##### Table of Contents



As filed with the Securities and Exchange Commission on April 13, 2005   SECURITIES AND EXCHANGE COMMISSION  FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2004
Commission file number: 1-15156
   TELEKOM AUSTRIA AG  AUSTRIA
(Jurisdiction of incorporation or organization) Lassallestraße 9, 1020 Vienna, Austria (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredAmerican Depositary Shares,
representing Common Stock
    
    New York Stock ExchangeCommon Stock, no par value
    
    Vienna Stock Exchange
New York Stock Exchange*
   *
    
    Not for trading, but only in connection with the registration of American Depositary Shares,
pursuant to the requirements of the Securities and Exchange Commission.   Securities registered or to be registered pursuant to Section 12(g) of the Act. NONE   Securities for which
there is a reporting obligation pursuant to Section 15(d) of the Act. NONE   Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: Common Stock, no par value
    
    
    500,000,000
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by  Section 13 or15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past
90 days.  þ YesoNo Indicate
by check mark which financial statement item the registrant has
elected to follow.   o Item 17þItem 18




---



TABLE OF CONTENTS  
 PART IItem 1.
    
    Identity of Directors, Senior Management and Advisors
    
    
    2Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    2Item 3.
    
    Key Information
    
    
    23.1. Selected Financial and Other Data
    
    
    23.2. Dividends
    
    
    63.3. Exchange Rate Information
    
    
    73.4. Risk Factors
    
    
    8Item 4.
    
    Information on the Company
    
    
    134.1. History and Development of the Company
    
    
    134.2. Business Overview
    
    
    15Strategy
    
    
    15Wireline
    
    
    17Wireless
    
    
    33Properties
    
    
    43Research and development
    
    
    434.3. Regulation and legal framework
    
    
    45Item 5.
    
    Operating and Financial Review and Prospects
    
    
    635.1. Overview
    
    
    635.2. Results of operations 2004 compared to 2003
    
    
    725.3. Results of operations 2003 compared to 2002
    
    
    885.4. Liquidity and capital resources
    
    
    105Item 6.
    
    Directors, Senior Management and Employees
    
    
    113Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    118Item 8.
    
    Financial Information
    
    
    120Item 9.
    
    The Offer and Listing
    
    
    124Item 10.
    
    Additional Information
    
    
    12510.1. Memorandum and Articles of Association
    
    
    12510.2. Taxation
    
    
    13610.3. Documents on Display
    
    
    141Item 11.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    142Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    145PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    145Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    145Item 15.
    
    Controls and Procedures
    
    
    145Item 16A.
    
    Audit Committee Financial Expert
    
    
    145Item 16B.
    
    Code of Ethics
    
    
    146Item 16C.
    
    Principal Accountant Fees and Services
    
    
    146Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    148Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    148PART IIIItem 17.
    
    Financial Statements
    
    
    149Item 18.
    
    Financial Statements
    
    
    149Item 19.
    
    Exhibits
    
    
    149Exhibit 1.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1
  i




---



##### Table of Contents



REFERENCES In this annual report, Telekom Austria or we refers to Telekom Austria AG and its
consolidated subsidiaries, of which mobilkom austria AG & Co KG and its subsidiaries are a part of.
If mobilkom austria AG & Co KG or one of its subsidiaries is being referred to, the full name of
the Company is used. mobilkom austria group or the Wireless segment refers to mobilkom austria
AG & Co KG and its subsidiaries. FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements that involve risks and uncertainties.
These forward-looking statements are usually accompanied by words such as believe, intend,
anticipate, plan, expect and similar expressions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of a number of factors,
including the risks described in Item 3.4. Risk factors, and elsewhere in this annual report.
Forward-looking statements involve inherent risks and uncertainties. We caution that a number of
important factors could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statement. These factors include, but are not limited to, the following:  

the level of demand for telecommunications services or equipment, particularly with
regard to access lines and subscribers, traffic, bandwidth and new products;

competitive forces in liberalized markets, including pricing pressures, technological
developments, alternative routing developments and new access technologies, and our ability
to retain market share in the face of competition from existing and new market entrants;

the effects of our tariff reduction initiatives or other marketing initiatives;

the impact of insolvencies of our major customers or international suppliers;

the regulatory developments and changes, including the levels of tariffs, the terms of
interconnection, unbundling of access lines and international settlement arrangements;

our ability to achieve cost savings and realize productivity improvements;

the success of new businesses, operating and financial initiatives, many of which
involve start-up costs, and new systems and applications;

our ability to secure the licenses we need to offer services and the cost of these
licenses and related network infrastructure expansions;

the progress and success of our domestic and international investments, joint ventures
and alliances;

the impact of our new business strategies and transformation processes including the
restructuring of operations;

the availability, terms and deployment of capital and the impact of regulatory and
competitive developments on capital expenditures;

the outcome of current and future litigation in which we are or will be involved;

the level of demand for our shares which can affect our business strategies;

our ability to further reduce our existing workforce;

changes in the law including regulatory, civil servants and social security, pensions and tax law;

concerns over health risks associated with the use of wireless handsets or radio
frequency emissions from transmission masts; and

general economic conditions, government and regulatory policies, new legislation and
business conditions in the markets we serve. Unless otherwise stated, references to market share, penetration rates and other market data
throughout this annual report are estimates we have made based on official and unofficial published
sources and our operating and marketing records. While we believe our estimates are accurate,
estimates are inherently uncertain and those by other persons may differ from our estimates. 1




---



##### Table of Contents



PART I 
 Item 1.  Identity of Directors, Senior Management and Advisors Not applicable. 
 Item 2.  Offer Statistics and Expected Timetable Not applicable. 
 Item 3.  Key Information 
 3.1. SELECTED FINANCIAL AND OTHER DATA The following tables present a summary of consolidated financial and operating data for
Telekom Austria. The financial data presented in these tables are derived from the consolidated
financial statements which have been prepared in accordance with U.S. GAAP and are included
elsewhere in this annual report. You should read those sections for a further explanation of the
financial data summarized here. For a description of other factors which have affected or may
affect our financial results, see  3.4. Risk factors and Item 5.1. Overview. Prior to June 28, 2002, Telekom Austria held a 74.999% interest in mobilkom austria AG & Co
KG. Due to certain substantive participating rights held by the minority shareholder, Telecom
Italia Mobile International N.V., Telekom Austrias investment in mobilkom austria was accounted
for under the equity method. On June 28, 2002, we acquired 100% of Autel Beteiligungs GmbH, which
held a 25.001% stake in mobilkom austria AG & Co KG, from Telecom Italia Mobile International N.V.,
bringing our total interest in mobilkom austria AG & Co KG to 100%. Consequently, we have
consolidated the Wireless segment effective June 28, 2002. The consolidated statement of operations
for the year ending December 31, 2002 reflects Telekom Austrias equity in earnings of mobilkom
austria group through June 28, 2002 and mobilkom austria groups results of operations for the
period June 28, 2002 until December 31, 2002. The consolidated financial statements for the years ended December 31, 2000 and 2001 have been
audited in accordance with auditing standards generally accepted in the United States of America by
KPMG Austria GmbH Wirtschaftsprüfungs- und
Steuerberatungsgesellschaftand Grant Thornton  Jonasch
& Platzer Wirtschaftsprüfungs- und Steuerberatungsgesellschaft-OHG. The consolidated financial
statements of Telekom Austria for the years ended December 31, 2002, 2003 and 2004 have been
audited in accordance with auditing standards generally accepted in the United States of America by
KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und Steuerberatungsgesellschaft. The consolidated
financial statements of mobilkom austria group for the years ended December 31, 2002 and 2003 have
been audited in accordance with auditing standards generally accepted in the United States of
America by Grant Thornton Wirtschaftsprüfungs- und Steuerberatungs-GmbH. Totals in the following tables may differ from the sum of their components as a result of
rounding effects. 2




---



##### Table of Contents



Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in EUR millions, except per share information)Consolidated statements of operations:Operating revenues (1) (2) (3)
    
    
    4,056.3
    
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    2,659.7
    
    
    
    2,814.4Operating expenses:Materials
    
    
    (324.5
    )
    
    
    (297.1
    )
    
    
    (196.4
    )
    
    
    (71.9
    )
    
    
    (108.2
    )Employee costs, including benefits
and taxes (4)
    
    
    (673.7
    )
    
    
    (699.3
    )
    
    
    (600.7
    )
    
    
    (619.1
    )
    
    
    (865.6
    )Depreciation and amortization
    
    
    (1,114.8
    )
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )
    
    
    (904.1
    )
    
    
    (913.8
    )Impairment charges
    
    
    (1.3
    )
    
    
    (6.8
    )
    
    
    (41.9
    )
    
    
    (145.1
    )
    
    
    (2.1
    )Other operating expenses
    
    
    (1,489.3
    )
    
    
    (1,463.6
    )
    
    
    (1,205.4
    )
    
    
    (1,114.9
    )
    
    
    (1,223.9
    )Total operating expenses
    
    
    (3,603.6
    )
    
    
    (3,600.0
    )
    
    
    (3,060.7
    )
    
    
    (2,855.1
    )
    
    
    (3,113.6
    )Operating income (loss)
    
    
    452.7
    
    
    
    369.8
    
    
    
    57.4
    
    
    
    (195.4
    )
    
    
    (299.2
    )Other income (expense):Interest income
    
    
    70.0
    
    
    
    75.2
    
    
    
    88.2
    
    
    
    82.7
    
    
    
    78.6Interest expense
    
    
    (188.8
    )
    
    
    (231.0
    )
    
    
    (244.6
    )
    
    
    (241.0
    )
    
    
    (239.9
    )Dividend income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.2
    
    
    
    1.4Equity in earnings of affiliates
    
    
    0.6
    
    
    
    19.1
    
    
    
    140.5
    
    
    
    195.4
    
    
    
    36.3Other, net
    
    
    15.6
    
    
    
    (0.5
    )
    
    
    2.3
    
    
    
    (44.0
    )
    
    
    (38.2
    )Income (loss) before income taxes and
minority interests
    
    
    350.1
    
    
    
    232.6
    
    
    
    43.8
    
    
    
    (200.1
    )
    
    
    (461.0
    )Income tax benefit (expense)
    
    
    (122.2
    )
    
    
    (83.1
    )
    
    
    (26.1
    )
    
    
    94.9
    
    
    
    178.8Minority interests
    
    
    (0.6
    )
    
    
    (3.4
    )
    
    
    (4.9
    )
    
    
    0.6
    
    
    
    0.1Income before extraordinary items and
cumulative effect of change in
accounting principle
    
    
    227.3
    
    
    
    146.1
    
    
    
    12.8
    
    
    
    (104.6
    )
    
    
    (282.1
    )Extraordinary loss, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.5
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    (11.9
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    227.3
    
    
    
    134.2
    
    
    
    12.8
    
    
    
    (104.6
    )
    
    
    (285.6
    )Basic and fully diluted earnings (loss) per
share
    
    
    0.46
    
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.57
    )Basic and fully diluted earnings (loss) per share
excluding extraordinary items
    
    
    0.46
    
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.56
    )Basic and fully diluted earnings (loss) per share
excluding cumulative effect of change in
accounting principle
    
    
    0.46
    
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.57
    )
 Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in EUR millions)Consolidated cash flow data:Cash generated from operations
    
    
    1,304.7
    
    
    
    1,219.9
    
    
    
    1,171.4
    
    
    
    842.4
    
    
    
    1,007.7Cash used in investing activities
    
    
    (509.3
    )
    
    
    (643.9
    )
    
    
    (1,175.9
    )
    
    
    (453.2
    )
    
    
    (893.7
    )Cash from (used in) financing activities
    
    
    (704.9
    )
    
    
    (406.8
    )
    
    
    1.8
    
    
    
    (380.7
    )
    
    
    (476.5
    )Effect of exchange rate differences
    
    
    (4.2
    )
    
    
    5.4
    
    
    
    3.6
    
    
    
    0.1
    
    
    
    0.2Net increase (decrease) in
cash and cash equivalents
    
    
    86.3
    
    
    
    174.6
    
    
    
    0.9
    
    
    
    8.7
    
    
    
    (362.4
    )
 3




---



##### Table of Contents



At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in EUR millions)Consolidated balance sheet data:Assets:Current assets
    
    
    1,273.9
    
    
    
    1,124.8
    
    
    
    865.2
    
    
    
    839.2
    
    
    
    912.0Property, plant and equipment, net
    
    
    3,888.7
    
    
    
    4,457.7
    
    
    
    5,000.7
    
    
    
    4,591.8
    
    
    
    5,069.5Intangible assets, net (5)
    
    
    1,263.9
    
    
    
    1,309.6
    
    
    
    1,316.6
    
    
    
    80.7
    
    
    
    230.3Investments
    
    
    136.8
    
    
    
    147.2
    
    
    
    171.3
    
    
    
    682.2
    
    
    
    768.6Other assets and deferred tax assets
    
    
    679.2
    
    
    
    857.0
    
    
    
    1,180.5
    
    
    
    1,315.5
    
    
    
    864.3Due from related parties (long-term)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218.0
    
    
    
    218.0Total assets
    
    
    7,242.5
    
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3
    
    
    
    8,062.7Liabilities:Current liabilities
    
    
    1,872.1
    
    
    
    1,789.7
    
    
    
    2,531.0
    
    
    
    1,680.1
    
    
    
    1,799.4Long-term debt, net of current portion
    
    
    1,647.2
    
    
    
    2,342.3
    
    
    
    2,079.9
    
    
    
    2,005.2
    
    
    
    2,353.9Lease obligations, net of current portion
    
    
    761.1
    
    
    
    861.3
    
    
    
    1,076.4
    
    
    
    1,086.9
    
    
    
    799.0Employee benefit obligations
    
    
    110.0
    
    
    
    156.0
    
    
    
    232.5
    
    
    
    378.1
    
    
    
    448.5Other liabilities and deferred income taxes
    
    
    110.5
    
    
    
    107.6
    
    
    
    105.0
    
    
    
    76.6
    
    
    
    58.3Total liabilities
    
    
    4,500.9
    
    
    
    5,256.9
    
    
    
    6,024.8
    
    
    
    5,226.9
    
    
    
    5,459.1Stockholders equity
    
    
    2,741.6
    
    
    
    2,639.4
    
    
    
    2,509.5
    
    
    
    2,500.4
    
    
    
    2,603.6Total liabilities and Stockholders equity
    
    
    7,242.5
    
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3
    
    
    
    8,062.7
 At December 31,Other data:
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Wireline (in thousands)Fixed access lines
    
    
    2,906.7
    
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    3,166.9
    
    
    
    3,269.0Fixed access channels
    
    
    3,570.7
    
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    3,806.2
    
    
    
    3,832.9Internet customers in Austria (6)
    
    
    1,187.0
    
    
    
    1,026.6
    
    
    
    846.5
    
    
    
    666.4
    
    
    
    293.4Customers Czech On Line
    
    
    247.1
    
    
    
    279.4
    
    
    
    275.3
    
    
    
    238.2
    
    
    
    188.7Wireless customers (in thousands)Austria
    
    
    3,273.6
    
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    2,849.9
    
    
    
    2,804.3Croatia
    
    
    1,308.6
    
    
    
    1,210.5
    
    
    
    1,097.8
    
    
    
    855.7
    
    
    
    531.4Slovenia
    
    
    363.3
    
    
    
    361.5
    
    
    
    350.0
    
    
    
    269.6
    
    
    
    Liechtenstein
    
    
    3.5
    
    
    
    2.5
    
    
    
    2.0
    
    
    
    1.3
    
    
    
    0.2Total
    
    
    4,949.0
    
    
    
    4,737.7
    
    
    
    4,451.2
    
    
    
    3,976.5
    
    
    
    3,335.9Full-time equivalent employees, including
mobilkom austria group (year-end)
    
    
    13,307
    
    
    
    13,890
    
    
    
    14,951
    
    
    
    16,586
    
    
    
    18,301
 4




---



##### Table of Contents



(1)

In 2003, the Austrian Supreme Court ruled that no contractual relationship exists between
value added service providers (VASP) and Telekom Austria, with the contractual relationship
being established directly between the VASP and the customers. We are no longer considered the
primary obligor and ceased reporting revenues on a gross basis beginning on October 1, 2003.
Had the ruling been in effect for all of 2003, 2002 and 2001, revenues and expenses in the
accompanying consolidated statements of operations would have been lower by EUR 45.9 million,
EUR 51.2 million, and EUR 41.4 million, respectively.  (2)

On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria AG & Co KG from
Telecom Italia Mobile International, which also held certain blocking rights that precluded us
from consolidating mobilkom austria group in prior years. Our consolidated figures now include
mobilkom austria groups results of operations since June 28, 2002 and are therefore not
directly comparable with previous years.  (3)

Effective January 1, 2002, the Austrian regulatory authority approved a change in the way
interconnection charges between Austrian alternative service providers are billed and
collected. As a result of the change Telekom Austria is no longer a party to such
transactions. Had the new regulation been in place during 2001, revenues and operating
expenses in the Wireline segment would have been lower by EUR 257.2 million. This change had
no impact on operating income.  (4)

In the Wireline segment in 2003, a one-time charge in connection with the early retirement of
civil servants increased employee costs by EUR 47.3 million. This was partially compensated by
the release of accruals for contractual termination benefits of EUR 26.8 million in 2003. For
further information see note (18) of the accompanying financial statements.  (5)

In 2002, net intangible assets increased significantly to EUR 1,316.6 million due to the
addition of goodwill, licenses, brand names and subscriber base relating to the acquisition
and consolidation of mobilkom austria group. For further information see note (9) of the
accompanying financial statements.  (6)

The total number of internet customers excludes approximately 85,200 ADSL subscriptions in
2004, 53,500 in 2003, 31,000 in 2002 and 14,200 in 2001 that were sold to our wholesale
customers. 5




---



##### Table of Contents



3.2. DIVIDENDS The following table sets forth the annual dividends declared and paid per share based on 496.8
million shares outstanding with respect to the financial year 2003 and 500 million shares
outstanding with respect to the financial years 2002, 2001 and 2000. Dividend amounts have been
converted into U.S. dollars based at the noon buying rate on the respective dividend payment dates. For the fiscal year
    
    Dividends declared and paid per shareEUR
    
    
    USD2000
    
    
    
    
    
    
    2001
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    2003
    
    
    0.13
    
    
    
    0.16
 We did not pay dividends for 2000, 2001 and 2002. For fiscal year 2003, we paid an aggregate
cash dividend of EUR 64.6 million in 2004. Under Austrian law, we may pay dividends only from net
income as shown in the annual financial statements of Telekom Austria AG prepared under Austrian
GAAP. The Management Board and Supervisory Board plan to propose to the shareholders at the annual
general meeting on May 25, 2005 a distribution from unappropriated earnings of EUR 0.24 per no par
value share. The payment of future dividends depends on our earnings, financial condition and other
factors, including cash requirements, our future prospects, taxation and regulations. Investors
should not assume that any dividend will actually be paid or make any assumption about the amount
which may be paid in any given year. Our historical pay-out ratio of dividends should not be
considered as indicative of our future dividend pay-out ratio. Any dividends paid will be subject
to Austrian withholding tax. For further information on Austrian withholding tax, see Item 10.2.
Taxation  Austrian taxation. Cash dividends payable to the holders of shares listed on the Vienna Stock Exchange will be
paid to an Austrian bank  which will be selected and announced in due time prior to our annual
general meeting (AGM) on May 25, 2005  as paying agent, in Euro for disbursement to shareholders.
Cash dividends payable to holders of ADSs listed on the New York Stock Exchange will be paid to The
Bank of New York, which will convert the dividends into U.S. dollars, at the rate of exchange
applicable on the date such dividends are paid, for disbursement to such holders. 6




---



##### Table of Contents



3.3. EXCHANGE RATE INFORMATION Effective January 1, 1999, Austria and eleven other member states of the European Union have
adopted the Euro as the single currency in substitution for their then existing national
currencies. On March 1, 2002, the Euro became the sole legal tender for Austria and the Austrian
Schilling (ATS) was withdrawn from circulation. Our financial statements and certain other amounts
stated in Euro appearing in this document have been translated from Austrian Schilling at the
official fixed conversion rate of EUR 1.00 = ATS 13.7603. Beginning with fiscal year 2000, Telekom Austria began publishing its financial statements in
Euro in accordance with U.S. GAAP. Our shares are quoted in Euro on the Vienna Stock Exchange. Our ADSs are quoted in U.S.
dollars and traded on the New York Stock Exchange. Exchange rate fluctuations between the Euro and U.S. dollar may affect the U.S. dollar
equivalent of the Euro price of our shares on the Vienna Stock Exchange and, as a result, are
likely to affect the market price of the ADSs on the New York Stock Exchange. In the future we will
declare any cash dividends in Euro and exchange rate fluctuations will affect the U.S. dollar
amounts received by holders of ADSs on conversion of cash dividends on the shares represented by
the ADSs. The following table shows, for the periods indicated, information concerning the exchange rate
between the U.S. dollar and the Euro. These rates are provided solely for your convenience. We do
not represent that the Euro could be converted into U.S. dollars at these rates or at any other
rate. The high and low columns show the highest and lowest quotes, respectively, on any business
day during the relevant period. On April 8, 2005, the noon buying rate translated to EUR 1.00 = USD
1.2912. Year or Month
    
    End of period
    
    
    High
    
    
    Low
    
    
    AverageUSD per EUR 1.00(1)2000
    
    
    0.9388
    
    
    
    1.0335
    
    
    
    0.8270
    
    
    
    0.92072001
    
    
    0.8901
    
    
    
    0.9535
    
    
    
    0.8370
    
    
    
    0.89092002
    
    
    1.0485
    
    
    
    1.0485
    
    
    
    0.8594
    
    
    
    0.94952003
    
    
    1.2597
    
    
    
    1.2597
    
    
    
    1.0361
    
    
    
    1.14112004
    
    
    1.3538
    
    
    
    1.3625
    
    
    
    1.1801
    
    
    
    1.2478October 2004
    
    
    1.2746
    
    
    
    1.2783
    
    
    
    1.2271November 2004
    
    
    1.3259
    
    
    
    1.3288
    
    
    
    1.2703December 2004
    
    
    1.3538
    
    
    
    1.3625
    
    
    
    1.32242005January 2005
    
    
    1.3049
    
    
    
    1.3476
    
    
    
    1.2954February 2005
    
    
    1.3274
    
    
    
    1.3274
    
    
    
    1.2773March 2005
    
    
    1.2969
    
    
    
    1.3465
    
    
    
    1.2877April 2005 (through April 8)
    
    
    1.2912
    
    
    
    1.2912
    
    
    
    1.2838
   (1)
    
    Based on the U.S. Federal Reserve Bank noon buying rate for the Euro. The average exchange
rates for 2000, 2001, 2002, 2003 and 2004 are calculated using the rate on the last business
day of each month during the period specified. 7




---



##### Table of Contents



3.4. RISK FACTORS You should carefully consider the risks described below and other information in this document. The
occurrence of any of the following events could harm Telekom Austria and lead to a decline in the
value of your ordinary shares. Risks relating to our business We expect continuing competition in the fixed line and mobile communications markets which may
have a negative impact on our revenues and profitability. Several of our existing and potential competitors in each of our business segments are
affiliated with international telecommunications operators, some of which are incumbents in their
own countries of origin, that have substantial financial resources. In addition, on the basis of
the interconnection rates fixed by the regulatory authority and the availability of access to
subscriber lines, numerous competitors are able to compete with us in our Wireline business with
minimal or modest investments in network infrastructure and with prices that undercut our tariffs. As a result of liberalization, we have lost market share in the fixed line and mobile
communications services markets and we have reduced our tariffs in response to increasing downward
pressure on tariffs. Intensifying competition from existing and new operators may result in
additional losses of market share and further tariff reductions. Particularly as a consequence of
the recent merger of two of our main competitors in the fixed line market we expect that
competition will increase. The combined competitor has publicly announced its intention to
aggressively pursue the market. Other factors that may increase competition include new forms of
telecommunications that circumvent conventional tariff structures as well as licensing schemes and
alternative technologies such as providing wireless access. See Item 4.2. Business overview. According to the new European Regulatory Framework, the Austrian Telecommunications Act
requires mobile operators to make mobile number portability available to customers. A regulatory
decision was filed in August 2004 forcing operators to implement mobile number portability by
October 16, 2004. Due to this, competition may intensify in the future, especially in the market
for business customers. For further information see Item 4.3. Regulation and legal framework 
Regulation  Ordinances under the Telecommunications Act of 2003 and  Numbering. In Austria, we also compete with operators that offer wireless communications services without
maintaining their own networks (known as mobile virtual network operators, MVNO) and which
therefore incur substantially lower costs than we do. Two of our competitors in the fixed line
business offer their services as a mobile virtual network operator, with its own access numbers,
respectively as a service provider reselling mobile communications services of another competitor
under its own brand name. All UMTS (Universal Mobile Telecommunications System  third generation
mobile communications network) license holders have launched UMTS services, but competition for 3G
(third generation mobile networks which are designed for high data transmission rates) services is
expected to increase in 2005 as a sufficient amount of UMTS handsets will be available for a
broader customer base. Although we are confident that revenues generated from the UMTS technology
will justify the investment in license and network of UMTS, we cannot guarantee that this business
will be profitable in the near future. We expect increased competition in our Croatian market due to the recent auction of UMTS
licenses in 2004. The entry of a third operator may result in increased pressure on tariffs and the
obligation to offer national roaming or to sell available capacity. Because of the increased competition, the main challenge we face is maintaining our leadership
in the Austrian telecommunications market. If we do not manage to maintain this leadership, our
revenues, profitability and growth may be adversely affected. Approximately 88% of our revenues come from the Austrian market. Both, the Austrian mobile
communications and fixed line markets are saturated, highly competitive and characterized by fierce
competition. If this development continues our profitability may decline. Our primary business is the provision of communications services in Austria. We expect a
decline in revenues in the fixed line market, and lower growth in revenues for mobile
communications in Austria. The number of fixed lines may further diminish as more customers migrate
to mobile communications, substitute technologies like Voice over IP utilizing broadband internet
access, and alternative fixed network operators. 8




---



##### Table of Contents



In the mobile communications business we face increasing competition. Austria has one of the
highest penetration rates of mobile communications in Europe, reaching approximately 98.0% at
December 31, 2004. Since the market has been approaching saturation in terms of customer growth, we
are focusing on retention of the existing customer base leading to increased customer retention
costs. Formerly, competition was based on handset subsidies. Lately our competitors have started to
compete increasingly through lower tariffs resulting in offering mobile voice services for one Euro
Cent per minute or free calls within their respective networks. As customer retention costs
increase and the tariff reductions by our competitors are very aggressive, a continuation of the
low tariffs would have a material adverse effect on our profitability. We generate only about 12% of our revenues in markets outside Austria and therefore our
success is highly dependent on the Austrian market. However, the increasing saturation of the
Austrian fixed line and mobile communications markets may adversely affect our results of
operations which might not be compensated by the profitability of our investments in
telecommunications companies outside Austria. We may neither realize the expected level of demand for our products and services nor the
expected level or timing of revenues generated by those products and services as a result of lack
of market acceptance or technological change. Through the rapid technological progress and the trend towards technological convergence
(where different technologies are combined into a new service), there is a danger that new
established products or services will not only complement, but also substitute each other. Voice
over IP and Wireless Local Area Networks (WLAN) are new technologies that have the potential to
replace existing technologies and services and reduce our market share and revenues. Moreover there is a risk that we will not succeed in making customers sufficiently aware of
existing and future value added services and creating customer acceptance of these services. This
risk exists in particular with respect to our anticipated future growth drivers in the mobile
communications area (e.g. mobile data services provided via UMTS or other technologies) and in the
fixed line communications area (e.g. Asymmetric Digital Subscriber Line (ADSL)). Furthermore
additional competition may exist from IT companies which position themselves as full IT and
telecommunications providers on the Austrian market and compete strongly for the large corporate
accounts. A lack of market acceptance of services based on 3G technology like UMTS or EDGE (Enhanced
Data Rates for Global Evolution mobile communications systems with high transmission rates
conceived for video- or internet-telephony use) could have a negative impact on revenues and
results of operations including the possibility that we will not be able to secure our investments
in 3G technology. We are limited in our ability to adjust our operating expenses according to the changing
market environment. In recent years we have taken measures in order to cut our costs and enhance our
competitiveness. One of these measures was to reduce our existing workforce. Currently, 51% of all
employees of Telekom Austria are civil servants who cannot be dismissed without cause. In the past
we have implemented early retirement packages for voluntary retirement of our employees. Changes in
Austrian law will no longer allow us to implement early retirement packages in the future. In view
of the increasingly competitive environment in which we operate, such restrictions may have an
adverse impact on our results of operations. The restrictions of the Austrian Career Public Service
Regulations Act on further reducing our current workforce could have a negative impact on our
profitability. Our customer tariffs for fixed line services are widely subject to prior approval by the
regulatory authority and we may be forced to decrease our fixed or mobile interconnection rates.
These restrictions may limit our flexibility in pricing, particularly in bidding for contracts from
the public sector, and may adversely affect our profitability. Changes to our tariff structure are generally subject to prior approval by the regulatory
authority, whereas our competitors are generally free to alter their prices without any prior
approval. As a consequence, our competitors may be more nimble at setting a pricing structure that
exploits changes in the market, thus increasing their market share. Our interconnection rates in
our fixed and mobile networks may be lowered by the regulatory authority in 2005, which may
adversely affect our profitability. Our competitors may also be more successful in bidding for
contracts from the public sector which could have an adverse effect on our results of operations.
For further information see Item 4.3. Regulation and legal framework  Legal framework 
Procurement law and telecommunications act. 9




---



##### Table of Contents



The extent to which we must share our infrastructure and services with our competitors remains
to be settled by the implementation of the Telecommunications Act of 2003 through the Austrian
regulatory authority and the courts. A regulatory framework unfavorable to us in any of the markets
in which we operate could cause our revenues and growth to decline. The adoption of new, or modifications to existing laws, regulations, licenses or policies by
the regulatory authorities overseeing the Austrian telecommunications market or interpretations
thereof by the courts, may have a material adverse impact on our business, financial condition and
results of operations. Some important regulatory issues remain to be settled. These include among others the
following:  

We do not know the extent to which we will be obliged to share our infrastructure and
services, including technical facilities and administrative services, with other operators
or the price we may charge for such sharing. Thus, the principle of neutrality in terms of
technology (any kind of transmission technology) could lead to an extended regulation of
infrastructure and services which have so far not been subject to regulation such as mobile
communications and internet services. The Telecommunications Act 2003 increases the
competencies of the regulatory authority (see Item 4.3. Regulation and legal framework 
Regulation). In several decisions since 2001, the regulatory authority decided that we
must also allow partial unbundling of our local loop to other fixed network operators and
to internet service providers. We have appealed these decisions. If we are not successful,
the decisions could significantly affect our profitability and, with respect to access to
internet service providers, the integrity of our network.  

