new aforementionednew standards on the Group’s consolidated operatingresults and financial position is not significant and, accordingly, no priorperiod adjustment has been made.

 

TheGroup has not adopted SSAP 35 “Governmentgrants and disclosure of government assistance” and SSAP 12  “Incometaxes”, which are effective for periods commencing on or after July 1, 2002 andJanuary 1, 2003 respectively.

 

Shouldthe Group have adopted the revised SSAP 12 in2002, it would apply retrospectively. As such, the Group estimated that the opening retained profits as of January 1, 2002 would increase by approximatelyRMB373,159,000, which represent the deferred tax assets related to provision of doubtful debts of the GSMBusiness previously not recognized. Thischange would result in a decrease in the income tax expense by approximatelyRMB32,140,000for the yearended December 31, 2002.

 

***(******b)******        ******Group accounting***

 

**(i)****           ****Consolidation**

 

The consolidated financial statements include the financialstatements of the Company and its subsidiaries made up to December 31.

 

Subsidiaries are those entities in which theCompany, directly or indirectly, controls the composition of the board ofdirectors; controls more than half of the voting power; or holds more than halfof 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 acquisition or up to the effective date of disposal, asappropriate.

 

All significant inter-company transactions andbalances within the Group are eliminated on consolidation.

 

Minority interests represent the interests ofoutside shareholders in the operating results and net assets of subsidiaries.

 

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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 statement of income includes the Group’s share of the results ofassociated companies for the year, and the consolidated balance sheet includesthe Group’s share of the net assets of the associated companies andgoodwill/negative goodwill (net of accumulated amortization) on acquisition.

 

Equityaccounting is discontinued where the carrying amount of the investment in anassociated company reaches zero, unless the Group has incurred obligations orguaranteed obligations in respect of the associated companies.

 

Where,in the opinion of the directors, there is an impairment loss of an associatedcompany, permanently reduced below its carrying value, or the market value hasfallen below the carrying value over a sustained period, a provision is madefor such impairment loss.

 

***(c******)******         ******Use of estimates***

 

Thepreparation of financial statements in conformity with HK GAAP requires management to make estimatesand assumptions that affect the reported amount and disclosures.  Accordingly, actualresults may differ from those estimates and assumptions.

 

***(d******)******        ******Property, plant and equipment***

 

**(i)****           ****Land use rights and building**

 

Landuse rights and buildings are stated at valuation.  Independent valuations are performed periodically with the last valuation performed on March 31, 2000.  In the intervening years, the directorsreview the carrying value of land use rights and buildings and adjustment ismade where in the directors’ opinionthere has been a material change in value. Any increase in land use rights andbuildings valuation is credited to the revaluation reserve; any decrease isfirst offset against an increase on earlier valuation in respect of the sameproperty and is thereafter charged to the statement of income. Upon the disposal of revalued land use rights and buildings, the realized portion of the revaluationreserve is transferred from the valuation reserve to retained profits.

 

**(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 incurred after the property,plant and equipment have been put into operation, such as repairs andmaintenance and overhaul costs, are normally charged to expense in the year inwhich they are incurred. In situationswhere it can be clearly demonstrated that the expenditure has resulted in anincrease in the future economic benefits expected to be obtained from the useof the asset beyond its originally assessedstandard of performance, the expenditure is capitalized as anadditional cost of the assets.

 

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**(iii)****   ****Depreciation**

 

Landuse rights are depreciated over the period of the lease while other fixedassets are depreciated at rates sufficient to write off their costs lessaccumulated losses over their estimated useful lives on a straight-line basis.The estimated useful lives of property, plant and equipment are as follows:

 
|                                 |   | **Depreciable  life**     |   | **Residual  value** |   |
|--------------------------------------|--------|---------------------------|--------|---------------------|--------|
|                                 |   |                      |   |                |   |
| Land use rights                      |   | Over the period of  lease |   | —              |   |
| Buildings                            |   | 8 – 40  years        |   | 3                   | %      |
| Leasehold improvements               |   | Over the lease term       |   | —              |   |
| Telecommunications  equipment        |   | 4 – 15 years         |   | 3                   | %      |
| Office furniture, fixtures and other |   | 4 – 14 years         |   | 3                   | %      |

 

**(iv)****      ****Construction-in-progress**

 

Construction-in-progressrepresents buildings under construction and plant and equipment pendinginstallation, and is stated at cost lessaccumulated impairment losses. Costs include construction and acquisition costs, and interest chargesarising from borrowings used to finance the assets during the constructionperiod.

 

Noprovision for depreciation is made on construction-in-progress until such timeas the assets are completed and ready for use.

 

**(v)****          ****Impairment and gains or loss on sale**

 

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 thestatement of income and classified under “general, administrative and otherexpenses” as a component of operating expenses.  Reversal of impairment losses recognized in prior years isrecorded when impairment losses recognized for the asset no longer exist orhave decreased.  The reversal isrecorded 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 balance remaining attributable to the relevantasset is transferred to retaining earnings and is shown as a movement inreserves.

 

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***(******e******)******         ******Goodwill***

 

Goodwillrepresents the excess of purchase consideration over the fair values of the Group’s shareof thenet identifiable assets and liabilities of the acquired subsidiary/associated company at the date of acquisition. Goodwill is carried at cost lessaccumulated amortization and accumulated impairment losses.  Goodwill is amortized using the straight-line method over the estimatedeconomic lives of the acquired businesses. Goodwill arising on major strategic acquisitions of the Group to expandits geographical market coverage is amortized over 20 years.  For all other acquisitions, goodwill isgenerally amortized over 5 to 7 years.

 

Whenlater events and circumstances occur which indicate the carrying balance ofgoodwill may not be recoverable, the unamortized balance is written down to itsestimated recoverable amount. Estimated recoverable amount is determined basedon estimated discounted future net cash flows of the related business over its remaining life.

 

***(******f******)******           ******Other assets***

 

Otherassets mainly represent long-term (i)expenditures on facilities for interconnection with other operators, for whichthe Group has a permanent use right, (ii) prepaidleased lines and rentals and (iii) deferredcustomer acquisition costs of certain CDMA contractual subscribers.

 

Expenditureson interconnection facilitiesare amortized using the straight-line method over the period of benefit of 5years.Long-term prepaid leased lines and rentals are recognizedusing a straight-line method over the lease period.

 

Deferredcustomer acquisition costs of certain CDMA contractual subscriber represent thecost of CDMA handsets given to contractual subscribers under special promotional packages. Deferred customeracquisition costs, to the extent recoverable, are amortized over thecontractual period (not exceeding 2 years) to match with the minimum contractrevenue.  Deferred customer acquisitioncosts are included in “prepayment and other current assets” when the customercontract is within 1 year, whereas they are recorded as “other assets” when thecontract period is over 1 year.

 

***(******g******)******        ******Investments******in securities***

 

**(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 statement of income. This impairment loss is written back to statement 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 statement of income.

 

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**(ii)****       ****Trading securities**

 

Trading securities are carried at fair value.  At each balance sheet date, the net unrealizedgains or losses arising from the changes in fair value of trading securitiesare recognized in the statement of income. Gains or losses on disposal of trading securities, representing thedifferences between the net sales proceeds and the carrying amounts, arerecognized in the statement of income as they arise.

 

***(h)******        ******Cash and cash equivalents***

 

Cash and cash equivalents are carried in thebalance sheet at cost. For the purposes of the cash flow statement, cash andcash equivalents comprise cash on hand, deposits held at call with banks, cashinvestments with maturity of 3 months or less from the date of investment.

 

***(******i******)******           ******Short-term bank deposits***

 

Short-termbank deposits are cash invested in fixed-term deposits with original maturitiesranging from more than 3 months toone year.

 

**(*****j******)******           ******Accounts receivables and other receivables***

 

Provision is made against accounts receivables and otherreceivables to the extent they are considered to be doubtful. They are statedin the balance sheet net of such provision.

 

***(k)******        ******Inventories***

 

Inventories,which principally comprise handsets, SIM cards, UIM cards, pagers andaccessories, are stated at thelower of cost and netrealizable value.  Cost is based on theweighted average method and comprises all costs of purchase and other costsincurred in bringing the inventories to their present location and condition.Net realizable value is determined on the basis of anticipated sales proceedsless estimated selling expenses.

 

***(******l******)******           ******Advances from customers***

 

Advancesfrom customers are monthly fees paid by paging subscribers in advance oramounts paid by customers for GSM prepaid cards, GSM and CDMA prepaid service fees, Internetprotocol (“IP”) telephone cards and other calling cards which cover futuretelecommunications services (over a period of 3 to 12months).  Customer advances are statedat the amount of proceeds received less the amount already recognized asrevenues upon the rendering of services.

 

F - 18

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***(m******)******     ******Assetsunder lease***

 

**(i)****           ****Finance leases**

 

Leases that substantially transfer to the Group allthe risks and rewards of ownership of assets are accounted for as financeleases.  Finance leases are capitalizedat the inception of the lease at the lower of the fair value of the leasedassets or the present value of the minimum lease payments. Each lease paymentis allocated between the capital and finance charges so as to achieve aconstant rate on the capital balances outstanding.  The corresponding rental obligations, net of finance charges, areincluded in long-term liabilities.  Thefinance charges are charged to the statement of income over the lease periods.

 

Assets held under finance leases are depreciatedover the shorter of their estimated useful lives and the lease periods.

 

**(ii)****       ****Operatingleases**

 

Leases where substantially all the risks andrewards of ownership remain with the lessor are accounted for as operatingleases. Minimum payments under operating leases net of any incentives receivedfrom the lessor are charged to the statement of income on a straight-line basisover the lease periods.

 

***(******n******)******        ******Borrowing costs***

 

Borrowing costs are expensed asincurred, except for interest directly attributable to the acquisition,construction or production of an asset, that necessarily takes a substantial period of time to get ready for itsintended use, in which case they are capitalized as part of the cost of thatasset. Capitalization of borrowing costscommences when expenditures for the asset and borrowing costs are being incurredand the activities to prepare the asset for its intended use are in progress.Borrowing costs are capitalized up to the date when theproject is completed and ready for its intended use.

 

To the extent that fundsare borrowed specifically for the purpose of obtaining a qualifying asset, theamount of borrowing costs eligible for capitalization on that asset isdetermined as the actual borrowing costs incurred on that borrowing during theperiod less any investment income on the temporary investment of thoseborrowings.

 

Tothe extent that funds are borrowed generally and used for the purpose ofobtaining a qualifying asset, the amount of borrowing costs eligible for capitalizationis determined by applying a capitalization rate to the expenditures on thatasset. The capitalization rate is the weighted average of the borrowing costsapplicable to the borrowings of the Group that are outstanding during theperiod, other than borrowings made specifically for the purpose of obtaining aqualifying asset. The amount of borrowing costs capitalized incurred during aperiod should not exceed the amount of borrowing cost incurred during thatperiod. Other borrowing costs are recognized as expenses when incurred.

 

Thecapitalized borrowing rate represents the cost of capital for raising therelated borrowings externally and varies from 4.54%to 6.24%for the year ended December 31, 2002 (2000:4.95% to 6.66%; 2001: 5.46% to 7.65%).

 

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***(******o******)******        ******Provision******s***

 

Provisions are recognized when the Group has presentlegal or constructive obligations as a result of a past event, it is probable(i.e. more likely than not) that an outflow of resources will be required tosettle the obligation, and a reliable estimate of the amount can be made.Provisions are reviewed at each balance sheet date and adjusted to reflect thecurrent best estimate.  Where the effectof the time value of money is material, the amount of a provision is thepresent value of the expenditures expected to be required to settle theobligation. Where the Group expects a provision to be reimbursed, for exampleunder an insurance contract, the reimbursement is recognized as a separateasset but only when the reimbursement is virtually certain.

 

***(******p******)******        ******Revenue recogn******ition***

 

(i)             Revenue isrecognized when it is probable that the economic benefits associated with a transaction will flow to the Group and when the revenue and cost can be measured reliably, on thefollowing basis:

 

•                  Usage feesare recognized when the service is rendered;

 

•                  Monthly feesare recognized as revenue in the month during which the services are rendered;

 

•                  Connectionfees are recognized as revenue upon activation of service for subscribers;

 

•                  Telecommunicationcalling card sales, which represent prepaid service fees received fromsubscribers for telephony services, is recorded as advances from customers.Revenue is recognized when the related service is rendered upon actual usage ofthe telephone cards by customers;

 

•                  Leased linerental income is recognized on a straight-line basis over the leaseterm; and

 

•                  Sales oftelecommunications products, such as handsets and accessories, SIM cards, UIMcards and pagers etc, arerecognized when title has passed to the buyers.

 

(ii)          Interestincome

 

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)       Dividendincome

 

Dividendincome is recognized when the rights to receive payment is established.

 

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***(q)******        ******Foreign currency translation***

 

TheGroup maintains its books and records in Renminbi (“RMB”), which is not freelyconvertible into foreign currencies. Transactions in foreign currencies are translated at the exchange ratesat the dates of the transactions. Monetary assets and liabilities denominatedin other currencies are translated at exchange rates ruling at the balancesheet date.  Exchange differences arisingfrom changes in exchange rates subsequent to the transaction dates are dealtwith in the statement 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, 2002 of US$1.00=RMB8.2800. No representation is made that RMBamounts could have been, or could be, converted into US$ at that rate onDecember 31, 2002, or at other rate.

 

***(******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 benefits and other housing benefits areexpensed as incurred.

 

**(iii)****   ****Equity compensation benefits**

 

Shareoptions are granted to directors and employees under the relevant share option schemes approved by the Board ofDirectors (Note 31). The financial impact of the shareoption granted is not recorded in the financial statements until such time asthe options are exercised. When the options are exercised, the proceedsreceived net of any transaction costs are credited to share capital (nominalvalue) and share premium

 

***(******s******)******          ******Taxation***

 

**(i)****           ****Income tax**

 

Incometax is provided on the basis of income for statutory financial reportingpurposes, adjusted for income and expense items, which are not assessable ordeductible for tax purposes.

 

**(ii)****       ****Deferred taxation**

 

Deferredtaxation is provided under the liability method, at the current tax rate, inrespect of timing differences between income as computed for taxation purposesand income as stated in the statement of income.  A deferred tax asset is not recognizedunless the related benefits are expected to crystallize in the foreseeable future.

 

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***(******t******)******           ******Related parties***

 

Entitiesare considered to be related if one has the ability to control the other,directly or indirectly, or has the ability to exercise significant influenceover the financial and operating decisions of the other.  Entities are also considered to be relatedif they are subject to common control or common significant influence.

 

***(u)******        ******Contingent liabilities and contingentassets***

 

Acontingent liability is a possible obligation that arises from past events andwhose existence will only be confirmed by the occurrence or non-occurrence ofone or more uncertain future events not wholly within the control of theGroup.  It can also be a presentobligation arising from past events that is not recognized because it is notprobable that outflow of economic resources will be required or the amount ofobligation cannot be measured reliably.

 

Acontingent liability is not recognized but is disclosed in the notes to thefinancial statements.  When a change inthe probability of an outflow occurs so that outflow is probable, the liabilitywill then be recognized as a provision.

 

Acontingent asset is a possible asset that arises from past events and whoseexistence will be confirmed only by the occurrence or non-occurrence of one ormore uncertain events not wholly within the control of the Group.

 

Contingentassets are not recognized but are disclosed in the notes to the financialstatements when an inflow of economic benefits is probable.  When an inflow is virtually certain, anasset is recognized.

 

***(v)******         ******Events after the balance sheet date***

 

Eventsafter the balance sheet date that provide additional information about theposition at the balance sheet date or those that indicate the going concernassumption is not appropriate (adjusting events) are reflected in the financialstatements.  Events after the balancesheet date that are not adjusting events are disclosed in the notes whenmaterial.

 

***(w)******      ******Segment reporting***

 

Inaccordance with the Group’s internal financial reporting, the Group hasdetermined that business segments be presented as the primary reporting format.

 

Unallocatedcosts primarily represent corporate expenses. Segments assets consist primarilyof property, plant and equipment, other assets, prepayments, inventories,receivables and operating cash and exclude short-termbank deposits. Segment liabilities comprise operating liabilities.  Capital expenditure mainly comprisesadditions to property, plant and equipment.

 

***(******x******)******        ******E******arnings per share and per American Depository Share(“ADS”)***

 

Basicearnings per share has been computed by dividing the income attributable toshareholders by the number of weighted average number of ordinary sharesoutstanding during the year.

 

Dilutedearnings per share has been computed by dividing the income 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.

 

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**4.****             ****OPERATING REVENUE**

 

Operatingrevenue primarily comprises of usagefees, monthly fees, connection fees, interconnection revenue, leased linerental income and sales of telecommunication products earned by the Group fromGSM, CDMA, data, Internet, longdistance and paging services.  Tariffsfor these services are subject to regulations by various governmentauthorities, including the State Development Planning Commission, the MII****and the provincial regulatory authorities.

 

Operatingrevenue is net of business tax and government surcharges.

 

Themajor components of operating revenue are as follows:

 
|                                    |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   |
|-----------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                    |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **GSM  Business**                       |   |     |   |             |   |             |   |             |   |
| Usage fee                               |   | (i) (a)  |   | 8,212,332        |   | 14,937,448       |   | 20,274,987       |   |
| Monthly fee                             |   | (ii)     |   | 2,476,104        |   | 3,660,473        |   | 4,169,129        |   |
| Connection fee                          |   | (iii)    |   | 517,642          |   | 204,986          |   | —           |   |
| Interconnection  revenue                |   | (iv)     |   | 753,591          |   | 1,262,267        |   | 1,709,771        |   |
| Other revenue                           |   | (vi)     |   | 228,135          |   | 439,884          |   | 1,234,038        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Total GSM service revenue               |   |     |   | 12,187,804       |   | 20,505,058       |   | 27,387,925       |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **CDMA  Business**                      |   |     |   |             |   |             |   |             |   |
| Usage  fee                              |   | (i) (a)  |   | —           |   | —           |   | 2,231,050        |   |
| Monthly  fee                            |   | (ii)     |   | —           |   | —           |   | 713,483          |   |
| Interconnection  revenue                |   | (iv)     |   | —           |   | —           |   | 184,296          |   |
| Other revenue                           |   | (vi)     |   | —           |   | —           |   | 96,518           |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Total CDMA service revenue              |   |     |   | —           |   | —           |   | 3,225,347        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **Data and  Internet Business**         |   |     |   |             |   |             |   |             |   |
| Usage fee                               |   | (i) (b)  |   | 342,651          |   | 1,581,189        |   | 2,069,415        |   |
| Monthly fee                             |   | (ii)     |   | 7,005            |   | —           |   | 9,478            |   |
| Interconnection  revenue                |   | (iv)     |   | 141,992          |   | 146,844          |   | 348,248          |   |
| Leased lines rental                     |   | (v)      |   | 45,841           |   | 64,117           |   | 274,274          |   |
| Other revenue                           |   | (vi)     |   | 2,636            |   | 28,061           |   | 91,624           |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Total Data and Internet service revenue |   |     |   | 540,125          |   | 1,820,211        |   | 2,793,039        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **Long Distance  Business**             |   |     |   |             |   |             |   |             |   |
| Usage fee                               |   | (i) (b)  |   | 127,875          |   | 539,808          |   | 1,223,051        |   |
| Monthly fee                             |   | (ii)     |   | 71               |   | —           |   | —           |   |
| Interconnection  revenue                |   | (iv)     |   | 151,753          |   | 577,780          |   | 664,302          |   |
| Leased lines rental                     |   | (v)      |   | 275,414          |   | 363,078          |   | 873,054          |   |
| Other revenue                           |   | (vi)     |   | 1,156            |   | 8,067            |   | 5,316            |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Total Long Distance service revenue     |   |     |   | 556,269          |   | 1,488,733        |   | 2,765,723        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **Paging  Business**                    |   |     |   |             |   |             |   |             |   |
| Monthly fee                             |   | (ii)     |   | 7,992,999        |   | 4,141,232        |   | 1,912,786        |   |
| Connection fee                          |   | (iii)    |   | 68,233           |   | 1,595            |   | —           |   |
| Interconnection  revenue                |   | (iv)     |   | —           |   | —           |   | 113,123          |   |
| Other revenue                           |   | (vi)     |   | 422,258          |   | 198,997          |   | 135,279          |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Total Paging service revenue            |   |     |   | 8,483,490        |   | 4,341,824        |   | 2,161,188        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **Total service revenue**               |   |     |   | 21,767,688       |   | 28,155,826       |   | 38,333,222       |   |
|                                    |   |     |   |             |   |             |   |             |   |
| Sales of telecommunications products    |   |     |   | 1,924,770        |   | 1,237,060        |   | 2,243,303        |   |
|                                    |   |     |   |             |   |             |   |             |   |
| **Total operating revenue**             |   |     |   | 23,692,458       |   | 29,392,886       |   | 40,576,525       |   |

 

F- 23

----

 

Notes:

 

(i)             Usage feescomprise:

 

(a)          charges forincoming and outgoing calls made by cellular subscribers including charges forlocal calls, domestic direct dial (“DDD”) and international direct dial (“IDD”)as well as roaming fees for calls made by cellular subscribers outside theirlocal service areas.

 

(b)         charges forIP telephone calls, data and Internet services and fixed line long distance calls.

 

(ii)          Monthly feesrepresent fixed amounts charged to cellular, data, Internet, and pagingsubscribers on a monthly basis for maintaining their access to the related services.

 

(iii)       Connectionfees are charged to cellular and paging subscribers for the one-time activationservice rendered to connect the cellular subscribersto the Group’s cellular network or to reconfigure the receivingfrequency of the subscribers’pagers to the Group’spaging network. Connection fees have beencancelled since July 1, 2001.

 

(iv)      Interconnectionrevenue represents amounts received from other operators, including UnicomGroup, for calls from their networks to the Group’s networks. It also includes roaming-in fees receivedfrom other operators, including Unicom Group, for calls made by theirsubscribers using the Group’scellular networks.Interconnection revenue is recognized when the relevant calls are made bysubscribers (see Note 33(a)).

 

(v)         Leased linerental income represents rentals received for leasing of transmission lines toUnicom Group, business customers and other carriers in the PRC.

 

(vi)   Otherrevenue mainly represents revenue from the provision of value-added services tosubscribers such as short messageservices.

 

F- 24

----

 

**5****.****             ****INCOME BEFORE TAXATION**

 

Incomebefore taxation is stated after charging and crediting the following:

 
|                                                                                     |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   |
|------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                     |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **After****charging/(****crediting):**                                                   |   |     |   |             |   |             |   |             |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Share of (profit) losses from associated companies                                       |   | 8        |   | (258             | )      | 24,773           |   | (553             | )      |
| Dividends from investment securities                                                     |   | 8        |   | (9,321           | )      | (22,864          | )      | (24,978          | )      |
| Realized gains on investment securities                                                  |   | 8        |   | —           |   | (944             | )      | (18,098          | )      |
| Realized gains on trading securities                                                     |   | 8        |   | (64,956          | )      | (31,979          | )      | (1,876           | )      |
| Unrealized (gains) losses on trading securities                                          |   | 8        |   | (31,855          | )      | 56,576           |   | 27,461           |   |
| Gains on disposal of interests in associated  company                                    |   | 8        |   | —           |   | —           |   | (1,251           | )      |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Interest income                                                                          |   |     |   | (1,748,805)      |   | (2,096,972       | )      | (470,282         | )      |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Interest expense:                                                                        |   | 7        |   | 1,606,403        |   | 2,593,402        |   | 1,879,663        |   |
| Less: amounts capitalized in construction-in-progress                                    |   | 7        |   | (252,657         | )      | (686,254         | )      | (422,927         | )      |
| Total interest expenses                                                                  |   | 7        |   | 1,353,746        |   | 1,907,148        |   | 1,456,736        |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Depreciation:                                                                            |   |     |   |             |   |             |   |             |   |
| -          Assets held under finance leases |   | 20       |   | —           |   | 9,327            |   | 20,046           |   |
| -          Other assets                     |   |     |   | 5,511,045        |   | 7,715,229        |   | 10,830,635       |   |
| Total depreciation                                                                       |   | 20       |   | 5,511,045        |   | 7,724,556        |   | 10,850,681       |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Amortization of goodwill                                                                 |   | 21       |   | 100,781          |   | 74,261           |   | 23,414           |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Amortization of deferred customer acquisition costs of contractual  CDMA subscribers     |   | 32(b)    |   | —           |   | —           |   | 1,385,424        |   |
| Other amortization                                                                       |   | 22       |   | 122,489          |   | 463,479          |   | 381,629          |   |
| Total amortization of other assets                                                       |   |     |   | 122,489          |   | 463,479          |   | 1,790,467        |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Loss on disposal of property, plant and equipment                                        |   | 6(iv)    |   | 277,973          |   | 54,475           |   | 82,467           |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Operating lease expense:                                                                 |   |     |   |             |   |             |   |             |   |
| -          Leased lines                     |   |     |   | 1,158,123        |   | 853,306          |   | 691,358          |   |
| -          CDMA network capacities          |   | 32(a)    |   | —           |   | —           |   | 891,897          |   |
| -          Other leasing expense            |   | 6(iv)    |   | 546,165          |   | 569,954          |   | 610,931          |   |
| Total operating lease expense                                                            |   |     |   | 1,704,288        |   | 1,423,260        |   | 2,194,186        |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Auditors’ remuneration                                                              |   |     |   | 47,030           |   | 52,972           |   | 38,916           |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Provision (write-back) for doubtful debts:                                               |   |     |   |             |   |             |   |             |   |
| -          GSM Business                     |   |     |   | 355,082          |   | 517,663          |   | 802,914          |   |
| -          CDMA Business                    |   |     |   | —           |   | —           |   | 42,050           |   |
| -          Data and Internet Business       |   |     |   | 2,635            |   | 24,743           |   | 70,922           |   |
| -          Long Distance Business           |   |     |   | 1,684            |   | 13,058           |   | 46,124           |   |
| -          Paging Business                  |   |     |   | 85,430           |   | (14,510          | )      | 9,979            |   |
| Total provision for doubtful debts                                                       |   | 6(iv)    |   | 444,831          |   | 540,954          |   | 971,989          |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| Cost of inventories                                                                      |   |     |   | 2,390,758        |   | 1,268,645        |   | 2,161,512        |   |
|                                                                                     |   |     |   |             |   |             |   |             |   |
| (Write-back) write-down of inventories to net realizable value                           |   |     |   | (91,038          | )      | 16,605           |   | 7,156            |   |

 

F- 25

----

 
|                                                                                                                         |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                                         |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **After****charging/(****crediting):**                                                                                       |   |     |   |             |   |             |   |             |   |
| Personnel:                                                                                                                   |   |     |   |             |   |             |   |             |   |
| -          Salaries and wages                                                   |   |     |   | 1,573,147        |   | 2,156,911        |   | 2,654,845        |   |
| -          Contributions to defined contribution  pension schemes               |   | 12       |   | 148,322          |   | 163,500          |   | 203,164          |   |
| -          Contributions to supplementary defined  contribution pension schemes |   | 12       |   | —           |   | —           |   | 11,066           |   |
| -          Special monetary housing benefits                                    |   | 13       |   | —           |   | 88,911           |   | 277,944          |   |
| -          Contributions to other housing fund                                  |   | 13       |   | 44,333           |   | 69,963           |   | 92,549           |   |
| -          Other housing benefits                                               |   | 13       |   | 4,038            |   | 7,933            |   | 95,650           |   |
| Total personnel                                                                                                              |   | 6(iii)   |   | 1,769,840        |   | 2,487,218        |   | 3,335,218        |   |
|                                                                                                                         |   |     |   |             |   |             |   |             |   |
| Provision for impairment for:                                                                                                |   |     |   |             |   |             |   |             |   |
| -          Property, plant and equipment                                        |   |     |   | —           |   | 468,611          |   | —           |   |
| -          Goodwill                                                             |   | 6(iv)    |   | —           |   | 163,900          |   | 38,797           |   |
| Total provision for impairment                                                                                               |   |     |   | —           |   | 632,511          |   | 38,797           |   |
|                                                                                                                         |   |     |   |             |   |             |   |             |   |
| Additional provision (write-back) for impairment  losses of investments in:                                                  |   |     |   |             |   |             |   |             |   |
| -          Associated companies                                                 |   |     |   | 7,501            |   | (3,219           | )      | —           |   |
| -          Investment securities                                                |   |     |   | 6,812            |   | (12,490          | )      | 650              |   |
| Total provision for impairment in investments                                                                                |   |     |   | 14,313           |   | (15,709          | )      | 650              |   |
|                                                                                                                         |   |     |   |             |   |             |   |             |   |
| Net exchange losses (income)                                                                                                 |   | 8        |   | 30,881           |   | (14,476          | )      | 21,533           |   |

 

F- 26

----

 

**6****.****             ****OPERATING EXPENSES**

 

Thenature of the major components of operating expenses is as follows:

 

(i)             Leased linecharges and network capacities are incurred in association with leasing oftransmission capacity from other operators and CDMAnetwork capacities from Unicom New Horizon (see Note 32 (a)).

 

(ii)          Interconnectioncharges represent amounts paid to other operators, including Unicom Group, forcalls from the Group’snetworks to the networks of other operators.

 

(iii)       Personnelcosts comprise staff salaries and wages, bonuses and medical benefits,contributions to defined contribution pension schemes and housing benefits.

 

(iv)      General,administrative and other expenses are analyzed as follows:

 
|                                                                          |   | **2000**         |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                          |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                          |   |             |   |             |   |             |   |
| Operating lease rental expenses                                               |   | 546,165          |   | 569,954          |   | 610,931          |   |
| Repair and maintenance expenses                                               |   | 635,197          |   | 424,614          |   | 832,259          |   |
| Provision for doubtful debts                                                  |   | 444,831          |   | 540,954          |   | 971,989          |   |
| Loss on disposal of property, plant and equipment                             |   | 277,973          |   | 54,475           |   | 82,467           |   |
| Provisions for impairment loss of property, plant  and equipment and goodwill |   | —           |   | 632,511          |   | 38,797           |   |
| Traveling, entertainment and meeting expenses                                 |   | 389,335          |   | 612,592          |   | 850,876          |   |
| Power and water charges                                                       |   | 229,308          |   | 473,774          |   | 729,650          |   |
| Office expenses                                                               |   | 385,980          |   | 587,727          |   | 582,187          |   |
| Other                                                                         |   | 834,274          |   | 1,602,396        |   | 932,694          |   |
|                                                                          |   |             |   |             |   |             |   |
|                                                                          |   | 3,743,063        |   | 5,498,997        |   | 5,631,850        |   |

 

**7****.****             ****FINANCE********COSTS**

 
|                                                          |   | **2000**         |   | **2001**         |   | **2002**         |   |
|---------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                          |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                          |   |             |   |             |   |             |   |
| Interest on bank loans repayable over 5 years                 |   | —           |   | —           |   | 41,115           |   |
| Interest on bank loans repayable within 5 years               |   | 1,558,090        |   | 2,593,402        |   | 1,838,548        |   |
| Interest on loans from Unicom Group repayable  within 5 years |   | 48,313           |   | —           |   | —           |   |
| Less: Amounts capitalized in  construction-in-progress        |   | (252,657         | )      | (686,254         | )      | (422,927         | )      |
|                                                          |   |             |   |             |   |             |   |
| Total interest expenses                                       |   | 1,353,746        |   | 1,907,148        |   | 1,456,736        |   |
| Bank charges                                                  |   | —           |   | 10,418           |   | 17,705           |   |
|                                                          |   |             |   |             |   |             |   |
|                                                          |   | 1,353,746        |   | 1,917,566        |   | 1,474,441        |   |

 

F- 27

----

 

**8.****             ****OTHER (INCOME) EXPENSE,NET**

 
|                                               |   | **2000**         |   | **2001**         |   | **2002**         |   |
|----------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                               |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                               |   |             |   |             |   |             |   |
| Realized gains on trading securities               |   | (64,956          | )      | (31,979          | )      | (1,876           | )      |
| Unrealized (gains) losses on trading securities    |   | (31,855          | )      | 56,576           |   | 27,461           |   |
| Share of (income) losses from associated companies |   | (258             | )      | 24,773           |   | (553             | )      |
| Dividends from investment securities               |   | (9,321           | )      | (22,864          | )      | (24,978          | )      |
| Realized gains on investment securities            |   | —           |   | (944             | )      | (18,098          | )      |
| Losses (gains) from exchange difference            |   | 30,881           |   | (14,476          | )      | 21,533           |   |
| Other                                              |   | 16,280           |   | (30,917          | )      | 12,870           |   |
|                                               |   |             |   |             |   |             |   |
|                                               |   | (59,229          | )      | (19,831          | )      | 16,359           |   |

 

 

**9.****             ****DIRECTORS’, SENIOREXECUTIVES’ AND SUPERVISORS’ EMOLUMENTS**

 

**(a)****         ****Directors’ emoluments**

 

Theaggregate amounts of fees and emoluments payable to directors of the Companyduring the years are set out below:

 
|                                                                                                   |   | **2000**         |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                                   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                                   |   |             |   |             |   |             |   |
| Non-executive directors:                                                                               |   |             |   |             |   |             |   |
| Fees                                                                                                   |   | —           |   | 1,273            |   | 849              |   |
|                                                                                                   |   |             |   |             |   |             |   |
| Executive directors:                                                                                   |   |             |   |             |   |             |   |
| Fees                                                                                                   |   | —           |   | —           |   | —           |   |
| Other emoluments                                                                                       |   |             |   |             |   |             |   |
| -          Salaries, allowance and other allowances       |   | 2,825            |   | 9,083            |   | 9,722            |   |
| -          Pension benefits/pension  scheme contributions |   | 52               |   | 124              |   | 38               |   |
| -          Bonuses paid  and payable                      |   | 222              |   | 11,162           |   | 5,887            |   |
|                                                                                                   |   |             |   |             |   |             |   |
|                                                                                                   |   | 3,099            |   | 20,369           |   | 15,647           |   |
|                                                                                                   |   |             |   |             |   |             |   |
|                                                                                                   |   | 3,099            |   | 21,642           |   | 16,496           |   |

 

Directors’ emoluments disclosed above includeapproximately RMB636,000 (2000: Nil; 2001: approximately RMB637,000) paid toindependent non-executive directors.

 

During the year, 2,802,000 (2000: 2,107,000; 2001:Nil) share options were granted to the directors under the amended Share OptionScheme approved by the independent non-executive directors on July 10, 2002.Refer to Note 31 of the financial statements for details of share optiongranted during the year.

 

F- 28

----

 

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)** |   | **2000**                 |       | **2001** |   | **2002** |   |
|                                              |   |                     | ** ** |   | ** ** |   | ** ** |
| $nil - $1,000,000                                 |   | 5                        |       | 4 |   | 4 |   |
| $1,000,001 - $1,500,000                           |   | —                   |       | — |   | 2 |   |
| $2,000,001 - $2,500,000                           |   | —                   |       | — |   | 1 |   |
| $2,500,001 - $3,000,000                           |   | —                   |       | 2 |   | 1 |   |
| $3,000,001 - $3,500,000                           |   | —                   |       | — |   | 1 |   |
| $3,500,001 - $4,000,000                           |   | —                   |       | 1 |   | 1 |   |
| $4,000,001 - $4,500,000                           |   | —                   |       | 1 |   | — |   |
| $5,000,001 - $5,500,000                           |   | —                   |       | 1 |   | — |   |
|                                              |   |                     |       |   |   |   |   |
|                                              |   | 5                        |       | 9 |   | 10 |   |

 

No directors waived the right to receive emolumentsduring the year.

 

**(b)****         ****F****ive highest paid individuals**

 

Thefive individuals whose emoluments were the highest in the Group for 2002 include four directors (2000: All; 2001: All) whoseemoluments are reflected in the analysis presented above. The emolumentspayable to the remaining individual during year 2002 are as follows:

 
|                                      |   | **2002**         |   |
|-------------------------------------------|--------|------------------|--------|
|                                      |   | **RMB’000** |   |
|                                      |   |             |   |
| Salaries, allowance and other  allowances |   | 1,432            |   |
| Bonuses paid and payable                  |   | 849              |   |
|                                      |   |             |   |
|                                      |   | 2,281            |   |

 

Theemoluments of the remaining individual during year 2002 fell within the band ofHK$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 - 29

----

 

**10.****      ****TAXATION**

 

Provisionfor taxation represents:

 
|                                                                                  |   | **2000**         |   | **2001**         |   | **2002**         |   |
|---------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                  |   |             |   |             |   |             |   |
| Provision for  PRC enterprise income tax on the estimated taxable income for the year |   | 1,619,169        |   | 1,608,825        |   | 1,192,801        |   |
| Deferred  taxation                                                                    |   | (514,200         | )      | (567,688         | )      | 559,545          |   |
|                                                                                  |   |             |   |             |   |             |   |
|                                                                                  |   | 1,104,969        |   | 1,041,137        |   | 1,752,346        |   |

 

Thereis no Hong Kong income tax liability as the Group does not have any assessable income sourced from Hong Kongfor the years endedDecember 31, 2000, 2001 and 2002.

 

Theincome tax liability of CUCL wasassessed as follows:

 

(a)          For 2000, the provincial branches and the head office of CUCL wasassessed for income tax liability on a consolidated basis as a single entityand were subject to the statutory tax rate of 33%. On the other hand, most ofGuoxin’s subsidiaries were individually subject to enterprise income tax at therate of 33% and certain subsidiaries were granted by tax authorities a reducedincome tax rate of 15%.

 

(b)         For 2001 and 2002, CUCL was approved as a foreign investment enterprise(“FIE”) and the tax liabilities were assessed in accordance with FIE taxationrequirements.

 

(c)          Accordingly, for 2001 and 2002, CUCL was assessed for income taxliability on a consolidated basis as a single entity and settled income taxliabilities centrally in Beijing approved by the tax authority.

 

(d)         Starting from January 1, 2001, Guoxin and its subsidiaries (except forUnicom Guomai) were subject to the FIE taxation requirement as stated in Note (b)above and assessed for income tax liability on a consolidated basis with CUCLas a single entity.

 

F - 30

----

 

Thereconciliation of PRC enterprise income tax between the statutory tax rate of33% applied to income before taxation and the effective tax rate actuallyrecorded in the statement of income is as follows:

 
|                                                                                                                                   |   | **2000** |       | **2001** |       | **2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **PRC**                                                                                                                                |   |     | ** ** |     | ** ** |     | ** ** |
|                                                                                                                                   |   |     | ** ** |     | ** ** |     | ** ** |
| Statutory tax rate of  33%                                                                                                             |   | 33.0     | %          | 33.0     | %          | 33.0     | %          |
| Non-deductible  expenses:                                                                                                              |   |     |       |     |       |     |       |
| - Housing  benefits                                                                                                                    |   | —   |       | 2.2      |       | —   |       |
| - Personnel  expenses                                                                                                                  |   | 2.0      |       | 0.7      |       | 0.1      |       |
| - Selling  and marketing expenses                                                                                                      |   | 2.9      |       | —   |       | —   |       |
| - Other                                                                                                                                |   | 0.5      |       | 1.2      |       | 1.4      |       |
| Non-taxable income:                                                                                                                    |   |     |       |     |       |     |       |
| - Connection  fees                                                                                                                     |   | (2.6     | )          | —   |       | —   |       |
| Effect of preferential  tax rates                                                                                                      |   | (1.3     | )          | (2.7     | )          | (3.2     | )          |
| Investment tax credits  (Note (a))                                                                                                     |   | —   |       | —   |       | (2.8     | )          |
| Non-recognition of  deferred taxes:                                                                                                    |   |     |       |     |       |     |       |
| - Provision  for doubtful debts of Cellular Business                                                                                   |   | 3.8      |       | 4.6      |       | 5.3      |       |
| - Provision  for doubtful debts of Cellular Business provided in prior years approved by  tax authority to be deducted for tax purpose |   | —   |       | —   |       | (4.7     | )          |
| Additional  depreciation deductible for tax purpose from 2001 (Note (b))                                                               |   | —   |       | (9.8     | )          | —   |       |
| Other                                                                                                                                  |   | (0.2     | )          | —   |       | —   |       |
|                                                                                                                                   |   |     |       |     |       |     |       |
| Effective PRC income  tax rate                                                                                                         |   | 38.1     | %          | 29.2     | %          | 29.1     | %          |
|                                                                                                                                   |   |     |       |     |       |     |       |
| **Hong Kong**                                                                                                                          |   |     |       |     |       |     |       |
|                                                                                                                                   |   |     |       |     |       |     |       |
| Statutory tax rate of  16%                                                                                                             |   | 16.0     | %          | 16.0     | %          | 16.0     | %          |
| Non-taxable income:                                                                                                                    |   |     |       |     |       |     |       |
| - Interest  income                                                                                                                     |   | (16.0    | )          | (16.0    | )          | (16.0    | )          |
|                                                                                                                                   |   |     |       |     |       |     |       |
| Effective HK income  tax rate                                                                                                          |   | —   |       | —   |       | —   |       |
|                                                                                                                                   |   |     |       |     |       |     |       |
| Total overall  effective income tax rate                                                                                               |   | 24.7     | %          | 19.1     | %          | 27.8     | %          |

 

Taxeffect of preferential tax rates is as follows:

 
|                                |   | **2000** |   | **2001** |   | **2002** |   |
|-------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |     |   |
| Aggregate  amount (RMB in millions) |   | 37.9     |   | 83.6     |   | 191.3    |   |
| Per  share effect (RMB)             |   | 0.003    |   | 0.007    |   | 0.015    |   |

 

----

Notes:

 

(a)          For 2002,investment tax credits represented the tax credits relating to the additions ofcertain domestic equipment that were deductible against current tax.

 

(b)         During 2001,CUCL obtained the approval from the relevant tax authorities in the PRC thatcertain depreciation expenses prior to 2000, which had previously beendisallowed for deduction against current tax, could be used to deduct againstenterprise income tax over 5 years. Accordingly, the deferred tax assetrelating to this “additional depreciation deductible for tax purpose” wasrecognized in 2001 upon the receipt of the tax approval. Such deferred tax willbe reversed on a straight-line basis for the period from 2000 to 2004.

 

F- 31

----

 

Themovement of the deferred tax assets is as follows:

 
|                                             |   | **2000**         |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                             |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                             |   |             |   |             |   |             |   |
| Balance, beginning of year                       |   | 499,520          |   | 1,013,720        |   | 1,581,408        |   |
| Acquisition of Unicom New  Century               |   | —           |   | —           |   | 307,623          |   |
| Deferred taxation charged to statement of income |   | 514,200          |   | 567,688          |   | (559,545         | )      |
|                                             |   |             |   |             |   |             |   |
| Balance, end of year                             |   | 1,013,720        |   | 1,581,408        |   | 1,329,486        |   |

 

Deferredtaxation as of year-end representsthe taxation effect of the following timing differences:

 
|                                                                              |   | **2001**         |   | **2002**         |   |
|-----------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                              |   | **RMB’000** |   | **RMB’000** |   |
| Deferred  tax assets:                                                             |   |             |   |             |   |
| Interest  on loans from CCF joint ventures                                        |   | 317,447          |   | 287,998          |   |
| Loss  arising from terminations of CCF Arrangements                               |   | 348,082          |   | 309,813          |   |
| Income tax on advances from customers for  telephone cards                        |   | 529,049          |   | 471,657          |   |
| Difference  in goodwill amortization period                                       |   | 23,590           |   | 12,878           |   |
| Provision for impairment loss for property, plant  and equipment                  |   | 154,642          |   | 112,994          |   |
| Provision for impairment loss for goodwill                                        |   | 54,087           |   | 27,620           |   |
| Provision  for doubtful debts of  Paging Business                                 |   | 53,223           |   | 38,673           |   |
| Write-off of other assets to statement of income                                  |   | 24,368           |   | 17,662           |   |
| Write-down  of inventories  to net realizable value                               |   | 35,819           |   | 31,260           |   |
| Amortization  of retirement benefits                                              |   | 39,852           |   | 37,379           |   |
| Additional  depreciation deductible for  tax purpose                              |   | 232,291          |   | 171,091          |   |
| Differences on tax basis for the residual value  of property, plant and equipment |   | —           |   | 19,634           |   |
| Other                                                                             |   | 20,590           |   | 68,152           |   |
|                                                                              |   |             |   |             |   |
|                                                                              |   | 1,833,040        |   | 1,606,811        |   |
|                                                                              |   |             |   |             |   |
| Deferred  tax liabilities:                                                        |   |             |   |             |   |
| Accelerated  depreciation for tax purpose                                         |   | (129,526         | )      | (76,468          | )      |
| Capitalized  interest already deducted for tax purposes                           |   | (122,106         | )      | (200,857         | )      |
|                                                                              |   |             |   |             |   |
|                                                                              |   | (251,632         | )      | (277,325         | )      |
|                                                                              |   |             |   |             |   |
| Net deferred  tax assets                                                          |   | 1,581,408        |   | 1,329,486        |   |
| Less: Current  portion of deferred tax assets                                     |   | (569,192         | )      | (502,918         | )      |
|                                                                              |   | 1,012,216        |   | 826,568          |   |

 

Theabove deferred tax assets included the effects of interest on loans from CCFjoint ventures and loss arising from termination of CCF arrangements (see Note11 below). 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. Such deferred tax assets will reverse on a straight-line basisup to 2006.

 

F- 32

----

 

Deferred tax assets not recognized consist ofthe following:

 
|                                                             |   | **2001**         |       | **2002**         |       |
|------------------------------------------------------------------|--------|------------------|------------|------------------|------------|
|                                                             |   | **RMB’000** |       | **RMB’000** |       |
|                                                             |   |             | ** ** |             | ** ** |
| Tax effect of  provision for doubtful debts of Cellular Business |   | 373,159          |       | 485,748          |       |
| Tax effect of  operating loss of a subsidiary                    |   | 107,299          |       | 107,299          |       |

 

Theabove deferred tax assets have not been recognized as it is uncertain that theywill crystallize in the foreseeable future.

 

**1****1****.****      ****CHINA-CHINA-FOREIGN ARRANGEMENTS AND THEIR TERMINATIONS**

 

Priorto 2000, in the process of developing its cellular network, the GSM Businessentered into cooperation agreements with certain contractual joint venturecompanies (the “CJVs”) established in the PRC. Each CJV was established by one or more Chinese enterprises and one ormore foreign parties.  The cooperationarrangements between the GSM Business and the CJVs are hereinafter referred toas the China-China-Foreign Arrangements (the “CCF Arrangements”).

 

Pursuantto the CCF Arrangements, the CJVs extended funding to the GSM Business for theconstruction of telecommunications systems and network equipment in the PRC.Upon completion of construction, the GSM Business was responsible for operatingthe systems.  In return for funding theconstruction of the cellular networks, the CJVs were entitled to receive(usually on an annual or semi-annual basis) from the GSM Business a fixedproportion of the cash flows generated from the operations of the cellularnetworks. It was anticipated at the inception of the CCF Arrangements that suchperiodic distributions of cash would be sufficient for the CJVs to recovertheir principal together with a reasonable return.  The cooperation periods under these CCF Arrangements generallyranged from twelve to fifteen years.  Assecurity, the fixed assets during the cooperation periods were held by the CJVsin a manner similar to a pledging arrangement under a mortgage loan.  Accordingly, the CCF Arrangements were accountedfor as secured financing arrangements. At the end of the cooperation periods, the CJVs’ rights to share thecash flows from the cellular networks and the security rights in the underlyingfixed assets were to be relinquished.

 

Theestimated costs of the funding provided by the CJVs were accrued over thecooperation periods and accounted for as interest costs.  The accrual was made using thethen-prevailing market interest rates applicable to long-term bank loans whichranged from 6.21% to 8.01%.  As all CCFArrangements were terminated in early 2000, no further interest was accruedduring that year.

 

Theperiodic cash distribution to the CJVs in excess of the accrued interestpayable was accountedfor as repayment of principal.  Sincethe amount and the timing of the periodic cash distributions to the CJVs werenot fixed and depended on the actual cash flows generated by the operations ofthe cellular networks, the CCF Arrangements were treated as long-term borrowings with no fixed repaymentschedules.  The entire outstandingamounts of approximately RMB6,200 million in relation to those CCF Arrangementswere terminated in 2000 (as further discussedbelow).

 

F- 33

----

 

CertainCCF Arrangements were terminated in 1999 and all the remaining CCF Arrangementswere terminated in 2000.  Pursuant tothe termination agreements signed between the CJVs and Unicom Group,compensation in the form of cash and share warrants was paid to the CJVs. Theaggregate losses arising from the extinguishment of these CCF debts amounted toapproximately RMB1,194 million for 2000. The losses were calculated based on the difference between the netcarrying amounts of the outstanding CCF debts being terminated, which amountedto approximately RMB6,263 million for 2000, and the total cash compensationamounts of approximately RMB7,457 million for 2000 made to the CJVs.

 

Substantiallyall of the total cash compensation of approximately RMB7,457 million wasfinanced by long-term bank loans originally borrowed by Unicom Group, which were restructured into long-term loans borrowed directly by CUCL in 2000 (see Note 33(d)).

 

Apartfrom the cash compensation, share warrants were granted to the CJVs or theirdesignees as part of the compensation for the termination of the CCFArrangements in 2000.  These sharewarrants allowed the holdersto subscribe for new shares of the Company at the initial public offeringprice.  The total exercise value of theshare warrants granted to the CJVs or their designees was fixed, amounting to approximately RMB5,024 million inaggregate.  The exercise period lasted for sixmonths following the date that is six months after the Global Offering, 22 June2000.As of 31 December 2001, all share warrantsexpired and no share warrants were exercised by these CJVs or their designees.

 

**1****2****.****      ****RETIREMENT BENEFITS**

 

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 was required to make defined contributions to thestate-sponsored pension scheme at the rate of 19% for 2002 (2000: 19.1%; 2001: 19%) of the employees’ basicsalaries.  Under this scheme, the Grouphas no obligation for 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.  Under this plan, the Group makes a monthlydefined contribution of 2% to 6% of the monthly salary of each employee.  There were no vested benefits attributableto past services upon adoption of the plan.

 

Retirementbenefits charged to the statement of income were as follows:

 
|                                                                |   | **2000**         |   | **2001**         |   | **2002**         |   |
|---------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                |   |             |   |             |   |             |   |
| Contributions to defined contribution pension  schemes              |   | 148,322          |   | 163,500          |   | 203,164          |   |
| Contributions to supplementary defined contribution pension schemes |   | —           |   | —           |   | 11,066           |   |

 

F- 34

----

 

**1****3****.****      ****HOUSING BENEFITS**

 

Underhousing reform schemes in accordance with government regulations at theprovincial level, the Group provided benefits to certain qualified employees toenable them to purchase living quarters at a discount. In the case of Guoxin,the living quarters were provided by China Telecom prior to the establishmentof Guoxin and the related benefits were not charged to the Group.  In the case of the GSM Business, certain ofthese living quarters were provided by Unicom Group and the related benefitswere not charged to the Group. Housing benefits which were not charged to the Groupamounted to approximately RMB18.5 million for 2002 (2000: RMB18.5 million;2001: RMB18.5 million).

 

Subsequentto the establishment of Guoxin, for living quarters purchased or built by theGroup, the liability to provide the housing benefits was recognized by theGroup upon finalization of the allocation of the housing units to specificemployees.  The amount of the benefitswas the difference between the cost of the quarters purchased by the employeesand the amount actually charged to the employees. The benefits are recorded asexpenses over the estimated remaining average service life of the participatingemployees.

 

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% (2000: 5%;2001: from 5% to 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.

 

The Group finalized its monetary housing benefit scheme as a special employee incentivescheme for all qualified employees in year 2001.  According to the scheme, the total amount of monetary housingbenefit for each employee is determined based on the working age of theemployee and the property market price prevailing in the relevant location.  The total monetary housing benefit isdivided into three annual payments in the proportion of 40%, 30% and 30% respectively. In order to beincluded in the incentive scheme, employees are required to sign a servicecontract with a minimum service period of three years.  The employees will be entitled to the first40% payment only when the following criteria are met:

 

(i)             the provincial branchin which the employees are working has achieved the annual performance budgetset by head office management; and

 

(ii)          the employees continue to be under theemployment of the Group at the time of the payment.