We are required to provide other telephone network operators access to our local network
infrastructure at fees determined by the regulatory authority. These fees are currently
subject to several appeals pending before the Austrian High Courts. The outcome of these
proceedings is uncertain. Should the courts reduce our fees, particularly if they are
reduced retroactively, or if the charges we have to pay to other networks are raised, our
competitive strength may be damaged and our revenues may decline. In addition, if the
regulatory authority decides to significantly decrease the price for providing these
services, it could affect our competitiveness and decrease our revenues. We will be obliged to adopt new accounting standards in 2007 which may have a material impact
on our financial statements and may render a comparison between financial periods more difficult. In June 2002, the European Union adopted new regulations requiring all listed EU companies to
apply International Financial Reporting Standards (IFRS, previously known as International
Accounting Standards or IAS) in their financial statements from January 1, 2005. Member States
may defer mandatory application of IFRS until 2007 for companies that either have listed debt
securities only or already use other internationally accepted standards for purpose of a listing
outside the EU. Telekom Austria currently reports under U.S. generally accepted accounting principles (U.S.
GAAP), but will be obligated to adopt IFRS as its new accounting standards in 2007 which may have a
material impact on its financial statements and comparability to the financial statements in
accordance with U.S. GAAP previously published. For further information on the impact of IFRS, see
Item 5.1. Overview  New accounting pronouncements. The risk relating to the insolvency of major customers or international suppliers may have an
impact on our revenues or profitability. In the past some of our large wholesale customers faced severe liquidity constraints.
Insolvencies of these customers might expose us to risks in connection with settlement of our
accounts receivables. Insolvencies of major international suppliers of bandwidth might have an
adverse effect on the availability of the connectivity we need to provide services to our
customers. The risk relating to system failures due to natural or human failure and the technological
dependency on third parties may have an impact on our reputation and the rate of customer
satisfaction. Our technical infrastructure (including our network infrastructure for fixed line network
services and mobile telecommunications services) may be damaged or disrupted by fire, lightning,
flooding, earthquake and other calamities, technological failures, human errors and other similar
events. Moreover, the technological backbone of Telekom Austria depends on third party software and
hardware. Although we have taken measures to safeguard against such problems, we cannot be sure
they will be effective under all circumstances. Damage or 10




---



##### Table of Contents



disruption of our infrastructure, technology or software may result in reduced user traffic
and reduced revenues as well as increased costs, and might deteriorate our reputation and customer
satisfaction. Technological change could increase competition, render existing technologies obsolete or
require us to make substantial additional investments. Our services are technology-intensive, and the development of new technologies could render
our services non-competitive and require us to write-down the book values of investments we have
made in existing licenses and technologies. We are already making substantial investments, and may
have to make substantial additional investments in new technologies in order to remain competitive.
New technologies that we choose to develop or acquire, however, may not prove to be successful. In
addition, we may not receive the regulatory or intellectual property licenses needed to provide
services based on new technologies in Austria or abroad. As a result, we might lose customers, fail
to attract new customers or incur substantial costs to maintain our customer base. We are in the process of evaluating the details and financial implications of a migration to
next generation networks (NGN) with particular consideration of existing investments. The costs
relating to the expansion of NGN and its implications on our business are expected to be
substantial. The time frame for its development will depend on various factors including customer
needs and competition. At this stage, however, it is too early to quantify the capital expenditure
requirements or to give a time horizon for its implementation. As a result this might lead to
substantial investments in the future and might impair the value of existing investments which
could have a negative impact on our profitability. The value of our international investments in telecommunications companies outside Austria,
particularly in Central and Southeastern Europe, may be adversely affected by political, economic
and legal developments in these countries. We have made significant equity investments in telecommunications operators in the Czech
Republic, Slovenia and Croatia and may make further investments in Bulgaria (see also Item 4.2.
Business overview  Wireless  Bulgaria) and other markets with significant growth potential.
These countries have political, economic, and legal systems that are in different stages of the
process of transformation. Political or economic disruption or changes in laws and their
application may harm the companies in which we have invested. This may impair the value of these
investments. Actual or perceived health risks or other problems relating to mobile handsets or transmission
masts could lead to litigation or decreased mobile communications usage. Concern has been expressed that the electromagnetic signals from mobile handsets and
transmission masts, which serve as antennas for transmitting radio signals, may pose health risks
and interfere with the operation of electronic equipment. Actual or perceived risks of transmitters
and receivers, and related publicity, litigation or legislative actions could reduce the growth
rate of our mobile communications business, customer base, or average usage per customer.
Environmental objections may also impair our ability to augment our infrastructure, including
primarily our mobile network, and reduce the willingness of contract partners to renew site
contracts for mobile sites in the upcoming years. Risks relating to disputes and litigation with regulators, competitors and other private
parties. We are subject to numerous risks relating to legal and regulatory proceedings in which we are
currently a party or that could develop in the future. We cannot guarantee that the ultimate
outcome of such legal proceedings will not have a material adverse effect on our results of
operations or financial condition. For information concerning some of the litigation in which we
are involved, see Item 8.2. Other information  Litigation. For information concerning our
regulatory environment, see Item 4.3. Regulation and legal framework  Regulation. Risks relating to our shares Our major shareholder, ÖIAG, continues to exercise significant influence over our strategic
direction and major corporate actions. Österreichische Industrieholding AG(ÖIAG) continues to hold a controlling interest in our
shares. This level of shareholding gives ÖIAG significant rights to determine our strategic
direction and to determine what matters are brought to shareholders for a vote. The issues that may
be influenced by ÖIAG include any merger, 11




---



##### Table of Contents



acquisition or divestiture of material assets, approval of the annual financial statements and
declaration of dividends, capital increases, and the election and removal of members of our
Supervisory Board. The interests of ÖIAG in deciding these matters and the factors ÖIAG considers
in exercising its votes could be different from other shareholders interests. This could have the
effect of initiating, accelerating, delaying, or preventing a change of control, or a merger,
consolidation, takeover or other business combination or restructuring that shareholders might
otherwise approve. For further information see Item 7  Relationship with the Republic of Austria
and ÖIAG. The future sale of a substantial number of our shares or ADSs could negatively affect our
share price and could lead to a change in control in Telekom Austria in case they are sold to
another investor. The market price of our shares could fall as a result of sales of substantial amounts of
shares in the public market, or the perception that a large number of shares are available for
sale. In 2003, the Austrian government announced its intention to sell its 47.2% ownership in our
share capital which was held through ÖIAG, by the end of the legislative period in 2006. In
December 2004, ÖIAG sold 85,000,000 shares in us through a private placement, corresponding to 17%,
thus reducing their stake in us to 30.2% and has agreed not to sell any shares in us until June 5,
2005. However, after this date ÖIAG will be free to sell the shares they own in us, which could
lead to a change of control in us. A change of control as defined in the Austrian Takeover Act would require the investor to make
a compulsory offer to our remaining shareholders. A change of control followed by the compulsory
offer would therefore be likely to reduce the liquidity of our shares in the public markets and
could eventually lead to their delisting from the Vienna and New York Stock Exchanges. See Item
10.1. Memorandum and Articles of Association  Takeover rules. Currency fluctuations may adversely affect the trading prices of our common stock and ADSs and
the value of any distributions we make. The value of the Euro against the U.S. dollar has appreciated significantly since January
2002. Before that point the value of the Euro against the U.S. dollar had generally declined and
had fluctuated significantly.Because our common stock is traded in Euro and our ADSs are
traded in U.S. dollars, fluctuations in the exchange rate between the two currencies may negatively
affect the value of your investment. In addition, should we make any distribution on our common
stock in Euro, the depositary will convert such distributions to U.S. dollars. If exchange rates
fluctuate before the depositary converts the currencies, shareholders may lose some of the value of
the distribution. Shareholders rights are governed by Austrian law and differ in some respects from the rights
of shareholders under U.S. law. We are a stock corporation organized under the laws of the Republic of Austria. The rights of
holders of our ordinary shares, and, therefore, many of the rights of our ADS holders are governed
by our Articles of Association and by Austrian law and the laws of the European Union. These rights
differ in some respects from the rights of shareholders in typical U.S. corporations. In
particular, Austrian law significantly limits the circumstances under which shareholders of
Austrian corporations may bring derivative actions. In addition, it may be difficult for
shareholders to prevail in a claim against us under, or to enforce liabilities predicated upon,
U.S. securities laws. It may not be possible for shareholders to enforce judgments of U.S. courts against members of
our Supervisory Board or Management Board. Telekom Austria is an Austrian stock corporation. The members of our Supervisory Board and
Management Board are non-residents of the United States. In addition, our assets and the assets of
members of our Supervisory Board and Management Board are located in whole or in substantial part
outside the United States. As a result, it may not be possible for shareholders to enforce against
us or the members of our Supervisory Board and Management Board judgments obtained in United States
courts based on the civil liability provisions of the securities laws of the United States. In
addition, awards of punitive damages and judgments rendered in the United States or elsewhere may
be unenforceable in Austria. 12




---



##### Table of Contents



Item 4. Information on the Company Telekom Austria AG is a stock corporation (Aktiengesellschaft) organized under the laws of the
Republic of Austria. It is the parent company of the consolidated Telekom Austria Group (Telekom
Austria) providing a wide range of advanced wireline and wireless communications services. The corporate headquarters and the principal executive offices of Telekom Austria were
transferred to Lassallestraße 9, 1020 Vienna, Austria from Schwarzenbergplatz 3, 1010 Vienna,
Austria on June 30, 2003. The telephone number is +43 (0)590591 0 and our website address is
www.telekom.at. Reference to our website does not incorporate the information contained on the
website into this annual report. Our agent for service of process in the United States is CT Corporation System, 111 Eighth
Avenue, New York, New York, 10011. 
 4.1. HISTORY AND DEVELOPMENT OF THE COMPANY Before the liberalization of the Austrian telecommunications market in 1998, the Post- und
Telegraphenverwaltung, or PTV, and its successor Post und Telekom Austria AG, or PTA, had the
exclusive right to provide telecommunications services in Austria. PTV was an integrated part of
the federal property administration of the Republic of Austria and a department of the Federal
Ministry of Science and Transportation. As a consequence of the liberalization of the
telecommunications sector, PTV was transformed into a private stock corporation. The Austrian Post
Restructuring Act (Poststrukturgesetz) of 1996 created Post und Telekom Austria AGas the successor
to PTV to continue its activities in telecommunications, postal services, and public
transportation. PTA was created on May 1, 1996 as a wholly-owned subsidiary of Post- und Telekom
Beteiligungsgesellschaft mbH, or PTBG, a holding company wholly-owned by the Republic of Austria,
which exercised its ownership through the Federal Minister of Finance. In October 1996, Post und Telekom Austria AGtransferred its mobile communications business to
its wholly-owned subsidiary mobilkom austria. In April 1997, Post und Telekom Austria AGsold 25%
plus one share of mobilkom austria to STET Mobile Holding N.V., at the time a joint subsidiary of
STET International S.p.A., Telecom Italia Mobile S.p.A. and Telecom Italia. In July 1998, Post und Telekom Austria AGs telecommunications business became Telekom Austria
AG owned by Post und Telekom Austria AG. Only a few months later in October 1998, Post und Telekom
Austria AGsold 25.00007% of Telekom Austria to STET International Netherlands N.V., a joint
subsidiary of STET International and Telecom Italia. In May 2000, the Austrian parliament passed the ÖIAG Act 2000 (ÖIAG-Gesetz 2000), under which
PTBG and Post und Telekom Austria AG, the latter owning 74.99993% of Telekom Austria, merged with
Österreichische Industrieholding AG(ÖIAG), an industrial holding company wholly owned by the
Republic of Austria. As a result, ÖIAG held 74.99993% of the share capital of Telekom Austria, and
Telecom Italia indirectly held the remainder. In November 2000, ÖIAG sold a portion of its shareholding in Telekom Austria as part of the
initial public offering in Austria and the United States of America and as a private placement
elsewhere. As a result, 22.4% of our share capital was held by widely dispersed retail and
institutional investors. Telecom Italia S.p.A., through a subsidiary, owned the remaining 29.8% and
disposed of its entire stake in Telekom Austria in two transactions. On November 4, 2002 Telecom
Italia sold 75 million shares in a private placement, reducing its level of ownership to 14.8%. On
January 21, 2004 Telecom Italia sold its residual shareholding, corresponding to 73.9 million
shares or 14.8% of Telekom Austrias share capital, in a private placement to institutional
investors. In December 2004, ÖIAG reduced the share capital held in Telekom Austria through a
private placement to institutional investors by 17%, from 47.2% to 30.2% of our share capital. In 2002, we decided to reintegrate some of our main subsidiaries into Telekom Austria. On
October 1, 2002, we merged with our wholly owned subsidiaries Datakom Austria GmbH, Jet2Web
Internet Services GmbH and Jet2Web Network Services GmbH and the wholly owned subsidiary of Datakom
Austria GmbH, Datakom International Solutions GmbH, effective as of December 31, 2001. We believe
that these mergers helped to strengthen our market position by establishing a customer-focused
organization of our Wireline segment, comprising voice telephony, data communications and internet. 13




---



##### Table of Contents



In December 2004, we entered into call option agreements giving us the right to acquire 100%
of the share capital of MobilTel AD, the leading Bulgarian telecommunications provider, exercisable
from July until August 2005. For further information see  4.2. Business overview  Wireless 
Bulgaria. For further information concerning the structure of Telekom Austria see Item 19 Exhibits 
Structure of Telekom Austria. Change in mobilkom austrias corporate form and ownership In March 2001, in order to realize a number of benefits, including an increase in Telekom
Austrias liquidity and favorable tax treatment, we converted Mobilkom Austria AG into a limited
partnership called mobilkom austria AG & Co KG. A newly formed mobilkom austria AG was created to
act as general partner of mobilkom austria AG & Co KG. Prior to June 28, 2002, Telekom Austria held 75% minus one share of common stock interest in
mobilkom austria AG and a 74.999% interest in mobilkom austria AG & Co KG. On June 28, 2002, we
acquired 100% of Autel Beteiligungs GmbH, which held 25% plus one share of common stock interest in
mobilkom austria AG and 25.001% stake in mobilkom austria AG & Co KG, from Telecom Italia Mobile
International N.V. (the successor of STET Mobile Holding N.V.), bringing our total interest in
mobilkom austria AG & Co KG to 100%. 14




---



##### Table of Contents



4.2. BUSINESS OVERVIEW In 2003 we started to report our business in the following three segments:  

Wireline (merging the previous fixed line, data communications, and internet services segments);  

Wireless (renaming our previous mobile communications segment); and  

Other activities (covering internal financial services). We are the market leader in Austria in both the Wireline and Wireless business segments. On May 21, 2002, our Supervisory Board approved the reintegration and merger of Datakom
Austria GmbH, Datakom International Solutions GmbH, Jet2Web Internet Services GmbH and Jet2Web
Network Services GmbH into Telekom Austria. On October 1, 2002 these companies have been
incorporated into Telekom Austria with effect from December 31, 2001. As of January 1, 2003 we
finalized the reorganization of our operations into two distinct operating segments, Wireline, and
Wireless, and a third segment Other activities which includes primarily various centralized
financial services that are provided by our subsidiary Telekom Finanzmanagement GmbH to both
business segments, Wireline and Wireless. The two business segments also conduct business with each
other which is accounted for in the form of eliminations. In order to give shareholders a clear
view of our external performance as a company, we separately disclose these internal transactions
when presenting our results. We have started reporting according to the new segments commencing with the first quarter of
2003. 
 Strategy Telekom Austria pursues separate strategies for the Wireline and Wireless business segments.
In the Wireline segment we seek to generate a stable cash flow, and in the Wireless segment we
strive to achieve moderate growth in our existing Wireless markets and sustainable growth through
acquisition, in order to reach our overall goal of substantially strengthening corporate value.
Strategic issues between the two business segments are coordinated by our management board. In 2004, the Wireline segment continued its efforts to reduce operational expenditures by
optimizing both organizational and technical processes. We also intensified our efforts to increase
our revenues in the fields of internet, broadband and IT-solutions. In order to achieve this goal we will significantly strengthen customer relations through
service leadership, an attractive offering of bundled wireline services, the promotion of advanced
new services over broadband access (Triple Play; combines voice, data and video services) as well
as tailored voice and internet packages to the market. We will exploit growth opportunities from new technologies and applications and strive to
become one of the most cost-efficient operators in Europe. The Wireless segment, consisting mainly of mobilkom austria AG & Co KG in Austria, VIPnet in
Croatia, Si.mobil in Slovenia and mobilkom [liechtenstein] in Liechtenstein, has adapted its
strategy to the local needs of its respective country of operation. All companies are the leading
or second strongest provider in their markets. In 2004 we fostered our international cooperation between our foreign subsidiaries to enable a
smooth implementation of products of our Vodafone partnership and mobilkom austria group products
(see  4.2. Business overview  Wireless). We expect that the international partnership with
Vodafone, including roaming agreements and joint product developments, will further strengthen our
ability to offer our customers cutting edge services and to reduce costs. mobilkom austria AG & Co
KG, VIPnet and Si.mobil simultaneously launched Vodafone live! on their markets and benefit from a
vast range of services available to customers. A close cooperation among our Wireless companies at
all levels enables us to generate synergies and therefore retain a lean organizational structure. In Austria and Croatia we focus on quality and innovation to intensify our customer retention
measures and maintain a strong market position through innovative voice and data products. In
Slovenia we improved our 15




---



##### Table of Contents



image among the young and heavy users and are now perceived as a price leader accompanied by
selected innovative products and services from the Vodafone portfolio. To enable further growth we will continue to investigate possible acquisitions mainly in
Southeastern Europe and have already taken further steps increasing our share in VIPnet to 100% and
buying call options for 100% of MobilTel AD, the leading Bulgarian mobile operator. Overview of Telekom Austrias revenues Our operating revenues are derived principally from fixed line communications services and
mobile communications services. The growth in mobile communications and internet services and
revenues from subsidiaries outside of Austria has offset the decline in switched voice telephony.
The following table shows our operating revenues for each of our reporting segments for the years
2002 to 2004. On June 28, 2002 we acquired Telecom Italia Mobile Internationals stake in mobilkom austria
AG & Co KG. As a result of the acquisition, we gained full strategic and operating control of our
mobile communications business. Thus, our consolidated statement of operations for the fiscal year
ending 2002 reflects our equity in earnings of mobilkom austria group through June 28, 2002, and
consolidates mobilkom austria groups results of operations for the period from June 28, 2002 until
December 31, 2002. Our consolidated figures set forth below are therefore not directly comparable. However,
although we were unable to consolidate mobilkom austria group prior to June 28, 2002, we have
always managed the business of mobilkom austria group. To facilitate a discussion of results on a
comparable basis, we are providing supplemental total managed data below. The total managed data
shown in this table include 100% of mobilkom austria groups financial statements. Since 2003 total
managed and total consolidated figures have been identical. For a discussion of our operating
revenues and more details, see also Item 5  Results of operations. 2004
    
    
    2003
    
    
    2002(in EUR millions)Operating revenues:Wireline
    
    
    2,184.7
    
    
    
    2,197.7
    
    
    
    2,260.0Wireless
    
    
    2,125.5
    
    
    
    2,030.2
    
    
    
    1,002.5Other activities & eliminations
    
    
    (253.9
    )
    
    
    (258.1
    )
    
    
    (144.4
    )Consolidated operating revenues
    
    
    4,056.3
    
    
    
    3,969.8
    
    
    
    3,118.1Wireless  prior to consolidation
    
    
    
    
    
    
    
    
    
    
    906.9Intersegmental eliminations
    
    
    
    
    
    
    
    
    
    
    (116.8
    )Total managed operating revenues
    
    
    4,056.3
    
    
    
    3,969.8
    
    
    
    3,908.2
 Approximately 12% of Telekom Austrias total operating revenues in 2004 were derived from
activities outside of Austria, mainly in the Wireless segment. Austria has demonstrated a strong demand for communications services, with a mobile user
penetration rate of 98% at December 31, 2004, one of the highest in Europe. Internet user
penetration in Austria was approximately 58% on that same date. 16




---



##### Table of Contents



Wireline In 2004, our Wireline segment generated revenues of EUR 2,184.7 million. Switched voice
telephony services in particular continue to be our most significant revenue contributor,
representing approximately 44.6% of total Wireline revenues in 2004. Market position We are the leading provider of Wireline telecommunications services in Austria. In 2004, we
were able to retain our market position in the Wireline segment. At December 31, 2004 we had a
voice telephony market share of 54.4%, which is based on traffic volume excluding internet dial-up
traffic, compared to 52.7% at the end of 2003. Our market share for voice telephony including
internet dial-up slightly increased to 55.2% in 2004 compared to 54.1% in 2003, although there was
a decrease of dial-up minutes. We serviced 2.9 million access lines in Austria, of which 451,200
operate on our Integrated Services Digital Networks (ISDN). ISDN networks allow simultaneous, fully
digital transmission of voice and data at higher speed than over normal access lines. Our network
infrastructure covers all of Austria and is fully digital. We are the overall market leader in data communications and IT-solutions in the Austrian
telecommunications market. In particular, we believe that we are the market leader in our core
service areas of switched and routed data networks. Although the weak economic environment
negatively impacted the Austrian data communications market, we managed to stabilize our revenues.
In order to provide our customers one-stop-solutions and to stabilize our revenues we extended our
business into a wide range of IT-services supplementing our provision of data communications
services, which we market as network centric IT-services. With approximately 1,187,000 internet customers we are the largest internet service provider
in Austria in terms of customers. In the fourth quarter of 2004 our market share in the residential
internet market remained stable at 42% (including 3% contributed by mobilkom austria AG & Co KGs
mobile internet customers) compared to the fourth quarter of 2003. According to the Austrian
Internet Monitor (AIM) survey, Austria had an internet user penetration rate of 58%, up from 55% in
the fourth quarter of 2003 based on a population of 6.8 million persons aged 14 and older which
means that in total 3.9 million Austrians use the internet. We are also the leading provider of wholesale fixed line services in Austria. In 1999, we were
one of the first incumbent telecommunications companies in Europe to introduce Asymmetrical Digital
Subscriber Lines (ADSL) services. ADSL is one of the XDSL technologies (all types of digital
subscriber line technologies via copper lines) that permit the transmission of data at very high
speeds using a standard copper access line. Primary services Wireline is our largest business segment and includes:  

Switched voice telephony;  

Pay phones and value-added services (VAS);  

Data and IT-solutions including wholesale;  

Internet access & media;  

Wholesale voice & internet and  

Other (customer premises equipment and directory services). Switched voice telephony Services We provide traditional telephone line access, also called Public Switched Telephone Network
(PSTN) access, and Integrated Services Digital Network (ISDN) basic and multi access. Unlike a PSTN
telephone line which offers a single access channel, an ISDN basic line provides two channels and
an ISDN multi-line provides 30 channels which can be used for simultaneous voice and data
transmission at higher speeds. We are required 17




---



##### Table of Contents



by law to grant other operators access to our subscriber lines, also called the local loop.
Under the Telecommunications Act 2003 we were required to act as the only universal service
provider until December 31, 2004. We will be obliged to render universal services until a new
service provider has been appointed by the Austrian Federal Minister for Transportation, Innovation
and Technology. We offer a variety of calling services to residential and business customers throughout
Austria. These services include local, long distance, fixed-to-mobile and internet dial-up at
different tariffs. We provide international fixed line voice services to destinations worldwide. We
also offer a range of call management services comprising digital voicemail, call waiting, call
forwarding, three-way conference calls and caller identification. Access lines The following table shows selected data relating to our PSTN and ISDN lines for the periods
indicated. The figures exclude pay phones, but include our internal lines and approximately 249,800
lines for qualifying low income persons at December 31, 2004. The service for low income persons
includes free monthly rental and one hour of free local traffic per month. We partly receive
reimbursement from the government for each of these lines. For further information see  4.3.
Regulation and legal framework  Regulation  Major regulatory decisions affecting Telekom
Austria. Each PSTN line includes one access channel, each basic ISDN line includes two access
channels and each multi ISDN line includes 30 access channels. At December 31,2004
    
    
    2003
    
    
    2002(in thousands)Number of fixed lines:PSTN access lines
    
    
    2,455.5
    
    
    
    2,555.8
    
    
    
    2,659.1Basic ISDN access lines
    
    
    443.6
    
    
    
    447.2
    
    
    
    430.1Multi ISDN access lines
    
    
    7.6
    
    
    
    7.8
    
    
    
    8.1Total access lines
    
    
    2,906.7
    
    
    
    3,010.8
    
    
    
    3,097.3Total access channels
    
    
    3,570.7
    
    
    
    3,684.2
    
    
    
    3,762.3
 To date, the major portion of the demand for our ISDN lines has come from business customers.
The number of our ISDN lines decreased slightly from approximately 455,000 at December 31, 2003, to
approximately 451,200 at December 31, 2004, representing a decrease of 0.8%. The decline in the
number of our access lines is primarily due to continuing migration to mobile networks. Traffic volume The following table shows selected information regarding our national fixed line traffic for
the periods indicated. It includes all minutes of tariff packages that are generally charged by the
minute, as well as free minutes at certain times of the week. Year ended December 31,2004
    
    
    2003
    
    
    2002(in millions of
minutes) (1)Traffic minutes:National (local + national long distance)
    
    
    4,174
    
    
    
    4,485
    
    
    
    4,607Fixed-to-mobile
    
    
    854
    
    
    
    855
    
    
    
    826International
    
    
    467
    
    
    
    484
    
    
    
    472Total voice minutes
    
    
    5,495
    
    
    
    5,824
    
    
    
    5,905
   (1)
    
    All amounts exclude traffic minutes that were not generated from our customers such as
interconnection traffic that originated in networks of other providers or payphone traffic. 18




---



##### Table of Contents



The decrease of our voice traffic by 5.6% in 2004 reflects the competitive environment
and the further migration to mobile communication. The overall mix of our voice traffic in 2004,
only slightly changed when compared with 2003. In 2004, our customers generated 467 million minutes of outgoing international traffic through
our fixed line network, compared to 484 million minutes in 2003 and 472 million minutes in 2002.
This resulted in a decrease of 3.5% in 2004 compared to an increase of 2.5% in 2003. Our principal
outgoing international traffic routes are to Germany, Switzerland and Italy and accounted for
approximately 59.3% of our total outgoing international traffic during 2004. Tariffs We currently have two tariff schemes. One of the tariff schemes is based on pulses and the
other is based on pay-per-second. In regards to the tariff scheme based on pulse, the number of
pulses per minute determines the exact charge, however the number of pulses per minute varies
depending upon the calling time, day and destination. At December 31, 2004 we had about 1.2 million
customers using tariff schemes based on pulse. In 2001, we introduced a pay-per-second tariff scheme, the so-called TikTak tariffs, which
is adapted to our customers calling patterns and re-launched it in 2004. As a result, we managed
to increase our voice market share (excluding internet dial-up) to 54.4% at December 31, 2004, up
from 52.7% at December 31, 2003. At the end of 2004, the TikTak tariff scheme accounted for 69.4%
of our traffic volume. At December 31, 2004, more than 1.4 million customers had opted for one of
the TikTak tariffs. The table below shows the trend of our average tariffs. Due to increased marketing efforts and
growing competition, our average national and international tariffs fell in comparison to 2003. The
fixed-to-mobile tariff increased because more calls terminated in higher priced networks. The total
average tariff for voice services decreased by 3.8% in comparison to the prior year. The average
tariffs are calculated by dividing the revenues in each category by the total minutes as reported
in the table of traffic minutes excluding internal traffic. Year ended December 31,2004
    
    
    2003
    
    
    2002(in EUR)Average tariffs:National (local + national long distance)
    
    
    0.040
    
    
    
    0.044
    
    
    
    0.048Fixed-to-mobile
    
    
    0.187
    
    
    
    0.184
    
    
    
    0.189International
    
    
    0.185
    
    
    
    0.196
    
    
    
    0.213Average voice tariff
    
    
    0.075
    
    
    
    0.078
    
    
    
    0.081
 In September 2003, we discontinued our Minimum Tariff, a tariff option for low usage
customers, because revenues did not cover costs. Existing customers of the Minimum Tariff were
transferred to the Standard Tariff. For further information see Item 8.2. Other information 
Litigation. In May 2004, we launched a complete tariff reform, offering competitive prices to all
destinations. We essentially created tariffs specific to our main market segments. We offer TikTak
privat for the residential segment, TikTak office for small and home offices and TikTak business
for all other companies. In addition, we launched tailor-made packages which entitle the customer
to specific price reductions for an additional monthly fee, adapted the charge by second and
adjusted the call charge to key destinations. Within these packages we introduced the flat rate
tariff for residential customers in off-peak time. At December 31, 2004 more than 320.000 packages
were in use. The new TikTak tariffs resulted in an improvement of price perception and the possibility of
selling additional or upgraded products. Pay phones and value-added services Public pay phone services We are the principal provider of public pay phones in Austria and operate approximately 21,700
pay phones including about 500 public multimedia terminals across Austria. Multimedia terminals
provide access to internet, 19




---



##### Table of Contents



e-mail, video telephony and various other multimedia services. The number of pay phones was reduced
by 4.0%. The roll-out of public multimedia terminals, primarily in premium locations, began 2003
and increased in 2004 by approximately 400%. Tariffs for pay phones are separated from fixed voice tariffs. Therefore, tariff reductions
for fixed line calls did not impact pay phone revenues. In 2004, we began using the payphones and multimedia stations as advertising media, renting
advertising space to different companies. Value-added services (VAS) Our current portfolio of VAS includes:  

Toll-free services, which enable a user to call a telephone number free of charge;

Shared cost service, which allows callers and call recipients to share call charges;

Premium rate services, which charge the caller a higher than standard telephone rate
in exchange for services provided, a portion of which is passed on to the information
provider called by the customer;

Voting lines which allow the caller to participate in various polls;

IVR (Interactive Voice Response) Solutions;

Voice virtual private network (VPN); VPN are network services that form a virtual
network designed for the exclusive use of a corporate or governmental entity using the
infrastructure of one or more carriers; and

Calling cards. In 2004, the demand for toll-free services, especially for customer service hotlines, has
increased due to stronger competition and higher demands for professional customer services.
Premium rate services allow our business customers to sell their products and services directly
over the telephone, thus reducing sales costs and meeting their customers needs. We expect to
increase market share in the area of premium-rate, free-phone and shared cost services due to
further product innovations and variations launched in 2005. In particular, new event-based
services show high growth rates and we are able to gain from the early adoption of our services.
Event-based services are believed to establish new markets in which we expect to perform highly in
terms of market shares and revenues. The strategic aim of VAS for 2005 is to provide more services and cover a broader range of the
value-added chain on the customer side. Tariffs We adhere to the regulated tariffs for toll-free numbers, shared cost and premium rate
services. Telekom Austrias prepaid calling cards allow customers to make calls from both
fixed-line and mobile telephones from Austria to about 200 countries and vice versa from about 40
countries to Austria at various prepaid price models. Data and IT-solutions We offer customers a full range of integrated services, bundling data, internet and
IT-services into customized solutions. Services We offer a wide range of national and international data communications and IT-solutions, including:  

Leased lines and related services;

Switched data services; 20




---



##### Table of Contents





Corporate network services;

Data value-added services;

IT-solution services; and

Business applications. As we are Austrias leader in the leased lines market, the regulatory authority requires us to
give other operators access to our leased line network. Leased lines and connected services We are the principal provider of national and international leased lines in Austria and
operate a centrally managed national leased line network. The leased line business generates
revenues by leasing fixed lines to customers for their exclusive and dedicated use. Our leased line
basic service establishes a permanent connection for the transmission of voice and data traffic
between two geographically separate points or between one point and several other points. These
points can be entirely within Austria or partly in Austria and partly abroad. Moreover, we offer our leased lines in combination with a service package such as security and
network management. These packages are used by customers to establish, operate and extend their own
networks. Our leased line customers pay an initial installation charge and a recurring fee based on the
type, length and capacity of the leased line. However, in recent years, the recurring fees have
declined significantly. We expect that competition will continue to pressure leased line prices.
Nonetheless, we expect demand for leased lines and connected services to continue to increase as
telecommunications and internet service providers lease additional capacity to establish new, or
extend existing, networks. Data services based on SDH Technology (Synchronous Digital Hierarchy).Our transmission
network provides cost-effective broadband services for business customers requiring higher and more
flexible levels of bandwidth and permits integrated voice, data and multimedia communications. Switched data services We offer a range of data services on our switched network, including packet switched, frame
relay, ATM (asynchronous transfer mode), video connection and IP-MPLS (multi-protocol label
switching technology based on the internet protocol standard) services. Packet-switched services.We provide packet-switched services on our public switched data
network. These services allow data communications for a range of applications, such as database
searches, electronic funds transfers, and e-mail. The number of our service ports connected to our
packet-switched service increased by 0.7% to approximately 56,400 at the end of 2004 from 56,000 at
the end of 2003. Frame relay services.Frame relay is a high speed open protocol, which is well suited to
data-intensive applications, such as connecting local area networks and is a cost-effective
alternative to leased lines for some of our business customers. After being re-launched in 2004,
frame relay now provides QoS (Quality of Service) and premium service levels. The number of frame relay service ports declined by 13.2% to approximately 3,300 at the end of
2004 from 3,800 at the end of 2003 because of the migration to our new IP-based platform. The
provided bandwidth increased by 5% during the same period. ATM services.ATM is a high-performance, cell-oriented and multiplexing technology that
utilizes fixed-length packets to carry different types of traffic. We have developed products to
counteract system failure and increase resilience. As a result, we are able to back up our
customers networks in case of system break-downs. The number of ATM ports increased by 3.7% to
4,475 in 2004 from 4,316 in 2003. Video Connection services.The Video Connection service provides access to our domestic Video
Connection platform and our international Video Connection gateway. The service started
experimentally in the fourth quarter of 2004. 21




---



##### Table of Contents



IP-MPLS services We were the first provider in Austria with a stand alone business IP backbone, based on MPLS
technology with different classes of service features. Stand alone means that we operate our
customer VPNs (virtual private networks) on our network rather than on a public internet platform,
which is important for security and performance reasons. MPLS is a technology to increase the
performance of a routed network determining the best path for forwarding packets of data between
any two hosts. Each customer application can be assigned to one of five classes of services, each
providing different performance levels. This business IP backbone is the basis network for our
business IP products and solutions. IP-MPLS services is a segment with substantial growth since it allows new features and
applications, such as data prioritization, high class video and voice applications or integration
of home and mobile users. Corporate network services We offer a wide range of corporate network services, including planning, installation, network
management, and maintenance of corporate-wide communications networks. These services include:  

Corporate network LAN solutions. Local-Area Networks (LAN) are computer networks that
are typically confined to a single or a few buildings.

Corporate network WAN solutions. Wide-Area Networks (WAN) are computer networks that
interconnect two or more LANs and provide coverage of larger geographical areas. Our WAN
solutions provide fully designed and managed WAN network infrastructure to business
customers.

Network Management solutions provide advanced functionalities for customers to manage
and customize their computer networks.

International Corporate & Partner Services in cooperation with international partners
provides customers global access to various network services like frame relay, ATM, IP
services and corporate network services.

IP-Voice services. We offer corporate customers the integration of real-time voice
communications into corporate data networks including PABX (private automatic branch
exchange) functionality using the technology VoIP. We offer these IP-Voice Solutions as
hosted or dedicated services to our customers. Corporate network customers pay a flat rate for services, such as network management,
depending on the level of service selected in the service level agreement. We expect that the demand for corporate network services will continue to increase as
businesses increase internal efficiency and knowledge management, as well as the need to provide
products and services to customers more quickly and conveniently. We also expect to provide
corporate network services bundled with IT-solutionsions and business applications and utilize
additional synergies. Electronic payment systems. Datacash is a solution which enables cashless payment systems with
online verification and meets the increasing demand for secure electronic payment. Aircash is the
wireless equivalent to Datacash. Aircash is a joint product of our Wireline and Wireless segments. Telemetry and Security Services (TuS)enables the transmission of emergency calls and alarms
to security firms (public emergency units and private sentries) as well as telemetry data from the
customer to its central security and control office. The TuS network is a uniform area-wide, highly
available and 24-hour-monitored high security network that is on par with international security
network specifications. IT-solution services IT-solution services deals with a wide range of IT-services supplementing our provision of
data communications services which we market as network centric IT-services and generates
additional value for our customers beyond traditional data services. The service offering ranges
from consulting to design and implementation of customer specific IT-solutions. These solutions are
designed for outsourcing customers IT infrastructures to external service providers, in the way
that analogous to customers needs several IT-services modules can be flexibly and efficiently
combined to a homogenous IT-solution. Moreover, Telekom Austria is 22




---



##### Table of Contents



responsible for the continuous surveillance, end-to-end management and maintenance of
IT-services, which ensures the ongoing success of customers business transactions. IT-solution services mainly include 5 different service definitions:  

IT infrastructure services,launched in 2003, centrally provide the basic data center
infrastructure (housing services) as well as the disposition of local services at the
customer site (desktop services).

Managed IT-services, available since mid-2003, provide housing (providing
accommodation of IT equipment) and hosting services (providing hardware and software for
IT-solutions) for the customers IT infrastructure with defined service level
agreements. In 2004, storage-providing services will complete the managed IT-services
offering.

Application and web servicescontain in addition to the supply of domain name
services the provision of web space and standard applications, such as applications for
mailing services.