 

Similarly, the employees will only be entitled to thesecond and then the third annual payments when and only when the above twoconditions are also fulfilled in subsequent years.

 

The Group accrues for each annual payment upon thefulfillment of the above criteria by the employees, at which time the liability isconsidered to have arisen.

 

Forthe years endedDecember 31, 2002 and 2001, 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 and 2001 amounted to approximately RMB277,944,000 and RMB88,911,000  respectively,based on the aforementioned distributionplan.The remaining provinces were not entitled to the special monetary housing benefits since they did not achieve their annual performance budget in 2001 and 2002, accordingly,noprovision for such benefits was made.

 

F- 35

----

 

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):

 
|                              |   | **2000**         |   | **2001**         |   | **2002**         |   |
|-----------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                              |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Special monetary housing benefits |   | —           |   | 88,911           |   | 277,944          |   |
| Contributions to housing fund     |   | 44,333           |   | 69,963           |   | 92,549           |   |
| Other housing benefits            |   | 4,038            |   | 7,933            |   | 95,650           |   |
|                              |   |             |   |             |   |             |   |
|                              |   | 48,371           |   | 166,807          |   | 466,143          |   |

 

**14.****      ****DISTRIBUTION OF INCOME**

 

CUCLwas established as a foreign investment enterprise in the PRC on April 21,2000. In accordance with the Articles of Associationof CUCL, CUCL is required to provide for certain statutory reserves, namely,general reserve fund and staff bonus and welfare fund, which are appropriatedfrom income after taxation and minority interests but before dividenddistribution.

 

CUCLis required to allocate at least 10% of its income after tax and minorityinterests determined under PRC GAAP to the general reserve fund until thecumulative amounts reach 50% of the registered capital. The statutory reserve can only be used, upon approvalobtained from the relevant authority, to offset accumulated losses or increasecapital.

 

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 the collectivewelfare of the employees and are not distributable as cash dividends. Under HKGAAP, the appropriations to the staff bonus and welfare fund will be charged tostatement of income as expenses incurred since any assets acquired through thisfund belong to the employees. For the years ended December 31, 2000, 2001 and 2002, noappropriation to staff bonus and welfare fund has been made.

 

As such, CUCL appropriated approximately RMB433,249,000 to the statutory reserve for the year ended December 31, 2002 (2000:RMB424,805,000; 2001: RMB224,628,000).

 

Forthe year ended December 31, 2002, income attributable to shareholders includeda net income of approximately RMB287,492,000 (2000: RMB1,584,848,000; 2001:RMB1,981,843,000) which has been dealt with in the financial statements of theCompany. As of December 31, 2002, the amount of distributable reserves to shareholders of the Company amounted to approximatelyRMB3,854,183,000 (2000:RMB1,584,848,000; 2001: RMB3,566,691,000).

 

At a meeting held on April 1, 2003, the Board ofDirectors of the Company proposed the payment of final dividend of RMB0.10 per ordinary share to the shareholders for the year ended December 31, 2002,totaling RMB1,255,299,607 (2000 and 2001: Nil). This proposed dividend is notreflected as a dividend payable in the financialstatements as of December 31, 2002, but will be reflected as an appropriation of retained earnings for the year ending December 31, 2003.

 

F- 36

----

 

**1****5****.****      ****EARNINGS PER SHARE**

 

**Earnings per share and perAmerican Depository Share (“ADS”)**

 

Basic earnings pershare for the years ended December 31, 2000, 2001 and 2002were computed by dividing theincome attributable to shareholders by the weighted average number of ordinaryshares in issue during the years.

 

Diluted earningsper share for the years ended December 31, 2000, 2001 and 2002 were computed by dividing the incomeattributable to shareholders by the weighted average number of ordinary shares inissue during the years, after adjusting for the effects of the dilutivepotential ordinary shares.  All potential dilutive shares arose from (i)share options granted under the amended Pre-Global Offering Share Option Scheme(see Note 31); (ii) share options granted under the amended Share Option Scheme(see Note 31), (iii) share warrants as described in Note 11 in 2000 and (iv)the over-allotment option granted to the underwriters, which if converted toordinary shares would decrease net earnings per share in 2000.

 

Therewas no dilution of net earnings pershare for 2001 and 2002. In 2002, anti-dilutive shares arising from the shareoptions of approximately 48,745,000 shares (2000: Nil; 2001: 30,451,000 shares)were not included in the calculation of diluted earnings per share.

 

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:

 
|                                  |   | **2000**         |   | **2001**      |   | **2002**                           |   |
|---------------------------------------|--------|------------------|--------|---------------|--------|------------------------------------|--------|
|                                  |   | **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** |   |
|                                  |   |             |   |          |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings                        |   | 3,234,051        |   | 11,208,224    |   | 0.289                              |   | 4,456,761 |   | 12,552,996 |   | 0.355 |   | 4,566,072 |   | 12,552,996 |   | 0.364 |   |
| Effect of conversion of share options |   | —           |   | 11,455        |   | —                             |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                  |   |             |   |          |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings                      |   | 3,234,051        |   | 11,219,679    |   | 0.288                              |   | 4,456,761 |   | 12,552,996 |   | 0.355 |   | 4,566,072 |   | 12,552,996 |   | 0.364 |   |

 

**16. TRADING SECURITIES**

 

Tradingsecurities represented listed equity securities in the PRC, which are carried at fair value. Therealized gains on tradingsecurities for the year ended December 31, 2002 amounted to approximately RMB1,876,000 (2000: RMB64,956,000; 2001: RMB31,979,000) and the unrealizedlosses amounted to RMB27,461,000 (2000: Unrealized gains RMB31,855,000;2001: Unrealized loss RMB56,576,000). Therehave been no significant changes in the fair values of the listed securities after the balance sheet date.

 

F- 37

----

 

**1****7****.****      ****ACCOUNTS RECEIVABLE, NET**

 
|                                                |                                                         | **2001**         |     | **2002**         |       |
|-----------------------------------------------------|--------------------------------------------------------------|------------------|----------|------------------|------------|
|                                                |                                                         | **RMB’000** |     | **RMB’000** |       |
|                                                |                                                         |             |     |             |       |
| Accounts  receivable for GSM services               |                                                         | 2,787,993        |     | 3,920,821        |       |
| Accounts  receivable for CDMA services              |                                                         | —           |     | 1,004,754        |       |
| Accounts  receivable for Data and Internet services |                                                         | 173,124          |     | 410,479          |       |
| Accounts  receivable for Long Distance services     |                                                         | 412,711          |     | 543,838          |       |
| Accounts  receivable for Paging services            |                                                         | 130,172          |     | 181,348          |       |
| Sub-total                                           |                                                         | 3,504,000        |     | 6,061,240        |       |
|                                                |                                                         |             |     |             |       |
| Less:                                               | Provision for doubtful debts for GSM services                |             | (931,687 | )                | (1,466,803 | ) |
|                                                | Provision for  doubtful debts for CDMA services              |             | —   |             | (62,821    | ) |
|                                                | Provision for  doubtful debts for Data and Internet services |             | (26,056  | )                | (99,214    | ) |
|                                                | Provision for  doubtful debts for Long Distance services     |             | (16,063  | )                | (60,176    | ) |
|                                                | Provision for  doubtful debts for Paging Business            |             | (32,131  | )                | (44,958    | ) |
|                                                |                                                         |             |     |             |       |
|                                                |                                                         | 2,498,063        |     | 4,327,268        |       |

 

Theaging analysis of accounts receivable was as follows:

 
|                       |   | **2001**         |   | **2002**         |   |
|----------------------------|--------|------------------|--------|------------------|--------|
|                       |   | **RMB’000** |   | **RMB’000** |   |
|                       |   |             |   |             |   |
| Less than three months     |   | 2,362,274        |   | 4,130,226        |   |
| Three months to six months |   | 577,211          |   | 464,750          |   |
| Six months to one year     |   | 314,028          |   | 769,718          |   |
| More than one year         |   | 250,487          |   | 696,546          |   |
|                       |   |             |   |             |   |
|                       |   | 3,504,000        |   | 6,061,240        |   |

 

The normal credit period granted by the Group is onaverage 30 days from the date of invoice.

 

Provision for doubtful debts was analyzed asfollows:

 
|                              |   | **2000**         |   | **2001**         |   | **2002**         |   |
|-----------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                              |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                              |   |             |   |             |   |             |   |
| Balance, beginning of year        |   | 407,261          |   | 671,894          |   | 1,005,937        |   |
| Provision for the year            |   | 444,831          |   | 540,954          |   | 971,989          |   |
| Acquisition of Unicom New Century |   | —           |   | —           |   | 327,936          |   |
| Written-off for the year          |   | (180,198         | )      | (206,911         | )      | (571,890         | )      |
|                              |   |             |   |             |   |             |   |
| Balance, end of year              |   | 671,894          |   | 1,005,937        |   | 1,733,972        |   |

 

F- 38

----

 

**1****8****.****      ****INVENTORIES**

 
|            |   | **2001**         |   | **2002**         |   |
|-----------------|--------|------------------|--------|------------------|--------|
|            |   | **RMB’000** |   | **RMB’000** |   |
|            |   |             |   |             |   |
| Handsets        |   | 11,029           |   | 2,357,577        |   |
| Telephone cards |   | 548,524          |   | 672,728          |   |
| Pagers          |   | 116,847          |   | 77,134           |   |
| Other           |   | 75,591           |   | 122,464          |   |
|            |   |             |   |             |   |
|            |   | 751,991          |   | 3,229,903        |   |

 

**19****.****      ****PREPAYMENTS AND OTHERCURRENT ASSETS**

 
|                                                                         |   | **Note** |   | **2001**         |   | **2002**         |   |
|------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                         |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                         |   |     |   |             |   |             |   |
| Prepaid rental                                                               |   |     |   | 73,620           |   | 85,185           |   |
| Deposits and prepayments                                                     |   |     |   | 620,419          |   | 1,069,939        |   |
| Interest  receivable                                                         |   |     |   | 167,004          |   | 37,780           |   |
| Advances to employees                                                        |   |     |   | 58,069           |   | 106,749          |   |
| Deferred customer acquisition costs of certain  contractual CDMA subscribers |   | 32(b)    |   | —           |   | 508,596          |   |
| Other                                                                        |   |     |   | 50,449           |   | 765,515          |   |
|                                                                         |   |     |   |             |   |             |   |
|                                                                         |   |     |   | 969,561          |   | 2,573,764        |   |

 

Theaging analysis of prepaymentsand other current assetswas as follows:

 
|            |   | **2001**         |   | **2002**         |   |
|-----------------|--------|------------------|--------|------------------|--------|
|            |   | **RMB’000** |   | **RMB’000** |   |
|            |   |             |   |             |   |
| Within one year |   | 906,225          |   | 2,227,594        |   |
| Over one year   |   | 63,336           |   | 346,170          |   |
|            |   |             |   |             |   |
|            |   | 969,561          |   | 2,573,764        |   |

 

F- 39

----

 

**20.****      ****PROPERTY, PLANT ANDEQUIPMEN****T****, NET**

 
|                                     |   | **2002**                                        |   | **2001**                             |   |
|------------------------------------------|--------|-------------------------------------------------|--------|--------------------------------------|--------|
|                                     |   | **Land****use  rights****and****b****uildings** |   | **Telecommun-  ications  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                        |   | 6,204,733                                       |   | 69,492,330                           |   | 2,628,187 |   | 638,224 |   | 17,110,796 |   | 96,074,270 |   | 65,130,214 |   |
| Additions                                |   | 204,283                                         |   | 98,939                               |   | 540,433 |   | 146,414 |   | 18,375,052 |   | 19,365,121 |   | 31,264,132 |   |
| Acquisition of Unicom New Century        |   | 1,351,887                                       |   | 17,362,600                           |   | 565,441 |   | 130,777 |   | 3,920,070 |   | 23,330,775 |   | — |   |
| Transfer from CIP                        |   | 2,603,614                                       |   | 16,361,659                           |   | 978,173 |   | 38,116 |   | (19,981,562 | ) | — |   | — |   |
| Disposals                                |   | (9,505                                          | )      | (390,890                             | )      | (41,085 | ) | (5,970 | ) | (5,007 | ) | (452,457 | ) | (320,076 | ) |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| End of year                              |   | 10,355,012                                      |   | 102,924,638                          |   | 4,671,149 |   | 947,561 |   | 19,419,349 |   | 138,317,709 |   | 96,074,270 |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Representing:                            |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| At cost                                  |   | 7,651,932                                       |   | 102,924,638                          |   | 4,671,149 |   | 947,561 |   | 19,419,349 |   | 135,614,629 |   | 93,371,190 |   |
| At valuation                             |   | 2,703,080                                       |   | —                               |   | — |   | — |   | — |   | 2,703,080 |   | 2,703,080 |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                     |   | 10,355,012                                      |   | 102,924,638                          |   | 4,671,149 |   | 947,561 |   | 19,419,349 |   | 138,317,709 |   | 96,074,270 |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated depreciation and impairment: |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                        |   | 609,087                                         |   | 18,476,999                           |   | 962,581 |   | 257,823 |   | 19,345 |   | 20,325,835 |   | 12,266,577 |   |
| Charge for the year                      |   | 459,923                                         |   | 9,489,172                            |   | 736,564 |   | 165,022 |   | — |   | 10,850,681 |   | 7,724,556 |   |
| Impairment losses                        |   | —                                          |   | —                               |   | — |   | — |   | — |   | — |   | 468,611 |   |
| Disposals                                |   | (2,005                                          | )      | (300,607                             | )      | (32,056 | ) | (5,970 | ) | (4,798 | ) | (345,436 | ) | (133,909 | ) |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| End of year                              |   | 1,067,005                                       |   | 27,665,564                           |   | 1,667,089 |   | 416,875 |   | 14,547 |   | 30,831,080 |   | 20,325,835 |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net book value:                          |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| End of year                              |   | 9,288,007                                       |   | 75,259,074                           |   | 3,004,060 |   | 530,686 |   | 19,404,802 |   | 107,486,629 |   | 75,748,435 |   |
|                                     |   |                                            |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Beginning of year                        |   | 5,595,646                                       |   | 51,015,331                           |   | 1,665,606 |   | 380,401 |   | 17,091,451 |   | 75,748,435 |   | 52,863,637 |   |

 

Therewas no property, plant and equipment pledged to banks as loan security as ofDecember 31, 2002 (2000: RMB6,993 million; 2001: RMB6,742 million).

 

Asof December 31, 2002, prepayments for property, plant and equipment to be usedin construction amounting to approximately RMB4,164 million(2000: RMB1,376 million; 2001: RMB2,272 million) have been included inconstruction-in-progress.

 

Forthe year ended December 31, 2002, interest of approximately RMB423 million(2000: RMB253 million; 2001: RMB686 million) was capitalized toconstruction-in-progress.

 

As of December 31, 2002, the cost or valuation ofland use rights (located in the PRC) and the accumulated depreciation amountedto approximately RMB348 million and RMB77 million respectively (2000: RMB241million and RMB34 million; 2001: RMB315 million and RMB60 million).

 

F- 40

----

 

Landuse rights 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 resulting revaluation surplus anddeficit amounted to RMB177 million and RMB28 million, respectively. Theadditional depreciation attributable to the revaluation surplus amounted to approximately RMB8.8 million for the year endedDecember 31, 2002 (2000:RMB12.6 million; 2001: RMB8.8 million). The revaluation deficit was charged tothe statement of income during the yearended December 31, 2000.

 

As of December 31, 2002, the carrying amount ofland use rights and buildings that would have been included in the financialstatements had the assets been carried at cost less accumulated depreciationwas approximately RMB 2,032 million (2000: RMB2,267 million; 2001: RMB2,139million).

 

As of December 31, 2002, net book value oftelecommunications equipment held under finance leases amounted toapproximately RMB159 million (2000: Nil; 2001: RMB179 million).

 

In 2001, the economic performance of Paging Business was worse than originally expected.Updated analyses and forecasts wereprepared by the Group to determineif there had been animpairment of assets. The test forimpairment was conducted for the paging telecommunications business ofeach province, representing a cash-generating unit, after considering the significant decline in revenue and profitabilityin 2001. The impaired assets, including telecommunications equipment and the related goodwill of certain provinces were writtendown to their recoverable valuesdetermined based on their value in use. Value in use is determined based on the present value of estimated futurenet cash flows expected to arise from the continuing use of the paging assets. Inestimating the future net cash flows, the Group has made key assumptions andestimates on the appropriate discount rate adopted (8% per annum) and theperiod covered by the cash flow forecast, the gradual slow-down in the futureloss of customers, the expected stability in average revenue per subscriber,the effects of incremental cash flows arising from new paging businesses andthe adoption of cost reduction plans.

 

These assumptions and estimations are made after considering the historical trends, the prevailing market trends and the physicalconditions of the related assets. Based on the above, the Group recorded impairment losses for property, plant and equipment amounting to approximately RMB469million and for goodwill amounting to approximately RMB164 million for the yearended December 31, 2001.

 

In 2002, the Group conducted a re-assessment of therecoverability of the carrying amount of the paging assets based on the Group’sbest estimates of the discounted net cash flows expected to be generated fromthe Paging Business over a period of five years.  Management expected that the continued increase in cash flowsarising from new value-added paging services would substantially offset theexpected further reduction of cash inflows to be generated from the traditionalpaging services.  Other assumptions arebasically consistent with those adopted in the previous assessment performed inthe prior year.  Based on this latestestimate of the discounted net cash flows expected to arise from the continuinguse of the paging assets, the Group concluded that the carrying amount of thepaging assets as of December 31, 2002 did not exceed its recoverable amount andaccordingly no additional impairment loss was recognized in 2002.

 

In 2002, the Group also recognized losses ondisposal of property, plant and equipment of approximately RMB82 million (2000:RMB278 million; 2001: RMB54 million).

 

F- 41

----

 

**21****.****      ****GOODWILL**

 
|                                                         |                     | **2001**         |     | **2002**         |     |
|--------------------------------------------------------------|--------------------------|------------------|----------|------------------|----------|
|                                                         |                     | **RMB’000** |     | **RMB’000** |     |
|                                                         |                     |             |     |             |     |
| Cost                                                         |                     | 505,485          |     | 525,431          |     |
| Goodwill arising from Acquisition of the  Unicom New Century |                     | —           |     | 2,365,197        |     |
|                                                         |                     |             |     |             |     |
|                                                         |                     | 505,485          |     | 2,890,628        |     |
| Less:                                                        | Accumulated amortization |             | (298,298 | )                | (321,712 | ) |
|                                                         | Impairment losses        |             | (163,900 | )                | (202,697 | ) |
|                                                         |                     |             |     |             |     |
|                                                         |                     | 43,287           |     | 2,366,219        |     |

 

In 2002, goodwill arising from the Acquisition represented the excess ofthe costs of investments of RMB4,909 million over the fair value of theCompany’s share of separable net assets acquired amounting to RMB2,544 million as of December 31, 2002 (effective date of the Acquisition). Such goodwillis amortized over 20 years on astraight-line method based on the estimated economic beneficial periods.

 

Prior to 2002, goodwill represented the excess of purchase consideration over the fair valuesof the separately identifiable assets acquired by Guoxin for (i) certain localPaging Businesses during itsrestructuring in 1998 and (ii) minority interests in the provincial subsidiariesof Guoxin.  The amortization charge of goodwill for the year endedDecember 31, 2002 amounted to approximately RMB23,413,000 (2000: RMB100,781,000; 2001: RMB74,261,000).

 

The impairment provision in 2002 amounted toapproximately RMB38,797,000 (2000: Nil; 2001:RMB163,900,000) representing the write-down of goodwill relating tothe Paging Businesses in certain provinces to their recoverable amounts.

 

F- 42

----

 

**2****2****.****      ****OTHER ASSETS**

 
|                                                                         |   | **Note** |       | **2001**         |       | **2002**         |       |
|------------------------------------------------------------------------------|--------|----------|------------|------------------|------------|------------------|------------|
|                                                                         |   |     |       | **RMB’000** |       | **RMB’000** |       |
|                                                                         |   |     | ** ** |             | ** ** |             | ** ** |
| Interconnection facilities                                                   |   |     |       | 464,575          |       | 568,099          |       |
| Prepaid rental and leased line                                               |   |     |       | 957,361          |       | 1,405,431        |       |
| Other                                                                        |   |     |       | 343,531          |       | 869,558          |       |
|                                                                         |   |     |       |             |       |             |       |
|                                                                         |   |     |       | 1,765,467        |       | 2,843,088        |       |
| Less:  Accumulated amortization                                              |   |     |       | (750,029         | )          | (1,299,029       | )          |
|                                                                         |   |     |       |             |       |             |       |
|                                                                         |   |     |       | 1,015,438        |       | 1,544,059        |       |
|                                                                         |   |     |       |             |       |             |       |
| Deferred  customer acquisition costs of certain contractual CDMA subscribers |   | 32(b)    |       | —           |       | 5,474,164        |       |
|                                                                         |   |     |       |             |       |             |       |
|                                                                         |   |     |       | 1,015,438        |       | 7,018,223        |       |

 

Amortizationof other assets for the year endedDecember 31, 2002 amounted to approximately RMB381,629,000 (2000: RMB122,849,000; 2001: RMB463,479,000).

 

**2****3****.****      ****INVESTMENT SECURITIES**

 
|                                            |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                            |   | **RMB’000** |   | **RMB’000** |   |
|                                            |   |             |   |             |   |
| Unlisted equity securities in the PRC,  at cost |   | 131,212          |   | 111,863          |   |
| Less: Provision for impairment in losses        |   | (7,712           | )      | (6,215           | )      |
|                                            |   |             |   |             |   |
|                                            |   | 123,500          |   | 105,648          |   |

 

**2****4****.****      ****INVESTMENTS IN SUBSIDIARIES**

 

Pursuantto an ordinary resolution passed at an extraordinary general meeting held onDecember 23, 2002, the Companyacquired the entire issued share capital of UNC (BVI), whereas the only asset of UNC (BVI) is its interestsin the entire equity of Unicom New Century. The acquisition became effective on December 31, 2002.

 

In2002, the Company has contributed cash of approximately RMB17,464,520,000(2001:14,647,535,000) to CUCL as additional investment.

 

By December 31, 2002, Guoxin has already acquiredall of the minority interests of 30 subsidiaries. These 30 paging subsidiariesthen became the wholly owned subsidiaries of Guoxin.  In addition, Guoxin has deregistered the legal entity status of 28wholly owned subsidiaries in 25 provinces and 3 municipalities in the PRC. Asof December 31, 2002, minority interests only existed in Unicom GuomaiCommunications Co. Ltd. (“UnicomGuomai”).

 

Asof December 31, 2002, the Company has direct or indirect interests in thefollowing principal subsidiaries.  Allof these subsidiaries are privately-held limited companies except UnicomGuomai whose shares are listed on the Shanghai StockExchange.

 

F- 43

----

 

Asof December 31, 2002, the details of the Company’s subsidiaries were asfollows:

 
| **Name**                                                                  |   | **Place  and date of  incorporation and  kind of legal entity**           |   | **Percentage  of equity  interest held** |   | **Issued and  fully paid  capital** |   | **Principal  activities** |
|---------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|------------------------------------------|--------|-------------------------------------|--------|---------------------------|
|                                                                      |   |                                                                      |   | **Direct**                               |   | **Indirect**                        |   | **RMB’000**          |   |   |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| China Unicom  Corporation Limited                                         |   | The PRC, April 21, 2000, limited liability company                        |   | 100.00                                   | %      | —                              |   | 6,502,490                 |   | Telecommunications operation |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| Unicom New  Century (BVI) Limited                                         |   | British Virgin Islands, October 23, 2002,  limited liability company |   | 100.00                                   | %      | —                              |   | 12                        |   | Investment holding |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| Guoxin Paging Corporation Ltd.                                            |   | The PRC, September 17, 1998,  limited liability company                   |   | —                                   |   | 100.00                              | %      | 6,825,088                 |   | Investment holding |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| Unicom New  Century Telecommunications Co., Ltd.                          |   | The PRC, July 16, 2002, limited liability company                         |   | —                                   |   | 100.00                              | %      | 328,936                   |   | Telecommunications  operation |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| LiaoningGuoxin  TelecommunicationsCo., Ltd. (“Liaoning Guoxin”) |   | The PRC, November 11, 1998, limited liability  company                    |   | —                                   |   | 100.00                              | %      | 372,000                   |   | Paging operation |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| Sichuan Guoxin  Telecommunications Co., Ltd. (“Sichuan Guoxin”) |   | The PRC, September 30, 1998, limited liability  company                   |   | —                                   |   | 100.00                              | %      | 386,628                   |   | Paging operation |
|                                                                      |   |                                                                      |   |                                     |   |                                |   |                      |   |   |
| Unicom Guomai  Communications Co., Ltd. (“Unicom Guomai”)       |   | The PRC, November 24, 1992, limited  liability company                    |   | —                                   |   | 58.88                               | %      | 364,883                   |   | Paging operation |

 

F- 44

----

 

**2****5****.****      ****INVESTMENT IN ASSOCIATED COMPANIES**

 
|                                      |   | **2001**         |   | **2002**         |   |
|-------------------------------------------|--------|------------------|--------|------------------|--------|
|                                      |   | **RMB’000** |   | **RMB’000** |   |
|                                      |   |             |   |             |   |
| Cost                                      |   | 51,145           |   | 37,036           |   |
| Share of net  assets                      |   | (23,940          | )      | (11,998          | )      |
|                                      |   |             |   |             |   |
|                                      |   | 27,205           |   | 25,038           |   |
| Less: Provision  for impairment in losses |   | (23,059          | )      | (21,224          | )      |
|                                      |   |             |   |             |   |
|                                      |   | 4,146            |   | 3,814            |   |

 

Fullprovision for impairment loss in respect of investments in certain associatedcompanies was made in2001 when the Group judged that the recoverable amount ofthese investments would be minimal based on the estimated discounted future netcash flows of the investment.  In viewof the persistent poor operating results of these associated companies,management concluded that the impairments were not temporary.