IT Security Servicesinclude firewall services (centrally hosted or locally provided
at the customer site) and  launched in 2003  an e-mail security service which protects
customers e-mail traffic from computer viruses. In 2004 we expanded our product
portfolio by a complementary service blocking Spam (unsolicited commercial e-mail).

IT Outsourcing Servicesinclude managing a customers IT landscape partially or
entirely. Thus, the customer specific IT-services are completely outsourced to and
provided by Telekom Austria. Business applications Business applications represent a wide range of services, which are focused on e-business,
e-office and e-customized solutions. E-business mainly consists of our well established business-to business communication services
and some newer products associated with e-commerce services. Through our cooperation with A-Trust, in which we hold a 19.9% stake, we provide a digital
signature product allowing secure digital signatures to be used on-line, thereby enabling the
secure processing of transactions and payments over the internet. E-office solutions, such as the new e-conferencing solution, enable companies to conduct
virtual meetings and share virtual presentations. New web-learning products provide virtual
classrooms. A typical customized e-business solution is the electronic data interchange service of legal
documents (Elektronischer Rechtsverkehr). This is a secure on-line system operated for the Austrian
Federal Ministry of Justice in cooperation with the Austrian Bar Association which enables
customers to file legal documents electronically with the Austrian courts. We also provide a
service called the European Business Register (Europäisches Firmenbuch) providing access to
commercial register databases in 13 European countries. In the medical sector, we offer a special network used for the transmission and management of
patient data to and from medical institutions, called DaMe. Recently, we signed a contract to take
part in the national health insurance project E-Card (Electronic Card), which is designed to
replace the paper-based health insurance certificates and in a future step, to process
electronically approvals granted by the health insurance authorities for special medical treatment. As a full service provider we offer solutions including access to the platform, standard
content, individual content creation and consulting and customized solutions from customer
relationship management, e-marketing or e-procurement to corporate website services. This is due to
the successful cooperation with our 100% subsidiary World-Direct eBusiness solutions GmbH. Internet access & media We provide internet services in Austria and in the Czech Republic, through our 100%
subsidiary, Czech On Line. 23




---



##### Table of Contents



Austria Internet access & media includes the following services:  

Access services (dial-up access, broadband ADSL access, business internet access); and

Portal business with online media sales, e-commerce, paid services and multimedia services. Our brand Aon combines all product and service offerings for private internet access and
internet services. Access services We offer fixed network internet access through dial-up service and high speed broadband
internet access service, XDSL (ADSL and SDSL). The table below shows the development of the number of our internet customers at the dates
shown: At December 31,2004
    
    
    2003
    
    
    2002Dial-up customers
    
    
    888,600
    
    
    
    819,000
    
    
    
    703,400ADSL customers
    
    
    298,400
    
    
    
    207,600
    
    
    
    143,100Total customers
    
    
    1,187,000
    
    
    
    1,026,600
    
    
    
    846,500Internet dial-up traffic (in millions of minutes)
    
    
    3,376
    
    
    
    3,953
    
    
    
    4,305Average Internet dial-up tariff (in EUR/min.)
    
    
    0.016
    
    
    
    0.017
    
    
    
    0.016
 At December 31, 2004, we had about 298,400 ADSL customers, of which 27,100 were business
internet customers and 271,300 residential customers. In addition, we have approximately 85,200
ADSL subscriptions that were sold to our wholesale customers. The table excludes traffic related to
our one-time internet offer, Complete, a flat-rate internet product, for which the minutes used are
not charged. We ceased offering this product in 2000. We derive revenues for our access services primarily from subscriber fees paid by customers
for our dial-up and ADSL services. Dial-up access In October 2001, we launched AonFlash, our dial-up product family with five different service
packages. For our product AonFlash Easy, as with its predecessor AonPuls, we do not charge a
monthly rental fee, but a special dial-up internet tariff for the connection via fixed line. In
addition, we offer AonSuccess which is an add-on product available to customers who use one of the
other internet products described above providing 50 megabites of additional web space for large
homepages. Broadband Residential ADSL access In the summer of 2003, the residential ADSL portfolio with modules for download volume or
online time was re-launched and Aon Speed FreeTime and add-on products like Aon Spamfilter and
AonVirenchecker(Aon virus check) were included to better meet the changing customers needs and
to satisfy their increasing demand for security products. In October 2004 the entire AonSpeed Portfolio was re-launched. Five different ADSL product
versions are targeted to specifically fit light users, average users and heavy users. Customers can
choose between three bandwidth alternatives and different data transfer volume categories. AonSpamfilter enables residential customers to take control of their personal mailbox and
protect themselves from unsolicited commercial e-mail. AonVirencheckerincludes a local desktop
virus protection software as well as a tool to scan incoming e-mails and attachments for viruses. For all products (except ISDN), residential customers can choose between self installation or
installation by the technical customer service. They can also choose an additional package offering
wireless connectivity in connection with several of our ADSL products. 24




---



##### Table of Contents



aon.tv.Telekom Austria continued its success with the broadband television service Aon.tv by
signing several new contracts with international partners. The service offers both, national and
international broadcast channels as well as a variety of on demand content such as feature films,
TV-series, music clips or news exclusively to AonSpeed customers. Buntes Fernsehen. In October 2004 Telekom Austria experimentally launched the first village
television service in Engerwirtzdorf(Upper Austria) where customers create content for their
community. Aon Gaming.Telekom Austria was the first official ADSL online gaming partner of Microsoft and
Sony when they started their online services in Austria in 2003. We developed product bundles
consisting of gaming consoles and broadband internet access. Business internet access For our business customers we re-launched the whole product group Business Access in 2004,
consisting of a new pricing scheme for XDSL, higher transfer limit, lower high usage fee and
included many more than the standard features. This re-launch made the XDSL products more
competitive and resulted in an increase of the product activations. With XDSL Office Light Telekom Austria closed the gap between AonSpeed and XDSL Office. Now
Telekom Austria can offer products for each target group which provides for more flexibility to the
customer. In addition we launched a wide product portfolio for business internet customers
consisting of Top Service, Business Access Backup and Business Access IP-Sec (Access Internet
Protocol Security). Top Service includes lower reaction and problem solving time. Business Access
Backup increases the availability of Internet access with a backup line based on ISDN or XDSL.
Business IP-Sec gives the customer the possibility to access the internet and to contact the main
office on a secure channel, all using the same line. Portal business with online media sales, e-commerce, paid services and multimedia services Our main portal, aon.at, offers a wide range of services from communication, information and
entertainment to online shopping and tries to satisfy various daily needs of Austrian users. A
portal is defined as a network that aggregates, navigates and delivers a wide range of internet
commerce, community, communication, customer services and content. Revenues are generated from
business-to-consumer services, multimedia services, aon.tv, sales of online advertising, paid
services and online shops. We expect to continue to transform existing free services into paid services and focus on
cooperations, entertainment, communication and local content in order to create new ways to
generate and increase revenues and our profitability. The Telekom Austria portals including mobilkom austria AG & Co KGs portal A1.net led the
Austrian portal market of internet service providers with approximately 815 million page
impressions and 2.0 million unique visitors in 2004. Page impressions refer to the number of times
a specific website has been accessed or viewed by users. Czech On Line We are present in the Czech internet market through our Czech subsidiary, Czech On Line a.s.
(COL), a leading provider of internet services and the first provider to introduce free dial-up
internet access in the Czech Republic. In 2004 and 2003 COL generated revenues of EUR 20.3 million
and EUR 18.5 million, respectively. We acquired 100% of COL in 2000. In 2001, COL evolved from an
internet service provider to a full communications service provider and has since then defended its
leading position in an increasingly competitive environment. At December 31, 2004, COL had
approximately 247,100 active customer accounts, down from approximately 279,400 at the end of 2003.
The decrease in the number of customers results from a decrease of low-end dial up customers due to
stronger competition, which could not be compensated by the increase in the more valuable ADSL and
voice customers. COL offers the following services:  

Free dial-up internet access through PSTN, ISDN and GSM;

Internet access for customers via frame relay, leased lines, and wireless
point-to-point and point-to-multipoint access services and ADSL services; 25




---



##### Table of Contents





PSTN voice services for business customers for local, national and international
calls based on direct access and carrier pre-selection, and for residential customers
based on carrier selection;

Value-added services (such as global internet roaming, web hosting, domain
registration, virtual mailboxes, anti-Spam and anti-virus software);

Content services, including a news aggregator and a customized search engine for
Czech content; and

Free customer support 24 hours a day, seven days a week. During 2004 COL continued to roll out its direct access microwave network in the 3.5 GHz
bandwidth spectrum covering 22 cities. Due to changes in the regulatory environment in 2003, COL was able to enter into an
interconnection agreement regarding the internet dial-up traffic with Cesky Telekom. Through the
introduction of ADSL products COL entered the broadband market. In addition, COL introduced bundled
voice and internet services for business customers. In 2004 COL launched voice telephony via
carrier pre-selection for residential customers. Wholesale voice & internet We provide wholesale services for national and international mobile and fixed network
operators and Internet Service Providers (ISP). National wholesale servicesinclude:  

Call origination and termination;

Transit and access to other services;

Toll-free and premium rate services;

Unbundling of local loop and collocation;

Signaling services for mobile applications (roaming, Short Messaging Service (SMS));

Network construction. We use our experience to plan, build, operate and maintain
networks for our wholesale customers. In 2004 we strengthened our position as the prime
outsourcing partner for high quality backbone networks for national mobile operators;

Broadband solutions for ISP and other telecommunications providers; and

Emergency and directory inquiry services. At December 31, 2004, we had entered into interconnection agreements with 24 fixed-line and 5
mobile licensed operators in Austria. Separate fixed and mobile interconnection agreements were
entered into with all five mobile operators. By the end of 2004 we had installed about 85,200 ADSL
connections for our wholesale customers. International wholesale servicesinclude:  

Call termination. We deliver international incoming calls to Telekom Austria
customers or subscribers of other network operators.

Voice transit service. This service consists of routing traffic via our international
network. We also act as account intermediary.

Signaling for international roaming.

Bandwidth transit services. Due to Austrias geographic location, we are in a
position to offer transit capacity on our international network among the eight
countries that border Austria. 26




---



##### Table of Contents





International internet access. We provide connections to the networks of other
European countries, the United States and worldwide.

Satellite services. We provide bandwidth as well as international connectivity to our
national and international customers through our own teleport. A teleport is a satellite
antenna station that provides connectivity to various international satellites.

International Virtual Private Networks (VPNs). We provide VPNs for national retail
business customers through our international partners throughout the world.

Jet2Web Stream. In 2004 we further expanded the development of our fiber optic
backbone network in foreign markets. The efforts were mainly focused on working out
solutions to extend the Jet2Web Stream to Slovenia and Croatia. We are in the process of
implementing backbone capacities pursuant to actual demand. At present, Telekom Austria
is also developing appropriate solutions to further extend the Jet2Web Stream from
Budapest to Romania and Bulgaria. Traffic volume Our incoming and outgoing international traffic includes calls to and from our customers and
customers of other network operators routed through our network. We processed more than 2.8 billion
traffic minutes of international incoming and outgoing calls, especially incoming calls to fixed
and mobile networks. Tariffs We receive payments for terminating international traffic and pay international carriers to
carry and terminate our outgoing calls in other countries. These receipts and payments are based on
settlement rates negotiated with other international carriers on a bilateral basis. In addition, we receive payments for national interconnection traffic and pay other national
carriers to carry and terminate calls from our customers in their networks. These tariffs are
regulated by the Austrian regulatory authority (RTR). In 2004, RTR decreased fixed line
interconnection tariffs by 3.3% on average. Our main source of interconnection costs arises from calls to mobile networks. Interconnection
fees for terminating calls in the network of other mobile operators range from EUR 0.1318
(T-Mobile), EUR 0.1380 (Connect Austria, tele.ring since April 2005), EUR 0.1599 (tele.ring until
April 2005), to EUR 0.1962 (Hutchison 3G Austria). The Austrian regulatory authority recently
announced its intention to decrease incrementally all mobile termination tariffs until December 31,
2011. Interconnection costs also arise from calls to toll-free and VAS numbers provided in our
network which originated in networks of Austrian mobile operators. The underlying, so-called mobile
origination tariffs range from EUR 0.1028 (mobilkom austria AG & Co KG) up to EUR 0.1962 (Hutchison
3G Austria). Daytime, evening and weekend rates are identical. Other services (customer premises equipment and directory services) Customer premises equipment We are a leading provider of telecommunications equipment, systems, related post-sales
maintenance, and service for residential and business customers in Austria. As in most European
Union member countries, the market in Austria for such equipment and systems, commonly known as
customer premises equipment, is characterized by high competition and low profit margins. We
believe, however, that the supply and servicing of customer premises equipment is an essential
element of providing full service to our customers. Through the provision of customer premises
equipment, we are able to develop closer relationships with our customers, encourage the use of new
technologies and cross-sell other services such as ISDN and ADSL. It also helps us to better
understand our customers evolving telecommunications needs. We sell and lease customer premises
equipment manufactured by leading vendors through retail outlets, including our own call centers,
our Telekom Austria and A1 Shops, direct sales force (for business customers), our door-to-door
agents, as well as third-party distributors. Our range of customer premises equipment includes:  

Telephone systems, which help corporate customers manage their telephone extensions
based on state-of-the-art technologies and developments like Voice over IP (VoIP)
telephony; 27




---



##### Table of Contents





Enhancements and supplements to PABX (private automatic branch exchange) such as
Computer-Telephony Integration (CTI), contact-center applications or unified messaging
(UMS), which provides a single interface for voice, e-mail and fax messages;

LAN and WAN networks based on standardized ISDN-telephony or based on VoIP telephony;

Voice communication based on ISDN and VoIP telephony, and PC software applications;

Telephones and accessories, fax machines;

Mobile products; and

Maintenance services. We plan to grow our customer premises equipment business by exploiting opportunities arising
from the convergence of information technology and telecommunications systems, systems integration
and internet services. Directory services Directory services mainly include directory assistance services, directory data selling,
directory publications and information-services. The number of directory inquiries and related
services decreased further during 2004 due to the availability of electronic inquiry devices via
internet, which are mostly free of charge, as well as electronic devices such as PDAs (Personal
Digital Assistant) and mobile phones that include applications for directory management. Directory assistance services & information services.We provide national and international
operator-supported directory services through value added numbers. New products like directory
services per SMS for reverse searches of names and addresses were launched during 2004 and now
complete the directory assistance portfolio. Furthermore, we provide directory assistance for other
carriers and are also hosting directory service numbers for other service providers. Moreover, we
offer a number of information-services and the classic telegram. In 2005, Telekom Austria plans to
extend its portfolio in the information-business with new automated voice-operated services. Directory publications & directory data selling.According to the Austrian Universal Service
Ordinance we collect and maintain a database of our subscriber data and other fixed-line and mobile
service providers which is the basis for the Austrian telephone directory published by Herold. This
database is also offered to other directory assistance providers and telephone book publishers. In January 2004, the online telephone directories www.etb.at, provided by Telekom Austria
and www.herold.at, provided by Herold Business Data AG merged into a joint search machine for
Austrian telephone numbers, provided by Herold Business Data GmbH & Co. KG. Competition We face intense competition that has resulted in a reduction of tariffs and prices throughout
the market and we expect that pressure on tariffs will continue. We believe that market
liberalization has contributed to market growth for internet services and intensified competition
in voice telephony. Management believes that the market for data communications and IT-solutions as
well as internet services will continue to grow moderately whereas the fixed-line voice telephony
market will further stabilize. The population of Austria is concentrated primarily in a few urban areas. Approximately 20% of
the Austrian population lives in the Vienna area. Competitors can therefore service a large
percentage of the Austrian population by focusing on a limited geographic area. Under our universal
service obligation, we are required to provide voice telephony, public pay phones, directory
inquiry services and other services throughout Austria, including rural areas. Until the end of
2002, competition has concentrated primarily on price. However, we believe that the decrease in
prices is slowing down and we are noticing a trend towards convergent and combined products and
services such as Triple Play (a combined service of voice, data and video). The Austrian data communications and mobile communications market is fully liberalized. The
regulatory authority has determined that we have significant market power in certain retail and
certain wholesale markets. 28




---



##### Table of Contents



This partially limits our pricing flexibility. As a result, most of our pricing has to remain
cost-based and significant changes have been subject to prior approval by the regulatory authority.
For more information, see  4.3. Regulation and legal framework  Regulation. The procurement of goods and services by the Austrian federal government, state governments,
municipalities and the public sector in Austria is subject to the Austrian public procurement law.
Under the approval procedure for our tariffs and general terms and conditions we are limited in our
ability to grant substantial price discounts and alter terms and conditions. The public procurement
law requires the public sector to make its purchase decision on either the best price or quality
among the offers. Our competitors are free to fix their tariffs and general terms and conditions
and thus may have greater flexibility in the price discounts and general terms and conditions they
may offer. We had interconnection agreements with 24 fixed line operators and 5 mobile network operators
as of December 31, 2004. Our primary competitors in the provision of voice telephony through fixed lines are the
recently merged Tele2UTA, tele.ring, eTel and UPC Telekabel (Priority). Several smaller competitors
have left the market including Carrier One, European Telecom, TeraCom, KPNQwest, Red Telekom,
Cybertron and Comquest. Most of our competitors are partly or even in majority owned by
international, experienced telecommunications operators, and some of them are incumbents in their
own home markets. The acquisition of UTA by TELE2 resulted in a new, strong competitor with approximately 1.4
million customers and its ability to offer the full range of fixed line telecommunications
services. In addition Tele2UTA is offering mobile communications as a mobile virtual network
operator as well. In the market for data communications and IT solution we face intense competition ranging from
start-up companies to multinational alliances, like AT&T, Equant, T-Systems, Colt, IBM, SBS
(Siemens Business Services), Atos Origin, tele.ring and Tele2UTA. We compete in all areas of data
communications services based primarily on a combination of price and quality of service. We are
the overall leader among data communications providers in Austria. We face many competitors in the provision of internet services, ranging from established
global portal service providers to general telecommunications operators like Tele2UTA, UPC
Telekabel (chello), or Inode. Our main ISP competitors are partly or wholly owned by international
internet service providers. In the business market segment, we compete primarily with full-service
telecommunications operators that offer internet access services, hosting services and voice
telephony through fixed lines. Some of the operators in these market segments have longer operating
histories abroad and greater name recognition in some European markets or in the United States. Our
main competitor in the Austrian portal market for internet service providers is Tele2UTA. Providers who chose unbundling services grew considerably in the SOHO and SME market. In
general we have an ongoing market consolidation. Two major ISP, Nextra and Eunet, have been taken
over by the Air Call Group. UTA, the second largest Austrian full service provider joined the Tele2
Group through its merger with Tele2. Austrias third largest provider took over a couple of small
providers. T-Online decided to leave the Austrian ISP market due to the strong competition. Sales and marketing In the Wireline segment, we classify our retail customer base into three customer groups:  

Residential retail sales: in this marketing segment we serve about 2.3 million
residential customers. The customer base is segmented according to customer needs in
telecommunications services;

Small offices/home offices (SOHOs) and small and medium-sized enterprises (SMEs); and

Top SMEs; and key accounts. In all three retail customer groups, marketing activities are based on integrated marketing
analysis including customer needs, customer behavior and customer lifetime value. In accordance
with their telecommunications preferences, we create individual customer target groups and provide
them with special products and solutions. For each customer segment an individual communication
core message and communication channel mix is developed. We target our customers by direct
mailings, online advertising and sales promotions. 29




---



##### Table of Contents



Customers have the choice of ordering products and services by telephone, fax or mail and via
online shopping on http://shop.telekom.at. Our call center hotline is another important sales
channel through which customers can obtain information and order fixed line-related products and
services. Our wholesale customer base comprises national and international mobile and fixed network
operators and ISP. Our marketing activities are customized to the individual needs of our customers
focusing on the provision of integrated solutions and quality of service. At December 31, 2004, we had a network of 49 Telekom Austria Shops, offering competent
customer service and advice concerning our entire service offerings for residential and business
customers. In addition, we market our products and services through the offices of the Austrian
Postal service and use retail chains as point of sales. Furthermore, customers are directly
solicited personally or by phone by professionals and by our employees. We target business customers in this segment with our dedicated sales force. Starting in 2002,
we focused on retention of our large business customers and extension of our customer base by
attracting SME. Key account customers are targeted by our Business Solutions unit embarking on a
customer-focused approach with a strong emphasis on all-in-one solutions. Our wholesale services are marketed and sold directly to national and international carriers
by our carrier managers. In 2004, we served more than 110 national and 280 international wholesale
customers. We also plan to further push our sales activities through indirect Partner Sales in
those countries which are covered by our fiber optic ring (Jet2Web Stream). Customer service We are convinced that a long lasting customer relationship is essential to outperform our
competitors. Therefore, we continuously concentrate on service leadership. We handle about 13.9 million customer contacts at our front office, 1.2 million service and
installation assignments and 5 million back office cases a year with a focus on improving customer
satisfaction as well as increasing our performance. In an independent survey our directory services achieved best in class customer satisfaction
values compared to national competitors while significantly improving efficiency by 16% in terms of
automation and declining costs per billable minute by approximately 20% compared to the year 2003. Moreover, we have successfully implemented a nationwide workforce management tool connecting
1,300 technicians of our field force handling up to 7,000 service and installation cases a day.
This system allows us to maintain satisfactory customer service in a mass market through the use of
state of the art dispatching tools. Our internal process systems have benefited from increased
automation. We are also in the process of complementing our efficiency by making our process flows more
customer oriented with a special focus on our business customers and increased self service
functions through the use of the internet and by raising automation levels in the back office. Networks Telekom Austria is the largest telecommunications operator for fixed and mobile network
services in Austria. All customer services are based on advanced, high quality technology networks
with proven reliability. Switched network We operate a fully digital voice switching network serving 2.5 million PSTN access lines,
about 443,600 ISDN basic access lines, and 7,600 ISDN multi access lines at December 31, 2004. Our network combines reliable technology with efficient network design. To assure network
reliability our voice switching network operates on a double-tracked basis and we have an adequate
administration, and maintenance system. Our call success rate and exchange availability for 2000
through 2004 was between 99% 30




---



##### Table of Contents



and 100%. The call success rate is the percentage of originating calls resulting in successful
connections (ringing tone) with the intended destinations. At December 31, 2004, more than 94% of the voice switches and remote units were connected to
our transmission network by optical fiber cables, the highest capacity medium available. We are in the process of optimizing the switching network. We expect this program to reduce
operational costs, lower capital expenditures, and accelerate service rollout. Through our intelligent network, also known as IN platform, we offer, among other services,
toll-free, VAS and number portability. The demand for new IN services is driven by customer needs
for communication within a predetermined user group and by regulatory requirements, such as number
portability. By adopting the same IN technology in the fixed and mobile networks, we will be able
to offer convergent services such as using the same handheld phone for fixed and mobile calls. Data networks Technological innovations and advances in standardization allow us to provide a set of new
telecommunications and multimedia services in connection with our large established network
infrastructure. These innovations have occurred in three different areas: backbone network
infrastructure, access infrastructure, and advanced services. Backbone network infrastructure.This infrastructure is based on optical signal transmission.
We predominantly use optical fiber as the transport medium for high-speed digital transmission. Our
core network was based on approximately 20,087 kilometers of optical fiber cables at December 31,
2004. In addition, we provide radio links in specific areas upon customer demand. Telekom Austria runs a state-of-the-art multiservice network which is based on ATM and IP
technology. Through the deployment of MPLS networking technologies we are able to integrate the
SDH, ATM and IP networking concepts in order to offer the required quality of service for the whole
service portfolio of Telekom Austria, i. e. broadband access services based on ADSL and business
customer services derived from fiber and SDSL access technology. Thus, we are implementing our
networking infrastructure towards an All IP networking concept, which is the basis for further
cost reduction as well as offering new voice and data services. Access infrastructure.Our access infrastructure is the means by which our customers connect
to our networks. The access network plays a key role in our business as it supports the entire
range of services. Broadband technologies such as ADSL permit high-speed internet access and
digital video transmission on normal telephone lines. Across Austria we have installed 903 ADSL
relay stations covering more than 87% of Austrian households. We had about 383,600 ADSL lines
installed at the end of December 2004, up from 261,100 at the end of the year 2003 and we continue
our expansion. In addition, we provide multimedia and other data services with high capacity requirements
using direct access via optical fiber for large business customers. As the demand for broadband
services increases, we anticipate a deeper penetration of optical fiber in the access network and
expect to implement next generation solutions such as very high speed digital subscriber line
(VDSL) applications on existing copper lines. Advanced services.These services are driven partly by the technological developments and
partly by the demand from customers for more sophisticated services. New information and
communication technologies such as digital mass storage and techniques for video compression and
software platforms enable us to offer internet content services, unified messaging services, and
commercial services such as digital signatures. International network Our international voice traffic is routed through two international gateways. We have
connections to 244 destinations (including global satellite networks) and direct links to 136
international operators in 81 countries. We partially own or have rights to use undersea cables in
addition to satellite capacities of the corporations Intelsat and Eutelsat. We also take part in
projects for the installation of international optical fiber-backbones such as Trans European Lines
and Trans Asia European Lines. With the installation of Jet2Web Stream we have expanded our
broadband activities abroad. The network now covers Prague, Frankfurt, Munich, Bratislava,
Budapest, Ljubljana and Milan. All parts of this network can be expanded up to 320Gbits, which
would allow us to adjust capacity step-by-step to meet growing demand. The expansion of our fiber
optic ring Jet2Web Stream enabled us to connect mobilkom austria AG & Co KGs subsidiaries to our
networks at low costs and to act as a major provider for the transmission of voice and data
communications in Central and Southeast Europe. 31




---



##### Table of Contents



Next generation network Similar to the way in which the entire telecommunications network had to be completely renewed
through digitalization at the beginning of the 1980s, new technology is being developed to enable
a gradual transition from the digital networks to a packet oriented network, commonly referred to
as Next Generation Network (NGN). A packet oriented network is expected to enable a more efficient simultaneous transmission of
data services and voice telephony services. NGN is expected to give us more flexibility to satisfy
customer wishes and to offer the exact services that are needed at the moment. Easier access and
the opportunity to offer new services like videoconferencing, multimedia messaging services,
audio/video streaming applications or video mailboxes will generate additional business
opportunities. We are still in the process of evaluating the details of the financial implications of
different migration plans to NGN. We have began a technical review of concept projects in order to
evaluate the technology and compare how the different existing technologies enable us to deploy new
innovative services on new technologies with regard to optimizing network costs using existing
infrastructure (see Item 5.4. Liquidity and capital resources  Capital expenditures). Information technology/Operations support systems The quality of our operations support systems is critical to the success of our business. Our
operations support systems store, manage and analyze essential business information. These
operations support systems enable us to make timely business decisions and develop new products and
services based on the needs of our customers. By increasing the automation of our business
processes we improved the productivity of our operational units and improved access to information.
Our operations support systems are mainly based on market-standard software, and we expect to
further replace legacy systems with standard software solutions. 32




---



##### Table of Contents



Wireless Our Wireless segment is represented by mobilkom austria group which is comprised of mobilkom
austria AG & Co KG and its subsidiaries. mobilkom austria group generated revenues of EUR 2,125.5
million in 2004, EUR 2,030.2 million in 2003 and EUR 1,909.4 million in 2002, before intersegmental
eliminations. In addition to providing mobile communications services in Austria, we also provide
mobile communications services through VIPnet in Croatia, Si.mobil in Slovenia and mobilkom
[liechtenstein] in Liechtenstein, representing 21.6% of our mobile communications revenues in 2004
compared to 20.9% and 20.3% in 2003 and 2002, respectively. We had more than 4.9 million mobile communications customers at the end of 2004 representing,
a 4.5% increase compared to 2003. The Wireless segment covers a total population of about 15
million. Wireless market penetration ranges from 64.5% in Croatia and 79.1% in Slovenia to 98.0% in
Austria. In January 2003, upon an exclusive partnership with Vodafone to co-operate in the Austrian,
Croatian and Slovenian market was agreed. The cooperation has extended the range of existing
products and services of mobilkom austria group and has improved the product portfolio in
particular for business customers. Both companies collaborate in the field of roaming, purchasing,
development of new products and services, technical platforms, global account management and joint
marketing initiatives. In 2004, numerous joint products were launched, especially in the area of
data services and roaming. Among the launched services are:  

Vodafone live!, a mobile lifestyle service especially for residential customers,
offering a variety of services such as games, videos, news and other information via mobile
phone. Vodafone live! was launched simultaneously in Austria, Croatia and Slovenia in June
2004;

Vodafone Mobile Connect Cards, a data card for laptops enabling fast wireless access to
internet and corporate networks, and therefore offering full mobility for our customers;

Vodafone World, a new transparent roaming pricing scheme, which is offering simple
pricing all world-wide, roaming promotions (offering special rates) for our visitors in
Austria;

Blackberry enabling customers to automatically send and receive all e-mails on handheld
devices. Competition has resulted in a reduction of tariffs and prices throughout the markets and we
expect continued downward pressure on tariffs. We believe that market liberalization has
contributed to market growth and intensified competition in the Wireless segment. We expect that
the intrinsic growth in the Wireless segment will not be able to match the growth rates of prior
years. Austria mobilkom austria AG & Co KG is the leading provider of mobile communications services in
Austria with nearly 3.3 million customers at December 31, 2004, which represented a total market
share of 41.0% of the Austrian mobile communications market, in comparison to 43.3% at the end of
2003. Our mobile business has experienced rapid growth in recent years as the mobile penetration
rate in Austria increased from 14.4% at December 31, 1997 to 98.0% at December 31, 2004. The
penetration rate increased by 8.3 percentage points compared to 2003. We believe that we have a
strong market position as a result of our customer-focused services, two well recognized brands in
Austria, with A1 as the product brand and mobilkom austria as the company brand, broad network
coverage and eligible customer service. In August 2000, we were one of the first mobile communications operators worldwide to launch a
nationwide and commercially operated network based on general packet radio service (GPRS). GPRS is
a technology which is a data service enhancement for Global System for Mobile Communication (GSM).
GSM is one of the leading standards for digital wireless communications. mobilkom austria AG & Co KG holds 100% of paybox CEE, which has a 100% subsidiary in Austria
(paybox austria). This Company allows us to offer m-commerce (mobile commerce) solutions both in
Austria as well as in Central and Eastern Europe. In January 2002, mobilkom austria AG & Co KG was the first mobile communications service
provider worldwide who was assigned a bank license. This license allowed us to establish our 100%
subsidiary A1 Bank, enabling us to provide a broad range of m-commerce services. 33




---



##### Table of Contents



We were the first European operator to set up a nation wide UMTS network. We began commercial
operation of our UMTS network in April 2003. In 2004, we began actively promoting UMTS by
introducing a data package in combination with a data card, Vodafone Mobile Connect Card, to be
used with laptops. Voice packages have not seen a big market reception so far due to the fact that
there were only a few adequate UMTS handsets available. By the end of 2004, mobilkom austria AG &
Co KG covered all major cities and altogether about 60% of the Austrian population with its UMTS
network and thereby fulfilled our regulatory obligations concerning UMTS for the year 2005.
Furthermore, the extension of the service abroad has been successfully initiated by launching UMTS
roaming in 10 countries by year-end 2004. The further expansion of the network will focus on
in-building coverage. This will prepare us for a shift in traffic from GSM to UMTS in urban areas. In January 2005, mobilkom austria AG & Co KG launched EDGE (Enhanced Data Rates for Global
Evolution). EDGE is provided in addition to UMTS for those parts of Austria without UMTS-coverage
so far. This will allow data transfer in broadband quality all over Austria, reaching 95% of the
Austrian population by the end of the first half of 2005. Competition The Austrian mobile communications market currently has four GSM operators with UMTS licenses
(mobilkom austria AG & Co KG, T-Mobile Austria, ONE, and tele.ring) and one additional UMTS license
holder (Hutchison 3G Austria). Hutchison 3G Austria launched its UMTS operations shortly after
mobilkom austria AG & Co KG in May 2003. In December 2003, mobilkom austria AG & Co KG acquired
Telefonica-owned 3G Mobile, which also held a UMTS license, and thereby increased the available
frequency spectrum. However, the purchase was subject to the regulatory obligation to sell 2x5 MHz
of the acquired frequency spectrum by January 31, 2005. Therefore, mobilkom austria AG & Co KG
agreed to sell this frequency spectrum to our competitor T-Mobile Austria in March 2004. This sale
was completed in January 2005. Since the fourth quarter of 2004, TELE 2 which previously operated
as a service provider now operates as a Mobile Virtual Network Operator (MVNO) with its own access
number. In 2004, the fixed net operator eTel started as a service provider, reselling mobile
communications services under its own brand name, focusing on business customers and using the
network of ONE. By the end of 2004 all operators are commercially promoting UMTS services, whereas
tele.ring has one UMTS handset in their portfolio but is not promoting UMTS actively. T-Mobile
Austria just introduced data cards for business customers. Our competitors in the Austrian mobile communications market are partly or wholly owned by
international, experienced telecommunications operators, and some of these competitors are also
incumbents in their domestic markets. We compete in all facets of the mobile communications
business, including handset prices, tariffs, corporate image, distribution network, product
offerings, and network quality and coverage. Customers and traffic We have experienced substantial growth in our mobile customer base over the past few years.
According to our own market research, there were about 7.99 million mobile customers in Austria in
December 2004, representing a mobile penetration rate of 98.0% of the population, which is one of
the highest penetration rates of mobile communications in Europe. As a result of the market
saturation, we have focused on retaining customers rather than acquiring new customers. We expect
growth in the medium-term will be driven by new data services as well as the expansion of mobile
technology to new products and services. In December 2004, our mobile customers represented
approximately 41.0% of the mobile communications market in Austria, a 2.3 percentage point decrease
compared with the end of 2003. The following table shows selected customer and market share data for our services in Austria
at the dates specified. Customer totals are based on total customer identification numbers issued.
The size of this market has been estimated by us. 34




---



##### Table of Contents



At December 31,2004
    
    
    2003
    
    
    2002(in thousands)Customers at end of periodContract
    
    
    1,778.8
    
    
    
    1,682.2
    
    
    
    1,574.9Prepaid
    
    
    1,494.8
    
    
    
    1,481.0
    
    
    
    1,426.5Total customers
    
    
    3,273.6
    
    
    
    3,163.2
    
    
    
    3,001.4Net additions
    
    
    110.4
    
    
    
    161.8
    
    
    
    151.5Market InformationTotal market for mobile services
    
    
    7,993.0
    
    
    
    7,312.5
    
    
    
    6,762.8Our total market share
    
    
    41.0
    %
    
    
    43.3
    %
    
    
    44.4
    %
 Our customer base increased to nearly 3.3 million customers in 2004, of which approximately
1.8 million were contract customers and approximately 1.5 million prepaid customers. Our focus on
contract customers resulted in a stronger growth of our contract customer base in 2003 and 2004. The Austrian market experienced an increase in churn rate as a result of an aggressive price
policy. Nevertheless, mobilkom austria AG & Co KG has the lowest churn rate among the more
established Austrian providers, which is approximately 17.0%, compared to 16.1% in 2003. The churn
rate provides insight into the growth or decline of the customer base as well as the average length
of participation in the service. Our Austrian churn rate is calculated based on the total number of
customers who discontinue their use of our service in a 12 month period, divided by the average
number of total customers during that period. A prepaid customer is disconnected 13 months
following the last account deposit. In 2004, our contract churn rate was 11.9% and our prepaid
churn rate was 22.8%. These rates are in line with the average churn rate of mobile operators in
European Union countries where mobile operators subsidize handsets given to customers as an
incentive to switch operators. Subsidized handsets have been available in Austria since late 1998. The following table shows traffic volume of our customers excluding visitor roamers, average
number of customers, and the average monthly traffic per customer in Austria for the periods
indicated. Customer traffic comprises outgoing calls made in Austria and abroad and incoming calls
received by our customers abroad and excludes traffic from internal lines and from visitor roamers. Year ended December 31,2004
    
    
    2003
    
    
    2002Traffic (in millions of minutes)
    
    
    4,751
    
    
    
    4,509
    
    
    
    4,124Average number of customers (in thousands)
    
    
    3,184.4
    
    
    
    3,064.5
    
    
    
    2,895.7Minutes per customer per month
    
    
    124
    
    
    
    123
    
    
    
    119
 Sales, marketing and customer service Our mobile sales and marketing strategy aims to enhance the breadth and quality of our service
and build long-term relationships with our customers, thereby taking measures to balance our churn
rate and maintaining our strong position in a highly competitive market. Our sales and marketing
strategy includes:  

Increasing sales through our own shops and developing them into service points for
our customers, e.g. for hardware replacement;

Strong focus on valuable business customers;

Further improving customer service; and

Exploring additional distribution channels for internet retail. In the Wireless segment, we split our customer base into three customer groups:  

Business customers: individual business solutions are offered to this group of sole
proprietorships and larger corporations and organizations. 35




---



##### Table of Contents





Residential customers: residential contract customers with medium to high usage of
mobile communications services are included in this group.

Prepaid customers: residential customers with low usage of mobile communications
services are served in this group. We market contract and prepaid mobile communications services through various channels,
including our own shops, shops-in-shops, post offices, retail agents, tobacconists, internet, and a
key account sales force. At December 31, 2004, we operated 38 A1 shops in major metropolitan areas in Austria. A1 shops
offer mobile communications products, services and accessories, technical information and advice,
and the opportunity to test mobile communications products. We have also entered into distribution
agreements with approximately 1,450 electronics equipment outlets throughout Austria as of December
31, 2004. Our shop-in-shop concept comprises 179 branded information counters in large consumer
electronics outlets. In addition, our mobile communications products and services are also offered
in our Telekom Austria shops and in 1,639 post offices throughout Austria, which provide high
visibility for our products and services. In order to satisfy the demand for prepaid mobile communications services, we also sell our
prepaid products through other retail agents, such as supermarkets, tobacconists and gas stations
throughout Austria. We operate one of the leading Austrian e-commerce websites (www.a1.net) for our mobile
communications products and services, offering contract and prepaid subscriptions, accessories and
re-loading of prepaid accounts via internet. The majority of these services may also be accessed
via mobile handsets. Customer service In 2001, our call center and inbound and outbound services were certified by the ÖNORM
Institute, the Austrian Standards Institute, becoming the first certified call center in Austria.
In 2003, the ÖNORM Institute audited mobilkom austria AG & Co KGs customer service quality and
extended the certification for an additional two years. We seek to provide high quality customer service and to continuously strengthen the
relationship with mobile customers starting from the first contact. Operating in two locations,
customer services provides in and outbound call service including the active promotion of our
product range, customer data management, activation and cancellation, customer correspondence via
letter, fax and e-mail, complaint management as well as billing, accounting, fraud and debtor risk
management. In 2004, the entire customer services division was reorganized in order to enhance customer
value based service strategies. We introduced the A1 Service Center, a web based e-care platform,
which provides a self service alternative for our customers. We are continuously upgrading our billing system in order to support the introduction of new
products and services and to increase our ability to offer a more flexible tariff structure.
Particularly for corporate customers, our billing system allows us to carry out customer
segmentation and to offer multiple tariff rates and more customer tailored billing information. After introducing electronic online billing in 2003, we have promoted the increased usage of
online billing among private customers. As a result, we successfully motivated customers to switch
exclusively to this electronic based invoice, thus reducing costs for bill production and postal
distribution in the future. We continuously adjust our customer retention activities according to market requirements. We
try to retain our customers and keep our churn rate low through various special offers. Our focus
is on retaining high value customers and increasing their loyalty and satisfaction by optimizing
our customer-related processes. As part of our aim to encourage customer loyalty, we operate a
points-based customer loyalty program for which more than one million customers were registered at
December 31, 2004. The collected points entitle customers to purchase new subsidized handsets and
accessories for mobile phones. We also provide the A1Auskunftservice. This directory assistance offers address and telephone
number information. The information can be communicated by voice, sent by e-mail, SMS or fax, or
the customer can be directly connected to the requested number. 36




---



##### Table of Contents



Products and Services We offer a wide range of mobile communications products and services including value-added
services such as voicemail, information services, m-commerce, mobile internet access, mobile office
solutions, telematics (a combination of location-based services, global-positioning system (GPS)
localization and remote control), and service allowing the use of up to three mobile phones under
the same number, SMS and multimedia messaging services (MMS). Location-based services encompass all
services where information about the location of the consumer is needed, such as finding the
closest hospital, restaurant, post office or grocery store and other location based information. Whereas with SMS only text-based messages can be sent, MMS offers the ability to send and
receive multimedia messages comprising a combination of text, sounds, images and video up to 300KB
to and from MMS capable handsets. In addition, MMS can also be sent and received via special
internet platforms, such as the mobilkom austria AG & Co KG portal A1.net. The portal A1.net uses
the internet to promote, adapt and sell various products for our mobile phone services. We also
added video telephony to our service portfolio for UMTS customers, enabling our customers to have
multimedia person-to-person conversations. Contract services.For our contract customers we offer dedicated customer service and special
tariff packages. Our customized products target all segments, from residential customers to large
corporate accounts. Our large corporate customers benefit from a range of specialized corporate
services such as mobile communications with full virtual private network functionalities. The A1
XTRACARD PRO enables customers to use up to three SIM-Cards (Security Identity Module-Card) with
the same telephone number, allowing mobile data usage and voice calls at the same time.
Furthermore, mobilkom austria AG & Co KG was the first operator in Austria to launch Push to Talk
(PTT), a communications technology for mobile networks which is comparable to a walkie-talkie where
users take turns speaking by pushing the PTT key, in a friendly user trial among the teenagers
segment as well as our customers in the business segment. Prepaid services. Prepaid products are marketed primarily to lower volume mobile phone users.
The advantages of prepaid services for us are decreased credit risk, lower costs of sales and
reduced administrative costs. Since 2002, we observed a saturation of the prepaid-market. Call back service.mobilkom austria AG & Co KGs service development in the voice segment
focused on call completion services aimed at increasing voice usage of the total customer base. We
successfully introduced missed call notification to our 3.3 million customers. Our customers now
get an SMS notification with a list of all numbers that tried to call them while their handset was
turned off or out of coverage and the caller did not leave a message. Additionally, we increased
the usability of our voice mail system and our customers are now notified about the caller ID of
people who left a voice mail to facilitate easy call back. M-commerce services.Due to our wide range of m-commerce (mobile commerce) services we managed
to significantly broaden our customer base in the last year. The portfolio of services is large and
ranges from event ticketing to short-term insurance contracts for major sports injuries and paying
at vending machines and betting via mobile phone. In September 2003 we launched a ticketing
solution for public transportation in Vienna, Austria which enables customers to purchase tickets
via mobile phone. In October 2003, we started the m-parking service in Vienna, Austria. m-parking enables car
drivers to pay short-term parking fees via their mobile phone, processed through our subsidiary A1
Bank. A1 Bank administers the funds generated through parking management in trust for the City of
Vienna, Austria. Further services have been launched such as the public transport ticket in other
cities than Vienna or a highway toll ticket. Furthermore, the most popular gambling service in
Austria, the national lottery, offers its service via SMS. In 2004, mobilkom austria AG & Co KG
cooperating with Vodafone Germany, launched a cross border ticketing solution, allowing customers
to purchase train tickets from Austria to Germany. We broadened our product portfolio with A1 SIGNATURE  an e-government-compliant electronic
signature. This service already ensures secure authentication for a range of activities including
submission of tax forms and scholarship applications. Another new product is the A1 NAVI. The
graphic and voice-enabled instructions of A1 NAVI provide full turn-by-turn, dynamic, graphic and
voice-enabled navigation to GPRS/UMTS mobile phones within the home and roaming networks. Within the business service sector, mobilkom austria AG & Co KG achieved a major improvement
in customer perception of mobile business applications by launching easy-to-use products such as
MOBILE BROADBAND, which uses the Vodafone Mobile Connect Card as access to mobile office solutions.
An attractive tariff, charged at a fixed rate, combined with the benefit of the high performance
data rate makes MOBILE BROADBAND the first UMTS mobile business application for the mass market in
Austria. In 2004, 37




---



##### Table of Contents



we also introduced Blackberry, enabling customers to send and receive all e-mails on a
handheld device automatically. We are the market leader for m-commerce services in Austria and through ongoing innovations in
this area we strengthened this position in Austria in 2004. International roaming services.International roaming enables our customers to make and
receive calls with their mobile phones in other countries using the networks of operators with whom
we have entered into international roaming agreements. These services are offered to our contract
customers and registered prepaid customers. At December 31, 2004, we had international roaming
agreements with 288 mobile network operators in 145 countries. Additionally, we offered to our
prepaid customers roaming in 30 countries with 42 mobile operators without the necessity of prior
registration. At December 31, 2004, we offered GPRS roaming in 64 countries with 86 operators. In
2004, we started to focus on offering 3G roaming to our customers. At year end 2004, we launched 3G
roaming in 10 countries with 10 operators, significantly increasing the possibilities of data
transmission abroad. In addition, we offered our customers additional convenient services (e.g.
using the same short numbers for calling voice mail abroad), recharging the prepaid account abroad
and special rates during summertime at primary tourist destinations. Tariffs We offer promotional packages intended to attract and retain customers, such as usage options,
allowing cheaper prices per minute to other mobile and fixed networks by paying an additional
monthly fixed fee, or reduced monthly fees. With innovative tariff packages such as A1 Xcite and
B-Free Komix, we are the only operator in Austria which applies a segmented marketing approach by
limiting these services to certain age groups, therefore addressing the special needs of young
consumers and children. In addition, we intend to continue to focus on attracting and retaining
high-volume corporate customers by offering flexible corporate tariff structures, volume discounts
and handset replacements. In 2004 mobilkom austria AG & Co KG launched Vodafone World, an
international roaming tariff which offers more transparency, convenience as well as better prices
for customer calling within the Vodafone networks. In addition, we offered special discounts during
the heavy traveling time in summer for our customers in Vodafone networks. Due to the increased
importance of data services in 2004, mobilkom austria AG & Co KG offered special data roaming rates
for e.g. Blackberry users and heavy data roaming users, with special rates on our Vodafone partner
networks. Networks Our mobile networks in Austria are based on digital GSM, GPRS, EDGE, and UMTS technologies. mobilkom austria AG & Co KG continuously monitors the quality of its networks and those of its
Austrian competitors in terms of blocking, set-up success and drop call rate and reports the
results on a monthly basis. During 2004 the GSM call success rate was 98.2% on average, higher
than all of our competitors. This is a result of a test carried out under the supervision of the
Technical University of Vienna, Institute of Broadband Communications. In addition, the cooperation
with Vodafone enables us to compare our results with those of various European companies.
Therefore, we started benchmarking major performance-KPI  ́s (Key Performance Indicators),
particularly for end-to-end performance of GPRS and UMTS data transmission, in 2004, to be able to
further compare and enhance performance. At December 31, 2004, mobilkom austria AG & Co KGs GSM network consisted of 11 mobile
switching centers, 4 home location registers and 5,363 base stations. An intelligent network
platform is installed for GPRS and value-added services. We have expanded our GSM network in recent
years, focusing on improvements of coverage and capacity upgrades, particularly in areas of high
traffic such as Vienna. In 2004, 154 new base stations were brought on-line, of which 102 were
macrocell stations, which assure coverage, and 52 were microcell stations, which assure additional
capacity in densely populated urban areas. The following table shows the number of GSM microcell stations (which assure in-door coverage
and additional capacity), GSM macrocell stations and total GSM transmitter stations in Austria that
were operational at the end of the periods indicated. 38




---



##### Table of Contents



At December 31,2004
    
    
    2003
    
    
    2002Microcell stations
    
    
    1,062
    
    
    
    1,010
    
    
    
    932Macrocell stations
    
    
    4,301
    
    
    
    4,199
    
    
    
    4,025Total (on air)
    
    
    5,363
    
    
    
    5,209
    
    
    
    4,957
 We provide dual band services to accommodate our expanding customer base with the necessary
capacities and the best quality. At December 31, 2004, we held nationwide 2x17.0MHz (85 channels)
spectrum in the 900MHz band and 2x15.0MHz (75 channels) spectrum in the 1800MHz band. This includes
additional 2x6.6 MHz E-GSM (extended GSM) frequencies which have been auctioned for EUR 0.56
million in November 2004. E-GSM is an extension to the spectrum of GSM. Necessary for more total
capacity for GSM systems, the ETSI-standard GSM 05.05 spectrum was extended several times. The
first and most prominent extension was DCS-1800 or GSM-1800, the second was E-GSM. With E-GSM, the
original P-GSM (primary GSM) spectrum was enlarged by 2x10 MHz. As was done in the past, we will
expand dual band service to areas with significant amounts of mobile traffic such as large and
medium cities, technology parks, tourist sites, highways and airports. Our digital transmission network includes the standard components of a mobile
telecommunications network, such as digital cross-connects, radio links, and other transmission
devices to connect different components of its networks. We use our fixed line corporate network
services for transmission between mobile network elements and PSTN interconnection points, in
particular for high capacity and high availability transmission requirements. Wireless Application Protocol (WAP).In December 1999, mobilkom austria AG & Co KG introduced
WAP, a specification for a set of communication protocols to standardize the way that wireless
devices can be used for internet access, including e-mail and newsgroups. Since March 2000,
mobilkom austria AG & Co KG has offered a personalized WAP-portal with an integrated search engine.
In 2004 the popularity of WAP increased by launching Vodafone Live!, the common portal of Vodafone
companies and partner networks. General Packet Radio Service (GPRS).GPRS enables high-speed mobile data-transfers,
particularly for data applications such as mobile internet browsing and e-mail. We launched our
GPRS services in August 2000. GPRS is available over the entire network. Maximum data rates are
further achieved by optimizing data compression. Based on this GPRS data transport capability, MMS
was introduced in 2002. Through the implementation of Service Level Monitoring (concurrent
monitoring of prime services taking into account the customers view) we could further enhance our
quality of service. Enhanced Data Rates for Global Evolution (EDGE).EDGE evolved through an enhancement of GSM
providing faster data transmission. Because it is built upon the existing network, EDGE is used by
mobilkom austria AG & Co KG to complement our 3G coverage. mobilkom austria AG & Co KG launched
EDGE in Austria in January 2005. Universal Mobile Telecommunications System (UMTS).mobilkom austria AG & Co KG successfully
bid for a UMTS license in Austria in November 2000. UMTS allows operators to transmit data
significantly faster, significantly exceeding the speed of the preceding mobile systems. It also
permits implementation of multimedia applications that integrate voice, video, and data
communications. On September 25, 2002, the technical launch of UMTS was demonstrated with a live
video conference over mobilkom austria AG & Co KGs UMTS network. As the first operator in Austria,
mobilkom austria AG & Co KG commercially launched the service on April 25, 2003, covering about 50%
of the Austrian population at the end of 2003. At the end of 2004 our UMTS-network covered about
60% of the Austrian population. The takeover of 3G Mobile in December 2003 increased the available
frequency spectrum for mobilkom austria AG & Co KG from 2x10 MHz to 2x14.8 MHz, which gives us
ample capacity to handle potential growth of mobile services in the future and will allow us to
reach our goals with a smaller number of macrocell stations. Another 2x5 MHz frequency spectrum,
that has been acquired in the takeover, had to be re-sold due to regulatory requirements by January
31, 2005. Licenses for spectrum in the TDD (Time Division Duplex) domain remained unchanged at 1x10
MHz. The following table shows the number of UMTS stations. The focus of the rollout is, after
meeting regulatory requirements for population coverage, on enhanced indoor coverage and additional
capacity for densely populated areas: 39




---



##### Table of Contents



At December 31,2004
    
    
    2003
    
    
    2002Macrocell stations
    
    
    1,697
    
    
    
    1,271
    
    
    
    855Microcell/Indoor stations
    
    
    24
    
    
    
    
    
    
    
    Total (on air)
    
    
    1,721
    
    
    
    1,271
    
    
    
    855
 Synergies of our base station infrastructure are utilized by combining GSM and UMTS equipment. Wireless Local Area Network (WLAN). WLAN uses high-frequency radio waves to create a
locally-limited, broadband connection to computer networks. A1 WLAN was launched in March 2004. Our
main focus is to address business customers in high density areas, such as seminar hotels,
conference centres, and public transport. By year end 2004, the actual rollout exists of 238 WLAN
area access points. Key partners for A1 WLAN are major hotel groups including Hilton, Trend Hotel
Austria, and Arcotel. Every premise of the restaurant chain McDonalds Austria was covered
throughout Austria. Information technology/Operations support systems Our operations support systems store, manage and analyze essential business information. These
operations support systems enable us to make timely business decisions and develop new products and
services based on the needs of our customers. Essential developments in 2004 were the enhancement
of mobile number portability, Vodafone live!, the development of an interconnection billing system
(to manage wholesale business of national/international traffic), the implementation of an
m-payment platform with the ability to handle micro payments for m-commerce applications and the
enhancement of mobile payment methods such as Paybox. Our main IT systems include our billing systems, customer relationship management (CRM)
system, mobile data applications and internal/decision support applications. Our billing systems
collect and rate the individual customer transactions (voice and data) and produce the invoices
either electronically via secure access or in print. Our CRM system covers the total range of
customer contacts, serves as an information base for products and services, coordinates
business-sales-activities, documents the individual history of customer contacts, and operates
campaigns. Our mobile data applications  mobile portal
(internet applications via web and WAP)  enable the use of internet-based services via mobile phones, such as office solutions and portals
(www.a1.net). Our internal applications comprise SAP as Enterprise Resource Management System
(which is in use to support consolidated and streamlined business processes in the areas of
logistics, material management, finance, investment, and procurement) and our Data Warehouse, which
is continuously developed to deliver all relevant business information. Croatia In September 1998, Croatia awarded its second GSM license to VIPnet, a consortium in which we
have held an interest through mobilkom austria AG & Co KG since 1998. We increased our stake in
VIPnet by 9% on January 30, 2003, by 19% on June 23, 2003, and further by 1% on December 31, 2004,
bringing our total interest in VIPnet to 100%. VIPnet shares the Croatian mobile communications
market with the incumbent operator T-Mobile, a subsidiary of T-HT (Hrvatske telekomunikacije d.d.),
with Deutsche Telekom as its main shareholder. On December 22, 2004, the Swedish operator Tele2
received a combined GSM/UMTS license, which is valid for 20 years. The commercial launch of the
third Croatian operator is not expected before the second half of 2005. In April 2004, VIPnet began the introduction of EDGE technology reaching population coverage
of 90% by the end of June 2004. After placing the first UMTS test call in Croatia in May 2003,
VIPnet has been granted a UMTS concession for 20 years in October 2004. The commercial launch of
the UMTS services will be in the second quarter of the year 2005 making VIPnet one of the first
operators in Europe offering a combined EDGE and UMTS technology, offering high volume data
products in a cost efficient way to a broader customer base. Furthermore, VIPnet is considering
entering the market for fixed-line services. VIPnet started operations on July 1, 1999, and by December 31, 2004 it served 1.3 million
customers (85% of them use prepaid services), increasing its customer base in 2004 by 8.1% compared
to December 31, 2003. VIPnet had a low annual churn rate of 15.4% in 2004. VIPnet has a 46.0% share
in the Croatian mobile communications market. Croatias mobile communications penetration rate was
64.5% as of December 31, 2004. 40




---



##### Table of Contents



VIPnet is the first company in Croatia to offer single comprehensive business solutions. PROFI
PAKET enables the connection between mobile phones and fixed lines into a single network, constant
access to the Internet and secure mobile access to the data stored on the companys internal
network. In 2004, our Croatian customers sent more than 1 billion SMSs. On average, customers send 72
SMSs monthly, which is one of the highest SMS usage rates in Europe. This is partly due to
successful services such as VIPparking introduced in September 2001  a service that enables GSM
customers to pay their parking fees per SMS. This service can be used in 17 major towns in Croatia
and almost 2.7 million SMSs were sent in 2004 in order to pay for parking fees. As a major tourist destination, Croatia has a high number of visitor roamers in the summer
season. Visitors generated more than 12% of VIPnets total revenues. The strategic partnership with
Vodafone resulted in a successful launch of Vodafone live!, Vodafone Mobile Connect card and
Vodafone Mobile Connect EDGE card which both enable quick and easy internet access from laptops. In October 2004, VIPnet has introduced a new prepaid tariff to the market, offering the lowest
call prices on the prepaid market in Croatia. Prices have been decreased by up to 43% compared to
those applicable before. In 2004, VIPnet expanded its activities by offering different services for third parties such
as call center services, offering consultant services concerning customer support and by offering
Open Interface service which enables 3rd parties access to VIPnets infrastructure (e.g. SMS
center) for their own purposes. Slovenia In February 2001, we purchased a 75% plus one share interest in Si.mobil, a Slovenian mobile
communications provider. We fully consolidate Si.mobil because we hold an option to purchase the
shares which we do not currently own for a fixed price. At the end of December 2002 the final
closing of the purchase of the remaining shares was postponed until 2007. In Slovenia there are currently three mobile operators, Mobitel as the dominant incumbent,
Si.mobil and Vega. In addition, Debitel as a service provider provides mobile communications
services using the infrastructure of an existing competitor. The competitive environment is
characterized by a dominant incumbent with a market share of around 70.0% and high market
penetration at 79.1% at the end of 2004 . At December 31, 2004, Si.mobil had a market
share of 23.3% making it the second largest mobile operator in Slovenia. Si.mobils number of
customers amounted to 363,300 by the end of 2004, which represents an increase of the customer base
by 0.5% compared to the end of 2003. The contract customer base accounts for 42.9% of the total
customer base. Si.mobil introduced EDGE commercially in December 2003 as one of the first European operators,
with population coverage of 40%. In February 2004, Si.mobil launched Vodafone Mobile Connect Card. In 2003 Si.mobil offered, as
first operator in Slovenia, flat tariffs for the Residential segment which was well accepted, hence
we introduced flat tariffs for the Business segment in February 2004. For GPRS roaming we offered
in February 2004 unified tariffs to ensure transparent roaming prices for our customers. In May
2004, Si.mobil launched a new tariff portfolio for residential customers, aiming to improve
transparency for customers. In the beginning of June 2004, Si.mobil launched Vodafone live!. From
August through October 2004 we launched ORTO SMART, targeting young people from the ages of 15 to
27 years. The Slovenian mobile communications market is near saturation. However the Slovenian
regulatory authority has not yet taken any measures to increase competition. Therefore, Si.mobil
took the initiative and signed a new agreement with Mobitel on asymmetrical mobile-to-mobile
interconnection fees, providing Si.mobil with a favorable termination fee for calls from Mobitel
customers. Due to Slovenias entry into the European Union in May 2004, a harmonization of local
laws with European standards is taking place. The new legislation is mostly adopted, but still
remains to be implemented. 41




---



##### Table of Contents



Liechtenstein On November 16, 1999, the Principality of Liechtenstein granted a GSM license to mobilkom
[liechtenstein], a wholly owned subsidiary of mobilkom austria AG & Co KG. mobilkom [liechtenstein]
launched services on September 13, 2000. Furthermore, mobilkom [liechtenstein] started premium-rate
services and services for mobile virtual network operators, which are interconnection
margin-businesses that account for a substantial part of its financial results. The penetration rate in Liechtenstein reached 78.9% at December 31, 2004. The customer base of
mobilkom [liechtenstein] amounts to more than 3,500 (all of them contract customers), thus
accounting for a 13.1% share of the mobile communications market in Liechtenstein. mobilkom
[liechtenstein] is the second largest mobile communications provider in this highly competitive
market. Bulgaria In December 2004, we entered into call option agreements giving us the right to acquire 100%
of the share capital of MobilTel AD for an enterprise value of approximately EUR 1,600 million. The
call options are priced at up to EUR 80 million, which were paid on March 21, 2005, and exercisable
at specified periods between July 12, 2005 and August 23, 2005. We do not know if we will exercise
the call option, if we do not exercise the option the call option price of EUR 80 million will be
forfeited according to the call option agreements. 42




---



##### Table of Contents



Properties Our consolidated financial statements show a net carrying value for property, land and
equipment of EUR 3,888.7 million in 2004 and EUR 4,457.7 million in 2003. The acquisition costs
were EUR 10,863.6 million in 2004, and EUR 10,682.3 million in 2003. The acquisition costs include,
among others, communications network and other equipment totaling EUR 9,506.6 million, land
totaling EUR 59.2 million and buildings totaling EUR 689.6 million at December 31, 2004. The item
communications network and other equipment primarily include switching and transmission equipment
as well as access and trunk cables. The properties of Telekom Austria consist primarily of buildings with integrated technical
facilities, such as switching devices, transmission towers and antennas and, to a relatively small
extent, administrative buildings. In addition to the buildings we own, we also lease space. At
December 31, 2004, we used about 2,075 facilities, of which approximately 32% were leased. The land
and buildings comprise by the majority the property owned by Post und Telekom Austria AGallocated
between Österreichische Post and Telekom Austria as a result of
the spin-offs described under  4.2. History and Development of the Company. The majority of our information technology equipment is located at our own premises of
approximately 11,000 square meters in Vienna. Our main switching and transmission equipment is
based in our technology center (Arsenal), which occupies approximately 90,000 square meters in
Viennas third district. 
 Research and development Research and development (R&D) in combination with our innovation strategy, product lifecycle
management and technology strategy is an integral part of our innovation management. We believe
that R&D is important to our continuing success and on retaining technological innovation
leadership. We hold a variety of patents and licenses. No single patent or license is material to
our business. We seek to stay ahead in promising areas of new research and scientific advances with a
focus on application-oriented research. We focus our research activities on trend-setting
technologies particularly in the field of broadband communications, transmission technologies,
service platforms, optical core technology, network security and support systems within our fixed
line and mobile telecommunications networks. We consider these research areas indispensable for the
creation of new services and for the build-up of efficient and reliable multi-service network
structures. Related issues are being dealt with through participation in national and international
initiatives and network driving initiatives. In 2004 Telekom Austria started the Austrian IPv6 Task
Force. IPv6 is the new Internet protocol on which applications of the future will be based. This
initiative is to support the IT industry with preparation for IPv6 migration and to develop an
Austrian migration plan. We were supported by the Austrian regulatory authority and the University
of Vienna together with Siemens, HP, Alcatel, Cisco, IBM, Kapsch, Microsoft and Juniper. The two operating segments, Wireline and Wireless coordinate their research activities. To assure technological leadership, we analyze changing user patterns and adapt the research
and development activities accordingly. Thus, we intensified our studies in topics of cultural,
media & communications. Whether television (with set top box for broadband access), PC, notebook,
multimedia handset or personal digital assistant (PDA)  interaction and the access to content is
available from any device. At the Alpbach Technology Forum for the first time in Austria, Telekom
Austria presented a common platform for multimedia, television and interactions, the Next
Generation Media (NGM). We continued to cooperate with industrial and academic partners in research projects partly
funded by the European Commission, aiming to offer existing and next-generation customized
and personalized IN (Intelligent Network) services in an IP based environment to meet the demands
of multi-party, multi-connection and multimedia calls. Our Wireless unit continued to focus on application and service-oriented R&D programs. All
activities have been in line with our strategic focus of improving quality, usability and user
experience, many of them in cooperation with other companies, research institutes or universities.
Our projects have focused on modular, flexible and scalable mobile data applications, access
independent service delivery, advanced service platforms, multi-modal speech applications and
concepts for prototyping new services for our multilayer networks for GSM, GPRS, EDGE, UMTS and
WLAN and efficient use of resources. 43




---



##### Table of Contents



We hold patents for enhanced localization methods and a Service Interaction Gateway. In line
with the national main strategies for Intelligent Infrastructure sponsored by the Austrian
Federal Ministry for Transportation, Innovation and Technology we continued our research activities
in telematic services. During 2004, a growth in Spam (unsolicited commercial e-mail) in the internet was observed. In
order to avoid the annoyance and cost of Spam that could possibly be delivered to mobile devices,
we initiated a research project in cooperation with industrial partners and the ISPA (Internet
Service Providers Austria) organization to find new ways of how to fight Spam more effectively, in
particular avoiding attacks to mobile users. Our consolidated research and development expenses amounted to EUR 42.4 million, EUR 42.8
million and EUR 30.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. Capital expenditures For information relating to our capital expenditures, see Item 5.4. Liquidity and capital
resources  Capital expenditures. 44




---



##### Table of Contents



4.3. REGULATION AND LEGAL FRAMEWORK Regulation Liberalization (1998-2002) The development of the Austrian law follows the regulatory actions taken by the European
Union. As a result of implementing European Union directives, the Austrian telecommunications
market was liberalized by the Austrian Telecommunications Act of 1997. In 1998, we lost our last
exclusive right as the national incumbent to provide domestic and international voice telephony
services to the public in Austria via fixed network. The European Union Austria is a member of the European Union and is required to implement European Union law in
its domestic law and to take European Union legislation into account when applying its domestic
law. European Union legislation basically comes in two forms: regulations and directives.
Regulations are generally and directly applicable and binding in their entirety in all European
Union member states. Directives are binding, but national legislators choose the form and method of
their implementation into domestic law. In the 1990s, the European Commission (EC) had used its powers deriving from the EC-Treaty to
open telecommunications markets in the European Union member states by issuing directives providing
for liberalization, abolishing monopoly rights of the state-owned telecommunications operators. In
the following years, the European Union has adopted a number of directives and recommendations
regarding open and efficient access to and use of public telecommunications networks and services,
formerly known as Open Network Provisions. These requirements, replaced by a package of new
directives adopted in 2002, were intended to harmonize technical interfaces, usage conditions and
tariff principles throughout the European Union and to ensure objectivity, transparency and
non-discrimination in access to and use of public telecommunications networks and public
telecommunications services and foresaw first detailed regulatory measures like Carrier
Pre-selection or Number Portability and universal services like directory services, public
payphones or non-discriminatory access to the network. At the end of December 2000, the European Union issued a regulation regarding access to
unbundled local loops which is directly applicable in the member states. For further details see 
Interconnection and specific network access  Access to local subscriber lines. In February 2002
the European Union adopted a package of new directives, which was implemented in Austria by the
Telecommunications Act in August 2003 and which is shortly described below: The new legal
environment is based on the framework-directive, which defines new rules for the market definition
procedure and is more and more harmonized with general competition law which is the basis for any
regulation of the telecommunications markets. The 25% threshold for significant market power
(SMP) no longer applies. The national regulatory authorities are required to consider more factors
in determining whether a company has a dominant position in that market. Under the framework
directive the national regulatory authorities will seek to harmonize their decisions on an EU-wide
scale which also comprises exchanges with the European Commission. Therefore, the competencies of
the regulatory authorities to regulate the telecommunications markets will be extended. The Access- and Interconnection-directive provides for the legal instruments for regulating
the telecommunications wholesale markets (carrier to carrier relations) based on the principle of
technical neutrality, while the Universal Service directive which might be subject to a review
process already in the course of the next year focuses on the provision of universal service and
limited ways of regulating retail prices. The licensing directive establishes a common ground for
providing services and operating networks. By July 2002, the European Union adopted a new directive on the processing of personal data
and the protection of data privacy in the electronic communications sector which contains
provisions on the use of cookies, public directories and the confidentiality of communication. The
directive also regulates unsolicited commercial communication provided by automatic calling
machines, fax and e-mail which will be subject to the recipients prior consent (opt-in) unless the
recipient is given the opportunity for opting out. Finally, the directive on competition in the
markets for electronic communications networks and services, also adopted in September 2002, has
replaced the former directive on full competition (90/388/EC) by July 25, 2003. 45