 

Asof December 31, 2002, details of investment in associated companies were asfollows:

 
| **Name**                                             |   | **Place  and date of  incorporation** |   | **Percentage  of  equity interest  held** |   | **Issued and  fully paid  capital** |   | **Principal  activities** |   |
|------------------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|-------------------------------------|--------|---------------------------|--------|
|                                                 |   |                                  |   | **Direct**                                |   | **Indirect**                        |   | **RMB’000**          |   |   |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Beijing Zhongjie Mobile Telecommunications Co., Ltd. |   | The PRC,  April 5, 1999               |   | —                                    |   | 33.00                               | %      | 10,000                    |   | Telecommunications technology |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Shanghai Tianhua Guomai Information Co., Ltd.        |   | The PRC,  October 16, 1997       |   | —                                    |   | 40.00                               | %      | 5,000                     |   | Telecommunications technology |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Shanghai Beiyan Labor Service Co., Ltd.              |   | The PRC,  January 12, 1999       |   | —                                    |   | 48.00                               | %      | 500                       |   | Telecommunications technology |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Suzhou Huihong Precision Metal Co., Ltd.             |   | The PRC,  August 30, 2000        |   | —                                    |   | 22.50                               | %      | 13,245                    |   | Telecommunications technology |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Chengdu Tongfa Champion Communications Co., Ltd.     |   | The PRC,April 23, 1993                |   | —                                    |   | 37.50                               | %      | 41,590                    |   | Telecommunications technology |   |
|                                                 |   |                                  |   |                                      |   |                                |   |                      |   |   |   |
| Sichuan Sutong Expressway Communications Co., Ltd.   |   | The PRC,  July 8, 1997                |   | —                                    |   | 30.00                               | %      | 36,667                    |   | Telecommunications technology |   |

 

F- 45

----

 

**2****6****.****      ****PAYABLES AND ACCRUED LIABILITIES**

 
|                                              |   | **Note** |   | **2001**         |   | **2002**         |   |
|---------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                              |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                              |   |     |   |             |   |             |   |
| Payables to contractors and equipment suppliers   |   |     |   | 13,141,029       |   | 13,703,912       |   |
| Accrued expenses                                  |   |     |   | 717,827          |   | 1,139,645        |   |
| Payables to telecommunications products suppliers |   |     |   | 124,928          |   | 2,395,928        |   |
| Customer deposits                                 |   |     |   | 248,716          |   | 784,156          |   |
| Salary and welfare payables                       |   |     |   | 528,960          |   | 775,668          |   |
| Other                                             |   | (i)      |   | 567,976          |   | 1,012,652        |   |
|                                              |   |     |   |             |   |             |   |
|                                              |   |     |   | 15,329,436       |   | 19,811,961       |   |

 

----

*Note:*

 

(i)             Otherincludes miscellaneous accruals for housing fund and other governmentsurcharges.

 

Asof December 31, 2002, there are no payables tocontractors and equipment suppliers of the Group denominatedin US dollars(2001: approximately RMB67 million,about US$8 million).

 

Theaging analysis of payables andaccrued liabilities was as follows:

 
|                   |   | **2001**         |   | **2002**         |   |
|------------------------|--------|------------------|--------|------------------|--------|
|                   |   | **RMB’000** |   | **RMB’000** |   |
|                   |   |             |   |             |   |
| Less than six months   |   | 10,013,637       |   | 14,887,342       |   |
| Six months to one year |   | 3,903,316        |   | 2,521,886        |   |
| More than one year     |   | 1,412,483        |   | 2,402,733        |   |
|                   |   |             |   |             |   |
|                   |   | 15,329,436       |   | 19,811,961       |   |

 

F- 46

----

 

**2****7****.****      ****SHORT-TERM BANK LOANS**

 

Interestrates on short-term bank loans ranged from 4.54% to 5.56% per annum for 2002 (2000:4.52%to7.72% per annum; 2001: 4.19% to 7.72% per annum).

 

Supplementalinformation with respect to short-term bank loans was:

 
|               |   | **Balance at  year end** |   | **Weighted  average  interest rate  at year end** |   | **Maximum  amount  outstanding  during the year** |   | **Average  amount  outstanding  during the  year*** |   | **Weighted  average  interest rate  during the  year**** |   |
|--------------------|--------|--------------------------|--------|---------------------------------------------------|--------|---------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------------|--------|
|               |   | **RMB’000**         |   | **per annum**                                     |   | **RMB’000**                                  |   | **RMB’000**                                    |   | **per annum**                                            |   |
|               |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| December  31, 2001 |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - secured          |   | —                   |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - unsecured        |   | 7,089,000                |   |                                              |   |                                              |   |                                                |   |                                                     |   |
|               |   | 7,089,000                |   | 5.80                                              | %      | 10,816,951                                        |   | 7,411,409                                           |   | 5.80                                                     | %      |
|               |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| December  31, 2002 |   |                     |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - secured          |   | 209,000                  |   |                                              |   |                                              |   |                                                |   |                                                     |   |
| - unsecured        |   | 8,937,500                |   |                                              |   |                                              |   |                                                |   |                                                     |   |
|               |   | 9,146,500                |   | 5.06                                              | %      | 9,146,500                                         |   | 8,117,750                                           |   | 5.39                                                     | %      |

 

----

*                 The averageamount outstanding is computed by dividing the total of outstanding principalbalance as of January 1 and December 31, as applicable, by 2.

 

**          The weightedaverage interest rate is computed by dividing the total of weighted averageinterest rates as of January 1 and December 31, as applicable, by 2.

 

Asof December 31, 2002, short-term bank loans of approximately RMB463 million(2001: RMB200 million) were guaranteed by Unicom Group.

 

Asof December 31, 2002, short-term bank loans of approximately RMB209 million(2001: Nil) were secured by the future service fee revenue to be generated bythe cellular operations.

 

F- 47

----

 

**2****8****.****      ****LONG-TERM BANK LOANS**

 
|                             |   | **Interest  rate and final maturity**                                                                                                          |   | **2001**         |   | **2002**         |   |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                             |   |                                                                                                                                           |   | **RMB’000** |   | **RMB’000** |   |
|                             |   |                                                                                                                                           |   |             |   |             |   |
| Renminbi  denominated bank loans |   | Fixed interest rate ranging from 4.54% to 6.24% (2001: 5.46% to  7.65% per annum with maturity through 2008 (2001: maturity through 2007) |   |             |   |             |   |
| - secured                        |   |                                                                                                                                           |   | 17,247,009       |   | 24,627,646       |   |
| - unsecured                      |   |                                                                                                                                           |   | 19,933,362       |   | 18,518,021       |   |
|                             |   |                                                                                                                                           |   |             |   |             |   |
|                             |   |                                                                                                                                           |   | 37,180,371       |   | 43,145,667       |   |
| Less: Current portion            |   |                                                                                                                                           |   | (843,603         | )      | (5,459,505       | )      |
|                             |   |                                                                                                                                           |   |             |   |             |   |
|                             |   |                                                                                                                                           |   | 36,336,768       |   | 37,686,162       |   |

 

Therepayment schedule of the long-term bank loans was as follows:

 
|                                                  |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                  |   | **RMB’000** |   | **RMB’000** |   |
| Balances due:                                         |   |             |   |             |   |
| -  not later than one year                            |   | 843,603          |   | 5,459,505        |   |
| - later than one  year and not later than two years   |   | 9,339,561        |   | 4,825,581        |   |
| - later than two  years and not later than five years |   | 25,213,737       |   | 32,581,222       |   |
| Thereafter                                            |   | 1,783,470        |   | 279,359          |   |
|                                                  |   |             |   |             |   |
|                                                  |   | 37,180,371       |   | 43,145,667       |   |
| Less: Portion  classified as current liabilities      |   | (843,603         | )      | (5,459,505       | )      |
|                                                  |   |             |   |             |   |
|                                                  |   | 36,336,768       |   | 37,686,162       |   |

 

Asof December 31, 2002, long-term bank loans were secured by the following:

 

(i)             approximatelyRMB24,308 million (2001: RMB17,247 million) of long-term bank loans were secured by the futureservice fee revenue to be generated by the cellular operations of the relevantbranches and RMB3,471million (2001:RMB850 million) of which wasalso guaranteed by Unicom Group; and

 

(ii)  inaddition to the above, approximately RMB9,164 million (2001: RMB3,403million)of long-term bank loans were guaranteed by Unicom Group.

 

F - 48

----

 

**29****.****      ****OBLIGATIONS UNDER FINANCE LEASES**

 

Obligations under finance leases were analyzed asfollows:

 
|                                                         |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                         |   | **RMB’000** |   | **RMB’000** |   |
|                                                         |   |             |   |             |   |
| Total minimum lease payments under finance leases repayable: |   |             |   |             |   |
| - not later than one year                                    |   | 8,642            |   | 17,284           |   |
| - later than one year and not later than five years          |   | 34,569           |   | 34,659           |   |
| - later than five years                                      |   | 163,127          |   | 154,395          |   |
|                                                         |   |             |   |             |   |
|                                                         |   | 206,338          |   | 206,338          |   |
| Less:  Future finance charges                           |   | (97,430          | )      | (88,243          | )      |
|                                                         |   |             |   |             |   |
| Present value of minimum obligations                         |   | 108,908          |   | 118,095          |   |
|                                                         |   |             |   |             |   |
| Representing obligations under finance leases:               |   |             |   |             |   |
| - current liabilities                                        |   | 8,151            |   | 16,793           |   |
| - non-current liabilities                                    |   | 100,757          |   | 101,302          |   |

 
|                                                              |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                              |   | **RMB’000** |   | **RMB’000** |   |
|                                                              |   |             |   |             |   |
| The present value of obligations under finance  leases:           |   |             |   |             |   |
| -not later than  one year                                         |   | 8,151            |   | 16,793           |   |
| -later than one  year and not later than five years               |   | 28,224           |   | 28,224           |   |
| -later than  five years                                           |   | 72,533           |   | 73,078           |   |
|                                                              |   |             |   |             |   |
|                                                              |   | 108,908          |   | 118,095          |   |
| Less: Amount due within one year included in  current liabilities |   | (8,151           | )      | (16,793          | )      |
|                                                              |   |             |   |             |   |
|                                                              |   | 100,757          |   | 101,302          |   |

 

Interest rate of obligations under finance leases is at 6% per annum.

 

F - 49

----

 

**30****.****      ****SHARE CAPITAL**

 
|                                            |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                            |   | **HK$’000** |   | **HK$’000** |   |
| Authorized:                                     |   |             |   |             |   |
| 30,000,000,000  ordinary shares of HK$ 0.1 each |   | 3,000,000        |   | 3,000,000        |   |

 
|                    |   | **2001**                           |       | **2002**          |       |
|-------------------------|--------|------------------------------------|------------|-------------------|------------|
|                    |   | **Number of  shares  (’000)** |       | **HK$’ 000** |       | **RMB****e****quivalent  RMB’000** |   | **Number of  shares  (’000)** |   | **HK$’ 000** |   | **RMB****e****quivalent  RMB’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        |   | 2,827,996                          |       | 282,799           |       | 300,521 |   | 2,827,996 |   | 282,799 |   | 300,521 |   |
|                    |   |                               |       |              |       |   |   |   |   |   |   |   |   |
|                    |   | 12,552,996                         |       | 1,255,299         |       | 1,331,371 |   | 12,552,996 |   | 1,255,299 |   | 1,331,371 |   |

 

Pursuantto the resolution passed on 21 April 2000,9,725,000,020 shares of HK$0.1 each were allottedand issued to Unicom BVI for the transfer of the entire interest in ChinaUnicom to the Company.

 

Pursuantto the resolution passed on 20 June 2000, the Company completed its GlobalOffering as follows:

 

(i)             issued anaggregate of 2,459,127,000 shares of HK$0.10 each including an offering of122,956,000 shares at HK$15.42 per share on The Stock Exchange of Hong KongLimited (“HKSE”) (excluding the brokerage fee and HKSE transaction levy) and anoffering of 233,617,100 ADSs (each ADS represents 10 shares) at US$ 19.99(HK$15.58) on the New York Stock Exchange Inc., on 22 June 2000 and 21 June2000 respectively; and

 

(ii)          issued368,869,050 shares of HK$0.10 each at HK$15.58 per share by way of a placingamong professional and institutional investors on 3 July 2000 upon the fullexercise of an over-allotment option.

 

Thelisting proceeds of the aforementioned Global Offering of shares, net of directlisting expenses, amounted toapproximately RMB45,275,152,000. The resulting share premium amounted toapproximately RMB44,974,631,000.

 

F- 50

----

 

**31****.****      ****SHARE OPTION SCHEME**

 

OnJune 1, 2000, the Company adopted a share option scheme (the “Share OptionScheme”) pursuant to which the directors of the Company may, at theirdiscretion, invite employees, including executive directors, of the Company orany of its subsidiaries, to take up options to subscribe for shares up to amaximum aggregate number of shares (including those that could be subscribedfor under the pre-global offering share option scheme as described below) equalto 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 bya participant upon the exercise of an option will be determined by theDirectors at their discretion at the date of grant, except that such price maynot be set below a minimum price which is the higher of:

 

(i)             the nominalvalue of a share; and

 

(ii)          80% of theaverage of the closing prices of shares on the HKSE on the five trading daysimmediately preceding the date of grant of the option on which there were dealingsin the shares on the HKSE.

 

Theperiod during which an option may be exercised will be determined by thedirectors at their discretion, except that no option may be exercised laterthan 10 years from June 22, 2000. According to a resolution of the Board of Directorsin June 2001, the Company has granted 6,724,000 share optionsunder the Share Option Scheme which represent, on their fullexercise, 6,724,000 shares to certain employees of the Group in the followingterms:

 

(i)             the price ofa share payable by a participant upon the exercise of an option shall beHK$15.42 (excluding the brokerage fee and HKSE transaction levy); and

 

(ii)  the period during which an option may beexercised commences from the date of grant of the options and will end by June 22, 2010.

 

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:

 

(a)          the nominalvalue of the shares;

 

(b)         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

 

(c)          the averageclosing price of the shares on the Stock Exchange’s quotation sheets for thefive trading days immediately proceeding the offer date.

 

F- 51

----

 

Accordingto resolution passed by the Board of Directors and the IndependentNon-Executive Directors of the Company dated July 10, 2002, a total of 36,028,000 share options weregranted to eligible individuals including directors, independent non-executivedirectors, and the non-executive directors of the Company under the amendedShare Option Scheme in the following terms:

 

(i)             aggregate of2,802,000 options were granted to the executive directors, non-executivedirectors and independent non-executive directors of the Company;

 

(ii)          the exerciseprice is HK$6.18; and

 

(iii)       the periodduring which an option may be exercised commences from the date of offer but nolater than 6 years from the date of the offer date with the following portions:

 
| **Periods**                    |   | **Portions** |   |
|--------------------------------|--------|--------------|--------|
|                           |   |         |   |
| July 10, 2003 to  July 9, 2008 |   | 40           | %      |
| July 10, 2004 to  July 9, 2008 |   | 30           | %      |
| July 10, 2005 to  July 9, 2008 |   | 30           | %      |

 

Accordingto the resolution passed by the Board of Directors in June 2000, a total of the27,116,600 options were granted on June 22, 2000 to the senior management, includingdirectors, and certain other employees (which represent, on their fullexercise, 27,116,600 shares of the Company) under a fixed award pre-globaloffering share scheme adopted by the Company on June 1, 2000 (“Pre-GlobalOffering Share Option Scheme”) in the following terms:

 

(i)             the exerciseprice is equivalent to the share issue price of the Global Offering of HK$15.42per share (excluding the brokerage fee and HKSE transaction levy); and

 

(ii)          the optionsare exercisable after 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 of which are thesame as the Share Option Scheme in all material aspects.

 

All of the options granted are governed by theamended terms of the Share Option Scheme and Pre-Global Offering Share OptionScheme as mentioned above.

 

No options have been exercised or forfeited sincethe date of grant under the Share Option Scheme and Pre-GlobalOffering Share Option Scheme and up to thedate when the Board of Directors approved the financial statements.

 

F- 52

----

 

**32. COMMENCEMENT OF CDMA BUSINESS**

 

**(a)****          Leasingof CDMA network capacity**

 

In November 2001, CUCL entered into a conditional CDMAcapacity lease agreement  (the “CDMALease Agreement”) with Unicom Group and Unicom New Horizon MobileTelecommunications Company Limited (“Unicom New Horizon”, a subsidiary ofUnicom Group).  Pursuant to the CDMA Lease Agreement,Unicom New Horizon agreed to lease the capacity of CDMA network to CUCLcovering the 9 provinces of Guangdong, Jiangsu, Zhejiang, Fujian, Liaoning,Shandong, Anhui, Hebei, Hubei and the 3 municipalilities of Beijing, Shanghai and Tianjian.

 

Major terms of the CDMA Lease Agreement include the following:

 

•                  CUCL has the exclusive right to lease andoperate the CDMA network capacity in the above regions;

 

•                  The term of the CDMA Lease Agreement is foran initial period of 1 year (the “Initial Lease Term”), renewable for furtherone year terms at the option of the CUCL;

 

•                  The lease fee per unit of capacity is determinedat the outset of the CDMA Leasing Agreement;

 

•                  CUCL has the option to add or reduce thecapacity leased by giving specified period of advance notice.  There is no minimum requirement on thenetwork capacity to be leased beyond the Initial Lease Term; and

 

•                  CUCL has the option to purchase the networkassets.  The acquisition price will benegotiated between the CUCL and Unicom New Horizon, based on the appraisedvalue of the network determined by an independent appraiser, provided that itwill not exceed such price as would, add together with any lease payments madepreviously, enable Unicom New Horizon to recover its investment with aninternal rate of return of 8%.

 

Commencement of the CDMA LeaseAgreement was conditional upon, among others, the testing and initialacceptance and delivery of phase I of the CDMA network and the receipt of allnecessary government approvals. Upon the fulfillment of all the conditionsprecedent to the commencement of the CDMA Lease Agreement, the Initial LeaseTerm commenced in January 2002.  Thislease arrangement has been accounted for as an operating lease of the networkassets.

 

In addition, Unicom NewCentury has also entered into a CDMA capacity lease agreement with Unicom Groupand Unicom New Horizon. The terms of this leasing arrangement are in allmaterial respects the same as those contained in the CDMA Leasing Agreemententered into by CUCL as described above.  Under this lease, Unicom New Horizon agreed to lease the capacityof CDMA network to Unicom New Century covering the 8 provinces and 1municipality including Sichuan, Heilongjiang, Jilin, Henan, Jiangxi, Guangxi,Xinjiang, Shannxi and Chongqing.

 

F - 53

----

 

**(b)****          CDMAhandset cost****s**

 

As part of the arrangementwith certain CDMA contractual subscribers under special promotion packages,CDMA mobile phone handsets were provided to certain subscribers for their useat no additional cost during the specified contract periods ranging from 6months to 2 years.

 

Under the terms of these contracts, subscribers arerequired to spend a minimum amount of service fees during the contract period.In addition, to secure future performance, these subscribers are also requiredto (i) prepay service fees or deposits, (ii) maintain a restricted bankdeposits in a designated commercial banks to secure the minimum contractamount, or (iii) provide the Group with a guarantor who will compensate theGroup for any loss upon their contract non-performance. The costs of CDMA handsets under the above contractual arrangements are treated as deferred customer acquisitioncosts and, to the extent recoverable based on management periodic assessment,are amortized over the contractual period (not exceeding 2 years) to match withthe Group’sminimum contract revenue. Forthe year ended December 31, 2002, amortization of these deferred customeracquisition costs amounted to approximatelyRMB1,385 million, which was recorded in “selling and marketing” expenses.  As of December 31, 2002, thecarrying amount of unamortized deferred customer acquisition cost totaled RMB5,983million (included RMB1,816 million relating to Unicom New Century), with approximately RMB5,474 million recorded in “other assets” (for contract period over 1 year and includedRMB1,536 million relating to Unicom New Century) and with approximately RMB509 million recorded in “prepayments and other current assets”(for contractperiod within 1 year and included RMB280 million relating to Unicom NewCentury) (see Notes 19 and 22).

 

Asof December 31, 2002, the carrying amount of prepaid service fees and depositsobtained by the Group under the above contracts amounted to RMB2,775 million.

 

**3****3****.****      ****RELATED PARTY TRANSACTIONS**

 

Thetable set forth below summarizes the name of significant related parties andnature of relationship with the Companyas of December 31, 2002:

 
| **Name of related parties**                                                                                                                                                                                                   |   | **Nature of relationship with the Company** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|
|                                                                                                                                                                                                                          |   |                                        |
| China United Telecommunications  Corporation (“Unicom Group”)                                                                                                                                                       |   | Ultimate parent company                     |
| Unicom NewSpace Telecommunications  Co., Ltd (“Unicom NewSpace”, originally known as China United  Telecommunications Satellite Communication Company Limited, which changed to  its present name on July 10, 2002) |   | A subsidiary of Unicom Group                |
| Unicom Xingye Science and Technology Trade  Co. (“Unicom Xingye”)                                                                                                                                                   |   | A subsidiary of Unicom Group                |
| Beijing Unicom Xingye Science and Technology Company Limited (“Beijing  Xingye”)                                                                                                                                    |   | A subsidiary of Unicom Group                |
| Unicom Import and Export  Company Limited (“ Unicom I/E Co”)                                                                                                                                                        |   | A subsidiary of Unicom Group                |
| China Unicom  International Limited (“Unicom International”)                                                                                                                                                        |   | A subsidiary of Unicom Group                |
| Unicom International (HK)  Limited (“Unicom International (HK)”)                                                                                                                                                    |   | A subsidiary of Unicom Group                |
| Unicom New Horizon Mobile Telecommunications Company Limited (“Unicom  New Horizon”)                                                                                                                                |   | A subsidiary of Unicom Group                |
| China Unicom Corporation Limited (“CUCL”)                                                                                                                                                                           |   | A subsidiary of the Company                 |
| Unicom New Century Telecommunications Corporation Limited (“Unicom New  Century”)                                                                                                                                   |   | A subsidiary of the Company                 |
| Guoxin Paging Corporation  Ltd. (“Guoxin”)                                                                                                                                                                          |   | A subsidiary of the Company                 |
| Unicom Guomai Communications Corporation Limited (“Unicom Guomai”)                                                                                                                                                  |   | A subsidiary of the Company                 |

 

F - 54

----

 

**(a)****         ****Transactions with UnicomGroup**

 

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**    |   | **2000**         |       | **2001**         |       | **2002**         |       |
|---------------------------------------------------------------------------|--------|-------------|--------|------------------|------------|------------------|------------|------------------|------------|
|                                                                      |   |        |   | **RMB’000** |       | **RMB’000** |       | **RMB’000** |       |
| **Transactions  with Unicom Group and its subsidiaries:**                 |   |        |   |             | ** ** |             | ** ** |             | ** ** |
| Interconnection and roaming revenues                                      |   | (i), (iii)  |   | 339,536          |       | 875,305          |       | 1,678,637        |       |
| Interconnection and roaming charges                                       |   | (ii), (iii) |   | 131,315          |       | 298,828          |       | 331,179          |       |
| Rental charges for premises, equipment and facilities                     |   | (iv)        |   | 24,121           |       | 21,257           |       | 21,251           |       |
| Rental income for premises and facilities                                 |   | (iv)        |   | —           |       | —           |       | 3,434            |       |
| Revenue for leasing of transmission line capacity                         |   | (v)         |   | 168,556          |       | 216,113          |       | 566,519          |       |
| Commission revenue for sales agency services                              |   | (vi)        |   | 259,981          |       | 14,560           |       | —           |       |
| Sales of CDMA mobile handsets                                             |   | (vii)       |   | —           |       | —           |       | 487,850          |       |
| Charges for the international gateway services                            |   | (viii)      |   | —           |       | —           |       | 15,626           |       |
| Leasing of satellite transmission capacity                                |   | (ix)        |   | 62,394           |       | 61,778           |       | 35,153           |       |
| Purchase of telecom cards                                                 |   | (x)         |   | 476,827          |       | 1,255,533        |       | 877,221          |       |
| CDMA network capacity lease rental                                        |   | (xi)        |   | —           |       | —           |       | 891,897          |       |
| Commission expenses  for sales agency services incurred for telecom cards |   | (xii)       |   | 5,033            |       | 2,616            |       | 18,497           |       |
| Rental charges for leasing of transmission line                           |   | (xiii)      |   | —           |       | 16,882           |       | —           |       |
| Agency fee incurred for procurement of telecommunications equipment       |   | (xiv)       |   | 54,421           |       | 124,451          |       | 13,992           |       |
| Rental for the PRC corporate office                                       |   | (xv)        |   | 10,131           |       | 10,131           |       | 7,598            |       |
| Sales of telecommunications equipment                                     |   | (xvi)       |   | —           |       | —           |       | 16,088           |       |

 

----

Note:

 

(i)                                     Interconnectionrevenues represent the amounts received or receivable from Unicom Group forcalls from its networks to the Group’s networks.  Roaming revenues represent revenue for calls made using theGroup’s networks by Unicom Group’s subscribers.

 

(ii)                                  Interconnectioncharges are for calls made from the Group’s networks to Unicom Group’s networks.  Roaming expenses represent expenses forcalls made by the Group’s subscribers using Unicom Group’s networks.

 

(iii)                               Interconnectionsettlement between Unicom Group’s network and the Group’s network is based onstandards established from time to time by the MII.  In the case of calls between cellular subscribers in differentprovinces, settlement is based on either the standards established by the MIIor an internal settlement arrangement applied by Unicom Group based on theirrespective internal costs of providing this service.  Also, charges for roaming services between the Group and UnicomGroup are based on their respective internal costs of providing these services.