---



##### Table of Contents



Recent developments (2002-today) In August 2003, a newly amended Austrian Telecommunications Act (the Telecommunications Act
of 2003) implemented European Union telecommunications directives adopted in 2002 into Austrian
law aligning the Austrian communications market from sector specific regulation to the principles
of competition law. The act was also expected to lead to further harmonization of market conditions
through an obligatory European Union-wide consultation process among national regulatory
authorities, as well as by keeping national regulations technologically neutral. The
Telecommunications Act empowers the Austrian Federal Minister for Transportation, Innovation and
Technology (the minister) and the national regulatory authority to issue ordinances containing
detailed provisions relating to the Austrian telecommunications market. Regulatory framework The amended Telecommunications Act of 2003 which became effective on August 20, 2003, allows
unrestricted market access to all entrants who qualify under the act and replaced the former
licensing regime by a general notification requirement. Consequently, any telecommunications
service provider is allowed to offer its services in Austria without a license. One of the
principal objectives of the Telecommunications Act of 2003 is the promotion of competition within
the Austrian communications sector and the provision of reliable, high-quality and innovative
telecommunications services at a reasonable price. Regulatory measures are intended to promote a
modern telecommunications infrastructure that leads to high-quality sites and effective competition
by stimulating investments in innovation and infrastructure. Additional objectives include the
provision of universal service throughout Austria, the protection of customers and operators
against the distortion of competition, access to information and transparency of prices and general
terms, data protection, avoidance of SMP and efficient and interference-free use of frequencies.
Operators having SMP in particular communications markets are subject to a special regulatory
regime. In general, sector specific regulatory measures are applicable only in the absence of
effective competition. Regulatory measures should be kept technologically neutral and may not
restrict the introduction of innovative products and services (generally referred to as emerging
markets). Retail markets should only be subject to regulation if regulatory measures applied to the
wholesale markets fail to ensure effective competition. In accordance with the principles of
general competition law, markets which may be subject to sector-specific regulation are generally
identified by the European Commission and accordingly defined by the Austrian regulatory
authorities as subjects of market analysis. The European Commission can veto market definition and
market analysis decisions proposed by the national regulatory authority. Where the minister or the
national regulatory authority intends to take measures with material effect on the Austrian
telecommunications markets, a national consultation process is required to take place. Under the new regime, the scope of sector-specific regulation is subject to a broader market
concept and regulatory measures should be narrowly and proportionally directed at concrete market
failures. As a further result of the intended transition to general competition law, the Cartel
Court has been vested with sole jurisdiction over matters concerning abuse of SMP. The mandate of the regulatory authority overseeing the Austrian communications markets is to
ensure competition and the availability of high-quality communication services. Under the
Telecommunications Act of 2003, the regulatory authority is responsible for notification, usage of
frequencies, administration of the numbering system, ensuring unrestricted market access for new
entrants and controlling the provision of universal services. The regulatory authority is required
to define and analyze markets in order to identify operators with SMP and to impose regulatory
measures where it is deemed necessary. The regulatory authoritys role encompasses ensuring equal
access to networks, internally used services and facilities for all competitors, particularly in
the areas of interconnection, pre-selection of a carrier, number portability and opening of access
to local subscriber lines, also called unbundling of the local loop. Access may be refused only on
objective grounds, such as network-security or lack of interoperability of services. The
Telecommunications Act of 2003 also generally deals with protection of data, technical
infrastructure, numbering, rights of way and consumer protection. 46




---



##### Table of Contents



New markets and regulation of operators with significant market power Under the 2002 EU directives, the former sector-specific concept of market dominance, now
called significant market power (SMP) has been adjusted to the concept of market dominance as
used in European Union and Austrian competition law. In May 2003, the EU Commission identified the
following 18 markets which may be subject to sector-specific regulation. Retail level:  

Access to the public telephone network at a fixed location for residential customers;

Access to the public telephone network at a fixed location for non-residential customers;

Publicly available local and/or national telephone services provided at a fixed location for residential customers;

Publicly available international telephone services provided at a fixed location for residential customers;

Publicly available local and/or national telephone services provided at a fixed location for non-residential customers;

Publicly available international telephone services provided at a fixed location for non-residential customers; and

Minimum set of leased lines (which comprises the specified types of leased lines up to and including 2MB/sec as
referenced in Article 18 and Annex VII of the Universal Service Directive).Wholesale level:

Call origination on the public telephone network provided at a fixed location;

Call termination on individual public telephone networks provided at a fixed location;

Transit services in the fixed public telephone network;

Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing
broadband and voice services;

Wholesale broadband access;

Wholesale terminating segments of leased lines;

Wholesale trunk segments of leased lines;

Access and call origination on public mobile telephone networks;

Voice call termination on individual mobile networks;

Wholesale national market for international roaming on public mobile networks; and

Broadcasting transmission services, to deliver broadcast content to end users. With the exception of the market for broadcasting transmission services, the remaining 17 of
these markets are relevant for telecommunications. To date, the Austrian regulatory authority has
defined 16 nationwide markets which may be subject to sector-specific regulation in the Austrian
communications sector by market ordinance (Märkteverordnung) which entered into force on October
17, 2003. The only market that remains to be identified is the market for wholesale broadband
services where the regulatory authority still analyses the actual status, development and progress
of competition on this market (for further details on the issue see  Market analysis). The
absence of SMP implies effective competition. Under the new regime, an operator is considered to have SMP if: 47




---



##### Table of Contents





It faces little or no competition; or

Compared to its competitors, it has an overwhelming position due
to its ability to influence market conditions, its revenues in
comparison to the size of the market, its control of the means of
access to customers, its access to financial resources or its
experience in providing products and services. If the regulatory authority concludes that no provider is exercising SMP, the regulatory
authority will not take any measures to promote and strengthen competition. Where an operator is identified as having SMP, the regulatory authority will impose at a
minimum one of the following measures: On a wholesale market:  

Operators shall follow the principle of non-discrimination and provide competitors with
services and special network access facilities with the same terms and conditions and
quality at which the operator offers them to each of the 18 markets defined above, to its
affiliated companies and other competitors.

Operators shall provide the regulator with information about their costs and accounting,
technical specifications, network characteristics, general terms and pricing rules
including discounts.

Operators shall grant access to the telecommunications network, various facilities
(including site sharing, collocation etc.) or unbundled parts thereof on a
non-discriminatory basis to all competitors and users. Furthermore, operators may be
required to provide access of specific services on a wholesale basis for resale by third
parties, collocation or other forms of facility sharing (including lines, building or mast
sharing), access to operational support systems or similar software systems necessary to
ensure fair competition in the provision of services, or may be obliged to grant open
access to technical interfaces, protocols or other key technologies that are indispensable
for the interoperability of services or virtual network services.

Operators shall implement adequate, separate cost accounting systems for their
telecommunications activities and other businesses to ensure transparency and prevent
cross-subsidization. The regulatory authority is allowed to impose a specific cost
accounting method. On a retail market:  

Operators may be prevented from applying unjustified prices.

Operators may not discriminate among customers.

Operators may not unbundle services in a discriminatory manner.

Operators shall obtain prior approval for business terms and
conditions and tariffs relating to the provision of voice
telephony on fixed and mobile networks and leased lines. Pursuant to the Telecommunications Act of 2003, the regulatory measures in the retail market
may only be taken in case of failure of adequate measures in the respective wholesale markets. All
operators which are deemed to have SMP are obliged to provide a minimum set of leased lines
according to the principles of non-discrimination, cost orientation and transparency. Every measure taken by the regulatory authority must be proportional and appropriate and take
into consideration existing capacities, investment risks, industrial or intellectual property
rights, provision of European Union-wide services and long-term competition. Market Analysis In late 2003, the regulatory authority began its analyses of the markets pursuant to the
Telecommunications Act of 2003. Accordingly, the regulatory authority may impose specific
obligations, which are generally referred to as remedies, for operators with SMP in the relevant
retail (or end user) market, if there is no effective competition in that retail (or end user)
market and specific obligations such as carrier selection and carrier pre-selection can not achieve
effective competition. 48




---



##### Table of Contents



Once the regulatory authority has determined that we exercise SMP in one of the relevant
markets, the regulatory authority may subject us to the requirement that we do not charge excessive
prices, or provide unreasonable bundles. The regulatory authority still has the power to control
individual tariffs and cost orientation (the prices of tariffs have to be based on the fully
distributed costs) of these tariffs. The regulatory authority will approve our minimum offer of
leased lines and the prices for those leased lines. Moreover, under the relevant provisions of the EU regulatory framework, national regulators
are required to notify the Commission of all national measures that would affect trade between
Member States and that are intended to impose or remove regulation on undertakings providing
electronic communications networks or services. The Commission may comment on the draft measures,
or, where it disagrees with the conclusion on market definition or the designation of SMP, may
require the regulator to withdraw the draft measure (see below the discussion of wholesale market
transit services in the fixed public telephone network). To date the majority of the markets has been analyzed. The main change for us is that the
remedies the regulatory authority has imposed on us are more detailed than under the old regime.
The overall scope of intervention however, has not materially changed. The market analyses have
however resulted in the conclusion that we are no longer viewed as having SMP in the following
markets:  

In the retail market of  publicly available international telephone services provided
at a fixed location for residential customers;

In the wholesale market of wholesale trunk segments of leased lines;

In the wholesale market transit services in the fixed public telephone network the
Commission of the European Union vetoed the regulatory authoritys decision that we did not
have SMP in this market. At present, the regulatory authoritys response is still pending. The absence of regulatory action in these markets leads to more freedom in pricing, selecting
the product mix, as well as the ability to response quickly to costumer needs. For the remaining markets it has been determined that we have SMP. The following is a list of
remedies imposed on us by the regulatory authority for the individual markets. Retail market Remedies have been imposed on us in the markets of access to the public telephone network at
a fixed location for residential customers and access to the public telephone network at a fixed
location for non-residential customers.In particular we are obliged to continue to offer:  

Carrier Selection and Carrier Preselection;

Resale-Standard offer on retail-minus basis, which is the
wholesale line rental offer at a discount of our retail line
rental tariffs;

Our services on a non-discriminatory basis in order to provide
competitors with services and special network facilities on equal
terms, conditions and quality;

Our end-customers tariffs are still subject to ex-ante-approval.
However we are not restricted in our advertising campaigns and
promotion of special offers provided the special offer does not
exceed the time period of three months.

Cost orientation; and separated accounts. On the markets publicly available local and/or national telephone services provided at a
fixed location for residential customers and publicly available local and/or national telephone
services provided at a fixed location for non-residential customers the regulatory authority
imposed similar remedies on us including the prior-approval of end-customers tariffs, tariffs
within a VPN, calls from fixed networks to mobile networks and calls to special numbering ranges.
We are also required to maintain separated accounts in these markets. Similar remedies for the
market publicly available international telephone services provided at a fixed location for
non-residential customers have also been imposed on us. In the market minimum set of leased lines (which comprises specified types of leased lines
up to and including 2MB/sec listed in Article 18 and Annex VII of the Universal Service Directive)
we are required: 49




---



##### Table of Contents





To provide minimum set of leased lines to retail customers under non-discriminatory and
transparent conditions;

To publish information on this minimum set of leased lines (including technical
specifications, tariffs and conditions);

Cost orientation for tariffs within the minimum set (which comprises leased lines from n
x 64 kbit up to and including 2 Mbit/s-leased lines); and

Ex-ante approval of retail-tariffs for above mentioned lines as well as;

To maintain separated accounts. Wholesale level The market analyses did not result in any material changes in the scope of regulation at the
wholesale level. We are deemed to have SMP status on the markets of call termination on
individual public telephone networks provided at a fixed location and call origination on the
public telephone network provided at a fixed location. The decision on the market for transit
services in the fixed public telephone network is still pending due to the European Commissions
veto. Upon request by a competitor we are obliged to provide an offer for wholesale services under
the following conditions:  

Our services on a non-discriminatory basis;

Cost orientation for origination call charges (under the FL-LRAIC
 forward looking long range average incremental cost);

Separated accounts;

Offer direct and in-direct interconnection with public fixed
telephone network to other network operators concerning
termination/origination service; and

Publish standard/reference offer for interconnection service
termination/origination, specified minimum contend. For the wholesale markets of wholesale unbundled access (including shared access) to metallic
loops and sub-loops for the purpose of providing broadband and voice services the regulatory
authority imposed the following remedies. We are required:  

To allow access to wholesale unbundled loops, sub loops and shared access including complementary services on a
non-discriminatory basis;

To publish a standard/reference offer for wholesale unbundled lines;

cost orientation for all unbundling tariffs (under the FL-LRAIC) in this market and for access services; and

To maintain separated accounts. On the market for wholesale terminating segments of leased lines the regulatory authority
applied remedies that require us:  

To allow access to wholesale terminating segments of leased lines under non-discriminatory conditions;

To hand over terminating segments on a specific POP (point of presence) and permit coupling of terminating segments,
upon customer request;

To publish standard offers for wholesale terminating segments;

Cost orientation for all wholesale tariffs in this market and for access services; and

To maintain separated accounts. 50




---



##### Table of Contents



In the market for access and call origination on public mobile telephone networks the
regulatory authority concluded that no operator has SMP. Each operator, however, has SMP on the
call termination market on its own network. The regulatory authority applied the same remedies
for all operators. In particular these remedies are non-discrimination regarding quality and price,
cost-oriented termination fees on the basis of long range average incremental cost (LRAIC), and the
publication of a reference interconnection offer. However, the specific definition of LRAIC in
respect to mobile networks is still an open issue. mobilkom austria AG & Co KG has appealed appeal
against the decision that states SMP. As a consequence of SMP findings on the markets for voice call termination on individual
mobile networks Austrian regulatory authority recently announced its intention to decrease all
mobile termination tariffs on the basis of LRAIC. In its consultation paper of March 9, 2005, the
regulatory authority announced the following tariff reductions for 2005: mobilkom austria AG & Co
KG, T-mobile, and One are supposed to lower their current termination rates from November 1, 2005,
by approximately 0.5 Eurocent per minute, tele.ring lowers its termination rate from April 1, 2005,
to EUR 0.1380, and Hutchison 3G stays on the same level in 2005. The long run perspective is to
have reciprocal termination rates on the level of the most efficient mobile network provider in
Austria at the latest by end 2011. The current rate for termination in the network of mobilkom
austria AG & Co KG, which is a main source of our revenues, is EUR 0.1086. For the wholesale national market for international roaming on public mobile networks, the
investigations of the regulatory authority are still ongoing. Ordinances under the Telecommunications Act of 2003 Since the enactment of the Telecommunications Act of 2003, the minister and the regulatory
authority have issued several important ordinances. Some of the ordinances enacted in 2003, became
fully effective in 2004.  

The Telecommunications Market Ordinance (Märkteverordnung  which became effective on
October 17, 2003 defines the markets that may be subject to regulation (see also  New
markets and regulation of operators with significant market power  Market analysis).

The Mobile Number Portability Ordinance (Nummernübertragungsverordnung), established the
legal and regulatory framework for the portability of mobile subscriber numbers and
stipulates the requirements and the timeframe of a porting case, customer protection and
transparency of costs. In August 2004, the ordinance was completed by the decision of the
regulatory authority concerning the relevant interconnection obligations, e.g. the manner
in which calls originating in the fixed networks will be routed to these ported numbers, as
well as the specific steps customers have to take to start a porting request. The service
was launched on October 16, 2004. In February 2005 the administrative court has repealed
the decision, in case of porting between mobilkom and Hutchison 3G, however it is unlikely
that this has immediate effects on the provision of the service.

The Numbering, Tariffs and Value-added Services Ordinance (Kommunikationsparameter-,
Entgelte und Mehrwertdiensteverordnung) was released on Mai 15, 2004. Whereas the
numbering parameters and the requirements for allocation of numbers changed only slightly
(some number-ranges were removed and some new ones were added, such as a number-range for
convergent services), the main ambition was to optimize consumer protection in cases of
value-added-services, resulting from an ever increasing number of objections against these
services (especially dialer-abuse). Maximum prices for shared cost services and premium
rate services, several complex and detailed transparency rules as well as prohibitions for
misuse were added.

Ordinance of Legal Surveillance Cost
(Überwachungskostenverordnung)  of August 12,
2004  which introduces the fees to be paid by courts and governmental authorities for the
interception of voice; and

The Ordinance of Collecting Data for Statistics (Kommunikations-Erhebungs-Verordnung)
 of September 20, 2004  which sets out the frequency and details of information a
telecommunications service provider is required to provide to the regulatory authority for
statistical purposes. The Telecommunications Acts of 1997 and 2003 contain provisions relating to the nationwide
availability of certain basic telecommunication services, referred to as universal service.
Additional details concerning universal service requirements are provided in the Universal Service
Ordinance which became effective in June 1999 and was amended during 2000. The ordinance which
determines the amount operators are required to 51




---



##### Table of Contents



contribute to the funding of the regulatory authority became effective on March 8, 2004.
According to this ordinance, in 2004, operators with revenues exceeding EUR 230,000 in the
telecommunications sector are required to contribute to the financing of the regulatory authority
(see also  Universal service). The regulatory authority The Telecommunications Act of 2003 and the Communications Authority Act establish the legal
basis for the existing regulatory bodies in the telecommunications (Telekom-Control-Kommission) and
the broadcasting media sector (Communications Authority). The Rundfunk und Telekom
Regulierungs-GmbHserves as the administrative arm of both of these authorities. Within this report
the term regulatory authority refers to Telekom-Control-Kommission and to Rundfunk und Telekom
Regulierungs-GmbH. Telekom-Control-Kommission The Telekom-Control-Kommissionis an independent three-member committee that meets the
requirements of a Tribunal under the European Convention on Human Rights. The competencies of the Telekom-Control-Kommissioninclude ordering joint use in a dispute
concerning rights of way; decisions in proceedings concerning data of subscriber directories;
exercising the right to object pursuant to general conditions of business; determining financial
compensation to be paid from the universal service fund; determining the amount to be paid to the
universal service fund; determining if in a respective relevant market one or more operators have
SMP and imposing specific obligations; decisions in procedures concerning specific obligations
(e.g. obligation of non-discrimination, access to network equipment and network features,
interconnection, number portability and Carrier Selection); approval of conditions of business and
charges and exercising the right to object; decision on the licensing and allocating of frequencies
as well as change and revocation of frequency allocations; decision on the right to provide
communications networks or services, including the right to revoke these rights; decisions on
preliminary injunctions; identification and filing applications concerning unjust enrichment by
providers through excessive pricing; and filing applications with the Cartel Court. Rundfunk und Telekom Regulierungs-GmbH Generally, the Rundfunk und Telekom Regulierungs-GmbH, a non-profit company with limited
liability, is responsible for all issues, which are outside the responsibility of the
Telekom-Control-Kommission. Its primary activities are in particular numbering and dispute
resolution between end-users and operators and dispute resolution among operators. Pursuant to a
modification of the Telecommunications Act of 2003, the Rundfunk und Telekom Regulierungs-GmbHcan
enact ordinances (such as those concerning numbering, value added services or relevant markets for
regulation) and must resolve some disputes called alternative dispute resolution concerning the
Telekom-Control-Kommission. Although it is wholly owned by the Republic of Austria, the Rundfunk
und Telekom Regulierungs-GmbHis financially independent from the Austrian state. Its expenditures
are covered by annual payments from communication service providers and broadcasting companies in
relation to the total revenue of the respective markets. The minister supervises the Rundfunk und
Telekom Regulierungs-GmbHsactivities. Rundfunk und Telekom Regulierungs-GmbHis required to
publish a yearly report about the activities of the regulatory authority and is also obliged to
report annually in writing to the minister and to the Parliament on the implementation of the
targets set by the regulation. Communications Authority Pursuant to the Communications Authority Act, the Communications Authority is responsible for
the broadcasting media sector. In some cases, the Communications Authority may serve as the
regulatory authority under the Telecommunications Act of 2003 or has at least the status of a party
in proceedings. Other regulatory bodies The minister, the Telecommunications Offices and the Office for Radio Installations and
Telecommunications Facilities are administrative authorities that are empowered to take all
measures requiring the exercise of administrative power in the area of telecommunications with
regard to Austrian telecommunications law. Although not established at this point, the
Telecommunications Advisory Board will advise the minister and the regulatory authority regarding
telecommunications matters. Decisions of the regulatory authority may be appealed to the Supreme
Administrative Court and in limited circumstances to the Constitutional Court. 52




---



##### Table of Contents



Regulation of market entry The Telecommunications Act of 2003 abolished the former licensing regime. Entry into the
market by a new participant requires only notification with the regulatory authority and the
payment of a processing fee. The new Telecommunications Act of 2003 also replaced the former licensing regime for mobile
operators using the GSM technology with a notification regime. However, the provision of mobile
telecommunication services continues to be limited by the allocation of frequency spectrum.
Therefore, the number of GSM-network operators has remained the same as under the former
Telecommunications Act. There are four GSM network operators:  

mobilkom austria AG & Co KG

T-Mobile Austria GmbH, the former max.mobil Gesellschaft für Telekommunikation GmbH

One GmbH, the former Connect Austria Gesellschaft für Telekommunikation GmbH and

tele.ring Telekom Service GmbH & Co KG. One Mobile Virtual Network Operator (MVNO), Tele2, and a service provider, e-Tel, use the
network of One GmbH. UMTS On November 3, 2000, six mobile operators, including mobilkom austria AG & Co KG, the three
other GSM-operators in Austria and two new entrants (Hutchison 3G Austria and 3G Mobile),
successfully bid for UMTS licenses. mobilkom austria AG & Co KG bid for paired 10MHz and unpaired
10MHz frequency spectra in an auction held by the Austrian regulatory authority. Under the terms of
the license award, mobilkom austria AG & Co KG is required to cover 25% of the Austrian population
by the end of 2003 and 50% by the end of 2005. At the end of 2004 mobilkom austria AG & Co KGs
UMTS network already covered about 60% of the Austrian population. By the end of 2003, one of the new entrants, Telefonica, suspended its operations in Austria.
mobilkom austria AG & Co KG bought the Telefonica-owned Austrian company 3G Mobile, thereby
acquiring additional paired 9.8 MHz frequency spectrum. However, prior to its approval, the
regulatory authority imposed the obligation on mobilkom austria AG & Co KG to sell 2x5 MHz
frequency spectrum by January 31, 2005. Therefore, mobilkom austria AG & Co KG agreed to sell 2x5
MHz to the competitor T-Mobile Austria in March 2004. The transaction was completed in January
2005. The Telecommunications Act of 2003 requires that UMTS licensees, like mobilkom austria AG & Co
KG, also hold digital GSM licenses. UMTS licenses grant national roaming services to any UMTS
licensees who do not operate a GSM network provided that there is enough capacity. National roaming
means that the customers of a UMTS operator are able to make and receive phone calls in areas not
covered by their UMTS operator by using the network of another GSM operator. National roaming has
been designed to allow UMTS operators which do not have an established GSM network to offer
nationwide GMS services, thereby enhancing competition. UMTS providers that have a geographic
coverage of 20% of Austria with their UMTS network are entitled to receive national roaming. If no
agreement on roaming rights can be reached among the respective UMTS providers, the regulatory
authority can determine the roaming rights and roaming fees after a hearing with the respective
parties. mobilkom austria AG & Co KG entered into an agreement with Hutchison 3G Austria for GSM
and GPRS roaming services as Hutchison 3G Austria only provides its customers a UMTS network in
congested areas. National roaming among UMTS operators is also permitted, although there is no
legal obligation to provide this service. Major regulatory decisions affecting Telekom Austria Wholesale line rental In November 2004, the regulatory authority approved an offer from Telekom Austria for our
competitors (monthly fee for the line rental EUR 12.70 per line (POTS  plain old telephone
system); one-off investment 53




---



##### Table of Contents



payment of EUR 750,000 and EUR 11.32 per line) after lengthy proceedings. In January 2005, one
of our competitors appealed to the Supreme Administrative Court. The regulatory authority decided
that due to our SMP in the access market, Telekom Austria is now formally obliged to provide a
standard offer for wholesale line rental. In March 2005, one operator initiated a regulatory proceeding against us requiring wholesale
billing services to enable him to bill his customers the monthly line rental as well as the traffic
volume. Current tariffs: voice telephony services and leased lines In anticipation of a decision to be rendered by the Austrian Supreme Court we introduced a new
tariff plan and frequent user reward program which was approved by the regulatory authority in
May 2004. It allows customers to benefit from the now wider choice of tariffs for calls to mobile
phones, different regions and friends (see Item 8.2. Other information  Litigation). In November
2004 Telekom Austria introduced additional tariff packages completing customers choice for calls
to mobile phones. Minimum set of leased lines and access to terminating segments of leased lines (see also 
New markets and regulation of operators with significant market power  Market analysis) Our minimum set of leased lines is still subject to approval. In October 2004, the regulatory authority attested Telekom Austria SMP on the market for
terminating segments of leased lines und obligated us to release a non-discriminatory wholesale
offer for these network elements on January 31, 2005. This may result in higher competition on the
market of leased lines in the next years. Fixed-to-mobile tariffs The regulatory authority set the amount which we may retain for each minute originating from
our fixed line network, known as the mobile turnover retention, at EUR 0.06 per minute. We may
retain this amount for each minute originating from our fixed line network, notwithstanding the
mobile operators termination charge. Even if we increase the fixed-to-mobile tariff we are not
allowed to retain more than EUR 0.06 per minute but have to pass the increase on to the mobile
operator. Tariffs for special services In December 2000, the Austrian government enacted a special act
(Fernsprechentgeltzuschussgesetz) providing for payments by the state for the communications
costs of certain customers, such as those who are indigent, physically handicapped or poor. The
Republic of Austria will pay telecommunications providers EUR 13.81 per month for each such
customer. With this entitlement, the eligible person is granted free access plus one hour of free
calls during day-time hours in their local zone. We also signed a contract with the minister that
regulates until March 2007 the administration and payment concerning this subsidy. We are currently
negotiating a new contract. At December 31, 2004 we served 249,830 entitled customers. Interconnection and specific network access The issue of interconnection is still of particular importance to the development of a
competitive market in telecommunications. The European Union Regulatory Framework for
Interconnection is set out in Directive 2002/19/EC on access to and interconnection of electronic
communication networks and associated facilities. These provisions were implemented into Austrian
law by the Telecommunications Act of 2003, the Interconnection Ordinance and the new Numbering
Ordinance. The Telecommunications Act imposes specific obligations concerning network access and
interconnection. The Interconnection Ordinance provides detailed regulations and specifies the
manner in which interconnection and special network access is to be carried out. The reissued
Numbering Ordinance also lays down the principles of pre-selection of a carrier and number
portability. General principles All operators of public telecommunications networks are obligated upon request to offer
network interconnection to other operators. If the parties fail to reach an agreement within six
weeks, each party can refer the matter to the regulatory authority, who will then decide on the
conditions for interconnection. The regulatory 54




---



##### Table of Contents



authority is also entitled to determine fees for interconnection if providers with SMP are
involved. The interconnection agreement must contain certain terms required by the Interconnection
Ordinance discussed below. Provisions applicable to operators with significant market power An operator with SMP of a communications network who offers communications services to the
public must grant other operators specific access to its communications network and facilities. In imposing these obligations the regulatory authority takes into consideration the technical
and economic viability of using or installing competing facilities (in the light of the rate of
market development), the feasibility of providing the access proposed (in relation to the capacity
available) and the initial investment by the facility owner plus the risks involved in making the
investment. If the regulatory authority decides to impose any measures, a network operator must
grant competitors access to its services on equal terms and conditions which it uses internally,
unless different conditions can be objectively justified. In addition, the operator may be required
to unbundle its services and therefore offer its services used internally, including transmission,
switching and operational interfaces in a way that competitors do not need to purchase services
they did not request. In addition, operators with SMP are obliged to grant physical collocation. This means the
operator is obliged, if technically feasible, to allow competitors to use transmission, switching
and operational interfaces to the competitors network on the operators premises on equal terms
and conditions which it uses internally. An operator with SMP must adhere to the harmonized technical standards for interfaces and
service features in conformity with the Directives of the New Regulatory Framework, especially
with the Access Directive, of the European Union. Operators with SMP may be obliged to issue reference interconnection offers. The regulatory
authority must publish reference interconnection offers. They also have the power to amend the
reference interconnection offers at any time. Operators that are obliged to render reference interconnection offers must file agreements on
interconnection and special network access to the regulatory authority. Agreements must be based on
objective criteria and be comprehensible. Interconnection and special network access must be
provided on a non-discriminatory basis. Interconnection in Austria In various decisions since March 1998, the regulatory authority has set out additional
principles for interconnection. With these decisions, the regulatory authority set the tariffs for
interconnection from fixed and mobile-to-fixed line and also from fixed line to mobile networks.
The regulatory authority decides on the tariffs for carrier selection, the type and scope of
carrier selection to be implemented, local interconnection, mutual access to toll-free numbers,
value-added services, shared cost services, private networks, personal numbers and access to
on-line services. At December 31, 2004, we had entered into interconnection agreements with 24 fixed-line and 5
mobile (GSM, UMTS) registered operators in Austria. Separate fixed and mobile agreements were
entered into with all five mobile operators. The most important services between operators are
voice interconnection services, such as call termination, carrier selection, call origination to
services (e.g. value-added services), and number portability as described below. Call termination in Austria Termination is the service which transports a telephone call from the point of physical
connection between two or more networks to the called party of another network. Fees for call
termination vary depending on the route taken by the signal, and the number of switching elements
used. Depending on the locations of the point of interconnection and the called party, there may be
a different number of switching stages and inter-exchange links, which is the reason for a more
complex tariff structure. The charge is calculated on a per minute basis. Austrian practice
distinguishes among three situations:  

Local exchange interconnection allows access to all customers
within a local area. At December 31, 2004, we allowed access to 43
local exchanges; 55




---



##### Table of Contents





Single transit interconnection is interconnection via a single
transit switch. In technical terms, this is known as single
transit or single tandem call termination. We offer seven long
distance exchanges for single transit interconnection; and

Double transit interconnection is interconnection via two transit
switches. In technical terms, this is known as double transit or
double tandem call termination. Carrier selection Carrier selection is the feature that allows a customer to select another network operator for
voice telephony services. Carrier selection is identified as an interconnection service in the
Telecommunications Act. Two types of carrier selection are currently regulated:  

Pre-selection. The customer chooses the network operator for all
local, long distance, international, fixed-to-mobile calls, and
calls to special service numbers on a permanent basis with the
opportunity for call by call override; and

Call-by-call selection. The customer dials a prefix number or
Carrier Access Code and a network operator code, or Carrier
Identification Code, each time prior to dialing the called partys
number to identify the network operator to be used to route the
call. We are required under the Numbering Ordinance to offer pre-selection and call-by-call
selection. Number portability (see also  Ordinances and the Telecommunication Act of 2003) According to European Union directives, the Austrian Telecommunications Act, and the Numbering
Ordinance,all fixed network providers are required to provide number portability. This means that
customers can change operators while keeping their existing telephone number provided they do not
change their residence. In early 2000, the regulatory authority decided on the portability of
geographical numbers as well as service numbers for the first time. The Numbering Ordinance requires the introduction of three types of number portability to be
implemented in two stages. The obligation to provide operator portability and service number
portability became effective on January 1, 1998. The obligation to provide geographic number
portability became effective on January 1, 2000. The regulatory authority, in a 2002 decision,
ruled that operator portability of geographic numbers and service number portability have to be
offered at a one-off fee of EUR 21.79. The Telecommunications Act of 2003 now requires mobile operators to provide for number
portability. The Number Portability Ordinance (Nummernübertragungsverordnung) became effective in
November 2003 (see also  Ordinances under the Telecommunication Act of 2003). Prior to the
effectiveness of the ordinance in mid-2002 all GSM-operators, the new UMTS-licensees, and all fixed
line operators established a working group with a goal to agree on the technical and commercial
terms for mobile number portability. As no agreement was reached, several proceedings were pending
with the regulatory authority since October 2003 to determine the details of the Number Portability
Ordinance. Following a decision of the regulatory authority issued in August 2004 the service was
launched on October 16, 2004, while there are ongoing discussions on the amount of porting fees
paid by the customers and the new provider. The administrative court has repealed this decision in
February 2005. However, it is unlikely that this has immediate effects on the provision of the
service. Access to local subscriber lines As described above, a network operator with SMP in a particular market must allow other
providers access to its network or unbundled parts of that network. Limitations on access may be
based only on the essential requirements as set forth in the European Union Regulation on
Unbundling of the Local Loop and the EU Unbundling Recommendation, which include the preservation
of the security of network operations, the maintenance of network integrity, the interoperability
of services and the protection of data. Agreements on network access must be based on objective
criteria, must be comprehensible and must provide non-discriminatory unbundled access with equal
opportunity to the telecommunications networks of an operator. In light of these obligations, various competitors have requested a reference unbundling offer
which contains the conditions according to which we provide them access to local subscriber lines,
also called unbundling of the local loop. Allowing competitors to connect to customer access lines
also gives them direct access to customers without having to construct local networks on their own.
Therefore, competitors may use our customer access lines to offer a wide range of services. We
receive a flat monthly fee from the operators, 56




---



##### Table of Contents



irrespective of the bandwidth transmitted. The regulatory authoritys decisions to date are
not restricted to voice telephony or a certain bandwidth. We have always adapted our reference
unbundling offer to these decisions. With full unbundling, the copper telephone line is leased to a third party for its exclusive
use. The lessee has full control of the relationship with its customer for the provision of a full
range of telecommunications services, including deployment of digital subscriber lines or DSL
systems for high speed data applications. A related issue is collocation, whereby we must grant space to operators requesting
unbundling, which must be physically close to the telecommunications lines. The regulatory
authority has determined that such space must be leased at market rates. We have filed appeals with
the Supreme Administrative Court on the basis that the imposed monthly and one-time fee per
customer does not cover our costs. On March 12, 2001, the regulatory authority decided that, beginning January 1, 2002, we must
offer full unbundling for a monthly fee of EUR 10.90 and sub-loop unbundling (unbundling of a
specific part, but not the entire local loop) for a monthly fee of EUR 8.43 until December 31,
2004. We may not charge our competitors for sub-loop unbundling from an in-house distribution point
to a network termination point. Some of our competitors initiated proceedings in 2004 to determine
new fees to be applicable after the expiration of the fees for unbundled lines on December 31,
2004. The proceedings are still ongoing. Due to various decisions that were rendered in 2000, leased line and internet providers are
also allowed to unbundle our subscriber lines under a non-discriminatory regime. We appealed to the
Supreme Administrative Court because we believe that this could endanger our networks integrity.
We think that the monthly and one-off fees set by the regulatory authority do not cover our costs
and that the penalties for not following the procedures are excessive. At December 31, 2004, we had entered into agreements with about 34 competitors concerning
unbundling the local loop. Due to advancing investments by our competitors in unbundling
activities, the number of unbundled subscriber lines is increasing. At December 31, 2004, about
73,000 subscriber lines have been fully unbundled. An alternative to full unbundling is high speed bit stream access in which an operator
installs a high speed access link to the customers premises, for example by installing its
preferred DSL equipment and configuration in its local access network. The access link must be made
available to third parties to enable them to provide high speed services to customers. This form of
unbundling is available on demand as a result of an agreement with ISPA, the organization of
Austrian Internet Service Providers, and put into force in March 2000. The agreement has been
frequently amended to reflect technical changes. In light of the European Union Regulation on Unbundling of the Local Loop which came into
force at the beginning of 2001, the regulatory authority requires us to offer shared use. With
shared use of the copper subscriber line, one of the operators provides telephone service, while
the other delivers high speed data services over the same subscriber line using its own high-speed
DSL modems. Telephone traffic and data traffic are separated by means of a splitter before the
switch. The line remains connected to and part of the public switched telephone network. While we
are presently required to offer shared use, there has been no significant demand in the Austrian
market for such usage so far and we have appealed against this decision. Regulation of interconnection and access fees Interconnection fees for the fixed network are regulated by element-based costing.
Element-based costing means that fees are charged according to the number and level of switching
facilities used. This differentiates between single and double tandem interconnection (See 
Interconnection and specific network access above). There are local, single tandem and double
tandem tariffs. Interconnection fees vary according to the time of day. Peak time is from 8:00 a.m.
to 6:00 p.m. from Monday through Friday. Off-peak time is from 6:00 p.m. to 8:00 a.m. on weekdays
and the entire weekend and on public holidays. Origination and termination fees are usually identical except for interconnection at the
double tandem level where origination fees are higher than termination fees. According to the
regulatory authority, higher origination fees on the double tandem level should avoid atypical
traffic (traffic with unforeseeable volume) by giving incentives to alternative network operators
to expand their networks into a larger number of points of interconnection locations. The
regulatory authority took this decision to avoid inefficient market entry from companies with few
switches or small networks. 57




---



##### Table of Contents



The following table shows the applicable interconnection fees, valid until the result of
market analysis. Single tandem
    
    
    Double tandemRates
    
    Local
    
    
    (One main switch)
    
    
    (Two main switches)(EUR per minute)
    
    
    (EUR per minute)
    
    
    (EUR per minute)Origination
    
    Peak
    
    
    0.0082
    
    
    
    0.0128
    
    
    
    0.0290Off-peak
    
    
    0.0048
    
    
    
    0.0071
    
    
    
    0.0110Termination
    
    Peak
    
    
    0.0082
    
    
    
    0.0128
    
    
    
    0.0225Off-peak
    
    
    0.0048
    
    
    
    0.0071
    
    
    
    0.0087Transit
    
    Peak
    
    
    n.a.
    