 

(iv)                              CUCL andUnicom Group signed service agreements to mutually lease premises, equipmentand facilities from each other.  Rentalsare based on the lower of depreciation costs and market rates.

 

(v)                                 Unicom Groupleases transmission line capacity from the Group in accordance with therelevant provision of the services agreement. Revenue for leases of transmission line capacity is based on tariffsstipulated by MII from time to time less a discount of up to 10%.

 

F - 55

----

 

(vi)                              Guoxin actsas the sales agent of Unicom Group to sell telecommunications products (such asSIM cards and prepaid cards) in 2001. In return, Guoxin receives agency commission from Unicom Group at fixedrates based on commission rates stipulated by Unicom Group applicable to thirdparty sales agents. This agency services was terminated in April 2001.

 

(vii)                           According tothe sales of CDMA mobile phones agreement entered into between Unicom Group andUnicom Guomai on May 10, 2002, Unicom Group agreed to purchase CDMA mobilephone handsets from Unicom Guomai.  Theselling price is negotiated on an arm’s length basis, which is not lower thanthe price sold by Unicom Guomai to independent third parties.

 

(viii)                        Charges forinternational gateway services represent the amounts paid or payable to UnicomGroup for international gateway services provided for the Group’s internationallong distance networks. The charge for this service is based on the cost ofoperation and maintenance of the international gateway facilities incurred byUnicom Group, including depreciation, together with a margin of 10% over cost.

 

(ix)                                Satellitetransmission capacity leasing fees represent the amounts paid or payable toUnicom NewSpace for the use of satellite transmission capacity.  The charges are based on the MII regulationsthen in effect less the applicable discount up to 10% as agreed with UnicomNewSpace.

 

(x)                                   The Grouppurchased SIM cards, UIM cards, Internet protocol phone cards and prepaidrechargeable calling cards at fixed prices from Unicom Xingye.  Upon the establishment of CUCL in 2000, CUCLsigned a service agreement with Unicom Group to purchase telecom cards fromUnicom Group (to be imported by Unicom Xingye) at cost plus a margin to beagreed from time to time, but not to exceed 20%, and subject to appropriatevolume discounts.

 

(xi)                                According tothe CDMA Lease Agreement entered among CUCL, Unicom Group and Unicom NewHorizon, Unicom New Horizon agreed to lease the capacity of CDMA network to CUCLcovering 9 provinces and 3 municipalities. The lease fee per unit of capacityis calculated on a basis that if full capacity is leased, it would permitUnicom New Horizon to recover its investment in constructing the CDMA networkin 7 years, together with an internal return of 8% (See Note 32(a)).

 

(xii)                             Unicom International and Unicom International (HK) provided sales agencyservices such as selling of telecommunications cards, leased linesand transfer calls to the Group. The commission expenses are charged based oncontractual prices which approximated market rates.

 

(xiii)                          In 2001, theGroup leased transmission line capacity from Unicom International (HK) andUnicom International in accordance with the relevant provision of the servicesagreement.  Leased line expenses arecharged based on market rates. There were no leased line rental charges in 2002since this service was terminated in October 2001.

 

(xiv)                         CUCL signeda service agreement with Unicom I/E Co., in which Unicom I/E Co. agreed toprovide equipment procurement services to CUCL.  Unicom I/E Co. charges the Group 0.7% of the value of importedequipment and 0.5% of the value ofdomestic equipment for such services.

 

(xv)                            CUCL signed a rental agreement with Beijing Xingye, under which BeijingXingye leases office premises to CUCL at its PRC corporate office.  Monthly rental is calculated on the basis ofUS$ 20 per square meter. This rental agreement was terminated in September2002.

 

F- 56

----

 

(xvi)                         Based on a resolution passed by the shareholders of Unicom Guomai onApril 23, 2002, Unicom Guomai agreed to sell telecommunications equipment to certainbranches of Unicom Group, these contracts were obtained by Unicom Guomaithrough a tendering process and the contract prices were negotiated on an arm’slength basis.

 

(xvii)                      Unicom Groupis the registered proprietor of the “Unicom’’ trademark in English and thetrademark bearing the “Unicom” logo, which are registered at the PRC StateTrademark Bureau.  Pursuant to anexclusive PRC trademark license agreement entered into between Unicom Group andCUCL, CUCL and its affiliates are granted the right to use these trademarks ona royalty free basis for an initial period of 5 years, renewable at CUCL’soption.

 

(xviii)                   According tothe Multiple Service Agreement (the “Agreement”) signed between the Group andUnicom Paging Limited (“Unicom Paging”, a subsidiary of Unicom Group) datedAugust 1, 2001, the Group and Unicom Paging agree to share the right to use theother party’s logo and trademark in the pagingbusiness at no cost.  In addition, the Agreementalso specifies the basis of allocating common expenses incurred by each partyfor any shared resources and facilities. For the years ended December 21, 2002 and 2001, the amount of commonexpenses involved was insignificant.

 

**(b)****         ****Amounts due from and torelated parties**

 

Amountsdue from and to related parties are unsecured, non-interest bearing, repayableon demand and arise in the ordinary course of business in respect oftransactions with subsidiaries of Unicom Group as described in (a) above.

 

**(c)****         ****Amounts due to UnicomGroup**

 

Thefollowing table summarizes the activities between the Group and Unicom Group and the resulting balance due to Unicom Group:

 
|                                                                                        |   | **2000**         |   | **200****1**     |   | **200****2**     |   |
|---------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                        |   |             |   |             |   |             |   |
| Due to Unicom  Group, beginning of year                                                     |   | 505,367          |   | 821,797          |   | 947,934          |   |
| Interconnection  and roaming revenues                                                       |   | (339,536         | )      | (875,305         | )      | (1,678,637       | )      |
| Interconnection  and roaming charges                                                        |   | 131,315          |   | 298,828          |   | 331,179          |   |
| Revenue for leasing of  transmission line capacity and premises and facilities              |   | (168,556         | )      | (216,113         | )      | (569,953         | )      |
| Rental charges for premises, equipment and facilities                                       |   | 24,121           |   | 21,257           |   | 21,251           |   |
| Commission revenue for sales agency services                                                |   | 259,981          |   | 14,560           |   | —           |   |
| Sales of CDMA mobile handsets                                                               |   | —           |   | —           |   | (487,850         | )      |
| Charges for the international gateway services                                              |   | —           |   | —           |   | 15,626           |   |
| Network construction costs paid by Unicom Group for China Unicom of  fixed-line networks    |   | 524,651          |   | 702,614          |   | 112,474          |   |
| Received (repaid) in current year                                                           |   | (115,546         | )      | 180,296          |   | 1,032,163        |   |
| Increase of amounts due to Unicom Group arising from the acquisition  of Unicom New Century |   | —           |   | —           |   | 838,446          |   |
|                                                                                        |   |             |   |             |   |             |   |
| Due to Unicom Group, end of year                                                            |   | 821,797          |   | 947,934          |   | 562,633          |   |

 

F - 57

----

 

Theoutstanding amounts were unsecured, non-interestbearing and repayable ondemand. The average outstanding balances during 2002 were approximately RMB755,284,000 (2000: RMB636,582,000; 2001: RMB884,866,000).

 

**(d)****         ****Loans from Unicom Group**

 

Loansof approximately RMB10,502 million as of 31 December 1999 were provided byUnicom Group to finance the operations and network construction of the CellularBusiness and to finance the settlement payments for the terminations of the CCFArrangements as described in Note 11. In order to provide these loans to the Cellular Business, Unicom Groupborrowed from various banks at the interest rates ranging from 5.85% to 7.2% for 2000.  Unicom Groupallocated these bank loans to the Cellular Business based on the amount offunds actually utilized by the Cellular Business.  The corresponding interest expenses were also charged to theCellular Business based on the loan amounts allocated.  Upon the establishment of CUCL in 2000, these loans were restructured into long-term loansborrowed directly by CUCL.

 

Asof December 31, 2002, short-term loans from Unicom Group represented loansprovided by Unicom Group to relevant branches of Unicom New Century to financethe operations of the Cellular Business. These loans were borrowed by UnicomGroup from banks at the interest rate of 4.54%.  These bank loans wereidentified as attributable to the relevant branches of Unicom New Century based on theamount of funds actually utilized by the GSM Business. The correspondinginterest expenses were also charge to these relevant branches based on fundsactually utilized. All of these loans were guaranteed by Unicom Group.

 

**(e)****         ****Bank loans guaranteed by Unicom Group**

 

The Group has approximatelyRMB12,635 million (2001: RMB4,253 million)of long-term bank loans and RMB 463 million (2001: RMB200 million) of short-term bank loans were guaranteed by Unicom Group.

 

F - 58

----

 

**3****4****.****      ****TRANSACTIONS WITH DOMESTIC CARRIERS**

 

TheGroup’s telecommunications networks depend, in large part, on interconnectionwith domestic carriers’ public switched telephone network and on transmissionlines leased from major domestic carriers. Major domestic carriers include China Telecom, China MobileCommunications Corporation and its subsidiaries (“China Mobile”) and ChinaNetcom Corporation and its subsidiaries (“China Netcom”) in 2002.

 

**(a)****         ****Transactions withdomestic carriers**

 

Thefollowing is a summary of significant transactions with domestic carriers:

 
|                                 |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   |
|--------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                 |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                 |   |     |   |             |   |             |   |             |   |
| Interconnection  revenue             |   | (i)      |   | 298,596          |   | 461,133          |   | 771,751          |   |
| Interconnection  charges             |   | (i)      |   | 1,145,913        |   | 1,375,852        |   | 2,666,186        |   |
| Leased line  charges                 |   | (ii)     |   | 1,008,077        |   | 668,386          |   | 680,508          |   |
| Operating lease  charges             |   | (iii)    |   | 135,075          |   | 33,127           |   | 12,370           |   |
| Agency fee on  collection of revenue |   | (iv)     |   | 108,943          |   | 2,665            |   | 3,663            |   |
| Social service  fees                 |   | (v)      |   | 15,907           |   | —           |   | —           |   |

 

----

*Note:*

 

(i)             Theinterconnection revenue and charges mainly represent the amounts due from or todomestic carriers for telephone calls made between the Group’s networks and thepublic switched telephone network of domestic carriers. The interconnectionsettlements are calculated in accordance with interconnection agreementsreached between the branches of theGroupand domestic carriers on a provincial basis. The terms of these agreements are set in accordance with the standardsettlement arrangement stipulated by the MII.

 

(ii)          Leased linecharges are paid or payable to domestic carriers by the Group for leasingdomestic carriers’ transmission line. The charges are calculated at a fixed charge per line, depending on thenumber of lines being used.

 

(iii)       Guoxin hassigned operating lease agreements with the relevant domestic carriers or theuse of certain land and buildings.  Therentals are based on the market rates in the locality of the land and building.

 

(iv)      Guoxin hassigned agency agreements with the relevant domestic carriers for sales agencyservices based on standard commission rates, being the prevailing market ratesin the locality.  Charges for collectionservices are calculated at a fixed percentage of fees collected fromsubscribers.

 

(v)         Prior to theestablishment of Guoxin, China Telecom charged the paging Business for varioussocial services, such as property management, meal and other social service, atcost.  Upon its establishment, Guoxinsigned social service agreement withChina Telecom to provide such services at a fixed amount per employeeannually.  For 2001 and 2002, suchsocial service agreement was terminated and no more service has been renderedby China Telecom.

 

F - 59

----

 

**(b)****         ****Amounts due from and todomestic carriers**

 
|                                                                                                       |   | **2001**         |   | **2002**         |   |
|------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                                       |   | **RMB’000** |   | **RMB’000** |   |
| Amounts due from  domestic carriers                                                                        |   |             |   |             |   |
| - revenue colled  on behalf of Guoxin                                                                      |   | 258,317          |   | 260,578          |   |
| - less:  provision for doubtful debts                                                                      |   | (58,857          | )      | (49,116          | )      |
|                                                                                                       |   |             |   |             |   |
|                                                                                                       |   | 199,460          |   | 211,462          |   |
| Amounts due to  domestic carriers                                                                          |   |             |   |             |   |
| -  payables  for interconnection  charges, leased lines,  operating leases and agency fees, etc. |   | 742,366          |   | 1,123,580        |   |
|                                                                                                       |   |             |   |             |   |
| Long-term payable due to domestic carriers                                                                 |   |             |   |             |   |
| -  payables  for obligations under  finance leases:                                              |   |             |   |             |   |
| - current portion of obligations under finance leases                                                      |   | 8,151            |   | 16,793           |   |
| - obligations under finance leases                                                                         |   | 100,757          |   | 101,302          |   |
|                                                                                                       |   |             |   |             |   |
|                                                                                                       |   | 108,908          |   | 118,095          |   |

 

Allamounts due from and to domestic carriers were unsecured, non-interestbearing and repayable within one year.

 

Long-term payable for obligations under financelease was related to the leasing of certain subsea transmission cables from adomestic carrier for a period of 25 years (See Note 29).

 

**35****.****      ****SEGMENT INFORMATION**

 

Operatingsegments represent components of an enterprise regarding which separatefinancial information is available for regular evaluation by the chiefoperating decision maker, or decision-making group, when considering how toallocate resources and in assessing performance.

 

TheGroup organizes its business segments based on the various types oftelecommunications services provided to customers in the PRC.  The major business segments operated by theGroup are classified as below:

 

•                  GSM Business— the provision of GSM telephone and related services;

•                  CDMABusiness — the provision of CDMA telephone and related services (the operationcommenced in 2002);

•                  Data andInternet Business — the provision of domestic and international data, Internetand other related services;

•                  Long Distance Business — the provision of domestic andinternational long distance and other related services; and

•                  PagingBusiness — the provision of paging and related services.

 

Theoperating segments are managed separately because each operating segmentrepresents a strategic business unit that provides various kinds oftelecommunication services.  All theoperating segments of the Group have been aggregated into the above reportablesegments since they are expected to exhibit similar future economiccharacteristics under central management at separate locations.

 

TheGroup’s primary measure of segment results is based on segment income (loss)before taxation.

 

F - 60

----

 

**(a)Business segments**

 
|                                                         |   | **2002**         |   |
|--------------------------------------------------------------|--------|------------------|--------|
|                                                         |   | **GSM Business** |   | **CDMA  Business** |   | **Internet and  Data  Business** |   | **Long Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                                                         |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Operating Revenue (Turnover):                                |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                    |   | 20,274,987       |   | 2,231,050 |   | 2,069,415 |   | 1,223,051 |   | — |   | — |   |   |   | 25,798,503 |   |
| Monthly fee                                                  |   | 4,169,129        |   | 713,483 |   | 9,478 |   | — |   | 1,912,786 |   | — |   |   |   | 6,804,876 |   |
| Connection fee                                               |   | —           |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |
| 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 |   |
| Intersegment revenue                                         |   | —           |   | — |   | 559,888 |   | 682,423 |   | 731,009 |   | — |   | (1,973,320 | ) | — |   |
| Total operating revenues                                     |   | 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 (Note 33(a))        |   | (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 | ) |
| Loss arising from terminations of CCF Arrangements (Note 11) |   | —           |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |
| Other (expenses) income, net                                 |   | (46,889          | )      | (10 | ) | (2,562 | ) | (152 | ) | 24,993 |   | 8,261 |   |   |   | (16,359 | ) |
| Segment income (loss) before Taxation                        |   | 6,349,399        |   | (1,031,999 | ) | 311,024 |   | 978,822 |   | (589,872 | ) | 287,492 |   |   |   | 6,303,166 |   |
| Taxation                                                     |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,752,346 | ) |
| Income after taxation                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,550,820 |   |
| Minority interests                                           |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 15,252 |   |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,566,072 |   |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets                                         |   | 97,483,508       |   | 5,724,427 |   | 7,081,704 |   | 13,876,837 |   | 8,410,871 |   | 58,016,167 |   | (41,370,609 | ) | 149,222,905 |   |
| Total segment liabilities                                    |   | 67,666,655       |   | 5,788,290 |   | 2,785,794 |   | 3,826,692 |   | 2,205,343 |   | 136,639 |   |   |   | 82,409,413 |   |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                           |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision (write-back) for doubtful debts               |   | 802,914          |   | 42,050 |   | 70,922 |   | 46,124 |   | 9,979 |   | — |   |   |   | 971,989 |   |
| Equity investment for segment Assets                    |   | —           |   | — |   | — |   | — |   | 3,814 |   | — |   |   |   | 3,814 |   |
| Impairment loss recognized in the statement 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 |   |

 

F - 61

----

 
|                                                         |   | **2001**          |   |
|--------------------------------------------------------------|--------|-------------------|--------|
|                                                         |   | **GSM  Business** |   | **CDMA  Business** |   | **Internet and  Data Business** |   | **Long Distance  Business** |   | **Paging  Business** |   | **Unallocated  amounts** |   | **Elimination** |   | **Total** |   |
|                                                         |   | **RMB’000**  |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Operating Revenue (Turnover):                                |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Usage fee                                                    |   | 14,937,448        |   | — |   | 1,566,149 |   | 554,848 |   | — |   | — |   |   |   | 17,058,445 |   |
| Monthly fee                                                  |   | 3,660,473         |   | — |   | — |   | — |   | 4,141,232 |   | — |   |   |   | 7,801,705 |   |
| Connection fee                                               |   | 204,986           |   | — |   | — |   | — |   | 1,595 |   | — |   |   |   | 206,581 |   |
| Interconnection revenue                                      |   | 1,262,267         |   | — |   | 132,741 |   | 591,883 |   | — |   | — |   |   |   | 1,986,891 |   |
| Leased lines rental                                          |   | —            |   | — |   | 102,804 |   | 324,391 |   | — |   | — |   |   |   | 427,195 |   |
| Other revenue                                                |   | 439,884           |   | — |   | 18,517 |   | 17,611 |   | 198,997 |   | — |   |   |   | 675,009 |   |
| Total services revenue                                       |   | 20,505,058        |   | — |   | 1,820,211 |   | 1,488,733 |   | 4,341,824 |   | — |   |   |   | 28,155,826 |   |
| Sales of telecommunications products                         |   | 820,585           |   | — |   | — |   | — |   | 416,475 |   | — |   |   |   | 1,237,060 |   |
| Total operating revenue from  external customers             |   | 21,325,643        |   | — |   | 1,820,211 |   | 1,488,733 |   | 4,758,299 |   | — |   |   |   | 29,392,886 |   |
| Intersegment revenue                                         |   | 651               |   | — |   | 303,357 |   | 866,572 |   | 66,734 |   | — |   | (1,237,314 | ) | — |   |
| Total operating revenues                                     |   | 21,326,294        |   | — |   | 2,123,568 |   | 2,355,305 |   | 4,825,033 |   | — |   |   |   | 29,392,886 |   |
| Operating expenses:                                          |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and network capacities                          |   | (533,455          | )      | — |   | (415,280 | ) | (15,252 | ) | (307,348 | ) | — |   | 418,029 |   | (853,306 | ) |
| Interconnection charges                                      |   | (2,195,396        | )      | — |   | (475,703 | ) | (158,642 | ) | — |   | — |   | 757,157 |   | (2,072,584 | ) |
| Depreciation and amortization                                |   | (5,556,317        | )      | — |   | (342,411 | ) | (604,961 | ) | (1,754,973 | ) | (3,634 | ) |   |   | (8,262,296 | ) |
| Personnel                                                    |   | (1,106,962        | )      | — |   | (250,493 | ) | (159,619 | ) | (937,198 | ) | (32,946 | ) |   |   | (2,487,218 | ) |
| Selling and marketing                                        |   | (2,486,867        | )      | — |   | (551,839 | ) | (157,015 | ) | (478,478 | ) | — |   | 61,309 |   | (3,612,890 | ) |
| General, administrative and other expenses                   |   | (3,046,235        | )      | — |   | (358,486 | ) | (285,596 | ) | (1,760,688 | ) | (48,811 | ) | 819 |   | (5,498,997 | ) |
| Cost of telecommunications products sold (Note 33(a))        |   | (788,218          | )      | — |   | — |   | — |   | (554,026 | ) | — |   |   |   | (1,342,244 | ) |
| Total operating expenses                                     |   | (15,713,450       | )      | — |   | (2,394,212 | ) | (1,381,085 | ) | (5,792,711 | ) | (85,391 | ) |   |   | (24,129,535 | ) |
|                                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                      |   | 5,612,844         |   | — |   | (270,644 | ) | 974,220 |   | (967,678 | ) | (85,391 | ) |   |   | 5,263,351 |   |
| Interest income                                              |   | 31,544            |   | — |   | 2,099 |   | 979 |   | 23,493 |   | 2,038,857 |   |   |   | 2,096,972 |   |
| Finance costs                                                |   | (1,560,826        | )      | — |   | (72,883 | ) | (243,288 | ) | (40,569 | ) | — |   |   |   | (1,917,566 | ) |
| Loss arising from terminations of CCF Arrangements (Note 11) |   | —            |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |
| Other (expenses) income, net                                 |   | (842              | )      | — |   | (952 | ) | (592 | ) | (6,159 | ) | 28,376 |   |   |   | 19,831 |   |
| Segment income (loss) before Taxation                        |   | 4,082,720         |   | — |   | (342,380 | ) | 731,319 |   | (990,913 | ) | 1,981,842 |   |   |   | 5,462,588 |   |
| Taxation                                                     |   |              |   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** | (1,041,137 | **)** |
| Income after taxation                                        |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,421,451 |   |
| Minority interests                                           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 35,310 |   |
|                                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,456,761 |   |
|                                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets                                         |   | 65,320,115        |   | — |   | 3,047,975 |   | 14,009,739 |   | 11,306,153 |   | 34,220,910 |   |   |   | 127,904,892 |   |
| Total segment liabilities                                    |   | 52,359,025        |   | — |   | 1,151,090 |   | 8,574,130 |   | 3,278,990 |   | 31,089 |   |   |   | 65,394,324 |   |
|                                                         |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision (write-back) for doubtful debts               |   | 517,663           |   | — |   | 24,743 |   | 13,058 |   | (14,510 | ) | — |   |   |   | 540,954 |   |
| Equity investment for segment Assets                    |   | —            |   | — |   | — |   | — |   | 4,146 |   | — |   |   |   | 4,146 |   |
| Impairment loss recognized inthe statement  of income        |   | —            |   | — |   | — |   | — |   | 632,511 |   | — |   |   |   | 632,511 |   |
| Capital expenditures for segment assets (1)             |   | 20,777,990        |   | — |   | 3,447,123 |   | 3,884,937 |   | 549,338 |   | 2,594,071 |   |   |   | 31,253,459 |   |

 

F - 62

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|                                                         |   | **2000**         |   |
|--------------------------------------------------------------|--------|------------------|--------|
|                                                         |   | **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                                                    |   | 8,212,332        |   | — |   | 342,651 |   | 127,875 |   | — |   | — |   |   |   | 8,682,858 |   |
| Monthly fee                                                  |   | 2,476,104        |   | — |   | 7,005 |   | 71 |   | 7,992,999 |   | — |   |   |   | 10,476,179 |   |
| Connection fee                                               |   | 517,642          |   | — |   | — |   | — |   | 68,233 |   | — |   |   |   | 585,875 |   |
| Interconnection revenue                                      |   | 753,591          |   | — |   | 141,992 |   | 151,753 |   | — |   | — |   |   |   | 1,047,336 |   |
| Leased lines rental                                          |   | —           |   | — |   | 45,841 |   | 275,414 |   | — |   | — |   |   |   | 321,255 |   |
| Other revenue                                                |   | 228,135          |   | — |   | 2,636 |   | 1,156 |   | 422,258 |   | — |   |   |   | 654,185 |   |
| Total services revenue                                       |   | 12,187,804       |   | — |   | 540,125 |   | 556,269 |   | 8,483,490 |   | — |   |   |   | 21,767,688 |   |
| Sales of telecommunications products                         |   | 696,058          |   | — |   | — |   | — |   | 1,228,712 |   | — |   |   |   | 1,924,770 |   |
| Total operating revenue from  external customers             |   | 12,883,862       |   | — |   | 540,125 |   | 556,269 |   | 9,712,202 |   | — |   |   |   | 23,692,458 |   |
| Intersegment revenue                                         |   | —           |   | — |   | 262,334 |   | 193,388 |   | 180,701 |   | — |   | (636,423 | ) | — |   |
| Total operating revenues                                     |   | 12,883,862       |   | — |   | 802,459 |   | 749,657 |   | 9,892,903 |   | — |   |   |   | 23,692,458 |   |
| Operating expenses:                                          |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Leased lines and network capacities                          |   | (580,596         | )      | — |   | (397,794 | ) | 123,570 |   | (759,025 | ) | — |   | 455,722 |   | (1,158,123 | ) |
| Interconnection charges                                      |   | (1,268,574       | )      | — |   | (93,867 | ) | (17,024 | ) | — |   | — |   |   |   | (1,379,465 | ) |
| Depreciation and amortization                                |   | (3,605,529       | )      | — |   | (69,342 | ) | (231,545 | ) | (1,827,535 | ) | (364 | ) |   |   | (5,734,315 | ) |
| Personnel                                                    |   | (361,914         | )      | — |   | (33,276 | ) | (19,686 | ) | (1,354,964 | ) | — |   |   |   | (1,769,840 | ) |
| Selling and marketing                                        |   | (1,426,829       | )      | — |   | (270,669 | ) | (23,426 | ) | (952,210 | ) | — |   | 180,701 |   | (2,492,433 | ) |
| General, administrative and other expenses                   |   | (1,772,753       | )      | — |   | (87,468 | ) | (59,238 | ) | (1,809,425 | ) | (14,179 | ) |   |   | (3,743,063 | ) |
| Cost of telecommunications products sold (Note 33(a))        |   | (380,849         | )      | — |   | — |   | — |   | (1,812,089 | ) | — |   |   |   | (2,192,938 | ) |
| Total operating expenses                                     |   | (9,397,044       | )      | — |   | (952,416 | ) | (227,349 | ) | (8,515,248 | ) | (14,543 | ) |   |   | (18,470,177 | ) |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                      |   | 3,486,818        |   | — |   | (149,957 | ) | 522,308 |   | 1,377,655 |   | (14,543 | ) |   |   | 5,222,281 |   |
| Interest income                                              |   | 100,944          |   | — |   | 477 |   | 159 |   | 52,320 |   | 1,594,905 |   |   |   | 1,748,805 |   |
| Finance costs                                                |   | (1,149,432       | )      | — |   | (97,727 | ) | (106,587 | ) | — |   | — |   |   |   | (1,353,746 | ) |
| Loss arising from terminations of CCF Arrangements (Note 11) |   | (1,184,534       | )      | — |   | — |   | (9,304 | ) | — |   | — |   |   |   | (1,193,838 | ) |
| Other  income, net                                      |   | 9,493            |   | — |   | — |   | — |   | 49,736 |   | — |   |   |   | 59,229 |   |
| Segment income (loss) before Taxation                        |   | 1,263,289        |   | — |   | (247,207 | ) | 406,576 |   | 1,479,711 |   | 1,580,362 |   |   |   | 4,482,731 |   |
| Taxation                                                     |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,104,969 | ) |
| Income after taxation                                        |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,377,762 |   |
| Minority interests                                           |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | (143,711 | ) |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                   |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,234,051 |   |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total segment assets                                         |   | 42,393,650       |   | — |   | 2,553,057 |   | 6,210,560 |   | 14,748,230 |   | 46,923,329 |   |   |   | 112,828,826 |   |
| Total segment liabilities                                    |   | 41,207,608       |   | — |   | 2,130,925 |   | 5,832,524 |   | 5,482,298 |   | 67,817 |   |   |   | 54,721,172 |   |
|                                                         |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other information:                                           |   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision  for doubtful debts                           |   | 355,082          |   | — |   | 2,635 |   | 1,684 |   | 85,430 |   | — |   |   |   | 444,831 |   |
| Equity investment for segment assets                    |   | —           |   | — |   | — |   | — |   | 25,700 |   | — |   |   |   | 25,700 |   |
| Impairment loss recognized in the statement of income   |   | —           |   | — |   | — |   | — |   | — |   | — |   |   |   | — |   |
| Capital expenditures for segment assets (1)             |   | 17,277,859       |   | — |   | 2,685,314 |   | 3,028,121 |   | 2,178,287 |   | 10,655 |   |   |   | 25,180,236 |   |

 

----

(1)          Capital expenditures classified under “unallocatedamounts” represent capital expenditure on common facilities, which benefit allbusiness segments.

 

F- 63

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**(b)****          Geographicalsegments**

 

The Group’s services users are mainly in the PRC.There is no other geographical segment with segment revenue from externalcustomers equal to or greater than 10% of total consolidated revenue from salesto all external customers.

 

Although the Group has its corporate headquarters inHong Kong, a substantial portion of the Group’s non-current assets (includingproperty, plant and equipment, goodwill and other assets) are situated in the mainland China, as the Group’sprincipal activities are conducted in the PRC. For the years ended December 31,2000, 2001 and 2002, substantially all capital expenditures were incurred toacquire assets located in the mainlandChina. There is no other geographical segment with segment assets equalto or greater than 10% of the total assets of all geographical segments.

 

**3****6.****       FAIR VALUE OF FINANCIALINSTRUMENTS**

 

Financial assetsof the Group include cash and cash equivalents, short term bank deposits,trading securities, accounts receivables, prepayment and other current assets,amounts due from related parties and domestic carriers. Financial liabilitiesof the Group include accounts payable and accrued liabilities, bank loans,lease payables and due to related parties and domestic carriers. Cash and cashequivalents andshort-term bank deposits denominated in foreign currencies as summarized below, have been translated to RMB at theapplicable rates quoted by the People’s Bank of China as of December 31, 2001and 2002.

 
|                            |   | **2001**               |   | **2002**           |   |
|---------------------------------|--------|------------------------|--------|--------------------|--------|
|                            |   | **Original  currency** |   | **Exchange  rate** |   | **RMB  equivalent** |   | **Original  currency** |   | **Exchange  rate** |   | **RMB  equivalent** |   |
|                            |   | **’****000**      |   |               |   | **RMB****’000** |   | **’****000** |   |   |   | **RMB’****000** |   |
| **Cash and  cash equivalents:** |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| - denominated in HK$            |   | 1,777,224              |   | 1.06               |   | 1,886,523 |   | 1,103,579 |   | 1.06 |   | 1,170,787 |   |
| - denominated in US dollars     |   | 899,868                |   | 8.28               |   | 7,448,635 |   | 785,328 |   | 8.27 |   | 6,497,476 |   |
|                            |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Sub-total                       |   |                   |   |               |   | 9,335,158 |   |   |   |   |   | 7,668,263 |   |
|                            |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| **Short-term  deposits:**       |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| - denominated in HK$            |   | 5,941,644              |   | 1.06               |   | 6,307,055 |   | 1,697,414 |   | 1.06 |   | 1,800,786 |   |
| - denominated in US dollars     |   | 2,222,981              |   | 8.28               |   | 18,400,664 |   | 365,047 |   | 8.27 |   | 3,020,321 |   |
|                            |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Sub-total                       |   |                   |   |               |   | 24,707,719 |   |   |   |   |   | 4,821,107 |   |
|                            |   |                   |   |               |   |   |   |   |   |   |   |   |   |
| Total                           |   |                   |   |               |   | 34,042,877 |   |   |   |   |   | 12,489,370 |   |

 

The Group did not have and does not believe it willhave any difficulty in exchanging its foreign currency cash into RMB at theexchange rates quoted by the People’s Bank of China.  The carrying amounts of the Group’s cash and cash equivalents,short term bank deposits, other current financial assets and liabilitiesapproximated their fair value as of December 31, 2001 and 2002 due to thenature or short maturity of those instruments.

 

The historical cost carrying amounts of receivablesand payables which are all subject to normal trade credit terms approximatetheir fair values.

 

The fair value of trading securities is estimated byreference to their quoted market price at the balance sheet date.

 

F - 64

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Investment securities are measured at cost as there isno quoted marked price in an active market and whose fair value cannot bereliably measured.

 

The carrying amounts of long-term bank loansapproximate their fair values based on prevailing market borrowing rates availablefor comparable bank loans with similar terms and maturities.

 

**3****7.****       CONTINGENCIES ANDCOMMITMENTS**

 

**(a)****          Capitalcommitments**

 

As of December 31, 2002 and2001, the Group had capital commitments, mainly in relation to theconstruction of telecommunications networks, as follows:

 
|                              |   | **2002**                |   | **2001**         |   |
|-----------------------------------|--------|-------------------------|--------|------------------|--------|
|                              |   | **Land and  buildings** |   | **Equipment**    |   | **Total** |   | **Total** |   |
|                              |   | **RMB’000**        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                              |   |                    |   |             |   |   |   |   |   |
| Authorized and contracted for     |   | 1,131,055               |   | 5,131,164        |   | 6,262,219 |   | 9,956,935 |   |
| Authorized but not contracted for |   | 12,940                  |   | 2,623,215        |   | 2,636,155 |   | 78,676 |   |
|                              |   |                    |   |             |   |   |   |   |   |
| Total                             |   | 1,143,995               |   | 7,754,379        |   | 8,898,374 |   | 10,035,611 |   |

 

As of December 31, 2002, approximately RMB385 million (2001: RMB662 million) of capital commitmentoutstanding was denominated in US dollars (i.e. US$47 million (2001: US$80million)).

 

F - 65

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**(b)****          Operatinglease commitments**

 

As of December 31, 2002 and2001, the Group had total future aggregate minimum operating leasepayments under operating leases as follows:

 
|                                                |   | **2002**                |   | **2001**         |   |
|-----------------------------------------------------|--------|-------------------------|--------|------------------|--------|
|                                                |   | **Land and  buildings** |   | **Equipment**    |   | **CDMA  network** |   | **Total** |   | **Total** |   |
|                                                |   | **RMB’000**        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                |   |                    |   |             |   |   |   |   |   |   |   |
| Leases expiring :                                   |   |                    |   |             |   |   |   |   |   |   |   |
| - not later than one year                           |   | 311,835                 |   | 274,140          |   | 3,045,600 |   | 3,631,575 |   | 1,954,961 |   |
| - later than one year and not later than five years |   | 920,038                 |   | 493,826          |   | — |   | 1,413,864 |   | 803,480 |   |
| - later than five years                             |   | 875,894                 |   | 255,273          |   | — |   | 1,131,167 |   | 759,696 |   |
|                                                |   |                    |   |             |   |   |   |   |   |   |   |
| Leases expiring :                                   |   | 2,107,767               |   | 1,023,239        |   | 3,045,600 |   | 6,176,606 |   | 3,518,137 |   |

 

In relation to the CDMAnetwork capacity leasing arrangement as described in Note 32(a), the abovecommitment is estimated based on the forecasted CDMA subscriber growth with theanticipated capacity of the lease for the year ending December 31, 2003.

 

**(c)****         ****Commitment topurchase CDMA handsets**

 

As of December 31, 2002, the Group committed topurchase CDMA handsets amounted to approximately RMB870 million.

 

**(d)****          Contingentliability**

 

For the year ended December 31, 2002, Unicom Guomaiprovided guarantees for bank loans borrowed by Shanghai TelecommunicationsCompany Limited (formally known as “Shanghai Provincial Post andTelecommunications Administrations”) amounted to approximately US$23.48million. All these bank loans were not yet due as of December 31, 2002.

 

F - 66

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**3****8.****      ****EVENTS AFTERBALANCE SHEET DATE**

 

**(a)****          Relatedparty transaction with Unicom Group**

 

Unicom Guomai entered into a supplemental agreementwith Unicom Group on January 9, 2003 and agreed to sell up to 120,000 CDMAhandsets for a maximum of RMB240 million to Unicom Group. This supplemental agreement is entered into basedon the terms similar to the CDMA handsets purchase agreement between UnicomGuomai and Unicom Group dated May 10, 2002.

 

**(b)****         ****Additional investment to CUCL**

 

Subsequent to 2002, theCompany increased its investment in CUCL by cash of approximately RMB4,467 million on January 21, 2003.

 

**(c)****          Tax approvalssubsequently obtained**

 

On February 27 and March 11,2003, CUCL obtained relevant tax approvals to include certain losses ondisposal of assets and provision of doubtful debts (previously treated as non-deductibleagainst current tax) amounted to approximately RMB102 million and RMB57 million respectively, as tax deductible itemsfor the year ended December 31, 2002. CUCL has accounted for the above taxeffects when filing its tax return for the year ended December 31, 2002.

 

**39.****       COMPARATIVEFIGURES**

 

Certain comparative figuresin the cash flow statements have been reclassified in accordance with newdisclosure requirement under new HK SSAP adopted in current year.

 

**40.****      ****APPROVAL OF FINANCIAL STATEMENTS**

 

The financial statementswere approved by the board of directors on April 1, 2003.

 

F - 67

----

 

**41.****      ****SIGNIFICANT DIFFERENCES BETWEEN HK GAAP AND US GAAP**

 

The consolidated financial statements of the Groupprepared under HK GAAP differ in certain material respects from those preparedunder generally accepted accounting principles in the United States of America(“US GAAP”).  Significant differencesbetween HK GAAP and US GAAP are summarized below:

 

**(A)****       Effectof the acquisition of entities under common control**

 

Under HK GAAP, the Groupadopted the purchase method to account for the acquisition of the entire equityinterest in Unicom New Century on December 31, 2002. Under the purchase method,the acquired results of operations are incorporated into the consolidated statements of income of the Groupfrom the date of Acquisition. The differences between the cost of theacquisition and the fair value of the identifiable assets and liabilitiesacquired is recognized as goodwill and is amortized on a straight-line basisover its useful life of 20 years.

 

As the Group and UnicomNew Century were under the common control of Unicom Group prior to theAcquisition, the acquisition is considered as a transfer of businesses undercommon control and the acquired assets and liabilities are accounted for athistorical cost under US GAAP. Furthermore, the consolidated financial statements prepared under USGAAP for all periods presented have been retroactively restated as if UnicomNew Century were always part of the Group. The net cash consideration paid bythe Company is treated as capital distribution in the year of the Acquisitionfor US GAAP purpose.  Expenses of thetransaction, which are capitalized as part of the acquisition price under HKGAAP, have been expensed in full under US GAAP.

 

**(B)****       Revenueand costs recognition**

 

Under HK GAAP, upfront non-refundable revenue, such asconnection fee,is recognized when received upon completion of activation services. Under US GAAP, in accordance with Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements’’, upfront non-refundable revenueand the related direct incremental costs incurred are deferred and recognizedover the estimated customer service periods.  The expected customerservice period for the Cellular Business is estimated based on the expected stabilizedchurn rates.  On this basis, theweighted average customer service period based on current estimation considering the prevailing marketenvironment is approximately 6years (2000:10 years; 2001: 6years).  The effect of the changeof estimate in 2001 was to increase the net income by approximately RMB26million for the year ended December 31, 2001.

 

**(****C)****       Employee housing schemes**

 

Prior to the establishment of Guoxin and CUCL, both China Telecom (the previousowner of Guoxin prior to its restructuring into the Group) and Unicom Groupprovided housing benefits to qualified employees of the Group to enable them topurchase living quarters.  Under HKGAAP, housing benefits incurred and borne by China Telecom and Unicom Group forthese employees were not recognized by the Group.  Under US GAAP, the amount of such housing benefits is beingrecognized as part of the Group’s operating expenses over the estimated averageservice life of the participating employees. The corresponding credits are being accounted for as capitalcontributions.

 

F - 68

----

 

**(****D)****       Deferred taxation**

 

Under HK GAAP, the Group provides for deferred taxliabilities only to the extent that there is a reasonable probability that suchdeferred taxes will become payable in the foreseeable future.  Deferred tax assets are not recognizedunless they are expected to crystallize in the foreseeable future.  Under US GAAP, a provision is made for alldeferred taxes.  If it is more likelythan not that deferred tax assets will not be realized, a valuation allowanceis recorded.

 

**(****E)****         Revaluation of property,plant and equipment**

 

Under HK GAAP, revaluation surplus in relation tobuildings is recorded by the Group as part of the property, plant and equipment.  Thereafter, depreciation is provided basedon the revalued amounts. Under US GAAP, all property, plant and equipment arestated at historical cost less accumulated depreciation, and prepaid land userights are stated at the unused prepaid amount as part of the other assets.

 

**(****F)****         Impairment of long-livedassets and goodwill**

 

The carrying amounts of property, plant and equipmentand goodwill under HK GAAP are reviewed periodically in order to assess whetherthe recoverable amount has declined below the carrying amount.  When such a decline occurs, the carryingamount is reduced to the recoverable amount based on the expected future cashflows generated by the assets discounted to their present value.  A subsequent increase in the recoverableamount is written back to the statement of income when circumstances and eventsthat led to the write-down or write-off cease to exist.

 

**(i) Goodwill**

 

UnderHK GAAP, goodwill is amortized over the expected economic lives of the acquiredbusinesses which are generally 5 to 20 years. Prior to January 1, 2002, the US GAAP treatment was consistent withthis. In addition, for the year ended December 31, 2001, although the projectedamount of future undiscounted cash flows was sufficient to recover the netcarrying amount of goodwill as of December 31, 2001, the amount of discountedcash flows was not. Consequently, for the year ended December 31, 2001,impairment provision for goodwill recognized under US GAAP were lower than thatrecognized under HK GAAP by RMB 62,948,000.

 

OnJanuary 1, 2002, under US GAAP, upon the adoption of Statements of FinancialAccounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), the Group no longer amortizesgoodwill but, rather, assesses the goodwill of each identified reporting unitfor impairment annually.  The adoptionof SFAS 142 has resulted in acumulative effect of accounting change of RMB 42,175,000 (net of tax RMB20,773,000) on January 1, 2002 and has been reflected in the condensedconsolidated statement of income for the year ended December 31, 2002 under USGAAP.  The subsequent annual impairmentassessment of goodwill as at December 31, 2002 did not result in any materialdifference in the fair values for the year ended December 31, 2002.  Prior to January 1, 2002, impairmentaccounting of goodwill under US GAAP was prescribed by SFAS 121.

 

F - 69

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Thepro-forma impact to the reported net income and earnings per share before andafter extraordinary items and cumulative effect of accounting change for theyear of initial application and prior two years are provided as follows:

 
|                                                                                                             |   | **200****0** |   | **200****1** |   | **200****2** |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Net income after  extraordinary items and cumulative effective of accounting change:                             |   |         |   |         |   |         |   |
| As reported (RMB’000)                                                                                       |   | 1,958,512    |   | 5,074,321    |   | 5,147,294    |   |
| Add back:  Goodwill amortization, net of tax impact                                                              |   | 67,523       |   | 49,755       |   | —       |   |
| Adjusted  (RMB’000)                                                                                    |   | 2,026,035    |   | 5,124,076    |   | 5,147,294    |   |
|                                                                                                             |   |         |   |         |   |         |   |
| Net income  before extraordinary items and cumulative effective of accounting change:                            |   |         |   |         |   |         |   |
| As reported (RMB’000)                                                                                       |   | 4,031,386    |   | 5,074,321    |   | 5,189,469    |   |
| Add back:  Goodwill amortization, net of tax impact                                                              |   | 67,523       |   | 49,755       |   | —       |   |
| Adjusted  (RMB’000)                                                                                    |   | 4,098,909    |   | 5,124,076    |   | 5,189,469    |   |
|                                                                                                             |   |         |   |         |   |         |   |
| Basic and  diluted earnings per share after extraordinary items and cumulative effective  of accounting change:  |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                               |   | 0.17         |   | 0.40         |   | 0.41         |   |
| Pro forma (RMB)                                                                                                  |   | 0.18         |   | 0.41         |   | 0.41         |   |
|                                                                                                             |   |         |   |         |   |         |   |
| Basic and  diluted earnings per share before extraordinary items and cumulative  effective of accounting change: |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                               |   | 0.36         |   | 0.40         |   | 0.41         |   |
| Pro forma (RMB)                                                                                                  |   | 0.37         |   | 0.41         |   | 0.41         |   |
|                                                                                                             |   |         |   |         |   |         |   |
| Basic and  diluted earnings per ADS after extraordinary items and cumulative effective  of accounting change:    |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                               |   | 1.75         |   | 4.04         |   | 4.10         |   |
| Pro forma (RMB)                                                                                                  |   | 1.81         |   | 4.08         |   | 4.10         |   |
|                                                                                                             |   |         |   |         |   |         |   |
| Basic and  diluted earnings per ADS before extraordinary items and cumulative effective  of accounting change:   |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                               |   | 3.60         |   | 4.04         |   | 4.13         |   |
| Pro forma (RMB)                                                                                                  |   | 3.66         |   | 4.08         |   | 4.13         |   |

 

F - 70

----

 

**(ii) Long-lived assets**

 

On January 1, 2002, theCompany has adopted, under US GAAP, Statements of Financial Accounting Standards No. 144 “Accountingfor the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which supercedes Statements of Financial Accounting Standards No. 121 “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of” and AccountingPrinciples Board Opinion No. 30,“Reporting the Results of Operations, Reporting the Effects of Disposal ofSegment of a Business and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions “.  SFAS 144 retains the previous accounting for the impairmentof long-lived assets to be heldand used in operation as prescribed under SFAS 121, but also establishes more restrictivecriteria that must be met to classify long-lived assets as held-for sale, and differentiates between long-lived assetsthat are disposed of by sale from those disposed of other than by sale. SFAS 144 also increases the range of dispositions that qualify forreporting as discontinued operations, and changes the manner in which expectedfuture operating losses from such operations are to be reported.

 

Under SFAS 144,long-lived assets excluding goodwill are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used is evaluated by 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 the estimated future discounted net cashflows expected to be generated by the asset held for continuous use.  Assets impaired or to be disposed of are reported at the lower of thecarrying amounts or 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 the adoption of SFAS144, no material differences arose in respect of the timing and the amount of impairmentfor equipment for the year ended December 31, 2002 and 2000.  For the year ended December 31, 2001, although the projected amount of futureundiscounted net cash flows was sufficient to recover the net carrying amountof long-lived assets as of December 31, 2001, the amount of future discountednet cash flows was not.  Consequently,for the year ended December 31, 2001, the impairment provision for equipment recognized under US GAAP werelower than that recognized under HK GAAP by RMB12,382,000.

 

F - 71

----

 

**(****G)****       Losses on debtextinguishment and share warrants**

 

Under HK GAAP, the loss onCCF termination is accounted for as an operating loss which reduces the incomefrom continuous operations of the Group. Under US GAAP, the amounts wereclassified as an extraordinary item in accordance with the requirement of SFASStatement No.4.

 

UnderHK GAAP, the Company’ share warrants granted to the CJVs or their designees aspart of the compensation for terminations of CCF Arrangements did not result inan expenses. The proceeds received from share warrants, if any, would berecognized as an increase to capital upon the exercise of the sharewarrants.  Under US GAAP, an additionalcharge to the statement of incomes was recorded to account for the fair valueof the share warrants granted at the completion of the Global Offering.  The fair value of the share warrants of thegrant date, using the Black-Scholes option pricing method, was approximatelyRMB1, 132 million.  The majorassumptions used include: no divided yield, expected volatility of 50%, riskfree interest rate of 6.54% and an expected life of one year.

 

F - 72

----

 

**(H)****       Shareoption scheme**

 

Under HK GAAP, the proceeds received from the exerciseof the share options granted under the fixed award amended Share Option Scheme and Pre-GlobalOffering Share Option Scheme are to berecognized as an increase to capital upon the exercise of the shareoptions as stated in Note 31 of thefinancial statements.

 

Under US GAAP, the Company applies AccountingPrinciples Board Opinion No. 25 (“APB 25”) to account for its fixed award stockoptions issued to employees. Under APB 25, compensation expense is recorded inthe amount of the excess, if any, of the quoted market price of the shares onthe date of grant over the exercise price of the options, which is amortizedover the vesting period of the option. Since the exercise price of the options granted did not exceed the market price of the underlying stock on the date ofgrant, no compensation cost for options has been recognized in the reconciliation of net income to USGAAP. In accordance with SFAS 123, as further amended by Statement of FinancialAccounting Standards, No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure”(“SFAS 148”) which is effective for the yearended December 31, 2002, the required information to be disclosed is set forthbelow:

 
|                                                                                                            |   | **200****0** |   | **200****1** |   | **200****2** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------|--------|--------------|--------|--------------|--------|
| Net income after  extraordinary items and cumulative effective of accounting change:                            |   |         |   |         |   |         |   |
| As reported (RMB’000)                                                                                      |   | 1,958,512    |   | 5,074,321    |   | 5,147,294    |   |
| Less:  Total stock-based employee compensation  expenses determined under fair value based method          |   | (59,649      | )      | (153,479     | )      | (90,288      | )      |
| Pro forma  (RMB’000)                                                                                  |   | 1,898,863    |   | 4,920,842    |   | 5,057,006    |   |
|                                                                                                            |   |         |   |         |   |         |   |
| Basic and diluted  earnings per share after extraordinary items and cumulative effective of  accounting change: |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                              |   | 0.17         |   | 0.40         |   | 0.41         |   |
| Pro forma (RMB)                                                                                                 |   | 0.17         |   | 0.39         |   | 0.40         |   |
|                                                                                                            |   |         |   |         |   |         |   |
| Basic and  diluted earnings per ADS after extraordinary items and cumulative effective  of accounting change:   |   |         |   |         |   |         |   |
| As reported  (RMB)                                                                                              |   | 1.75         |   | 4.04         |   | 4.10         |   |
| Pro forma (RMB)                                                                                                 |   | 1.69         |   | 3.92         |   | 4.03         |   |

 

F - 73

----

 

**(****I)****            Investment in equitysecurities**

 

Under HK GAAP, negotiable equity securities includingownership interest in an enterprise, which are intended to be held on acontinuing basis, are classified as investment securities and are stated atcost.  The carrying amounts ofinvestment securities are written down to reflect any diminution in valueexpected to be other than temporary. Provisions against the carrying value are reversed when thecircumstances and events that led to the write-downs or write-offs cease to existand if there is persuasive evidence that the new circumstances and events willpersist for the foreseeable future.

 

Under US GAAP, equity securities which are notmarketable and do not have readily determinable fair values are classified asother investments, which are stated at cost less impairment in value other thantemporary.  If an impairment in value isjudged to be other than temporary, the cost of the investment is written downto its recoverable amount as a new cost basis and the amount of the write-downis included in the statement of income. The new cost basis is not changed for subsequent recoveries in value.

 

During the year ended December 31, 2002, there was no recovery in the value of investments inequity securities under HK GAAP (2000: Nil; 2001: RMB12,305,000).

 

**(J)****        ****Recently issued accounting standards**

 

TheFinancial Accounting Standards Board (“FSAB”) issued Statement of FinancialAccounting Standards No. 143, Accounting for Assets Retirement Obligations(“SFAS 143”), Statement of Financial Accounting Standards No. 146, Accountingfor Costs Associated With Exit or Disposal Activities (“SFAS 146”), FASBInterpretation No. 45, Guarantor’s Accounting and Disclosure Requirements forGuarantees, including Indirectly Guarantees of Indebtedness of Others (“FIN45”), FASB Interpretation No.46, Consolidation of Variable Interest Entities(“FIN 46”) and Emerging Issues Task Force (“EITF”) Issue 00-21, “Accounting forRevenue Arrangements with Multiple Deliverables” that addresses certain aspectsof a vendor’s accounting for multiple revenue-generating arrangements (“EITFIssue 00-21”).

 

(a)          SFAS 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated assets retirement costs. SFAS 143 is effective forfiscal years beginning after June 15, 2002. The Company has not completed its assessment of the effects of adoptingthis new pronouncement.

 

(b)         SFAS 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force Issue No. 94-3 “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” The Group will adopt SFAS 146 onJanuary 1, 2003 and does not expect a material impact upon adoption.

 

(c)          FIN 45 elaborates on thedisclosures to be made by a guarantor about its obligations under certainguarantees that it has issued.  It alsoclarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The initialrecognition and initial measurement provisions under FIN 45 are applicable prospectively toguarantees issued or modified after December 31, 2002.  The adoption of disclosure requirements thatare effective for the year ended December 31, 2002 did not have a materialeffect on the note disclosures of the consolidated financial statements of theGroup.