    
    
    0.0028
    
    
    
    0.0060Off-peak
    
    
    n.a.
    
    
    
    0.0014
    
    
    
    0.0031
 A group of operators initiated a proceeding with the regulatory authority regarding future
fees. The regulatory authority decided in September 2004 to cap the interconnection fees in fixed
line networks on an average of 3.3%, retroactively for the aforementioned providers as of October
1, 2003. The interconnection fees will again be subject to new proceedings, at the latest, when we
fulfill the obligation to renew our reference interconnection offer in April 2005 according to the
final findings of the regulatory authority on market power in the relevant interconnection markets.
One of our competitors appealed against this decision at the Supreme Administrative Court. These interconnection fees apply to voice telephony services and other services, including
access to value-added services in the fixed network. For all other operators with whom we have
bilateral agreements the new interconnection fees had to be adjusted as of the dates set in these
bilateral agreements. Interconnection fees for accessing on-line services are EUR 0.0082 per minute (peak) and EUR
0.0048 per minute (off-peak) for the local level, and EUR 0.0128 per minute and EUR 0.0071 per
minute for single tandem. Local transit is not permitted. Although the principle of reciprocity is
approved the regulatory authority already decided in previous rulings that we must pay the
interconnection fee for regional call termination instead of a local termination fee to one
operator which is connected at the local level. The standard contracts contain a requirement that all contracting parties provide collateral
for the obligations under the contract, which allows us to minimize the risk of potential
insolvency of interconnection partners. Additionally, the standard interconnection contracts
include, among other conditions, the obligation for all operators to transmit the calling line
identification to allow us to trace the origin of the call. According to the decisions of the regulatory authority (see  New markets and regulation of
operators with significant market power  Market analysis) the current obligations in terms of
interconnection will be kept. Moreover, we are obliged to have our future reference interconnection
offer approved by the regulatory authority. Mobile operators must pay the same fees as fixed network operators for terminating their calls
in the fixed network. For fixed-to-mobile termination, the fees vary depending to which mobile
network the call is actually terminated. Commercial agreements on interconnection tariffs have been reached with all mobile operators
beginning October 1, 2003. Some of these agreements have expired or have been terminated by
December 2004, mainly because of the determination of SMP in the market for termination on each
individual mobile network, and the possibility of regulation as a consequence of that. Currently, negotiations are ongoing between mobile operators on the future development of
termination rates. mobilkom austria AG & Co KGs position is that the asymmetry of interconnection
rates should be replaced with symmetrical rates between all operators as soon as possible.
However, our negotiations with tele.ring have already failed, and tele.ring has started regulatory
proceedings against mobilkom austria AG & Co KG to ensure that the significant variance between
tele.rings and mobilkom austria AG & Co KGs termination rates will be prolonged. A possible
reduction may adversely affect our revenues. Frequency spectrum In December 2003, the regulatory authority granted a regional 5 MHz GSM-1800MHz-frequency
spectrum to mobilkom austria AG & Co KG, free of charge. 58




---



##### Table of Contents



In October 2004, mobilkom austria AG & Co KG purchased by auction a GSM-900-frequency spectrum
of 2 x 6.6 MHz. On October 4, 2004 TKK completed an auction of 17 spectrum packets at 3.5 GHz for
WLL, in five of which Telekom Austria is among the successful bidders. The spectrum assignments are
valid for 15 years. Numbering Pursuant to the Telecommunications Act of 2003, the national telephone numbering system is
administered by the regulatory authority and the minister. The regulatory authority must allocate
numbers for all applications (geographical, non-geographical), including numbers which provide
access to services (toll-free, shared cost and value-added services as well as emergency services
and special numbers). The regulatory authority is also responsible for designing the numbering plan
set out in the Numbering Ordinance, which has been replaced by the Ordinance for Numbering, Tariffs
and Value-added Services (see also  Ordinances under the Telecommunication Act of 2003). In general, the numbering environment and the requirements for allocation of numbers changed
only slightly (see  Ordinances under the Telecommunication Act of 2003 and  Interconnection
and specific network access). According to this ordinance operators are required to ensure interoperability to all
customers, independent of the operator they use. Moreover, pre-selection of a carrier and
call-by-call selection must be offered by operators with SMP and in addition, customers must have
the option of overriding their pre-selected carrier on a call-by-call basis. The selected carrier,
whether on a call-by-call or a pre-selected basis, is responsible for billing and collecting the
fees for the call. Universal service The Telecommunications Act of 2003 sets forth the framework for universal service in Austria.
Universal service is defined as the minimum public services that all users must have access to, at
an affordable price and at a specific quality level, independent of their place of residence or
business. The scope of universal service comprises access to public voice telephony via fixed line
including fax, modem and functional access to internet (excluding broadband), access to a
comprehensive directory enquiry service, access to a comprehensive telephone directory and the full
area coverage of public payphones at accessible locations. The detailed technical quality criteria
are further defined by the Universal Service Ordinance. The Universal Service Ordinance also provides criteria for the quality of voice transmission,
the reaction time for operator services, the percentage of public payphones in function and billing
accuracy. The operator responsible for the provision of universal service has to report to the
regulatory authority about the quality parameters once a year. Upon request from other providers of public telecommunications services and publishers of
comprehensive subscriber directories or comprehensive directory enquiry services, each provider of
public telephone services has to provide subscriber data online or at least weekly in
electronically readable form for cost oriented charges. Pursuant to the Telecommunications Act 2003 we have been the only provider that was required
to provide universal service until December 31, 2004. Under our universal service obligation, we
are required to provide voice telephony, public pay phones, directory inquiry services and other
services throughout Austria, including rural areas. The Federal Minister of Transport, Innovation
and Technology has determined that the general conditions for a tender procedure exist for the
comprehensive directory services and the provision of comprehensive enquiry services. Regarding the
other elements of universal services, Telekom Austria remains the universal service provider until
the next review which will be scheduled within the next five years. In case the provision of a universal service should result in a deficit, the regulatory
authority will create and manage a Universal Service Fund. All operators of telecommunications
services who generate revenues of more than EUR 5 million per year will contribute according to
their revenues in relation to the revenues of the other operators. The amount of the contribution
will be fixed by the regulatory authority. Regarding the net costs of the universal service in the past, a bilateral agreement between
Telekom Austria and alternative network operators has been reached. This agreement covers the
period of the last six years and 59




---



##### Table of Contents



comprises a refund of EUR 14.9 million. Austria is one of the first countries of the European
Union where the implementation of such a refund has been accomplished. Legal framework Rights of way The Telecommunications Act of 2003 also regulates the principal matters which were previously
governed by the no-longer effective Telecommunications Rights of Way Act. Each provider of
communications services or communications networks has the ability to use land for establishing,
developing, operating and maintaining communications lines. In exercising these rights, it is
necessary to have an agreement with the landowner or to receive a decision from the
Telecommunications Offices. The use of public land, including streets, sidewalks, public places and the airspace above
them, is free of charge. For the use of private land, compensation must be paid to the landowner.
If the landowner wants to use his land in a particular way the provider has to move the
communications line at the providers costs. There are also special obligations for the joint use
of alternative operators telecommunications lines. Ordinance regulating lawful interception The ordinance regulating surveillance systems (lawful interception) which became effective on
December 1, 2001 is based on a standardization recommendation by the European Telecommunications
Standards Institute and comprises detailed technical descriptions of new technologies and
interfaces which allow a harmonized European-wide surveillance system for use in criminal
prosecution. The amount of the refund by the government for our investments in surveillance
systems, have not yet been determined. Competition law and general legal framework In addition to the Telecommunications Act, our operations are subject to Austrian and European
competition laws. The main principles of the European Union competition rules are found in Articles 81 and 82 of
the EC Treaty (the former Articles 85 and 86), the Competition Directive (recently amended in 2002)
and in the European Union merger control regulations. Article 81 of the EC Treaty prohibits
collusive behavior between competitors which may affect trade between member states and which
restricts, or is intended to restrict, competition within the European Union. Article 82 prohibits
any abuse of a dominant market position within a substantial part of the European Union that may
affect trade between member states. These rules are enforced by the European Commission in
cooperation with the national competition authority. In addition, the national courts have
jurisdiction over alleged violations of European Union competition law. The Austrian Antitrust Act prohibits the abuse of dominant market position and the distortion
of competition caused by horizontal and vertical agreements or collusion of market participants.
While the Austrian Federal Competition Authority (Bundeswettbewerbsbehörde)focuses on improving
EU-wide cooperation of competition authorities and streamlining proceedings in order to make
competition law more effective, it is the Austrian Cartel Court which rules on these cases. Parties
can appeal against the Cartel Courts decisions with the Austrian Supreme Court in the function of
a Cartel Appellate Court. According to the Austrian Antitrust Act, the Cartel Court must be notified of any mergers,
acquisitions and joint ventures if the turnover of the parties involved reaches certain thresholds,
but remains below the threshold applicable to mergers which must be notified to the European
Commission. These mergers are prohibited if they create or strengthen a dominant market position.
Parties to a cooperation agreement may voluntarily ask the European Commission for clearance that
their cooperation does not violate the prohibition on collusive practices established by the EC
Treaty. The European Commission may also grant an exemption from the prohibition if the parties
show that the benefits of the cooperation for the consumer or for research and development outweigh
the supposed distortion of competition. We expect there to be further inquiries and other measures of the European Commission aimed at
promoting competition in the European telecommunications sector. 60




---



##### Table of Contents



Procurement law and telecommunications act Our customers in the public sector are subject to the Austrian procurement law. The Austrian
procurement law requires the public sector to make its purchase decision on either the best price
or quality among the offers. Under the tariff approval procedure we may offer only limited price
discounts. Our competitors are free to fix prices. Customer protection and data protection Customer protection The Telecommunications Act of 2003 identifies the protection of the customer as one of its
major goals. Accordingly, the Act contains various provisions regulating the rights of the
customers vis-à-vis the telecommunications services providers. All operators that provide public
communications services must ensure that the services are available to everyone on published terms
and conditions. The Telecommunications Act creates a special dispute resolution mechanism to
resolve billing disputes. We are obliged to issue itemized bills upon customers request to allow
the customers to check the accuracy of the calls listed. If a dispute cannot be amicably settled,
the customer can appeal to an Arbitration Board established within the regulatory authority without
prejudice to the right to appeal to the courts. We automatically inform every customer whose bill exceeds a certain threshold value within one
billing cycle (two months). The customer may choose lower limits and will be informed by us that
he/she has reached this lower chosen threshold value. The Ordinance on Tariffs for Value-added Services contains maximum prices for specific premium
rate services. The customer is required to receive price information about the call before being
connected. The Telecommunications Act of 2003 requires us to include in our description of terms and
conditions and services certain mandatory information such as the level of quality, provision time,
penalties to customers if services are not provided compliant to the service description, rules
about billing disputes and information about actual tariffs. In order to allow customers better
cost control, we have to provide free of charge a limitation of access for special value added
services once a year. Furthermore, we have to offer universal services on a prepaid basis and the
possibility to pay universal services in installments. For purposes of transparent billing, we are
obliged to provide customers free of charge with an itemized call list. The Ordinance on Itemized
Bills (Einzelentgeltnachweisverordnung) which was enacted on May 1, 2004 sets forth the standards
for itemized billing. Data protection Both the Telecommunications Act of 2003 and the Data Protection Act 2000 contain provisions
concerning data protection. Tapping and other forms of surveillance of telephone calls by third parties are prohibited.
Exceptions exist only for authorities investigating serious criminal offences. Special switches can
be established to trace people who stalk or harass others by telephone. Telephone calls and faxes for the purposes of direct marketing are permissible only if a
subscriber has given his prior consent. Likewise, it is generally not permitted to send e-mails 
including SMS-messages  to consumers for the purpose of direct-marketing or to more than 50
recipients without prior consent. In limited circumstances prior consent need not to be obtained.
This applies, for example, where a customer provided his electronic contact details to the sender
in connection with a sale of the senders products or services and where the subsequent direct
marketing relates to an offer of a similar product or service by the sender. In such instance, the
customer must be given an opportunity to object to the use of his/her contact details. Sending e-mails to non-consumers without prior consent is authorized when the recipient is
given the opportunity to reject future messages. After having obtained the customers consent, data for the direct marketing of
telecommunications services may be processed only to the extent necessary for such services. Any
other data may only be used upon customer 61




---



##### Table of Contents



consent. Customers have the right to request information about the storing and processing of
their data and to request corrections or deletions of data that was not properly stored. Network operators are not allowed to store traffic data after the end of the period during
which the bill may lawfully be challenged or payment may be pursued. Without the customers prior
explicit consent, traffic data such as billing data may only be processed in order to perform
telecommunications services. 62




---



##### Table of Contents



Item 5. Operating and Financial Review and Prospects 
 5.1. OVERVIEW The following discussion should be read in conjunction with the consolidated financial
statements included elsewhere in this annual report. Those financial statements have been prepared
in accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP). We report our business in three segments:  

Wireline (merging the previous fixed line, data communications, and internet services segments);

Wireless (renaming our previous mobile communications segment); and

Other activities (covering internal financial services). The two business segments also conduct business with each other, which are eliminated in
consolidation. In order to give shareholders a clear view of our external performance as a company,
we separately disclose these internal transactions when presenting our segment results. Accuracy of forward-looking statements In the normal course of business and in an effort to help keep shareholders and the public
informed about our operations, we may from time to time issue certain statements, either in writing
or orally, that contain or may contain forward-looking information such as statements made in this
annual report. Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or projections involving
anticipated revenues, earnings or other aspects of operating results. Such statements are subject
to a number of factors that may tend to influence the accuracy of the statements and the
projections upon which the statements are based. As noted elsewhere in this annual report, our
operations are subject to a number of uncertainties, risks and other influences, many of which are
beyond our control, and any one of which, or a combination of which, could materially affect our
results of operations. See Forward Looking Statements, Item 3.4. Risk factors, Item 4.3.
Regulation and legal framework,  Critical accounting policies and  Recent developments. Certain factors and trends affecting our financial results In recent years our business has been affected by a number of important trends including
increased competition as a result of the liberalization of the Austrian telecommunications market,
the declining importance of fixed line voice telephony and an increasing demand for mobile and
internet communications and technological changes. Therefore, investors should consider our results
of operations and future prospects in light of the fundamental changes occurring in the structure
of Telekom Austria and the environment in which we operate. Telekom Austria has identified the following key trends that have, and will continue to have,
an impact on our business, some of them described more detailed below: Wireline  

Slowly decreasing voice traffic volumes, mainly due to fixed mobile substitution;

Continued pricing pressure due to strong competition and regulatory constraints;

Introduction of new VAS, including services combining voice, data and video (Triple
Play), to partly offset declining voice revenues;

Migration of internet users from dial-up to broadband, supported by our new ADSL tariffs; 63




---



##### Table of Contents





Significant broadband and data revenue growth;

Growth in revenues from content and value added services provided on the internet; and

Continued reduction in operating expenses due to cost-cutting measures and reduction
of staff as well as decreasing depreciation and amortization costs due to lower capital
expenditures. Wireless  

Increasing competition due to new competitors and saturated markets;

Significant growth in VAS driven by the introduction of new technologies as well as
new and improved handsets leading to increased customer demand;

New products and services due to significant growth in the use of broadband
wireless technologies such as EDGE/UMTS; and

Expansion of Telekom Austria in targeted international markets, particularly in
south-eastern European countries. Open competition Since the full liberalization of the Austrian market several additional licenses have been
granted in the Wireless segment to our competitors in both the GSM and UMTS ranges. An additional
competitor, TELE 2, started its operations as a service provider in cooperation with the existing
mobile operator ONE in February 2003 and acquired 100% of the competitor in the wireline business,
UTA, in autumn 2004. Since October 2004 TELE 2 offers its services as a Mobile Virtual Network
Operator (MVNO) with its own access number. In May 2003, Hutchison 3G Austria entered the Austrian
mobile communications market as the first provider of UMTS only services. mobilkom austria AG & Co
KG entered into a national roaming agreement with Hutchison 3G Austria allowing our competitor to
use our GSM network as a supplement to its own UMTS network. We expect competition to further intensify in the foreseeable future as our current
competitors expand their operations. However, competition has also stimulated overall market demand
for telecommunications services, and we expect further growth in the markets for data and IT
solution services and internet services. In the mobile communications services market we expect
growth primarily from the international sector. Technological change Rapid technological changes in telecommunications and information technology (IT) will
continue to have a profound effect on the way we do business and will give rise to new competitive
challenges, as the traditional businesses of telecommunications, IT, media, entertainment and
security increasingly converge. Technological advances have increased the capacity of
telecommunications networks and led to the rise of a number of alternatives to traditional network
transmission and new access technologies. Because we have the competitive advantage of being the
leading telecommunications service provider in Austria that offers fixed network, mobile services,
data communications services, internet services for residential, business and wholesale customers,
we believe we have the opportunity to become a leading provider of multi-service networks and
advanced multimedia services. One of our objectives is to increase our medium-term infrastructure investments in growth
areas such as internet, broadband transmission and access, which are the main elements of the
future next generation network infrastructure, and new mobile communications services based on
UMTS. For further information see Item 4.2. Business overview. On the other hand, we intend to
reduce our capital expenditures in mature business areas such as fixed line voice telephony,
achieving an overall net decrease in our capital expenditures. Regulatory environment The regulatory authorities that oversee the Austrian telecommunications industry consider
Telekom Austria to have SMP in certain retail and wholesale markets. Once the regulatory authority
has determined that we exercise SMP in one of the relevant markets, the regulatory authority may
subject us to the requirement that we not charge excessive prices, or provide unreasonable bundles.
The regulatory authority still has the power to control individual tariffs and cost orientation of
these tariffs. The regulatory authority must approve our 64




---



##### Table of Contents



minimum offer of leased lines and the prices for those leased lines (see Item 4.3. Regulation
and legal framework  Regulation  New markets and regulation of operators with significant market
power  Market analysis). Changes to our fixed-line tariff structure are generally subject to prior approval by the
regulatory authorities, which could reduce our speed and flexibility in terms of pricing strategy
to respond to market developments. Furthermore, we must allow other fixed and mobile network
service providers to interconnect to our network and must provide fixed line telephone customers
the ability to select their preferred service provider on a call-by-call or pre-selection basis and
to keep their telephone numbers when changing service providers (see Item 4.3. Regulation and
legal framework). At December 31, 2004, we had entered into interconnection agreements with 24 fixed-line and 5
mobile (GSM, UMTS) registered operators in Austria. In August 2003, the directives of the European Union were implemented into Austrian domestic
law under the amended Telecommunication Act (See Item 4.3. Regulation and legal framework  Legal
framework  The European Union). According to the amended Telecommunications Act of 2003, a more
differentiated regulatory approach should be possible. This may imply a shift from ex-ante
regulation towards competition law in the long run and includes a further liberalization of the
licensing regime. For further information see Item 3.4. Risk factors. According to the new framework, mobilkom austria AG & Co KG and all other mobile operators
have been considered to have SMP for voice call termination on their individual mobile networks.
The regulatory authority prescribed the same remedies for all operators. In particular these
remedies require non-discrimination regarding quality and price, cost-oriented termination fees on
the basis of long range average incremental cost (LRAIC), and the preparation of a reference
interconnection offer. However the specific definition on LRAIC in respect to mobile network is
still an open issue. mobilkom austria AG & Co KG has appealed against this decision. For the
"wholesale national market for international roaming on public mobile networks, investigations of
the regulatory authority are still ongoing. Tariff reductions and reforms We adapt our tariffs according to market conditions, last in 2004, in order to meet
increasing competitiveness In anticipation of a decision to be rendered by the Austrian Supreme
Court we introduced a new tariff plan and frequent user reward program which was approved by the
regulatory authority in May 2004. It allows customers to benefit from the now wider choice of
tariffs for calls to mobile phones, different regions and friends. Within these packages we
introduced e.g. the flat rate tariff for residential customers in off-peak time or free national
calls during the weekend. We expect competition to lead to continued pressure on tariffs. However, the Austrian
regulatory authority recently expressed its intention to decrease reciprocal mobile interconnection
tariffs in several steps until December 31, 2011. Customer tariffs are assumed to fall as a result. Transformation program In order to prepare Telekom Austria for operating in a fully competitive environment, we began
a transformation program that aimed to reduce operating expenses, implement new technologies,
change our corporate culture and stabilize fixed line voice revenues in June 2000. To reduce personnel, we implemented three voluntary retirement incentive programs (VRIPs) in
1997, 1999 and 2000. These resulted in approximately 3,500 employees accepting early retirement. At
December 31 of the years 2003 and 2004, 120 and 118 employees, respectively, were covered by our
respective provisions. The other former employees have already left the program and no longer have
claims representing any current or future liability to us. On January 1, 2002 a law was enacted
that covers civil servants over the age of 55 which are covered by a governmental retirement plan
with the effect of reducing our obligation under the VRIPs. Following the enactment of that law we
reversed EUR 1.4 million, EUR 26.8 million and EUR 57.4 million of these accruals in 2004, 2003 and
2002 respectively. The Austrian government offered early retirement at reduced future pension payments to certain
civil servants. We offered these eligible employees additional payments to alleviate financial
losses from the reduction in future pension payments and to improve the acceptance rate of the
offer by our civil service employees. Due to this measure we were able to reduce our workforce by
470 and 650 civil servants in 2004 and 2003, respectively. We incurred a contractual obligation to
civil servants taking advantage of this opportunity 65




---



##### Table of Contents



and recorded expenses of EUR 19.3 million in 2004 and EUR 47.3 million in 2003. We do not
expect to incur any additional liabilities related to this offer beyond the amount of these
accruals. Recent changes in Austrian law no longer allow us to implement early retirement packages
in the future. Claims against the Republic of Austria In 2003, we filed a claim for a refund with the Austrian Federal Ministry of Finance as
representative of the Republic of Austria in the amount of EUR 245 million for certain expenses
relating to the employment of civil servants. The claim is based on the Postal Restructuring Act
and the argument that we have incurred higher costs for the employment of civil servants and their
termination compared to our competitors. In August 2003, an amendment to the law with retroactive
effect cancelled our claims. We are still seeking a settlement with the Federal Ministry of
Finance. Due to the uncertainties involved we have not recorded the claim in our financial
statements. Court ruling on value added services In 2003, the Austrian Supreme Court ruled that no contractual relationship exists between the
customer and Telekom Austria, but rather that the contractual relationship is established directly
between the VASP and the customers. As a consequence, we are no longer considered the primary
obligor towards our customers in respect to services provided by VASP on our lines and ceased
reporting revenues from these services on a gross basis, beginning on October 1, 2003. The figures
for 2003 are presented including the effect of the VASP until October 1, 2003, therefore not
directly comparable to the 2004 figures. Had the ruling been in effect for the full year of 2003
and 2002, revenues and expenses in the accompanying consolidated statements of operations would
have been lower by EUR 45.9 million and EUR 51.2 million, respectively. This reduction in revenue
has no impact on consolidated operating income. Seasonality In general, the financial results of Telekom Austria are affected by the following seasonal
variations, however there is no assurance that these trends will continue in the future. Traditionally, the year-end holiday season experiences higher revenues from equipment sales as
well as flat-rate packages which is partly offset by higher acquisition costs from equipment
provided to customers and sales commissions in the fourth quarter of the year. The Wireless segment
benefits from higher roaming revenues in the vacation period during the summer season, especially
in Croatia. As a result, Telekom Austrias performance during the second half of the financial year
can have a significant influence on its performance for the full year. Critical accounting policies Reported financial conditions and results of our operations are sensitive to accounting
methods, assumptions and estimates that underlie the preparation of financial statements. The
profile of critical accounting policies, the judgments and other uncertainties affecting the
application of those policies, and the sensitivity of reported results to changes in conditions and
assumptions are factors to be considered in conjunction with reviewing our financial statements and
the discussion below in  Results of operations. Valuation of long-lived assets, intangible assets and goodwill Fixed assets, intangible assets and goodwill comprise a significant portion of our total
assets. Changes in technology or changes in our intended use of these assets may cause the
estimated period of use or the value of these assets to change. We perform annual assessments to
confirm the appropriateness of estimated economic useful lives for each category of current
property, plant and equipment. Additionally, fixed assets and intangible assets with definite
useful lives are reviewed for impairment whenever events or changes in circumstances have indicated
that their carrying amounts may not be recoverable. Goodwill and intangible assets with indefinite
useful lives are tested for impairment at least annually. Estimates and assumptions used in setting
useful lives and testing for recoverability require both judgment and estimation. Total fixed assets, intangible assets and goodwill were EUR 5,152.6 million, EUR 5,767.3
million and EUR 6,317.3 million at December 31, 2004, 2003 and 2002 respectively. Depreciable fixed assets are depreciated over estimated useful lives between 3 and 50 years
and amortizable intangible assets are amortized over useful lives between 4 and 30 years. Although
we have substantial historical 66




---



##### Table of Contents



evidence about estimated useful lives of these assets, there is the inherent risk of a change
in useful lives. For example, a one-year increase or decrease in the useful lives of all
depreciable or amortizable assets would increase depreciation and amortization expense by
approximately EUR 359 million or decrease depreciation and amortization expense by approximately
EUR 166 million, respectively. Depreciation and amortization expenses amounted to EUR 1,114.8 for
the period ended December 31, 2004. Total impairment charges were EUR 1.3 million, EUR 6.8 million and EUR 41.9 million for the
periods ended December 31, 2004, 2003 and 2002, respectively. Valuation of employee benefit obligations Employee benefit obligations are established for (i) contractual termination benefits
available for eligible civil servants, (ii) service awards that are granted to eligible employees
after specified service periods, (iii) severance payments upon termination of employment of
eligible employees, and (iv) pension benefits granted to certain former employees. Contractual termination benefits.In order to reduce headcount and related operating expenses
we have offered several programs in 1997, 1999 and 2000, whereby selected employees who were
approaching the age of 55 were offered certain incentives to induce their voluntary retirement.
Under the terms of these programs employees that accept voluntary retirement are eligible to
receive payments until the day of retirement. We refer to these incentives as Voluntary Retirement
Incentive Programs (VRIPs) or social plans. Generally, such plans target civil servants who can not
be terminated without cause. In aggregate, 3,500 employees accepted one of our VRIP offers in prior
years. At the time an employee accepts a VRIP offer we recognize an accrual for the present value
of the estimated future contractual obligations assuming an annual salary increase of 2.5% for
future years and a discount rate of 4.5%. On January 1, 2002 a law was enacted that covers civil
servants after the age of 55 by a governmental retirement plan with the effect of reducing our
obligation under the VRIPs. Following that law we reversed EUR 1.4 million and EUR 26.8 million of
these accruals in 2004 and 2003, respectively. As of December 31, 2004, the remaining accrual of
EUR 19.4 million for the VRIPs relate to 118 employees. A change in the elected discount rate by 1%
would either increase or decrease the accrual for contractual termination benefits by about EUR 0.2
million. Service awardsare paid after 25 and 40 years of service and to retiring employees with at
least 35 years of service. The compensation is accrued as earned over the period of service taking
into account estimates of employees whose employment will be terminated or who will retire prior to
reaching the required service period. Actuarial gains and losses are recognized immediately in the
period realized. Severanceconsists of legal severance and voluntary severance. Eligible employees hired before
January 1, 2003 receive legal severance payments upon termination of their employment or upon
retirement. The amount of the severance payment equals a multiple of their monthly compensation
depending on the employees years of service including variable elements like overtime and bonus.
Following a legal change, obligations for employees starting to work for us after January 1, 2003
are covered by a defined contribution plan and we paid EUR 0.3 million in 2004 and EUR 0.1 million
in 2003 to this defined contribution plan (BAWAG Allianz Mitarbeitervorsorgekasse AG). Civil
servants do not qualify for legal severance payments. The Austrian government offered early
retirement at reduced future pension payments to certain civil servants. Under this legislation,
civil servants had a one-time opportunity to retire before reaching their legal retirement age. We
offered these eligible employees additional payments to alleviate financial losses from the
reduction in future pension payments and to improve the acceptance of the offer by our civil
servants. As a result, we recorded expenses totaling EUR 19.3 million for 470 civil servants who
accepted this offer in 2004. After making these payments Telekom Austria will not face any future
liabilities. Pension benefits. We provide defined benefits for certain former employees. This unfunded plan
provides benefits based on a percentage of the salary depending on the years employed not exceeding
80% of the salary before retirement including the pension provided by social security. We use the
projected unit credit method to determine pension cost and amortize actuarial gains and losses
using the corridor method. For further information see note (18) of the accompanying financial
statements. The recorded amounts for service awards, severance payments and pensions are affected by the
actuarial assumptions of discount rate, rate of compensation increase and rate of increase of
pensions. The total obligation for these benefits amounted to EUR 90.6 million, EUR 124.1 million
and EUR 100.2 million as of December 31, 2004, 2003 and 2002, respectively. A change of the
selected discount rate of 5.0% by one percentage point would increase the obligation by
approximately EUR 14.6 million or decrease the obligation for these benefits by approximately EUR
11.7 million in 2004. For further information see note (18) of the accompanying financial
statements. 67




---



##### Table of Contents



Valuation of tax assets At December 31, 2004, we had approximately EUR 398.8 million of operating loss carry-forwards.
Thereof, EUR 99.4 million relate to foreign subsidiaries with EUR 98.9 million expiring between
2005 and 2008. The remaining amount is deductible in Austria and do not expire under current
regulation. Their annual usage is limited to 75.0% of the taxable income in Austria for that year. In assessing the recoverability of deferred tax assets, management considers whether it is
more likely than not that all the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning strategies in making
this assessment. As of December 31, 2004 we recognized a net deferred tax asset of EUR 60.5 million
related to the operations in Austria. In order to realize this deferred tax asset we will need to
generate future taxable income exclusive of reversing taxable temporary differences of
approximately EUR 322.5 million. Based on the level of historical taxable income and projections
for future taxable income and tax planning strategies over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not we will realize the benefits
of these deductible differences, net of the existing valuation allowance. The amount of deferred
tax assets considered realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced. A tax reform act has been enacted in Austria, stipulating a reduction of the corporate income
tax rate from 34% to 25% and an expansion of the taxable base. The tax reform became effective in
January 2005. The changes led to an overall tax expense of EUR 21.8 million from revaluation of the
deferred tax assets and liabilities as of December 31, 2004. New accounting pronouncements EU regulations regarding IFRS In compliance with the European Parliament and Council Regulation on the application of
International Financial Reporting Standards (IFRS) adopted in July 2002, all listed European Union
companies are required to prepare their consolidated financial statements in accordance with IFRS
for fiscal years commencing on or after January 1, 2005. However, Member States may defer mandatory
application of IFRS until 2007, for companies that either have listed debt securities only or
already use other internationally accepted Standards for purpose of a listing outside the European
Union. The latter particularly applies to companies, such as us, listed on the New York Stock
Exchange (NYSE) and currently prepare their consolidated financial statements in accordance with
U.S. GAAP. In Austria the option to defer IFRS-adoption was implemented in December 2004, via the
Rechnungslegungsänderungsgesetz 2004. Accordingly, Telekom Austria will not be required to prepare
consolidated financial statements in accordance with IFRS until the fiscal year commencing on
January 1, 2007. In 2003, we established a project team consisting of various members of the Telekom Austria
organization under the responsibility of the CEO (Chief Executive Officer), which is responsible
for the conversion of the financial statements from U.S. GAAP to IFRS. By the summer of 2004, the
project team had conducted an analysis of the key differences between IFRS and U.S.GAAP and
performed an impact analysis of the effect of the new reporting requirements on previously reported
figures, accounting and other systems and procedures and our day-to-day business. After completing the first impact analysis, we identified the core set of accounting standards
to be applied by us under IFRS, including decisions with regard to the first time application of
IFRS. In this analysis, we reviewed all relevant IFRS and transition provisions (as laid down in
IFRS 1, First-time adoption) and considered:  