 

F - 74

----

 

**(J)****        ****Recently issued accounting standards**

 

(d)         FIN 46 provides guidance on theidentification of and financial reporting for entities over which control isachieved through means other than voting rights.  This Interpretation requires existing unconsolidated variableinterest entities to be consolidated by their primary beneficiaries if theentities do not effectively disperse risks among parties involved. Theinterpretation applies immediately to variable interest entities created afterJanuary 31, 2003, and to variable interests entities in which an enterpriseobtains an interest after that date.  Itapplies in the first fiscal year for interim period beginning after June 15,2003 to variable interests entities in which an enterprise holds a variable interestthat it acquires before February 1, 2003. The Group does not expect that the adoption of FIN 46 will have asignificant impact to the consolidated financial statements.

 

(e)**         **InNovember 2002, the Emerging Issues Task Force reached a final consensus on EITFIssue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”,which addresses certain aspects of a vendor’s accounting for multiplerevenue-generating arrangements”.  ThisIssue addresses when and, if so, how an arrangement involving multipledeliverables should be divided into separate units of accounting.  Factors to consider in this assessmentincludes whether any of the deliverables are independently functional orsufficiently separable, and if so, whether there is any sufficient evidence ofrelated fair values to account for them separately. Related provisions underthis Issue do not change otherwise applicable revenue recognitioncriteria.  This Issue also providesadditional guidance with respect to (i) the effect of certain customer rightsdue to vendor nonperformance on the recognition of revenue allocated todelivered units of accounting; (ii) the impact on the measurement and/orallocation of arrangement consideration of customer cancellation provisions andconsideration that varies as a result of future actions of the customer or thevendor; and (iii), the recognition of the cost of certain deliverables that areexcluded from the revenue accounting for an arrangement.  The provisions of this Issue becomeeffective for fiscal periods beginning after June 15, 2003, with earlyapplication permitted. The Group is currently reviewing the provisions of thisIssue to assess the potential impact on its results of operations and financialposition.

 

F - 75

----

 

Differences between HK GAAP and US GAAP which affectnet income and earnings per shares of the Group are summarized below:

 
|                                                                                                            |                                                                     | **Note** |   | **2000**         |      | **2001**         |   | **2002**         |   |
|-----------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|----------|--------|------------------|-----------|------------------|--------|------------------|--------|
|                                                                                                            |                                                                     |     |   | **RMB’000** |      | **RMB’000** |   | **RMB’000** |   |
|                                                                                                            |                                                                     |     |   |             |      |             |   |             |   |
| Net income under HK GAAP                                                                                        |                                                                     |     |   | 3,234,051        |      | 4,456,761        |   | 4,566,072        |   |
| Impact of US  GAAP adjustments:                                                                                 |                                                                     | (1)      |   |             |      |             |   |             |   |
| - Effect of acquisition of Unicom New  Century                                                                  |                                                                     | (A)      |   | (222,817         | )         | 351,889          |   | 648,006          |   |
| - Transaction costs for the  acquisition of Unicom New Century                                                  |                                                                     | (A)      |   | —           |      | —           |   | (109,221         | )      |
| - Deferral of upfront non-refundable revenue                                                                    |                                                                     | (B)      |   | (1,168,822       | )         | (1,001,637       | )      | (860,490         | )      |
| - Amortization of upfront non-refundable  revenue                                                               |                                                                     | (B)      |   | 252,520          |      | 455,839          |   | 526,982          |   |
| - Deferral of direct incremental cost                                                                           |                                                                     | (B)      |   | 1,071,222        |      | 934,713          |   | 776,387          |   |
| - Amortization of direct incremental cost                                                                       |                                                                     | (B)      |   | (199,497         | )         | (358,867         | )      | (435,385         | )      |
| - Employee housing benefits                                                                                     |                                                                     | (C)      |   | (18,532          | )         | (18,532          | )      | (18,532          | )      |
| - Reversal of depreciation for revalued  fixed assets                                                           |                                                                     | (E)      |   | 12,610           |      | 7,485            |   | 7,485            |   |
| - Reversal of revaluation deficit of fixed  assets                                                              |                                                                     | (E)      |   | 28,000           |      | —           |   | —           |   |
| - Differences in provision for impairment loss of equipment                                                     |                                                                     | (F)      |   | —           |      | 12,382           |   | —           |   |
| - Reversal of difference in provision for impairmentloss of equipment upon depreciation                         |                                                                     | (F)      |   | —           |      | —           |   | (3,538           | )      |
| - Differences in provision for impairment loss of goodwill                                                      |                                                                     | (F)      |   | —           |      | 62,948           |   | —           |   |
| - Non-recognition of recovery of impairment provision of investment  securities and associated companies        |                                                                     | (I)      |   | —           |      | (17,948          | )      | —           |   |
| - Deferred tax effects of US GAAP adjustments                                                                   |                                                                     |     |   | 11,370           |      | 44,190           |   | 59,563           |   |
| - Recognition of deferred tax assets in relation to the loss  carryforward from a subsidiary                    |                                                                     | (D)      |   | 23,582           |      | —           |   | —           |   |
| - Valuation allowance                                                                                           |                                                                     | (D)      |   | (23,582          | )         | —           |   | —           |   |
| - Recognition  of deferred tax assets in relation to provision for doubtful debts of  Cellular Business         |                                                                     | (D)      |   | 90,213           |      | 145,098          |   | 32,140           |   |
| - Additional charge relating to the grant of share warrants for the  termination of CCF Arrangements            |                                                                     | (G)      |   | (1,131,806       | )         | —           |   | —           |   |
| Cumulative effect of accounting change:                                                                         |                                                                     |     |   |             |      |             |   |             |   |
| - Transitional adjustment of goodwill impairmentupon the adoption of SFAS 142 (net of tax  RMB20,773,000)  |                                                                     | (F)      |   | —           |      | —           |   | (42,175          | )      |
|                                                                                                            |                                                                     |     |   |             |      |             |   |             |   |
| Net income as restated after extraordinary item and cumulative  effect of change in accounting policy (US GAAP) |                                                                     | (1)      |   | 1,958,512        |      | 5,074,321        |   | 5,147,294        |   |
|                                                                                                            |                                                                     |     |   |             |      |             |   |             |   |
| Add back:                                                                                                       | Extraordinary item (loss arising from terminations  of CCF Arrangements) |     | (G)    |             |      |             |   |             |   |   |
|                                                                                                            | - cash  compensation                                                     |     |   |             | 1,404,580 |             | — |             | — |   |
|                                                                                                            | - cash  compensation                                                     |     |   |             | 1,131,806 |             | — |             | — |   |
|                                                                                                            | - less: related  tax impact                                              |     |   |             | (463,512  | )                | — |             | — |   |
|                                                                                                            |                                                                     |     |   |             |      |             |   |             |   |
|                                                                                                            |                                                                     |     |   | 2,072,874        |      | —           |   | —           |   |
| Net income as restated from continuing operations before  extraordinary item (US GAAP)                          |                                                                     | (1)      |   | 4,031,386        |      | 5,074,321        |   | 5,147,294        |   |

 

F - 76

----

 

Differences between HK GAAP and US GAAP which affectshareholders’ equity of the Group are summarized below:

 
|                                                                                                       |   | **Note** |   | **2001**         |   | **2002**         |   |
|------------------------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                                                                       |   |     |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                                       |   |     |   |             |   |             |   |
| Shareholders’ equity under HK GAAP                                                                    |   |     |   | 61,681,163       |   | 66,247,235       |   |
|                                                                                                       |   |     |   |             |   |             |   |
| Impact of US GAAP adjustments:                                                                             |   | (1)      |   |             |   |             |   |
| - Effect of acquisition of Unicom New  Century                                                             |   | (A)      |   | 531,557          |   | (2,052,554       | )      |
| - Transaction costs for the  acquisition of Unicom New Century                                             |   | (A)      |   | —           |   | (109,221         | )      |
| - Deferred upfront non-refundable revenue                                                                  |   | (B)      |   | (3,675,556       | )      | (4,536,046       | )      |
| - Accumulated amortization of upfront non  – refundable revenue                                       |   | (B)      |   | 895,544          |   | 1,422,526        |   |
| - Deferred direct incremental cost                                                                         |   | (B)      |   | 2,843,514        |   | 3,619,901        |   |
| - Accumulated amortization of direct incremental  cost                                                     |   | (B)      |   | (581,497         | )      | (1,016,882       | )      |
| - Reversal of revaluation surplus of fixed  assets:                                                        |   |     |   |             |   |             |   |
| - Cost                                                                                                     |   | (E)      |   | (176,853         | )      | (176,853         | )      |
| - Accumulated depreciation                                                                                 |   | (E)      |   | 21,453           |   | 30,296           |   |
| - Reversal of revaluation deficit of fixed  assets:                                                        |   |     |   |             |   |             |   |
| - Cost                                                                                                     |   | (E)      |   | 28,000           |   | 28,000           |   |
| - Accumulated depreciation                                                                                 |   | (E)      |   | (1,358           | )      | (2,716           | )      |
| - Differences in cost and depreciation in provision for impairment  loss of equipment                      |   | (F)      |   | 12,382           |   | 8,844            |   |
| - Differences in provision for impairment loss of goodwill                                                 |   | (F)      |   | 62,948           |   | 62,948           |   |
| - Cumulative effect of accounting change:                                                                  |   |     |   |             |   |             |   |
| - Transitional adjustment of goodwill  impairment on the adoption of SFAS 142                              |   | (F)      |   | —           |   | (62,948          | )      |
| - Non-recognition of recovery of impairment provision of investment  securities and associated companies   |   | (I)      |   | (17,948          | )      | (17,948          | )      |
| - Deferred tax effects of US GAAP  adjustments                                                             |   |     |   | (213,211         | )      | (132,875         | )      |
| - Recognition  of deferred tax assets in relation to the loss carried forward from a  subsidiary           |   | (D), (2) |   | 107,299          |   | 107,299          |   |
| - Valuation  allowance                                                                                     |   | (D), (2) |   | (107,299         | )      | (107,299         | )      |
| - Recognition of deferred tax assets in relation to  the provision for doubtful debts of Cellular Business |   | (D)      |   | 373,159          |   | 405,299          |   |
|                                                                                                       |   |     |   |             |   |             |   |
| Shareholders’ equity as restated (US  GAAP)                                                           |   | (1)      |   | 61,783,297       |   | 63,717,006       |   |

 

----

Note:

 

(1)          Consistent with applying the accountingunder US GAAP as described in Note (a) above, the consolidated financialstatements under US GAAP for prior periods presented have been retroactivelyrestated as if the current structure and operations results from theacquisition of Unicom New Century had been in existence since the beginning ofthe earliest period presented.

 

(2)          A valuation allowancewas recorded against the deferred tax assets in relation to the loss carriedforward from a subsidiary prior to 2001 because it is highly uncertain as towhether sufficient future net income can be generated by the subsidiary toutilize the tax loss within thefive-year carried forward period allowed under tax laws of the PRC at that time. The operating loss carryforward expires in various years through 2003,if not utilized. Starting from 2001, with the approval of the state tax bureau,loss incurred by this subsidiary can be set off against taxable net income ofthe Group.

 

F - 77

----

 

The following summarized thecombining results of operations and the financial positions for the separateentities on a consolidated basis as of and for the years ended December 31,2000, 2001and 2002, restatedto reflect the impact of the effects of the acquisition of entities undercommon control, which is accounted for at historical cost under US GAAP withprior periods restated as if the entities were always combined, and otherdifferences between HK GAAP and US GAAP.

 
|                                            |   | **The Group********(before  acquisition of  Unicom New  Century)** |   | **Unicom New  Century** |   | **Elimination**  |   | **The Group****(after  acquisition of  Unicom New  Century)** |   |
|-------------------------------------------------|--------|--------------------------------------------------------------------|--------|-------------------------|--------|------------------|--------|---------------------------------------------------------------|--------|
|                                            |   | **RMB’000**                                                   |   | **RMB’000**        |   | **RMB’000** |   | **RMB’000**                                              |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| **As of/for the year ended December  31, 2002** |   |                                                               |   |                    |   |             |   |                                                          |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| Results of operations:                          |   |                                                               |   |                    |   |             |   |                                                          |   |
| Operating revenue                               |   | 40,243,016                                                         |   | 11,560,705              |   | (2,031,068       | )      | 49,772,653                                                    |   |
| Net income                                      |   | 4,499,286                                                          |   | 651,326                 |   | (3,318           | )      | 5,147,294                                                     |   |
| Basic earnings per share                        |   | 0.36                                                               |   | —                  |   | —           |   | 0.41                                                          |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| Financial position:                             |   |                                                               |   |                    |   |             |   |                                                          |   |
| Non-current assets                              |   | 93,000,469                                                         |   | 26,152,900              |   | —           |   | 119,153,369                                                   |   |
| Current assets                                  |   | 27,418,354                                                         |   | 4,819,732               |   | (825,599         | )      | 31,412,487                                                    |   |
| Total assets                                    |   | 120,418,823                                                        |   | 30,972,632              |   | (825,599         | )      | 150,565,856                                                   |   |
| Non-current liabilities                         |   | 25,448,161                                                         |   | 16,224,990              |   | —           |   | 41,673,151                                                    |   |
| Current liabilities                             |   | 33,434,846                                                         |   | 11,996,877              |   | (822,281         | )      | 44,609,442                                                    |   |
| Total liabilities                               |   | 58,883,007                                                         |   | 28,221,867              |   | (822,281         | )      | 86,282,593                                                    |   |
| Minority interests                              |   | 566,257                                                            |   | —                  |   | —           |   | 566,257                                                       |   |
| Net assets                                      |   | 60,969,559                                                         |   | 2,750,765               |   | (3,318           | )      | 63,717,006                                                    |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| **As of/for the year ended December  31, 2001** |   |                                                               |   |                    |   |             |   |                                                          |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| Results of operations:                          |   |                                                               |   |                    |   |             |   |                                                          |   |
| Operating revenue                               |   | 28,847,088                                                         |   | 6,755,481               |   | (752,780         | )      | 34,849,789                                                    |   |
| Net income                                      |   | 4,722,432                                                          |   | 351,889                 |   | —           |   | 5,074,321                                                     |   |
| Basic earnings per share                        |   | 0.38                                                               |   | —                  |   | —           |   | 0.40                                                          |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| Financial position:                             |   |                                                               |   |                    |   |             |   |                                                          |   |
| Non-current assets                              |   | 80,297,612                                                         |   | 21,671,682              |   | —           |   | 101,969,294                                                   |   |
| Current assets                                  |   | 49,957,870                                                         |   | 2,938,724               |   | (694,274         | )      | 52,202,320                                                    |   |
| Total assets                                    |   | 130,255,482                                                        |   | 24,610,406              |   | (694,274         | )      | 154,171,614                                                   |   |
| Non-current liabilities                         |   | 39,257,465                                                         |   | 16,017,811              |   | —           |   | 55,275,276                                                    |   |
| Current liabilities                             |   | 28,916,871                                                         |   | 8,061,039               |   | (694,274         | )      | 36,283,636                                                    |   |
| Total liabilities                               |   | 68,174,336                                                         |   | 24,078,850              |   | (694,274         | )      | 91,558,912                                                    |   |
| Minority interests                              |   | 829,405                                                            |   | —                  |   | —           |   | 829,405                                                       |   |
| Net assets                                      |   | 61,251,741                                                         |   | 531,556                 |   | —           |   | 61,783,297                                                    |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| **For the year ended December 31,  2000**       |   |                                                               |   |                    |   |             |   |                                                          |   |
|                                            |   |                                                               |   |                    |   |             |   |                                                          |   |
| Results of operations:                          |   |                                                               |   |                    |   |             |   |                                                          |   |
| Operating revenue                               |   | 22,776,156                                                         |   | 2,831,151               |   | (525,161         | )      | 25,082,146                                                    |   |
| Net income                                      |   | 2,181,329                                                          |   | (222,817                | )      | —           |   | 1,958,512                                                     |   |
| Basic earnings per share                        |   | 0.19                                                               |   | —                  |   | —           |   | 0.17                                                          |   |

 

F - 78

----

 

The following are condensedconsolidated statements of income, changes in shareholders’ equity and cashflow information for the years ended 2000, 2001 and 2002, condensedconsolidated balance sheets information for the Group as of December 31, 2001and 2002, and additional financial information as of and for the years endedDecember 31, 2000, 2001 and 2002, restated to reflect the impact of the effectsof the acquisition of entities under common control which is accounted for athistorical cost with retroactive restatement under US GAAP.

 

***CondensedConsolidated Statement of income***

 
|                                                                                       |   | **Note** |   | **2000**         |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                                       |   |     |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Revenue                                                                                    |   | (g)      |   | 25,082,146       |   | 34,849,789       |   | 49,772,653       |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Operating expenses:                                                                        |   |     |   |             |   |             |   |             |   |
| Leased lines and network capacities                                                        |   | (g)      |   | (1,264,306       | )      | (989,907         | )      | (2,020,833       | )      |
| Interconnection charges                                                                    |   | (g)      |   | (1,556,136       | )      | (2,407,600       | )      | (3,754,488       | )      |
| Depreciation and amortization                                                              |   |     |   | (6,691,028       | )      | (10,164,107      | )      | (14,226,042      | )      |
| Personnel                                                                                  |   |     |   | (1,933,593       | )      | (2,932,452       | )      | (4,024,943       | )      |
| Selling and marketing                                                                      |   | (g)      |   | (1,781,216       | )      | (3,968,518       | )      | (7,651,935       | )      |
| General, administrative and other expenses                                                 |   | (g)      |   | (4,185,637       | )      | (6,418,198       | )      | (7,196,421       | )      |
| Cost of telecommunications products sold                                                   |   | (g)      |   | (2,340,434       | )      | (1,377,616       | )      | (2,158,009       | )      |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Total operating expenses                                                                   |   |     |   | (19,752,350      | )      | (28,258,398      | )      | (41,032,671      | )      |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Operating income                                                                           |   |     |   | 5,329,796        |   | 6,591,391        |   | 8,739,982        |   |
| Interest income                                                                            |   |     |   | 1,756,403        |   | 2,114,462        |   | 486,755          |   |
| Financial costs                                                                            |   |     |   | (1,563,600       | )      | (2,543,888       | )      | (2,329,104       | )      |
| Other income (expenses), net                                                               |   |     |   | 61,522           |   | (2,008           | )      | (21,193          | )      |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Net income from continuing operations before taxation                                      |   |     |   | 5,584,121        |   | 6,159,957        |   | 6,876,440        |   |
| Taxation                                                                                   |   | (c)      |   | (1,409,024       | )      | (1,120,946       | )      | (1,702,223       | )      |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Net income from continuing operations before minority interests                            |   |     |   | 4,175,097        |   | 5,039,011        |   | 5,174,217        |   |
| Minority interests                                                                         |   |     |   | (143,711         | )      | 35,310           |   | 15,252           |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Net income before extraordinary item and cumulative effect of change  in accounting policy |   |     |   | 4,031,386        |   | 5,074,321        |   | 5,189,469        |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Extraordinary item (loss arising from terminations of CCF  Arrangements):                  |   |     |   |             |   |             |   |             |   |
| - cash compensation                                                                        |   |     |   | (1,404,580       | )      | —           |   | —           |   |
| - share warrants compensation                                                              |   |     |   | (1,131,806       | )      | —           |   | —           |   |
| - Less: related tax impact                                                                 |   |     |   | 463,512          |   | —           |   | —           |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
|                                                                                       |   |     |   | (2,072,874       | )      | —           |   | —           |   |
| Cumulative effect of accounting change:                                                    |   |     |   |             |   |             |   |             |   |
| - Transitional adjustment of goodwillimpairment upon the adoption of SFAS  142        |   |     |   | —           |   | —           |   | (62,948          | )      |
| - Less: related tax impact                                                                 |   | (c)      |   | —           |   | —           |   | 20,773           |   |
|                                                                                       |   |     |   |             |   |             |   |             |   |
|                                                                                       |   |     |   | —           |   | —           |   | (42,175          | )      |
|                                                                                       |   |     |   |             |   |             |   |             |   |
| Net income                                                                                 |   |     |   | 1,958,512        |   | 5,074,321        |   | 5,147,294        |   |

 

F - 79

----

 
|                                                                                                                        |   | **Note** |   | **2000** |   | **2001** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Basic and diluted earnings per share  after extraordinary item and cumulative effect of change in accounting policy  (RMB)  |   | (1), (2) |   | 0.17     |   | 0.40     |   | 0.41     |   |
|                                                                                                                        |   |     |   |     |   |     |   |     |   |
| Basic and diluted earnings per ADS  after extraordinary item and cumulative effect of change in accounting policy  (RMB)    |   | (3)      |   | 1.75     |   | 4.04     |   | 4.10     |   |
|                                                                                                                        |   |     |   |     |   |     |   |     |   |
| Basic and diluted earnings per share  before extraordinary item and cumulative effect of change in accounting  policy (RMB) |   | (1), (2) |   | 0.36     |   | 0.40     |   | 0.41     |   |
|                                                                                                                        |   |     |   |     |   |     |   |     |   |
| Basic and diluted earnings per ADS  before extraordinary item and cumulative effect of change in accounting  policy (RMB)   |   | (3)      |   | 3.60     |   | 4.04     |   | 4.13     |   |

 

----

Note:

 

(1)          Basic earnings per sharebefore or after extraordinary item and cumulative effect of change in accountingpolicy for the years ended December 31, 2000, 2001 and 2002 were computed by dividing the netincome before or after extraordinary item and cumulative effect of change in accountingpolicy for the financial years under US GAAP by the weighted averagenumber of ordinary shares in issue during the years.

 

(2)          Diluted earnings pershare before or after extraordinary item and cumulative effect of change in accountingpolicy for the years ended December 31, 2000, 2001 and 2002 were computed by dividing the netincome before or after extraordinary item and cumulative effect of change in accountingpolicy for the financial years under US GAAP by the weighted averagenumber of ordinary shares in issue during the years, after adjusting for theeffects of the dilutive potential ordinary shares.  All potential dilutiveshares arose from (i) share options granted under the amended Pre-GlobalOffering Share Option Scheme (see Note 31); (ii) share options granted underthe amended Share Option Scheme (see Note 31), (iii) share warrants asdescribed in Note 11 in 2000 and (iv) the over-allotment option granted to theunderwriters, which if converted to ordinary shares would decrease net earningsper share in 2000.

 

(3)          Basic and dilutedearnings per ADS before or after extraordinary item and cumulative effect ofchange in accounting policy have been computed by multiplying the earnings pershare by 10, which is the number of shares represented by each ADS.