Consistency with generally applied accounting practices in the telecommunications industry;

Impact on current business and procedures;

Degree of difficulty of systems conversion;

Impact on previously reported and future results; and

Degree of convergence with U.S. GAAP. 68




---



##### Table of Contents



We are currently in the process of performing the actual IFRS conversion and implementation.
The conversion and implementation consist of the issuance of an IFRS accounting manual, adjusting
existing reporting and accounting systems or implementing new systems, adapting procedures and
business policies where applicable, converting our financial statements, preparing an IFRS
compliant budgeting process and training and educating all relevant Telekom Austria employees. We believe, based on the analyses performed so far, that the following IFRS standards (and
exposure drafts) may result in material differences between U.S.GAAP and IFRS financial statements: Convergence of IFRS and US GAAP We expect the adoption of IFRS to have an impact on the comparability and consistency of its
financial reporting. Based on current U.S. GAAP and IFRS standards, we consider differences with a
significant impact on our Consolidated Financial Statements to be primarily related to: Pension Accounting  fresh start  General divergences between U.S. GAAP and IFRS, are for
example, pertaining to the measurement date of plan assets and obligations or the recognition of an
additional minimum liability and are accompanied by differences due to the application of IFRS 1,
First-time adoption of International Financial Reporting
standard. The Standard provides, among
other exemptions from calculating the net cumulative unrecognized actuarial gains and losses under
IFRS, which would generally be required at the date of transition by applying IAS 19
retrospectively for each year since inception of the respective pension plan. According to this
exemption, cumulative unrecognized actuarial gains and losses that had previously not been
recognized through application of the corridor approach under U.S. GAAP could be recognized by
adjusting retained earnings. Therefore, the corridor might be set to zero in the IFRS opening
balance sheet, thus resulting in a difference between U.S. GAAP and IFRS. The corridor approach is
an accounting concept that permits companies to amortize unrecognized net actuarial gains or losses
over the remaining service period of the employees when it exceeds 10% of the larger of the
beginning balance of the projected benefit obligation or the market related value of the plan
assets. Deferred Tax  Differences in accounting for income tax standards On June 28, 2002 we
acquired the remaining 25.001% of mobilkom austria AG & Co KG from Telecom Italia Mobile SpA. The
allocation of the purchase price to the net assets acquired resulted in the recognition of goodwill
attributable to the limited partnership mobilkom austria AG & Co KG. mobilkom austria KG also had
recognized taxable goodwill resulting from its organization in 1996. This taxable goodwill was not
recognized for U.S GAAP purposes, because the organization of mobilkom austria AG & Co KG was
deemed a transaction under common control. U.S. GAAP requires recording a deferred tax liability
for the difference of taxable goodwill of mobilkom austria KG resulting from its organization in
1996 and the goodwill arising from the acquisition of the remaining 25.001% in June 2002. The
deferred tax liability will increase over time with the amortization of the taxable goodwill and
will be recognized as a tax expense. Based on IFRS 1, the Company will elect not to apply IAS 22
Business Combinations retrospectively to past business combinations. Before the transition date
IFRS did not require any assets or liabilities to be recognized on the balance sheet because they
did not meet the asset or liability definition under IFRS but we adjusted retained earnings
instead. Therefore, the deferred tax liability arising from the goodwill of the acquisition of the
remaining 25.001% in June 2002 was derecognized, increasing retained earnings under IFRS. Cross
border lease transactions  recognition of assets and
liabilities  In 2001, 1999 and
1998, the Company entered into various cross border lease transactions, whereby certain equipment
items, mainly switches, transceiver stations, base station controllers and location registers were
sold or leased to a U.S.-based trust and leased back over certain terms. Concurrent with the
inception, the Company entered into Payment Undertaking Agreements (PUA) with several
counter-parties whereby the counterparties agreed to make lease payments on behalf of the Company
in exchange for a deposit or the lease payments received under the head lease. The counterparties
in the PUAs received upfront payments for a portion of the debt assumed in 2001, 1999 and 1998,
respectively. In addition to the PUAs, the Company provided a loan to the U.S.-based trust in
connection with the 2001 transaction. Interest accrued on the PUAs and the loan match interest on
the debt portion. In accordance with U.S. GAAP the cash deposits, the securities purchased in connection with
the PUAs and the upfront payments received for the head lease and the lease obligations are
recorded separately on the balance sheets as the Company has not been released from their
obligation under the lease and a legal right to offset does not exist. Accordingly, interest income
and expenses in an equal amount have been recognized in 2004, 2003 and 2002, respectively. 69




---



##### Table of Contents



In accordance with IFRS, SIC 27 Evaluating the substance of Transactions Involving the Legal
Form of a Lease and the Framework for the 1998 and 1999 cross border lease transactions no assets
or liabilities will be recorded for the separate investment account and the lease payment
obligations. The cash deposits and the securities purchased in connection with the PUAs and the
upfront payments received for the head lease and the lease obligations will not be recorded in the
balance sheet but disclosed as contingent liabilities only. However, for the 2001 transactions the major part of the investment accounts and the lease
payment obligations will have to be recorded as assets and liabilities because the Company is able
to control the investment account and withhold payments. The cash deposits in connection with the
PUAs and the upfront payments received for the head lease and the lease obligations will be
recorded separately on the balance sheets. Accordingly, interest income and expenses in an equal
amount will have to be recognized for 2003. Asset
Backed Securitization Program  In January 2002, the Company entered into a revolving
period securitization program and sold trade receivables to a Trust unrelated to the Company. The
Company retains servicing responsibilities relating to the sold receivables. Solely for the purpose
of credit enhancement from the perspective of the Trust, the Company retains interests in the sold
receivables (retained interests). Under U.S. GAAP, the Company determined that the transaction met the three sales criteria,
that (a) the transferred assets have been isolated from the transferor, beyond the reach of the
transferor and its creditor, even in the event of bankruptcy or receivership, (b) the transferee
obtains the right, free of any conditions that constrain, to pledge or exchange the assets and (c)
the transferor does not maintain effective control in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Additionally, the
limited liability corporation whose shares are owned by a charitable trust under the terms of a
trust fulfilled all conditions required to be a qualifying special purpose entity (QSPE) under SFAS
No. 140. In accordance with SFAS No. 140 the Company has not recorded a servicing asset as management
has determined, that it is not practicable to fair value the servicing asset, as the benefits of
servicing assets are adequate to compensate the Company for its servicing responsibility and no
servicing assets or servicing liability was recorded. Under IFRS, the Company will not derecognize the sold receivables as the assets transferred
are not readily obtainable in the market and the Company has retained substantially all of the risk
of ownership through a total return swap. Therefore, the Company will record the asset backed
securitization transaction as a secured borrowing. Other The Company expects that the adoption of IFRS will result in additional differences in
measuring and classification of assets and liabilities that will affect comparability, but these
differences are not expected to have a material impact on the performance of the Company, whereby
this assessment is based on IFRS-standards currently available. However, the IASB (International
Accounting Standards Board) may release certain pronouncements until our reporting date that might
have an impact on our results and would have to be applied consistently to our results from the
opening balance. Recent developments In January 2005, under the EMTN program Telekom Austria (through Telekom Finanzmanagement
GmbH) issued two bonds with a nominal value of EUR 500 million, one with a 5 year maturity and a
coupon of 3.375%, and one with a 12 year maturity and a coupon of 4.25%. The exercise hurdle (on the basis of earnings per share for the year 2004) for the first
tranche of stock options issued in 2004 was met and therefore the options of the first tranche 2004
can be exercised from April 20, 2005 until May 30, 2008. On March 15, 2005, the management board
decided to settle all stock options of the first tranche issued in 2004 in cash only. This would
have the effect as of December 31, 2004, that the stockholders equity decreases by EUR 4.5 million
and the liabilities increase by EUR 5.5 million together with a rise of employee costs by EUR 1.0
million. The decision of the Management Board of March 23, 2004, to increase the share capital by
up to EUR 6.5 million to service the stock options of the first tranche issued in 2004 will
therefore not be realized. For further information see also Item 6  Stock option plans. On January 19, 2005, the second tranche of 3,398,000 options were offered to the eligible
employees under the Stock Option Plan approved in 2004. 2,858,460 options of these offered options
were granted. The exercise price of Euro 13.98 was based on the average quoted closing price of
Telekom Austria stock during a 70




---



##### Table of Contents



period of twenty trading days ending two days before the granting of options. The options can
be settled either in cash or in shares at the Companys choice. Vesting of the stock options
awarded is based on the performance of basic earnings per share adjusted for certain effects. The
options have a vesting period of about 14 months from the grant day and an exercise period of
approximately three years after becoming exercisable. See also  Item 6  Stock option plans. On March 21, 2005, we paid EUR 80.0 million as option price under the call option agreement
concluded in December 2004 to purchase MobilTel AD, the leading Bulgarian wireless operator. The
call option gives us the unilateral and irrevocable right to purchase 100% of the share capital of
MobilTel AD for a total enterprise value of around EUR 1,600 million in 2005. On
April 1, 2005, one of our competitors launched a no thrill
operator. As a service provider this operator will offer a lean product range for mobile phones at low prices. We can not foresee the impact on our business. 71




---



##### Table of Contents



5.2. RESULTS OF OPERATIONS 2004 compared to 2003 OVERVIEW Consolidated operating results The following table shows our operating revenues, operating expenses and the resulting
consolidated operating income as well as the percentage changes for the periods indicated. 2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Operating revenues
    
    
    4,056.3
    
    
    
    3,969.8
    
    
    
    2.2Operating expenses:Materials
    
    
    (324.5
    )
    
    
    (297.1
    )
    
    
    (9.2
    )Employee costs, including benefits and taxes
    
    
    (673.7
    )
    
    
    (699.3
    )
    
    
    3.7Depreciation and amortization
    
    
    (1,114.8
    )
    
    
    (1,133.2
    )
    
    
    1.6Impairment charges
    
    
    (1.3
    )
    
    
    (6.8
    )
    
    
    80.9Other operating expenses
    
    
    (1,489.3
    )
    
    
    (1,463.6
    )
    
    
    (1.8
    )Total operating expenses
    
    
    (3,603.6
    )
    
    
    (3,600.0
    )
    
    
    (0.1
    )Consolidated operating income
    
    
    452.7
    
    
    
    369.8
    
    
    
    22.4
 Operating revenues Our consolidated operating revenues increased by EUR 86.5 million or 2.2% to EUR 4,056.3
million in 2004. If the change in revenue recognition for certain VAS provided by third-party
providers, in response to a decision by the Austrian Supreme Court had been in effect before
October 1, 2003, revenues and expenses in the accompanying consolidated statements of operations
would have been lower by EUR 45.9 million in 2003. With this adjustment, operating revenues in 2004
would have increased by 3.4% over 2003. For further information see  5.1. Overview  Court ruling
on value added services. This change has no impact on consolidated operating income. The increase
in 2004 is due to the growth in our Wireline segment  mainly due to the growth of terminal calls
to the mobile network and the refund for costs of universal services  and due to the growth in our
Wireless segment  an increase in the mobile customer base, higher interconnection traffic through
our mobile network and a growth in interconnection fees for SMS. Operating expenses Our consolidated operating expenses increased by EUR 3.6 million or 0.1% to EUR 3,603.6
million in 2004. A more detailed analysis of the individual expense items is presented below. Material costs Our consolidated material costs increased by EUR 27.4 million or 9.2% to EUR 324.5 million in
2004. The increase in material expenses of EUR 5.7 million in the Wireline segment was mainly due
to higher costs for network equipment. The material costs in the Wireless segment increased due to
the higher costs of high quality handsets and higher costs for spare parts for mobile transmission
infrastructure. Employee costs, including benefits and taxes Our consolidated employee costs including benefits and taxes decreased by EUR 25.6 million or
3.7% to EUR 673.7 million in 2004. In the Wireline segment the employee costs were lower by EUR
37.0 million, due to less severance costs and staff reduction. This has been offset partially by
the stock option program 2000 and 72




---



##### Table of Contents



2004 which generated costs in the amount of EUR 10.2 million for the Wireline segment. Other
factors concerning the development of personnel costs in the Wireline segment are described in 
5.2. Results of operations  Segment results  Wireline. In the Wireless segment the headcount
decreased but the lower current employee costs were more than offset by the stock option programs
generating costs of EUR 3.1 million, higher severance payments and the impact of a new bonus
system. Depreciation and amortization Our consolidated depreciation and amortization expenses decreased by EUR 18.4 million or 1.6%
to EUR 1,114.8 million in 2004. The decrease in depreciation and amortization results primarily from a strong decline in
depreciation and amortization expenses amounting to EUR 56.3 million in the Wireline segment mainly
due to our efforts to cut capital expenditures relating to our fixed line network. For further
information concerning our capital expenditures see 5.4. Liquidity and capital resources  Capital
expenditures. The growth of amortization and depreciation expense in the Wireless segment
partially offset this decline as a result of the amortization of the Austrian UMTS license as well
as related network equipment which started as of May 1, 2003, as well as depreciation of
infrastructure in connection with the UMTS license. Impairment charges Our consolidated impairment charges decreased by EUR 5.5 million or 80.9% to EUR 1.3 million
in 2004. The impairment charges in 2004 as well as in 2003 primarily relate to long-lived assets. Other operating expenses Our consolidated other operating expenses increased by EUR 25.7 million or 1.8% to EUR 1,489.3
million in 2004 which is mainly due to a rise in interconnection costs and services received in the
Wireless segment. In the Wireline segment other operating expenses decreased, particularly by
lower expenses from bad debt, losses on disposals of assets, advertising expenses and compensation
payments. This decrease in the Wireline segment was partially offset by a rise in interconnection
costs. If the change in revenue recognition for certain VAS provided by third-party providers, in
response to a decision by the Austrian Supreme Court had been in effect before October 1, 2003,
other consolidated operating expenses would have been lower by EUR 45.9 million in the first three
quarters of 2003. This change had no impact on consolidated operating income. Operating income Consolidated operating income increased by EUR 82.9 million or 22.4% to EUR 452.7 million in
2004. The factors described above contributed to the increase in operating income. Both business
segments contributed to this positive development in operating income. The operating income of the
Wireless segment increased by EUR 6.0 million to EUR 407.4 million in 2004 from EUR 401.4 million
in 2003 and the Wireline segment increased its operating income by EUR 90.1 million to EUR 55.8
million in 2004 from an operating loss of EUR 34.3 million in 2003. For an analysis of the
segmental operating revenues and expenses see  Segment Results. 73




---



##### Table of Contents



Other income, taxation, minority interests, cumulative effect of change in accounting principle and
net income 2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Consolidated operating income
    
    
    452.7
    
    
    
    369.8
    
    
    
    22.4Other income (expense)Net interest
    
    
    (118.8
    )
    
    
    (155.8
    )
    
    
    23.7Equity in earnings of affiliates
    
    
    0.6
    
    
    
    19.1
    
    
    
    (96.9
    )Other, net
    
    
    15.6
    
    
    
    (0.5
    )
    
    
    n.a.Income tax expense
    
    
    (122.2
    )
    
    
    (83.1
    )
    
    
    (47.1
    )Minority interest
    
    
    (0.6
    )
    
    
    (3.4
    )
    
    
    82.4Cumulative effect of changes in accounting principle
    
    
    
    
    
    
    (11.9
    )
    
    
    n.a.Consolidated net income
    
    
    227.3
    
    
    
    134.2
    
    
    
    69.4Interest Income
    
    
    70.0
    
    
    
    75.2
    
    
    
    (6.9
    )Interest Expense
    
    
    (188.8
    )
    
    
    (231.0
    )
    
    
    18.3(118.8
    )
    
    
    (155.8
    )
    
    
    23.7
 Net interest Net interest expense decreased by 23.7% to EUR 118.8 million in 2004. The decline of interest
expense by EUR 42.2 million to EUR 188.8 million resulted mainly from the continued reduction in
net debt in 2004. The decline of both, interest income and expenses, also resulted from lower
recognized interest income and expenses in equal amounts for cross border lease transactions we had
entered into in 1998, 1999 and 2001. For further information see notes (16) and (17) of the
accompanying financial statements. Equity in earnings of affiliates Equity in earnings of affiliates amounted to EUR 0.6 million in 2004 down from EUR 19.1
million in 2003. In 2004 only Omnimedia Werbegesellschaft mbHcontributed to this amount whereas
in 2003 a gain of 18.4 million resulted from the sale of the 26% stake in Herold Business Data AG. Income tax expense The effective tax rate for the full year 2004 decreased from 35.7% to 34.9% compared to the
prior year. A new Austrian tax reform act has been enacted reducing the corporate income tax rate
from 34.0% to 25.0% and an expansion of the taxable base. The tax reform has become effective on
January 1, 2005 and leads to an overall tax expense of EUR 21.8 million from revaluation of the
deferred tax assets and liabilities as of December 31, 2004. The effective income tax rate
excluding the effect of change in tax rate is 28.7% for the full year 2004. Income tax expense increased from EUR 83.1 million in 2003 to EUR 122.2 million in 2004 as a
result of the continued growth in profitability leading to a higher taxable base and also as a
result of the effect of tax reform in Austria. For the assessment of the recoverability of deferred tax assets see  5.1. Overview 
Critical accounting policies  Valuation of tax assets and note (21). Minority interests As mobilkom austria group has been fully consolidated since June 28, 2002, minority
shareholders earnings in VIPnet, one of mobilkom austria AG & Co KGs subsidiaries are presented
as minority interests in our income statement. Overall this company contributed positively to
mobilkom austria groups result. The portion of VIPnets earnings attributable to the minority
interests in the amount of EUR 0.6 million in 2004 are deducted in arriving at consolidated net
income. 74




---



##### Table of Contents



Cumulative effect of change in accounting principle The Company adopted SFAS No. 143 as of January 1, 2003 and recorded a cumulative change in
accounting principle for the retirement and decommissioning of existing base stations, buildings,
booths for public payphones and wooden masts impregnated with tar or salt in the amount of EUR 11.9
million in 2003. Consolidated net income Our consolidated net income increased by EUR 93.1 million to EUR 227.3 million in 2004.
Continued growth in the Wireless segment combined with various cost cutting measures and lower
depreciation, amortization and impairment charges in the Wireline segment contributed to this
effect. 75




---



##### Table of Contents



SUPPLEMENTARY INFORMATION We evaluate the performance of our segments using the non-U.S.GAAP financial measure adjusted
EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) which is based on net income
excluding interest, taxes, depreciation, amortization, impairment charges, dividend income, equity
in earnings of affiliates, other non-operating income/expense, minority interests and the
cumulative effect of changes in accounting principle. This equals operating income before
depreciation, amortization and impairment charges. The following table provides an overview for the
items that were excluded from net income to determine consolidated adjusted EBITDA for the periods
indicated. 2004
    
    
    2003(in EUR millions)Net income
    
    
    227.3
    
    
    
    134.2Adjustments:Depreciation and amortization
    
    
    1,114.8
    
    
    
    1,133.2Impairment charges
    
    
    1.3
    
    
    
    6.8Interest income
    
    
    (70.0
    )
    
    
    (75.2
    )Interest expense
    
    
    188.8
    
    
    
    231.0Equity in earnings of affiliates and dividend income
    
    
    (0.6
    )
    
    
    (19.1
    )Other (income) expense
    
    
    (15.6
    )
    
    
    0.5Income tax expense
    
    
    122.2
    
    
    
    83.1Minority interests
    
    
    0.6
    
    
    
    3.4Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    11.9Adjusted EBITDA
    
    
    1,568.8
    
    
    
    1,509.8
 Adjusted EBITDA excludes depreciation and amortization expenses, in order to eliminate the
impact of generally long-term capital investments, that cannot be significantly influenced by our
management on a short-term basis. Management also excludes impairment charges that were recorded as
a consequence of the decline in fair value of several long-term investments and buildings below
their carrying amount. In evaluating and managing our operating activities we exclude these charges
that cannot be influenced by our key operating decision makers on a short-term basis. We may record
impairment charges in the future if there are further declines in the fair values of our
investments. Adjusted EBITDA excludes other non-operating income/expense, since these do not
reflect the operating results that we achieve from servicing our customers. Dividend income and
equity in earnings of affiliates result from investments, in which we exercise significant
influence, but do not have control. As we do not control these entities, our management excludes
these results when evaluating the operating performance of our business segments. Minority
interests reflect the share in generated net income belonging to minority shareholders of fully
consolidated entities by Telekom Austria and are added back to adjusted EBITDA since our management
has to evaluate the total operating performance of these consolidated entities to make appropriate
business decisions. Adjusted EBITDA also excludes interest income and expense and the provision for
income taxes arising in connection with our capitalization and tax structures. The cumulative
effect of change in accounting principle which was caused by the adoption of SFAS 143 (Asset
Retirement Obligation) as of January 1, 2003 represents the retroactive recording of fair values
of asset retirement obligations for existing tangible long-lived assets. The management excludes
this non-recurring, unusual charge when evaluating the performance of our business segments. Our management believes adjusted EBITDA is meaningful to investors because it provides an
analysis of our operating results and our segment profitability using the same measure used by our
chief operating decision makers. Although adjusted EBITDA may be defined differently by other
companies in the telecommunications industry or present other varying financial measures, we
believe that adjusted EBITDA provides comparability in analyzing operating performance of companies
in the telecommunication industry. Adjusted EBITDA is also one of many factors used by credit
rating agencies to determine our credit ratings. There are material limitations to use measures such as adjusted EBITDA, including the
difficulty associated with comparing these performance measures as we calculate them to similar
performance measures presented by other companies, and the fact that these performance measures do
not take into account certain significant items, including depreciation and amortization,
impairment charges, dividend income, equity in earnings of affiliates or other non-operating
income/expense that directly affect our net income. Adjusted EBITDA should be considered in
addition to, but not a substitute for, other measures of financial performance reported in
accordance with 76




---



##### Table of Contents



accounting principles generally accepted in the United States of America such as operating
income and net income. 2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Adjusted EBITDA:Wireline
    
    
    814.3
    
    
    
    780.5
    
    
    
    4.3Wireless
    
    
    765.4
    
    
    
    727.1
    
    
    
    5.3Other activities & eliminations
    
    
    (10.9
    )
    
    
    2.2
    
    
    
    n.a.Adjusted EBITDA
    
    
    1,568.8
    
    
    
    1,509.8
    
    
    
    3.9
 Our adjusted EBITDA increased by 3.9% in 2004 to EUR 1,568.8 million from EUR 1,509.8 million
in 2003. As shown in the table above this increase is a result of the performance of both segments
 Wireline and Wireless. In the Wireline segment lower costs led to an increase in adjusted EBITDA
by 4.3% to EUR 814.3 million in 2004 from EUR 780.5 million in 2003. Our Wireless segment contributed to our consolidated adjusted EBITDA of EUR 765.4 million
which is an increase by 5.3% from EUR 727.1 million in 2003. This increase resulted from growing
revenues in the primary markets of our Wireless segment and a strong focus on cost-efficient
operations. 77




---



##### Table of Contents



SEGMENT RESULTS As of January 1, 2003 we finalized the reorganization of our operations into two distinct
operating segments, Wireline, which includes fixed line, data communications and internet services,
and Wireless, consisting of the mobile communications segment, and a third segment Other
activities which includes primarily various financial services that are provided by our subsidiary
Telekom Finanzmanagement GmbH to both business segments, Wireline and Wireless. In order to give
shareholders a clear view of our external performance as a company, we separately disclose these
internal transactions when presenting our results for Telekom Austria. Wireline The Wireline segment includes mainly the operating activities of Telekom Austria AG, and
provides telecommunications services such as voice telephony on fixed networks, data communications
services, internet services, services for other carriers, and equipment sales. The Austrian fixed line voice market, measured in terms of minutes, experienced another slight
decrease during 2004 especially in national minutes due to increased migration to mobile
communication services. Nevertheless, we were able to increase our market share based on minutes,
excluding internet dial-up minutes, to 54.4% at December 31, 2004, up from 52.7% at year-end 2003
due to the continuing promotion of our second-based TikTak tariffs, which were originally
introduced in 2001. With the growing use of pre-selection of a carrier and unbundling of the local
loop, we face increasing competition for national telephony traffic on fixed networks resulting in
lower average voice tariffs. Our market share for fixed line traffic including internet dial-up increased to 55.2% at
December 31, 2004 compared to 54.1% at year-end 2003 due to the successful customer retention
strengthening our voice market share which compensated for the decrease in dial up minutes. Our
ADSL broadband customer base increased by 46.9% including our wholesale ADSL lines in 2004,
attracting in particular regular users of the internet, while our dial-up customer base increased
by 8.5%. ADSL is a technology that permits a high speed transmission of data using a standard
copper access line. Revenues Revenues from our Wireline segment are derived primarily from the following sources:  

Switched voice base traffic charges for national (local and national long-distance),
fixed-to-mobile and international calls; switched voice monthly and other voice revenues
comprising initial connection fees, installation fees, monthly rental and other charges;

Public payphone services and value added services (VAS);

Data and IT-solutions including wholesale;

Internet access and media;

Wholesale voice and internet including interconnection fees paid by other carriers to
access our fixed line network and related carrier services; and

Fees from other services, including equipment sales and directory services. The following table shows revenues from our Wireline segment and percentage changes for the
periods indicated. 78




---



##### Table of Contents



2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Wireline operating revenues:Switched voice base traffic (1)
    
    
    403.4
    
    
    
    447.3
    
    
    
    (9.8
    )Switched voice monthly & other voice revenues
    
    
    570.1
    
    
    
    567.9
    
    
    
    0.4Payphones & VAS (1)
    
    
    52.6
    
    
    
    67.5
    
    
    
    (22.1
    )Data & IT-Solutions
    
    
    297.2
    
    
    
    338.3
    
    
    
    (12.1
    )Wholesale data
    
    
    143.8
    
    
    
    103.8
    
    
    
    38.5Data & IT-solutions including wholesale (2)
    
    
    441.0
    
    
    
    442.1
    
    
    
    (0.2
    )Internet access & media
    
    
    207.2
    
    
    
    198.4
    
    
    
    4.4Wholesale voice & Internet
    
    
    369.0
    
    
    
    311.4
    
    
    
    18.5Other (1)
    
    
    141.4
    
    
    
    163.1
    
    
    
    (13.3
    )Total wireline operating revenues
    
    
    2,184.7
    
    
    
    2,197.7
    
    
    
    (0.6
    )
   (1)
    
    If the change in revenue recognition for certain VAS provided by third-party providers,
in response to a decision by the Austrian Supreme Court had been in effect before October 1,
2003, total Wireline operating revenues would have been lower by EUR 32.7 million in 2003,
affecting revenues from switched voice base traffic, pay phones & VAS and other revenues.(2)
    
    The former revenue categories Data & IT-solutions and Wholesale data have been presented
as a total Data & IT-solutions including wholesale since January 1, 2004. For better
comparability with 2003 they are still shown as separate revenues. Switched voice base traffic Switched voice base traffic revenues decreased by 9.8% to EUR 403.4 million in 2004 from EUR
447.3 million in 2003. The decline in average tariffs resulted from a further drop of 5.6% in
traffic volume in 2004 compared to 2003 as a result of a decline in national traffic minutes by
6.9% in 2004, as illustrated in the table below and a decline in the price for switched base
traffic. 2004
    
    
    2003
    
    
    2004/2003(in millions of minutes)(1)
    
    
    (% change)Traffic minutes:National (local + national long distance)
    
    
    4,174
    
    
    
    4,485
    
    
    
    (6.9
    )Fixed-to-mobile
    
    
    854
    
    
    
    855
    
    
    
    (0.1
    )International
    
    
    467
    
    
    
    484
    
    
    
    (3.5
    )Total voice minutes
    
    
    5,495
    
    
    
    5,824
    
    
    
    (5.6
    )
   (1)
    
    All amounts exclude traffic minutes that were not generated from our customers such as
interconnection traffic that originated in networks of other providers or payphone traffic. Strong competition for fixed network services, especially the fixed to mobile
substitution, are the key factors in the decline of fixed line traffic. The successful promotion of
TikTak tariffs enabled us, however, to increase our market share based on minutes from 52.7% in
2003 to 54.4% in 2004. The reduction in revenues from switched voice base traffic was also caused by a change in
revenue recognition for certain VAS provided by third-party providers starting October 1, 2003, in
response to a decision by the Austrian Supreme Court. Traffic revenues would have been lower by EUR
18.5 million in 2003, if the revenue recognition had been applied retroactively. Switched voice monthly and other voice revenues Revenues from our initial connection and installation fees, monthly rentals and other network
services increased by 0.4% to EUR 570.1 million in 2004 from EUR 567.9 million in 2003. In July 2003, the regulatory authority granted its approval for Telekom Austrias plan to
discontinue its Minimum Tariff. Existing customers of the Minimum Tariff were transferred to the
Standard Tariff on September 28, 2003. This move was made due to the increased usage of the Minimum
Tariff by pre-selection customers. All other tariff models of Telekom Austria remained unchanged.
The discontinuation of the Minimum Tariff caused an increase in the monthly rental (incl. 20% VAT)
from EUR 14.38 to EUR 17.44, 79




---



##### Table of Contents



however resulting in up to 6% lower tariffs for voice base traffic. Due to this effect our
switched voice monthly and other voice revenues increased despite the decline in our total access
lines. These revenues are generally a function of the number and mix of standard PSTN telephone, ISDN
and the corresponding initial connection fees and monthly rental charges. Each of our traditional telephone lines, called PSTN lines, provides one access channel. We
also offer lines on new networks that provide up to 30 lines and can be used simultaneously for
voice and data transmissions at higher speeds than over normal access lines. These networks are
called integrated services digital network, or ISDN. There are two kinds of ISDN lines. Basic ISDN
lines provide two access channels each and multi ISDN lines provide 30 access channels each. The following table shows the number of our access lines and channels and percentage changes
for the periods indicated. The figures exclude payphones, but include our internal lines and
approximately 249,800 lines for qualifying low income persons at December 31, 2004. The service for
low income persons, which we have provided for many years, includes free monthly rental and one
hour of free local traffic per month. We partly receive a reimbursement from the federal government
for these services. 2004
    
    
    2003
    
    
    2004/2003(in thousands)
    
    
    (% change)Number of fixed lines:PSTN access lines
    
    
    2,455.5
    
    
    
    2,555.8
    
    
    
    (3.9
    )Basic ISDN access lines
    
    
    443.6
    
    
    
    447.2
    
    
    
    (0.8
    )Multi ISDN access lines
    
    
    7.6
    
    
    
    7.8
    
    
    
    (2.6
    )Total access lines
    
    
    2,906.7
    
    
    
    3,010.8
    
    
    
    (3.5
    )Total access channels
    
    
    3,570.7
    
    
    
    3,684.2
    
    
    
    (3.1
    )
 The total number of access lines decreased by 3.5% in 2004, primarily due to growth in the
mobile communications market and unbundling of local loops, and to a lesser extent due to a shift
to alternative providers such as cable television operators. The number of total access channels in
the fixed network declined by approximately 3.1% in 2004 compared to 2003. Public payphone services and value added services In 2004 the revenues from our public payphone and VAS decreased by 22.1% to EUR 52.6 million
from EUR 67.5 million in 2003. The revenues from public payphones declined due to falling demand
primarily as a result of the high mobile penetration rate. Neither the further roll-out of more
attractive public multimedia stations providing access to internet, e-mail, video telephony and
various other multimedia services in 2004 nor the increase in VAS from event based premium rate
services traffic could offset this decline. Revenues from VAS decreased resulting from a change in revenue recognition for certain VAS
provided by third-party providers. This began on October 1, 2003, in response to a decision by the
Austrian Supreme Court. Revenues from public payphone and VAS would have been lower by EUR 9.7
million in 2003, if the revenue recognition had been applied retroactively. Data and IT-solutions including wholesale In 2004, the revenues from data and IT-solutions including wholesale decreased by 0.2% to EUR
441.0 million from EUR 442.1 million in 2003. These revenues are generated from a large portfolio
of data-related services that are mainly provided to our business customers: leased line services,
switched data transmission services, corporate network services, MPLS services, data value added
services and IT-solutions. From 2004 onwards former wholesale data revenues are not disclosed
separately but reported in data and IT-solutions. Main driver for the slight decline in revenues from data and IT-solutions were price
reductions in leased line services as a result of the continuing price pressure in the national and
international leased line market. This decrease could not be completely offset by a growth in
revenues from corporate network services and electronic payment systems. 80