 

F- 80

----

 

***CondensedConsolidated Balance Sheet***

 
|                                                |   | **Note** |   | **2001**         |   | **2002**         |   |
|-----------------------------------------------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                                |   |     |   | **RMB’000** |   | **RMB’000** |   |
| **ASSETS**                                          |   |     |   |             |   |             |   |
| **Current  assets:**                                |   |     |   |             |   |             |   |
| Cash and cash equivalents                           |   |     |   | 19,308,730       |   | 14,433,498       |   |
| Short-term bank deposits                            |   |     |   | 24,921,943       |   | 4,825,205        |   |
| Trading securities                                  |   |     |   | 203,832          |   | 173,939          |   |
| Account receivable                                  |   |     |   | 4,227,286        |   | 6,061,240        |   |
| Less:  Provision for doubtful  debts           |   |     |   | (1,271,974       | )      | (1,733,972       | )      |
| Accounts receivable, net                            |   |     |   | 2,955,312        |   | 4,327,268        |   |
| Inventories                                         |   |     |   | 969,998          |   | 3,226,586        |   |
| Prepayments and other current assets                |   | (d)      |   | 1,148,706        |   | 2,573,764        |   |
| Amounts due from domestic carriers                  |   |     |   | 208,096          |   | 211,462          |   |
| Amounts due from related parties                    |   |     |   | 1,725,516        |   | 1,137,847        |   |
| Current portion of deferred tax assets              |   | (c)      |   | 760,187          |   | 502,918          |   |
|                                                |   |     |   |             |   |             |   |
| Total current assets                                |   |     |   | 52,202,320       |   | 31,412,487       |   |
|                                                |   |     |   |             |   |             |   |
| **Non-current  assets:**                            |   |     |   |             |   |             |   |
| Property, plant and equipment, net                  |   | (a)      |   | 96,220,234       |   | 107,310,593      |   |
| Goodwill                                            |   |     |   | 106,235          |   | 1,022            |   |
| Other assets                                        |   | (b)      |   | 4,296,541        |   | 10,561,980       |   |
| Deferred tax assets                                 |   | (c)      |   | 1,236,586        |   | 1,188,262        |   |
| Investment securities                               |   |     |   | 108,771          |   | 90,917           |   |
| Investment in associated companies                  |   |     |   | 927              |   | 595              |   |
|                                                |   |     |   |             |   |             |   |
| **Total  assets:**                                  |   |     |   | 154,171,614      |   | 150,565,865      |   |
|                                                |   |     |   |             |   |             |   |
| **LIABILITIES  AND EQUITY**                         |   |     |   |             |   |             |   |
| **Current  liabilities:**                           |   |     |   |             |   |             |   |
| Payables and accrued liabilities                    |   | (e)      |   | 18,241,905       |   | 19,811,961       |   |
| Short-term loans from Unicom Group                  |   |     |   | 1,799,395        |   | 724,127          |   |
| Short-term bank loans                               |   |     |   | 7,290,000        |   | 9,146,500        |   |
| Advances from customers                             |   |     |   | 3,364,913        |   | 6,240,225        |   |
| Taxes payable                                       |   |     |   | 1,443,917        |   | 1,106,006        |   |
| Current portion of long-term bank loans             |   | (f)      |   | 1,925,870        |   | 5,459,505        |   |
| Current portion of obligations under finance leases |   |     |   | 8,151            |   | 16,793           |   |
| Amounts due to Unicom Group                         |   |     |   | 1,227,379        |   | 562,634          |   |
| Amounts due to domestic carriers                    |   |     |   | 816,535          |   | 1,123,580        |   |
| Amounts due to related parties                      |   |     |   | 135,724          |   | 409,663          |   |
| Dividend payable                                    |   |     |   | 29,847           |   | 8,448            |   |
|                                                |   |     |   |             |   |             |   |
| Total current liabilities                           |   |     |   | 36,283,636       |   | 44,609,442       |   |
|                                                |   |     |   |             |   |             |   |
| **Non-current  liabilities:**                       |   |     |   |             |   |             |   |
| Long-term bank loans                                |   | (f)      |   | 51,732,626       |   | 37,686,162       |   |
| Obligations under finance leases                    |   |     |   | 100,757          |   | 101,302          |   |
| Deferred revenue                                    |   |     |   | 3,401,965        |   | 3,873,179        |   |
| Other long-term liabilities                         |   |     |   | 39,928           |   | 12,508           |   |
|                                                |   |     |   |             |   |             |   |
| Total non-current liabilities                       |   |     |   | 55,275,276       |   | 41,673,151       |   |
|                                                |   |     |   |             |   |             |   |
| **Minority interests**                              |   |     |   | 829,405          |   | 566,257          |   |
|                                                |   |     |   |             |   |             |   |
| **Shareholders’  equity**                      |   |     |   | 61,783,297       |   | 63,717,006       |   |
|                                                |   |     |   |             |   |             |   |
| **Total liabilities and shareholders’ equity** |   |     |   | 154,171,614      |   | 150,565,856      |   |

 

F - 81

----

 

***CondensedConsolidated Statement of Changes In Shareholders’ Equity***

 
|                                                                                                             |   | **RMB’000** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                             |   |             |   |
| Balance as of January 1, 2000 as previously reported before adjusting  for the acquisition of Unicom New Century |   | 7,903,957        |   |
| Adjustment for the acquisition of Unicom New Century                                                             |   | (195,594         | )      |
| Balance as of January  1, 2000 as adjusted for the acquisition of Unicom New Century                             |   | 7,708,363        |   |
| Net income for  the year ended December 31, 2000                                                                 |   | 1,958,512        |   |
| Issue of  ordinary share, net of direct listing expenses                                                         |   | 45,275,152       |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Deemed capital  contribution from owner for share warrants compensation of CCF loss                              |   | 1,131,806        |   |
| Contribution  from owner                                                                                         |   | 666,827          |   |
| Balance as of December  31, 2000                                                                                 |   | 56,759,192       |   |
| Net income for  the year ended December 31, 2001                                                                 |   | 5,074,321        |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Distribution to  owner                                                                                           |   | (68,748          | )      |
| Balance as of December  31, 2001                                                                                 |   | 61,783,297       |   |
| Net income for  the year ended December 31, 2002                                                                 |   | 5,147,294        |   |
| Deemed capital  contribution from owner for employee housing benefits                                            |   | 18,532           |   |
| Contribution  from owner                                                                                         |   | 1,567,883        |   |
| Deemed capital  distribution to Unicom Group relating to the payment of purchase price for  Unicom New Century   |   | (4,800,000       | )      |
|                                                                                                             |   |             |   |
| Balance as of December  31, 2002                                                                                 |   | 63,717,006       |   |

 

F - 82

----

 

***CondensedConsolidated Statement of******Cash******Flows***

 
|                                                   |   | **200****0**     |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                   |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| Net cash inflows (outflows) from:                      |   |             |   |             |   |             |   |
| Operating  activities                                  |   | 10,133,104       |   | 14,630,215       |   | 16,962,185       |   |
| Investing  activities                                  |   | (37,884,485      | )      | (58,134,015      | )      | (7,252,758       | )      |
| Financing  activities                                  |   | 67,090,345       |   | 16,989,059       |   | (14,584,659      | )      |
|                                                   |   |             |   |             |   |             |   |
| Net increase  (decrease) in cash  and cash equivalents |   | 39,338,964       |   | (26,514,741      | )      | (4,875,232       | )      |
| Cash and cash  equivalents, beginning of year          |   | 6,484,507        |   | 45,823,471       |   | 19,308,730       |   |
|                                                   |   |             |   |             |   |             |   |
| Cash and cash  equivalents, end of year                |   | 45,823,471       |   | 19,308,730       |   | 14,433,498       |   |
|                                                   |   |             |   |             |   |             |   |
| Interest paid  (net of amount capitalized)             |   | (1,264,133       | )      | (2,519,279       | )      | (2,254,457       | )      |

 

**Supplemental information**

 

Payables toequipment suppliers for construction-in-progress during the year ended December31, 2002 decreased by approximatelyRMB1,337 million (2000:increased by RMB5,776 million; 2001: increased by approximately RMB1,235million).

 

***(a) Property, Plant and Equipment,net***

** **
|                                   |   | **2001**         |   | **2002**         |   |
|----------------------------------------|--------|------------------|--------|------------------|--------|
|                                   |   | **RMB’000** |   | **RMB’000** |   |
|                                   |   |             |   |             |   |
| Buildings                              |   | 6,594,037        |   | 10,131,067       |   |
| Telecommunication  equipment           |   | 85,359,000       |   | 108,615,822      |   |
| Office  furniture, fixtures and others |   | 3,132,238        |   | 4,855,373        |   |
| Leasehold  improvements                |   | 821,082          |   | 1,069,153        |   |
| Construction-in-progress               |   | 23,843,437       |   | 19,419,349       |   |
|                                   |   |             |   |             |   |
|                                   |   | 119,749,794      |   | 144,090,764      |   |
| Less:  Accumulated depreciation        |   | (23,529,560      | )      | (36,780,171      | )      |
|                                   |   |             |   |             |   |
|                                   |   | 96,220,234       |   | 107,310,593      |   |

 

F - 83

----

 

***(b) Other Assets***

*** ***
|                                                                         |   | **2001**         |       | **2002**         |       |
|------------------------------------------------------------------------------|--------|------------------|------------|------------------|------------|
|                                                                         |   | **RMB’000** |       | **RMB’000** |       |
|                                                                         |   |             | ** ** |             | ** ** |
| Interconnection  facilities                                                  |   | 542,007          |       | 568,099          |       |
| Long-term  prepaid rental and leased line                                    |   | 1,458,657        |       | 1,753,709        |       |
| Deferred direct incremental costs                                            |   | 3,556,470        |       | 4,606,300        |       |
| Other                                                                        |   | 390,346          |       | 869,558          |       |
|                                                                         |   |             |       |             |       |
|                                                                         |   | 5,947,480        |       | 7,797,666        |       |
| Less:  Accumulated amortization                                              |   | (1,650,939       | )          | (2,709,850       | )          |
|                                                                         |   |             |       |             |       |
|                                                                         |   | 4,296,541        |       | 5,087,816        |       |
| Deferred  customer acquisition costs of certain contractual CDMA subscribers |   | —           |       | 5,474,164        |       |
|                                                                         |   | 4,296,541        |       | 10,561,980       |       |

 

***(c)******Taxation***

 

Detaildescription in relation to the assessment basis of income tax liabilityof the Group were set forth in Note 10 of this financial statements.

 

The income tax liability of Unicom New Century wasassessed as follows:

 

(a)          For 2000, 2001 and 2002,Unicom Group was assessed for PRC enterprise income tax liability under therelevant tax rules and regulations applicable to state-owned enterprises, andat the statutory rate of 33% on a consolidation basis as a single entity. Thetax provision for Unicom New Century was determined on a separate return basisusing the same tax policy applicable to Unicom Group. Under this basis, the taxliabilities attributable to Unicom New Century were determined as if it wereassessed for income tax separately from Unicom Group; and

 

(b)         Various provincial branchesof Unicom New Century including Sichuan, Chongqing, Xinjiang, Shannxi andGuangxi were granted a western region preferential treatment by tax authoritiesto assess their enterprise income tax at a tax rate of 15% for year 2002 (2000and 2001: 33%). The remaining provincial branches were assessed at a tax rateof 33%.

 

The components of income tax are as follows:

 
|                                                                                            |   | **2001**         |   | **2002**         |   |
|-------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                            |   | **RMB’000** |   | **RMB’000** |   |
|                                                                                            |   |             |   |             |   |
| Provision for  PRC enterprise income tax based on the estimated taxable net income for the year |   | 1,971,691        |   | 1,375,857        |   |
| Deferred  taxation                                                                              |   | (850,745         | )      | 326,366          |   |
|                                                                                            |   |             |   |             |   |
|                                                                                            |   | 1,120,946        |   | 1,702,223        |   |

 

F - 84

----

 

The reconciliation of PRC enterprise income tax at thestatutory tax rate of 33% applied to net income before taxation to theeffective tax rate actually recorded in the statement of income is as follows:

 
|                                                |   | **2000** |       | **2001** |       | **2002** |       |
|-----------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **PRC**                                             |   |     | ** ** |     | ** ** |     | ** ** |
|                                                |   |     | ** ** |     | ** ** |     | ** ** |
| Statutory tax  rate of 33%                          |   | 33.0     | %          | 33.0     | %          | 33.0     | %          |
| Non-deductible  expenses:                           |   |     |       |     |       |     |       |
| - Housing benefits                                  |   | 0.1      |       | 1.7      |       | 0.1      |       |
| - Personnel  expenses                               |   | 2.9      |       | 2.2      |       | 0.7      |       |
| - Selling and  marketing expenses                   |   | 2.0      |       | 0.1      |       | 0.1      |       |
| - Other                                             |   | 0.6      |       | —   |       | —   |       |
| Non-taxable  income:                                |   |     |       |     |       |     |       |
| - Connection  fees                                  |   | (2.7     | )          | —   |       | —   |       |
| Effect of  preferential tax rates                   |   | (1.3     | )          | (2.0     | )          | (3.1     | )          |
| Investment tax  credits for domestic equipment      |   | —   |       | (0.8     | )          | (4.5     | )          |
| Additional  depreciation deductible for tax purpose |   | —   |       | (7.4     | )          | (1.1     | )          |
|                                                |   |     |       |     |       |     |       |
| **Effective****PRC income tax rate**                |   | 35.2     | %          | 26.8     | %          | 25.2     | %          |
|                                                |   |     |       |     |       |     |       |
| **Effective****HK income tax rate**                 |   | —   |       | —   |       | —   |       |
|                                                |   |     |       |     |       |     |       |
| **Total overall  effective income tax rate**        |   | 25.2     | %          | 18.2     | %          | 24.7     | %          |

 

Effect of preferential tax rates is as follows:

 
|                                |   | **2000** |   | **2001** |   | **200****2** |   |
|-------------------------------------|--------|----------|--------|----------|--------|--------------|--------|
|                                |   |     |   |     |   |         |   |
| Aggregate amount  (RMB in millions) |   | 53.3     |   | 83.6     |   | 209.3        |   |
| Per share effect  (RMB)             |   | 0.004    |   | 0.007    |   | 0.017        |   |

 

The movement of deferred tax assets is as follows:

 
|                                                                                              |   | **2001**         |       | **2002**         |       |
|---------------------------------------------------------------------------------------------------|--------|------------------|------------|------------------|------------|
|                                                                                              |   | **RMB’000** |       | **RMB’000** |       |
|                                                                                              |   |             | ** ** |             | ** ** |
| Balance,  beginning of year                                                                       |   | 1,146,028        |       | 1,996,773        |       |
| Deferred  taxation charged to net income before cumulative effect of change of  accounting policy |   | 850,745          |       | (326,366         | )          |
| Deferred  taxation in relating to cumulative effect of change of accounting policy                |   | —           |       | 20,773           |       |
|                                                                                              |   |             |       |             |       |
| Balance,  end of year                                                                             |   | 1,996,773        |       | 1,691,180        |       |

 

F - 85

----

 

Deferred taxation represents the taxation effect ofthe following temporary differences:

 
|                                                                                       |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                                       |   | **RMB’000** |   | **RMB’000** |   |
| Non-current  deferred tax assets:                                                          |   |             |   |             |   |
| Net  of deferral and amortization of upfront non-refundable revenue and  incremental costs |   | 696,371          |   | 930,033          |   |
| Interest  on loans from CCF joint ventures                                                 |   | 317,447          |   | 287,998          |   |
| Loss  arising from terminations of CCF Arrangements                                        |   | 401,845          |   | 309,813          |   |
| Operating  loss of a subsidiary prior to 2001(Note 1)                                      |   | 107,299          |   | 107,299          |   |
| Provision  for impairment loss of property, plant and equipment                            |   | 150,556          |   | 110,075          |   |
| Provision  for impairment loss of goodwill                                                 |   | 33,314           |   | 27,620           |   |
| Provision  for doubtful debts                                                              |   | 515,340          |   | 547,289          |   |
| Write-off  of other assets                                                                 |   | 24,368           |   | 17,662           |   |
| Amortization  of retirement benefits                                                       |   | 39,852           |   | 37,379           |   |
| Additional  depreciation deductible for  tax purpose                                       |   | 232,291          |   | 171,091          |   |
| Differences  in tax basis of the residual value of the property, plant and equipment       |   | —           |   | 19,634           |   |
| Other                                                                                      |   | 45,777           |   | 86,953           |   |
|                                                                                       |   |             |   |             |   |
|                                                                                       |   | 2,564,460        |   | 2,652,846        |   |
| Less: Valuation allowance                                                                  |   | (107,299         | )      | (107,299         | )      |
|                                                                                       |   |             |   |             |   |
|                                                                                       |   | 2,457,161        |   | 2,545,547        |   |
| Non-current  deferred tax liabilities:                                                     |   |             |   |             |   |
| Net  of deferral and amortization of upfront non-refundable revenue and  incremental costs |   | (923,427         | )      | (1,079,960       | )      |
| Accelerated  depreciation for tax purpose                                                  |   | (161,924         | )      | (76,468          | )      |
| Capitalized  interest already deducted for tax purposes                                    |   | (135,224         | )      | (200,857         | )      |
|                                                                                       |   |             |   |             |   |
|                                                                                       |   | (1,220,575       | )      | (1,357,285       | )      |
|                                                                                       |   |             |   |             |   |
| Net non-current  deferred tax assets                                                       |   | 1,236,586        |   | 1,188,262        |   |
|                                                                                       |   |             |   |             |   |
| Current  portion of deferred tax assets                                                    |   |             |   |             |   |
| Income  tax on advances from customers for telephone cards                                 |   | 720,043          |   | 471,657          |   |
| Write-down  of inventory to net realizable value                                           |   | 35,819           |   | 31,261           |   |
| Other                                                                                      |   | 4,325            |   | —           |   |
|                                                                                       |   |             |   |             |   |
|                                                                                       |   | 760,187          |   | 502,918          |   |
|                                                                                       |   |             |   |             |   |
| Total                                                                                      |   | 1,996,773        |   | 1,691,180        |   |

 

----

Note (1): Refer to Note 2of net income reconciliation table.

 

F- 86

----

 

***(d) Prepayment and Other Current Assets***

*** ***
|                                                                 |   | **2001**         |   | **2002**         |   |
|----------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                                                 |   | **RMB’000** |   | **RMB’000** |   |
|                                                                 |   |             |   |             |   |
| Deposits and  prepayments                                            |   | 748,233          |   | 1,069,939        |   |
| Interest  receivables                                                |   | 167,004          |   | 37,780           |   |
| Advances to  employees                                               |   | 96,526           |   | 106,749          |   |
| Deferred  customer acquisition costs of contractual CDMA subscribers |   | —           |   | 508,596          |   |
| Others                                                               |   | 136,943          |   | 850,700          |   |
|                                                                 |   |             |   |             |   |
|                                                                 |   | 1,148,706        |   | 2,573,764        |   |

 

***(e) Payables and Accrued Liabilities***

 
|                                               |   | **2001**         |   | **2002**         |   |
|----------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                               |   | **RMB’000** |   | **RMB’000** |   |
|                                               |   |             |   |             |   |
| Payables to  contractors and equipment suppliers   |   | 15,627,669       |   | 13,703,912       |   |
| Accrued expenses                                   |   | 815,734          |   | 1,139,645        |   |
| Payables to  telecommunications products suppliers |   | 125,801          |   | 2,395,928        |   |
| Customer  deposits                                 |   | 283,961          |   | 784,156          |   |
| Salary and  welfare payables                       |   | 638,822          |   | 775,668          |   |
| Other                                              |   | 749,918          |   | 1,012,652        |   |
|                                               |   |             |   |             |   |
|                                               |   | 18,241,905       |   | 19,811,961       |   |

 

F - 87

----

 

***(f) Long-term Bank Loans***

*** ***
|                             |   | **Interest  rate and final maturity**                                                                                                      |   | **2001**         |   | **2002**         |   |
|----------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|
|                             |   |                                                                                                                                       |   | **RMB’000** |   | **RMB’000** |   |
|                             |   |                                                                                                                                       |   |             |   |             |   |
| Renminbi  denominated bank loans |   | Fixed interest rate ranging from 4.54% to 6.24% (2001: 5.46% to 7.65%)  per annum with maturity through 2008 (2001: maturity through 2007) |   |             |   |             |   |
| - secured                        |   |                                                                                                                                       |   | 25,443,751       |   | 24,627,646       |   |
| - unsecured                      |   |                                                                                                                                       |   | 28,214,745       |   | 18,518,021       |   |
|                             |   |                                                                                                                                       |   |             |   |             |   |
|                             |   |                                                                                                                                       |   | 53,658,496       |   | 43,145,667       |   |
| Less: Current portion            |   |                                                                                                                                       |   | (1,925,870       | )      | (5,459,505       | )      |
|                             |   |                                                                                                                                       |   |             |   |             |   |
|                             |   |                                                                                                                                       |   | 51,732,626       |   | 37,686,162       |   |

 

The repayment schedule of the long-term bank loans was as follows:

 
|                                             |   | **2001**         |   | **2002**         |   |
|--------------------------------------------------|--------|------------------|--------|------------------|--------|
|                                             |   | **RMB’000** |   | **RMB’000** |   |
| Balances due:                                    |   |             |   |             |   |
| - 2002                                           |   | 1,925,870        |   | —           |   |
| - 2003                                           |   | 12,190,111       |   | 5,459,505        |   |
| - 2004                                           |   | 10,436,529       |   | 4,825,581        |   |
| - 2005                                           |   | 20,327,681       |   | 22,039,439       |   |
| - 2006                                           |   | 5,444,834        |   | 8,047,373        |   |
| - 2007                                           |   | 1,550,000        |   | 2,494,410        |   |
| -Thereafter                                      |   | 1,783,471        |   | 279,359          |   |
|                                             |   |             |   |             |   |
|                                             |   | 53,658,496       |   | 43,145,667       |   |
| Less: Portion  classified as current liabilities |   | (1,925,870       | )      | (5,459,505       | )      |
|                                             |   |             |   |             |   |
|                                             |   | 51,732,626       |   | 37,686,162       |   |

 

As of December 31, 2002, long-term bank loans weresecured by the following:

 

(i)             approximatelyRMB24,308 million (2001: RMB25,044 million) of long-term bankloans were secured by the future service fee revenue to be generated by thecellular operations of the relevant branches and RMB3,471million (2001: RMB850 million) of which was also guaranteed by Unicom Group;and

 

(ii)          approximately RMB9,164 million (2001:RMB9,073 million) of long-term bank loans were guaranteed by Unicom Group.

 

F- 88

----

 

***(g) Related Party Transactions***

* *
|                                                                      |   | **2000**         |   | **2001**         |   | **2002**         |   |
|---------------------------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                                                                      |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
| **Transactions  with Unicom Group and its subsidiaries**                  |   |             |   |             |   |             |   |
| Interconnection and roaming revenues                                      |   | 104,557          |   | 363,644          |   | 604,830          |   |
| Interconnection and roaming charges                                       |   | 65,076           |   | 224,077          |   | 175,436          |   |
| Rental charges for premises, equipment and facilities                     |   | 26,663           |   | 24,963           |   | 25,035           |   |
| Rental income for premises and facilities                                 |   | —           |   | —           |   | 3,434            |   |
| Revenue for leasing of transmission line capacity                         |   | 89,952           |   | 107,299          |   | 281,685          |   |
| Commission revenue for sales agency services                              |   | 259,981          |   | 14,560           |   | —           |   |
| Sale of CDMA mobile handsets                                              |   | —           |   | —           |   | 887,885          |   |
| Charges for the international gateway services                            |   | —           |   | —           |   | 15,626           |   |
| Leasing of satellite transmission capacity                                |   | 62,394           |   | 61,778           |   | 35,153           |   |
| Purchase of telecom cards                                                 |   | 607,064          |   | 1,640,228        |   | 1,234,479        |   |
| CDMA network capacity lease rental                                        |   | —           |   | —           |   | 1,173,897        |   |
| Commission expenses for sales agency services incurred for telecom  cards |   | 5,033            |   | 2,616            |   | 18,497           |   |
| Rental charges for leasing of transmission line                           |   | —           |   | 16,882           |   | —           |   |
| Agency fee incurred for procurement of telecommunications equipment       |   | 67,572           |   | 143,881          |   | 17,087           |   |
| Rental for the PRC corporate office                                       |   | 10,131           |   | 10,131           |   | 7,598            |   |
| Sales of telecommunications equipment                                     |   | —           |   | —           |   | 16,088           |   |

 

Detaildescription of the nature and terms of the related party transactions are setforth in Note 33 of this financial statements.

 

F - 89

----

 

**Movement of significant provisions**

 

(a)Provision for deferred taxation valuation allowance was analyzed as follows:

 
|                        |   | **2000**         |   | **2001**         |   | **2002**         |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                        |   |             |   |             |   |             |   |
| Balance, beginning of  year |   | 83,717           |   | 107,299          |   | 107,299          |   |
| Provision for the year      |   | 23,582           |   | —           |   | —           |   |
|                        |   |             |   |             |   |             |   |
| Balance, end of year        |   | 107,299          |   | 107,299          |   | 107,299          |   |

 

(b)Provision for doubtful debts was analyzed as follows:

 
|                       |   | **2000**         |   | **2001**         |   | **2002**         |   |
|----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                       |   | **RMB’000** |   | **RMB’000** |   | **RMB’000** |   |
|                       |   |             |   |             |   |             |   |
| Balance, beginning of year |   | 481,499          |   | 862,982          |   | 1,271,974        |   |
| Provision for the year     |   | 593,270          |   | 675,784          |   | 1,258,287        |   |
| Written-off for the year   |   | (211,787         | )      | (266,792         | )      | (796,289         | )      |
|                       |   |             |   |             |   |             |   |
| Balance, end of year       |   | 862,982          |   | 1,271,974        |   | 1,733,972        |   |

 

(c)          Other than described in the above notes, therewas no other significant movement of provisions for the years ended December31, 2000, 2001 and 2002, except for the provisions for impairment loss ofequipment amounting to approximately RMB457 million and provisions forimpairment loss of goodwill amounting to approximately RMB101 million under USGAAP in 2001.

 

**Comprehensive Statement of income**

 

According to SFAS No. 130 “Reportingof Comprehensive Income”, certain items shown as components of commonequity must be more prominently reported in a separate statement as componentsof comprehensive income. Forthe years ended December 31,2000, 2001 and 2002, apart fromthe net income and revaluation surplus of land and buildings in 2000, there wasno other comprehensive income which should be included in the statement ofcomprehensive income.

 

F - 90

----

 

**Share option scheme**

 

As disclosed in Note 31, informationrelating to the shareoptions outstanding under the amended Pre-Global Offering Share Option Scheme and Share Option Scheme as ofDecember 31, 2000, 2001 and 2002 is as follows:

 
|                           |   | **2000**                 |   | **2001**                                         |   | **2002**                 |   |
|--------------------------------|--------|--------------------------|--------|--------------------------------------------------|--------|--------------------------|--------|
|                           |   | **Options  outstanding** |   | **Weighted  average********e****xercise  price** |   | **Options  outstanding** |   | **Weighted  average********e****xercise  price** |   | **Options  outstanding** |   | **Weighted  average********e****xercise  price** |   |
|                           |   |                     |   | **HK$**                                          |   |                     |   | **HK$** |   |   |   | **HK$** |   |
|                           |   |                     |   |                                             |   |                     |   |   |   |   |   |   |   |
| Outstanding, beginning of year |   | —                   |   | —                                           |   | 27,116,600               |   | 15.42 |   | 33,840,600 |   | 15.42 |   |
| Granted during the year        |   | 27,116,600               |   | 15.42                                            |   | 6,724,000                |   | 15.42 |   | 36,028,000 |   | 6.18 |   |
| Outstanding, end of year       |   | 27,116,600               |   | 15.42                                            |   | 33,840,600               |   | 15.42 |   | 69,868,600 |   | 10.66 |   |

 

As of December 31, 2002:33,840,600 share options (2000: Nil; 2001: 6,724,000 share options) wereexercisable and the weighted average exercise price was HK$15.42 (2000: N/A;2001: HK$15.42).  Also, asof December 31, 2002, weighted average remaining contractual lifeof the options outstanding was approximately 6.5 years (2000: 8.5 years; 2001: 9.5 years).

 

The SFAS No. 123 method of accounting is based on several assumptions andshould not be viewed as indicative of the operation of the Company in future periods.  The estimated fair value of each option grantedto the employees of the Group on the date of grant is estimated tobe HK$8.14, HK$4.90 and HK$2.48 for 2000, 2001 and 2002 respectively usingthe Black-Scholes option pricing method with the assumptions as follows:

 
|                      |   | **2000** |   | **2001** |   | **2002** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Risk free  interest rate  |   | 6        | %      | 6        | %      | 3        | %      |
| Expected life  (in years) |   | 5        |   | 8        |   | 5        |   |
| Expected  dividend yield  |   | 0        | %      | 0        | %      | 0        | %      |
| Volatility                |   | 54       | %      | 52       | %      | 41       | %      |

 

Had the compensation costs for the plan beendetermined based on the estimated fair value at the grant dates for awardsunder the plan consistent with the method of SFAS 123, the Group’s net income andearnings per share on a pro forma basis for the years ended December 31, 2000,2001 and 2002 are disclosed in the aforementioned Note H.

 

F - 91

----