---



##### Table of Contents



Internet access and media We are the leading internet service provider in Austria with approximately 1.2 million
residential customers. We had a share of approximately 42.0% of the residential internet market
(including 3.0% contributed by mobilkom austrias mobile internet customers) in the fourth quarter
of 2004. Internet access and media comprises access services (dial-up and broadband ADSL access)
and a portal business with online media sales, e-commerce and multimedia services. Our revenue generated by our internet access and portal business increased by 4.4% to EUR
207.2 million in 2004 from EUR 198.4 million in 2003. This growth was in line with the increase in
the subscriber base in Austria by 15.6% from 1,026,600 at the beginning of 2004 to 1,187,000 at the
end of 2004. ADSL-residential customers, also included in these figures, increased by 43.1% in the
same period, supported by the re-launch of our AonSpeed portfolio which includes special product
versions for light, average and heavy users. Business broadband access lines grew even stronger by
50.6% due to our re-launch of business broadband services in 2004. The new pricing system includes
higher download volumes and a lower high usage fee. The increase in revenues did not follow the
increase in the customer base due to lower average usage and lower average revenues per user on the
base of the new product portfolio. Our subsidiary Czech On Line, a Czech telecommunications provider with a strong focus on
internet services, which we acquired in 2000, generated overall revenues of EUR 20.3 million in
2004 up from EUR 18.5 million in 2003. Thereof, Czech On Line contributed revenues of EUR 11.4
million or 5.5% to our internet access and media business in 2004. Wholesale voice and internet Wholesale voice and internet services generate revenues by providing network services to
domestic and international carriers. These carrier services consist of termination, origination (or
carrier selection) and transit of national traffic and international termination in Austria and
abroad, international bandwidth services and internet access. Revenues increased by 18.5% to EUR 369.0 million in 2004 from EUR 311.4 million in 2003, thus
displaying the highest growth in revenues in the Wireline segment. This growth resulted mainly from
wholesale voice revenues. International traffic rose due to increased transit and incoming mobile
traffic. A higher number of unbundled subscriber lines and a reimbursement we received for the
provision of universal services more than offset the decline in national traffic caused by the
shift of customers to mobile communication. Moreover wholesale internet services increased
primarily due to the strong sales of our internet products for wholesale customers, showing higher
revenues in 2004, and raising the number of wholesale ADSL subscriptions from 53,500 in 2003 to
85,200 in 2004. Furthermore we recognized a refund for costs of universal services in the amount of
EUR 3.6 million for 2004 and EUR 11.2 million for the previous years. Other revenues (customer premises equipment and directory services) This category primarily includes sales and rentals of customer premises equipment and
directory services. We generate revenues from sales of telecommunications equipment including
residential, as well as mobile telephone equipment and systems for business customers, and by
providing related post-sale maintenance and services. As part of our directory services we generate
revenues from offering call-center services and the management of a database of subscriber data of
our and other fixed-line and mobile service providers subscribers, which is offered to directory
publishers. Revenues decreased by 13.3% to EUR 141.4 million in 2004 from EUR 163.1 million in
2003. The decline in other revenues was primarily due to lower revenues from directory services such
as directory publication, directory assistance and call center services. Revenues from equipment
sales and related maintenance and services in 2004 were at the same level as in 2003.Other revenues
decreased resulting from a change in revenue recognition for certain VAS provided by third-party
providers, beginning October 1, 2003, in response to a decision by the Austrian Supreme Court.
Other revenues would have been lower by EUR 4.5 million in 2003, if the revenue recognition had
been applied retroactively. Operating expenses The following table shows operating expenses of our Wireline segment and percentage changes
for the periods indicated. 81




---



##### Table of Contents



2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Wireline operating expenses:Material expense
    
    
    69.0
    
    
    
    63.3
    
    
    
    9.0Employee costs, including benefits and taxes
    
    
    494.9
    
    
    
    531.9
    
    
    
    (7.0
    )Depreciation and amortization, impairment charges
    
    
    758.5
    
    
    
    814.8
    
    
    
    (6.9
    )Interconnection (1)
    
    
    333.1
    
    
    
    319.7
    
    
    
    4.2Maintenance and repairs
    
    
    116.5
    
    
    
    119.2
    
    
    
    (2.3
    )Services received (1)
    
    
    41.9
    
    
    
    42.5
    
    
    
    (1.4
    )Other  total: (2)
    
    
    315.0
    
    
    
    340.5
    
    
    
    (7.5
    )Other support services
    
    
    87.2
    
    
    
    83.0
    
    
    
    5.1Other
    
    
    227.8
    
    
    
    257.5
    
    
    
    (11.5
    )Total wireline operating expenses
    
    
    2,128.9
    
    
    
    2,231.9
    
    
    
    (4.6
    )
   (1)
    
    If the change in revenue recognition for certain VAS provided by third-party providers,
in response to a decision by the Austrian Supreme Court had been in effect before October 1,
2003, total Wireline operating expenses would have been lower by EUR 32.7 million in 2003,
affecting costs from interconnection and services received.(2)
    
    From 2004 onwards other operating expenses are presented as divided into the categories other
support services, containing leased personnel, and other operating expenses. For better
comparability the sum is also presented as it was in prior years. Materials Materials consist mainly of expenses for spare parts, cables and supplies for our network and
merchandise we sell to our customers. Material expenses in the Wireline segment increased by 9.0%
in 2004 to EUR 69.0 million, from EUR 63.3 million in 2003. The increase in material expenses is
primarily due to the increasing costs for network equipment sold in Austria. Employee costs, including benefits and taxes Employee costs including benefits and taxes in our Wireline segment decreased by 7.0% in 2004
to EUR 494.9 million from EUR 531.9 million in 2003. The decrease was due to lower severance payments and lower current costs due to a decrease of
our average number by 1,032 employees or 9.4% to 9,995 employees in 2004 as a result of our
transformation program, as described in  Overview  Transformation program. The Austrian
government offered to certain civil servants an early retirement pension at reduced future pension
payments. We offered these eligible employees additional payments to alleviate financial losses
from the reduction in future pension payments and to improve the acceptance rate of the offer by
the government. Due to this measure our workforce could be reduced by 650 civil servants in 2003.
We incurred a legal obligation to civil servants making use of this opportunity and recorded
expenses of EUR 19.3 million and EUR 47.3 million in 2004 and 2003, respectively. We do not expect
any additional liabilities related to this offer beyond the amount of the accruals. From 1997 to 2000, we offered VRIPs to eligible employees. We made provisions for expenses
related to these programs of EUR 253.2 million in 2000. In 2004, we reversed 1.4 million of the
VRIP provisions after a reversal of EUR 26.8 million in 2003. At December 31, 2004, 118 employees
were still covered by the VRIP provisions. For more information about our relationship with
employees, see Item 6  Employees  Relationship with employees. In 2004, this decrease in employee costs was partially offset by the cost of the options
exercised under the stock option program 2000 and 2004 which resulted in expenses amounting to EUR
10.2 million in the Wireline segment and EUR 3.1 million in the Wireless segment. Depreciation and amortization including impairment charges Depreciation and amortization including impairment charges in our Wireline segment decreased
by 6.9% to EUR 758.5 million in 2004 from EUR 814.8 million in 2003 as a result of the continuing
downward trend of capital expenditures. Depreciation expenses decreased due to our efforts to cut capital expenditures in connection
with our fixed line network. Amortization expenses for intangible assets remained at an
insignificant level. 82




---



##### Table of Contents



The impairment charges for fiscal year 2004 were lower by EUR 5.5 million in comparison to
2003 and primarily relate to long-lived assets as future estimated net cash flows were below the
carrying value of related assets. Interconnection Interconnection costs increased by 4.2% to EUR 333.1 million in 2004 from EUR 319.7 million in
2003. The increase was mainly caused by higher interconnection traffic generated by international
transit and the shift of traffic to higher priced mobile networks. An offsetting factor for the increase in interconnection costs was the change in revenue
recognition for certain VAS provided by third-party providers, effective October 1, 2003, in
response to a decision by the Austrian Supreme Court. Interconnection costs would have been lower
by EUR 18.8 million in 2003 if the revenue recognition had been applied retroactively. Maintenance and Repairs Expenses for maintenance and repairs decreased by 2.3% to EUR 116.5 million in 2004 from EUR
119.2 million in 2003. The decrease resulted mainly from lower maintenance expenses for software
and hardware as well as maintenance on the fixed network. Services received Services received are incurred as a result of various services provided by third-parties such
as VAS. The change in revenue recognition for certain VAS provided by third-party providers,
starting October 1, 2003, in response to a decision by the Austrian Supreme Court would have
reduced services received by EUR 13.9 million in 2003 if the revenue recognition had been applied
retroactively. This fact offset the increase of services provided by third-parties for meeting the
growing demand for leased line services leading to a decrease by 1.4% in services received to EUR
41.9 million in 2004. Other support services Other support services consist of leasing personnel. The costs, which were contained in the
other operating expenses in former years, increased by 5.1% from EUR 83.0 million in 2003 to EUR
87.2 million in 2004. The increase in personnel leasing is due to improvements in the service
quality level in the call center which caused the employment of more leasing personnel and the
staff reduction in 2003 and 2004 which was partially compensated by leasing personnel. Other operating expenses Other operating expenses include expenses such as energy, rental, marketing, training,
advertising expenses and income and loss from retirement of equipment. Beginning in 2004, other
support services are presented separately. For better comparability the 2003 figures are shown
separately as well as in total. Other operating expenses in the Wireline segment decreased by 11.5% in 2004 to EUR 227.8
million from EUR 257.5 in 2003. We incurred lower expenses from bad debt and losses on disposals of assets, generated savings
from the insourcing of our property management, lowered our advertising expenses and received
insurance payments for the flood damages caused to our installations by the floods of the summer of
2003 and related compensation payments made by the European Union. Wireless The total number of customers in the Wireless segment as of December 31, 2004 grew by 4.5%
compared to December 31, 2003. At the end of 2004 we had more than 4.9 million customers in our
Wireless segment. The majority of customer growth came from mobilkom austria AG & Co KG. The
Austrian market had a penetration rate of 98.0% at the end of 2004. Our foreign subsidiaries
contributed with a percentage of 34% at the end of 2004 to the customer base, rising slightly from
33% in 2003. We were still able to increase the total number of our mobile customers in Austria by 3.5%, or
approximately 110,400 during 2004. However, due to stronger competition and an increasing number of 83




---



##### Table of Contents



Austrian mobile customers our market share decreased to 41.0% at December 31, 2004, down from
43.3% at the end of 2003. As a result of the aggressive price policy on the Austrian market, the
churn rate increased from 16.1% in 2003 to 17.0% in 2004. During 2004 the number of Austrian
contract customers increased by 5.7% and the number of prepaid customers increased by 0.9%. At
December 31, 2004, contract customers account for 54.3% of the total customer base of mobilkom
austria AG & Co KG compared to 53.2% at December 31, 2003 as a result of our continuing focus to
increase the share of high value contract customers. mobilkom austria AG & Co KGs subsidiary, VIPnet, a mobile operator in Croatia, added
approximately 98,100 customers in the year 2004. The penetration rate in Croatia amounted to 64.5%
at the end of 2004, with VIPnet holding a total market share of 46.0%. mobilkom austria AG & Co
KGs subsidiary Si.mobil, a mobile operator in Slovenia added approximately 1,800 customers in the
year 2004. Penetration in Slovenia reached a level of 79.1% at the end of 2004 with Si.mobil
holding a total market share of 23.3%. Revenues Our Wireless segment generates revenues from operations of our mobile networks. The revenues
mainly include traffic charges, monthly rental charges, equipment sales and roaming and
interconnection fees. The following table shows revenues from our Wireless segment and percentage changes for the
periods indicated. 2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Wireless operating revenues:Traffic revenues
(1)
    
    
    1,141.5
    
    
    
    1,095.6
    
    
    
    4.2Monthly rental
    
    
    303.9
    
    
    
    297.7
    
    
    
    2.1Equipment
    
    
    180.1
    
    
    
    176.3
    
    
    
    2.2Roaming
    
    
    175.6
    
    
    
    153.8
    
    
    
    14.2Interconnection
(1)
    
    
    328.0
    
    
    
    305.0
    
    
    
    7.5Other
    
    
    15.9
    
    
    
    18.1
    
    
    
    (12.2
    )Discounts
    
    
    (19.5
    )
    
    
    (16.3
    )
    
    
    (19.6
    )Total wireless
operating
revenues
    
    
    2,125.5
    
    
    
    2,030.2
    
    
    
    4.7
   (1)
    
    If the change in revenue recognition for certain VAS provided by third-party providers,
in response to a decision by the Austrian Supreme Court had been in effect before October 1,
2003, total Wireless operating revenues would have been lower by EUR 20.3 million in 2003,
affecting traffic revenues of mobilkom austria AG & Co KG and interconnection revenues of
mobilkom [liechtenstein]. Our operating revenues from our Wireless segment increased by 4.7% in 2004 to EUR 2,125.5
million from EUR 2,030.2 million in 2003, with 78.4% of operating revenues generated within the
Austrian market. Traffic revenues Traffic revenues depend on the total number of customers, traffic volume, mix of prepaid and
contract customers and tariffs. Traffic revenues increased by 4.2% in 2004 to EUR 1,141.5 million
from EUR 1,095.6 million in 2003. This growth was a result of an increase in the customer base by
4.5% in minutes of usage charged and in data revenues. The following table shows the number of
customers of our Wireless segment and percentage changes for the periods indicated. 2004
    
    
    2003
    
    
    2004/2003(in thousands)
    
    
    (% change)Wireless customers:Austria
    
    
    3,273.6
    
    
    
    3,163.2
    
    
    
    3.5Croatia
    
    
    1,308.6
    
    
    
    1,210.5
    
    
    
    8.1Slovenia
    
    
    363.3
    
    
    
    361.5
    
    
    
    0.5Liechtenstein
    
    
    3.5
    
    
    
    2.5
    
    
    
    40.0Total customers
    
    
    4,949.0
    
    
    
    4,737.7
    
    
    
    4.5
 84




---



##### Table of Contents



In addition to the higher customer base, the average usage per customer rose by 1.4% for the
Wireless segment. This was partially offset by a launch of a new tariff model allowing cheaper
prices per minute to other mobile and fixed networks by paying an additional fixed monthly fee. An
offsetting factor in 2003 was, in response to a decision by the Austrian Supreme Court, the change
in revenue recognition for certain VAS provided by third-party providers starting October 1, 2003.
Traffic revenues are lower by EUR 18.5 million in 2003. In the Wireless segment both, contract and prepaid customers contributed to the increase in
traffic revenues for 2004. For both types of customers the customer base rose. The contract
customer base grew by 5.1%, while the number of prepaid customers increased by 4.0%. Despite the
highly competitive markets, overall average revenue per customer showed a slight increase of 0.6%. The share of data traffic revenues increased from 13.9% at year-end 2003 to 15.0% at year-end
2004. In Austria this share increased by 1.2 percentage points to 12.6% at year-end 2004. The
majority of data revenues is derived from SMS and to a lesser extent from GPRS and MMS. We expect
that data revenues from GPRS and MMS services at mobilkom austria AG & Co KG will increase
significantly due to a leap in the number of GPRS users by 81.5% to 1,524,700 users compared to
839,900 users in 2003 and due to a growing number of MMS users in 2004. Monthly rental We generate revenues from monthly rental fees paid by our contract customers for access to our
mobile communications network. Revenues from monthly rentals increased by 2.1% to EUR 303.9 million
in 2004. The rise in revenues from monthly rental is primarily attributable to the increase in our
contract customer base by 5.7% in Austria and by 4.0% in Croatia, and the growth of data packages.
However, the introduction of tariff packages with lower or no monthly rental tariffs partially
offset the increase in revenues from monthly rental fees. Equipment We generate revenues from customer equipment primarily from sales of handsets to our customers
and to resellers. Revenues from equipment increased by 2.2% in 2004 to EUR 180.1 million from EUR
176.3 million in 2003 primarily due to increased sales of higher priced handsets with more
functionalities and more replacements among others of Vodafone live! handsets. This effect was
partially offset by a decline in the number of gross customer additions and higher handset
subsidies. Roaming Basically, roaming fees are generated when our mobile network carries a call made by a
customer of another international mobile operator. In addition to that, national roaming revenues
are generated by customers of our national competitor Hutchison 3G which use our network in
accordance with the national roaming agreement which was signed with Hutchison 3G in September
2002. Revenues from roaming fees increased by 14.2% in 2004 to EUR 175.6 million, from EUR 153.8
million in 2003. This increase was primarily caused by higher usage due to the Vodafone cooperation
due to a better capture rate and an increase of Vodafone customers. Additionally, higher roaming
revenues in Austria were generated by strong winter tourism and higher national roaming revenues. Interconnection Our Wireless segment generates interconnection revenues primarily from interconnection fees
from our Wireline segment as well as from other fixed and mobile operators for calls terminating in
our mobile networks. In addition, we receive revenues from service numbers such as toll free
numbers. Our interconnection revenues increased significantly by 7.5% in 2004 to EUR 328.0 million
from EUR 305.0 million in 2003. The increase in interconnection revenues in Austria was a result of
the increase in interconnection traffic minutes and higher usage from carrier business. The
increase of interconnection revenues in Croatia is a result of higher average interconnection fees
with the Croatian incumbent operator and higher revenues from SMS interconnection, based on an
agreement with the incumbent for SMS interconnection concluded in the last quarter of 2003. In
Slovenia, additional revenues were generated primarily as a result of increased carrier business,
higher average interconnection fees with the Slovenian incumbent operator since November 2003, and
higher traffic minutes charged. In Liechtenstein the increase was mostly generated from VAS. 85




---



##### Table of Contents



The change in revenue recognition for certain VAS provided by third-party providers starting
October 1, 2003, in response to a decision by the Austrian Supreme Court would have reduced
interconnection revenues at mobilkom [liechtenstein] by EUR 1.8 million in 2003, if the revenue
recognition had been applied retroactively. Other This category includes revenues from one-time charges such as initial connection fees and
collection services such as fees for transfer payments as well as fees for call center services,
and revenues from real estate. Revenues decreased by 12.2% in 2004 to EUR 15.9 million, from EUR
18.1 million in 2003 in part as a result of special promotions in Austria as well as lower
activation fees due to lower gross additions of subscribers at VIPnet. Discounts Discounts increased by 19.6% in 2004 to EUR 19.5 million compared to EUR 16.3 million in 2003.
A decrease in discounts at mobilkom austria AG & Co KG was offset by an increase at VIPnet. The increase at
VIPnet was caused by a retention campaign (higher discounts per average handsets) and an
acquisition campaign for prepaid customers. The release of provisions for customer loyalty programs
resulted in a decline at mobilkom austria AG & Co KG. Operating expenses The following table shows operating expenses from our Wireless segment and percentage changes
for the periods indicated. 2004
    
    
    2003
    
    
    2004/2003(in EUR millions)
    
    
    (% change)Wireless operating expenses:Material expense
    
    
    276.3
    
    
    
    254.7
    
    
    
    8.5Employee costs
    
    
    179.8
    
    
    
    167.8
    
    
    
    7.2Depreciation and amortization
    
    
    358.1
    
    
    
    325.6
    
    
    
    10.0Interconnection (1)
    
    
    236.0
    
    
    
    224.0
    
    
    
    5.4Repairs
    
    
    63.7
    
    
    
    62.0
    
    
    
    2.7Services received
    
    
    267.9
    
    
    
    250.9
    
    
    
    6.8Other  total: (2)
    
    
    336.3
    
    
    
    343.8
    
    
    
    (2.2
    )Other support services
    
    
    24.0
    
    
    
    25.3
    
    
    
    (5.1
    )Other
    
    
    312.3
    
    
    
    318.5
    
    
    
    (1.9
    )Total wireless operating expenses
    
    
    1,718.1
    
    
    
    1,628.8
    
    
    
    5.5
   (1)
    
    If the change in revenue recognition for certain VAS provided by third-party providers,
in response to a decision by the Austrian Supreme Court had been in effect before October 1,
2003, total Wireless operating expenses would have been lower by EUR 20.3 million in 2003,
affecting interconnection costs.(2)
    
    Since 2004 other operating expenses are presented as divided into the categories other
support services, containing leased personnel, and other operating expenses. For better
comparability the sum is also presented as it was in former years. Materials Materials in the Wireless segment increased by 8.5% in 2004 to EUR 276.3 million from EUR
254.7 million in 2003. The higher costs were caused by the rising demand for high quality products
and higher number of handset replacements, especially driven by the acceptance of the Vodafone
live! handsets, and are partially offset by the decline at VIPnet as a result of lower value
adjustment in inventories. Employee costs, including benefits and taxes Employee costs, including benefits and taxes increased by 7.2% in 2004 to EUR 179.8 million
from EUR 167.8 million in 2003. The increase is mainly caused by mobilkom austria AG & Co KG due to
higher benefits, the stock option program and higher severance expenses. In Croatia headcount and
base salary increased. Employee costs of Si.mobil declined due to lower headcount. 86




---



##### Table of Contents



Depreciation and amortization Depreciation and amortization expenses increased by 10.0% in 2004 to EUR 358.1 million from
EUR 325.6 million in 2003. The increase resulted from growing network-related capital expenditures
in prior years in order to increase capacity and maintain the quality of mobile transmissions in
all markets as well as the use of the UMTS license and related network equipment. However, capital
expenditures in the Wireless segment were reduced by 10.9% in 2004 to EUR 267.8 million from EUR
300.4 million in 2003. For further information regarding our capital expenditures, see  5.4.
Liquidity and capital resources  Capital expenditures. Interconnection Interconnection costs increased by 5.4% in 2004 to EUR 236.0 million from EUR 224.0 million in
2003. The growth was in line with the higher charged interconnection traffic minutes. The largest
increase in interconnection costs was recorded in Austria due to rising traffic volumes to one of
the smaller mobile operators, tele.ring, which still has an interconnection tariff higher than the
market average. VIPnet contributed to the growth in interconnection costs, due to increased average
interconnection fees and increased interconnection traffic. The change in revenue recognition for
certain VAS provided by third-party providers starting October 1, 2003, in response to a decision
by the Austrian Supreme Court reduced the increase in interconnection costs. Interconnection costs
would have been lower by EUR 20.3 million in 2003, if the revenue recognition had been applied
retroactively. Repairs Repairs increased by 2.7% in 2004 to EUR 63.7 million from EUR 62.0 million in 2003 primarily
due to increasing maintenance costs at VIPnet and Si.mobil for a growing amount of network and IT
equipment due to continuing capital investments. mobilkom austria AG & Co KGs development of
repair costs was stable. Services received Services received increased by 6.8% in 2004 to EUR 267.9 million from EUR 250.9 million in
2003 mainly due to an increase in roaming costs as a result of the increased roaming traffic. In
addition, higher Vodafone fees at mobilkom austria AG & Co KG, VIPnet and Si.mobil due to increased
services received from Vodafone and the launch of Vodafone live!, as well as increasing postage
fees for an increasing customer base and retention campaigns and energy costs at mobilkom austria
AG & Co KG contributed to the overall rise in costs from services received. Other support services Other support services decreased by 5.1% to EUR 24.0 million in 2004 from EUR 25.3 million in
2003. This decrease is mainly due to less leasing personnel and less IT-services carried out by
third parties as a result of increased efficiency in internal processes. Other operating expenses Other operating expenses in the Wireless segment decreased by 1.9% in 2004 to EUR 312.3
million from EUR 318.5 million in 2003. Lower expenses for consulting fees and lower marketing and
sales costs at VIPnet and Si.mobil contributed to this decline in other operating expenses.
Furthermore, mobilkom austria AG & Co KG reduced expenses for consulting. Other activities The segment Other activities includes primarily various centralized financial services that
are provided by our subsidiary Telekom Finanzmanagement GmbH to both business segments, Wireline
and Wireless. The segment Other activities did not record any revenues in either 2003 or 2004 and
the operating expenses were insignificant in both years as well. 87




---



##### Table of Contents



5.3. RESULTS OF OPERATIONS 2003 compared to 2002 All references in section 5.3. Results of Operations  2003 compared to 2002 refer to Form
20-F 2003. OVERVIEW On June 28, 2002 we acquired the remaining 25.001% of mobilkom austria from Telecom Italia
Mobile International, which also held certain blocking rights. These blocking rights precluded us
from consolidating mobilkom austria group prior to June 28, 2002. Our consolidated financial
statements include mobilkom austria groups results of operations for the entire year of 2003 and
are therefore not directly comparable to 2002. Consolidated operating results The following table shows our operating revenues, operating expenses and the resulting
consolidated operating income as well as the percentage changes for the periods indicated. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Operating revenues
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    27.3Operating expenses:Materials
    
    
    (297.1
    )
    
    
    (196.4
    )
    
    
    (51.3
    )Employee costs, including benefits and taxes
    
    
    (699.3
    )
    
    
    (600.7
    )
    
    
    (16.4
    )Depreciation and amortization
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )
    
    
    (11.5
    )Impairment charges
    
    
    (6.8
    )
    
    
    (41.9
    )
    
    
    83.8Other operating expenses
    
    
    (1,463.6
    )
    
    
    (1,205.4
    )
    
    
    (21.4
    )Total operating expenses
    
    
    (3,600.0
    )
    
    
    (3,060.7
    )
    
    
    (17.6
    )Consolidated operating income
    
    
    369.8
    
    
    
    57.4
    
    
    
    544.3
 Operating revenues Our consolidated operating revenues increased by EUR 851.7 million or 27.3% to EUR 3,969.8
million in 2003. The operating revenues for 2002 do not include EUR 790.1 net of intersegmental
eliminations, which were generated by mobilkom austria group before its consolidation as of June
28, 2002. If the change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court had been in effect
before October 1, 2003, revenues and expenses in the accompanying consolidated statements of
operations would have been lower by EUR 45.9 million in 2003 and EUR 51.2 million in 2002. The
effect in the fourth quarter of 2003 was a reduction in revenues in the amount of EUR 16.0 million.
For further information see  Court Ruling on Value Added Services. This change had no impact on
consolidated operating income. The increase is due to the growth in our Wireless segment due to the
growth of the mobile customer base, higher average usage per customer, higher interconnection
traffic through our mobile network and the introduction of interconnection fees for SMS in Austria.
This revenue growth was partially offset by declining revenues in the Wireline segment as a result
of lower revenues from switched voice base traffic and lower average voice tariffs. Operating expenses Our consolidated operating expenses increased by EUR 539.3 million or 17.6% to EUR 3,600.0
million in 2003. Total operating expenses do not include EUR 574.4 million net of intersegmental
eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28,
2002. A more detailed analysis of the individual expense items is presented below. 88




---



##### Table of Contents



Material costs Our consolidated material costs increased by EUR 100.7 million or 51.3% to EUR 297.1 million
in 2003. The material expenses for 2002 do not include EUR 97.6 million net of intersegmental
eliminations, which were incurred by mobilkom austria group before its consolidation as of June 28,
2002. Taking into account this effect, the remaining change was an increase in material expenses of
EUR 3.1 million. Material costs in the Wireline segment increased due to the expansion of the ADSL
network to provide better coverage and higher bandwidth in Austria. In the Wireless segment rising
demand for high quality handsets and handset replacements contributed to this increase. Employee costs, including benefits and taxes Our consolidated employee costs including benefits and taxes increased by EUR 98.6 million or
16.4% to EUR 699.3 million in 2003. The employee costs for 2002 do not include EUR 77.3 million net
of intersegmental eliminations, which were incurred by mobilkom austria group before its
consolidation as of June 28, 2002. Taking into account this effect, the remaining change was an
increase in employee costs of EUR 21.3 million. Both business segments contributed to this
increase. In the Wireline segment a one-time charge in connection with the early retirement of
civil servants increased employee costs by EUR 47.3 million. Other factors concerning the
development of personnel costs in the Wireline segment are described
in  Segment results 
Wireline. In the Wireless segment the headcount growth accompanying the growth of mobile business
contributed to the rise in employee costs as well. Depreciation and amortization Our consolidated depreciation and amortization expenses increased by EUR 116.9 million or
11.5% to EUR 1,133.2 million in 2003. Depreciation and amortization for 2002 do not include EUR
133.0 million net of intersegmental eliminations, which were incurred by mobilkom austria group
before its consolidation as of June 28, 2002. Taking into account this effect, the remaining change was a decrease in depreciation and
amortization of EUR 16.1 million resulting primarily from a strong decline in depreciation expenses
in the Wireline segment due to our efforts to cut capital expenditures relating to our fixed line
network. For further information concerning our capital expenditures
see  Liquidity and Capital
Expenditures  Capital Expenditures. The growth of amortization expense in the Wireless segment
partially offset this decline as a result of an increase in amortizable intangible assets and the
start of amortization of the Austrian UMTS license in May 2003. Impairment charges Our consolidated impairment charges decreased by EUR 35.1 million or 83.8% to EUR 6.8 million
in 2003. The impairment charges in 2003 primarily relate to long-lived assets as future estimated
net cash flows were below the carrying value of related assets. In 2002, impairment losses were
mainly driven by an impairment charge of EUR 40.4 million for our subsidiary Czech On Line based on
lower profitability expectations. Other operating expenses Our consolidated other operating expenses increased by EUR 258.2 million or 21.4% to EUR
1,463.6 million in 2003. Other operating expenses for 2002 do not include EUR 266.5 million net of
intersegmental eliminations, which were incurred by mobilkom austria group before its consolidation
as of June 28, 2002. If the change in revenue recognition for certain value-added services provided
by third-party providers, in response to a decision by the Austrian Supreme Court had been in
effect before October 1, 2003, other consolidated operating expenses would have been lower by EUR
45.9 million in 2003 and EUR 51.2 million in 2002. The effect in the fourth quarter of 2003 was a
reduction in other operating expenses in the amount of EUR 16.0 million. This change had no impact
on consolidated operating income. Operating income Operating income increased by EUR 312.4 million or 544.3% to EUR 369.8 million in 2003.
Operating income for 2002 does not include EUR 215.7 million net of intersegmental eliminations,
which were generated by mobilkom austria group before its consolidation as of June 28, 2002. The
factors described above contributed to the increase in operating income. Both business segments
contributed to this positive development in operating income. The consolidated operating income of
the Wireless segment increased to EUR 401.4 million in 2003 from EUR 164.8 million in 2002, while
the Wireline segment decreased its consolidated operating loss 89




---



##### Table of Contents



to EUR 34.3 million in 2003 from EUR 115.3 million in 2002. For an analysis of the segmental
operating revenues and expenses see  Segment Results. Other income, taxation, minority interests, cumulative effect of change in accounting principle and
net income 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Consolidated operating income
    
    
    369.8
    
    
    
    57.4
    
    
    
    544.3Other income (expense)Net interest
    
    
    (155.8
    )
    
    
    (156.4
    )
    
    
    0.4Equity in earnings of affiliates
    
    
    19.1
    
    
    
    140.5
    
    
    
    (86.4
    )Other, net
    
    
    (0.5
    )
    
    
    2.3
    
    
    
    n.a.Income tax expense
    
    
    (83.1
    )
    
    
    (26.1
    )
    
    
    (218.4
    )Minority interest
    
    
    (3.4
    )
    
    
    (4.9
    )
    
    
    30.6Cumulative effect of changes in accounting principle
    
    
    (11.9
    )
    
    
    
    
    
    
    n.a.Consolidated net income
    
    
    134.2
    
    
    
    12.8
    
    
    
    948.4
 Net interest Net interest expense decreased by 0.4% to EUR 155.8 million in 2003. The decline of interest
expense by EUR 13.6 million to EUR 231.0 million resulted mainly from the continued reduction in
net debt in 2003. The decline in interest income by EUR 13.0 million to 75.2 million in 2003 was
mainly caused by the effects of the consolidation of mobilkom austria group beginning June 28,
2002. The decline of both, interest income and expenses, also resulted from lower recognized
interest income and expenses in equal amounts for cross border lease transactions we had entered
into in 1998, 1999 and 2001. For further information see note (15) of the accompanying financial
statements. Equity in earnings of affiliates Equity in earnings of affiliates in 2002 includes primarily the equity income from the 74.999%
participation held in mobilkom austria. As a consequence of the consolidation of mobilkom austria
group beginning June 28, 2002 mobilkom austrias operations are included in the financial
statements of Telekom Austria and are no longer reported as equity in earnings of affiliates. Equity in earnings of affiliates amounted to EUR 19.1 million in 2003 down from EUR 140.5
million in 2002 and includes a gain of EUR 18.4 million resulting from the sale of the 26% stake in
Herold Business Data AG in July 2003. Income tax expense Income tax expense increased from EUR 26.1 million in 2002 to EUR 83.1 million in 2003 as a
result of the continued growth in profitability of our Wireless segment leading to a higher taxable
base. The effective tax rate for the full year 2003 decreased from 59.6% to 35.7% compared to the
prior year. Due to a higher tax base the effective tax rate came closer to the statutory tax rate
of 34.0% in Austria where most of Telekom Austrias operations are located. Our effective tax rate
of 59.6% in 2002 was primarily due to non-deductible goodwill impairment charges and an increase in
the deferred tax valuation allowance, partially offset by certain tax credits and incentives and
lower tax rate differentials on equity in earnings of affiliates. A new Austrian tax reform act has been proposed stipulating a reduction of the corporate
income tax rate from 34.0% to 25.0% and an expansion of the taxable base. The tax reform is planned
to become effective in 2005. The effect of this tax reform on our financial results could not be
estimated yet due to the early state of the proposal and the uncertainty about the provisions in
detail. For
the assessment of the recoverability of deferred tax assets see
 Critical accounting
policies  Valuation of tax assets. 90




---



##### Table of Contents



Minority interests Due to the consolidation of mobilkom austria group effective June 28, 2002, minority
shareholders earnings in some of mobilkom austrias subsidiaries are presented as minority
interests. Overall these companies contributed positively to mobilkom austria groups result, the
portion of the subsidiaries earnings attributable to the minority interests in the amount of EUR
3.4 million in 2003 are deducted in arriving at consolidated net income. Cumulative effect of change in accounting principle The Company adopted SFAS No. 143 as of January 1, 2003 and recorded a cumulative change in
accounting principle for the retirement and decommissioning of existing base stations, buildings,
booths for public payphones and wooden masts impregnated with tar or salt in the amount of EUR 11.9
million in 2003. For further information see note (13) of the accompanying financial statements. Consolidated net income Our consolidated net income increased by EUR 121.4 million to EUR 134.2 million in 2003.
Continued growth in the Wireless segment combined with the effect of full consolidation of mobilkom
austria as of June 28, 2002 mainly contributed to this strong increase in net income. The Wireline
segment also supported the growth in net income through various cost cutting measures and lower
depreciation, amortization and impairment charges leading to a stronger decrease in operating
expenses than the loss in Wireline operating revenues. 91




---



##### Table of Contents



SUPPLEMENTARY INFORMATION Although Austrian GAAP permitted us to consolidate mobilkom austria group, we did not
consolidate mobilkom austria group under U.S. GAAP through June 28, 2002. This was because through
that date mobilkom austrias minority shareholder, a subsidiary of Telecom Italia held substantive
contractual rights in connection with its investment. Consequently, we presented separately
consolidated financial information for mobilkom austria group. Since our initial public offering in November 2000 we have, however, shown total managed
results of operations for the entire Telekom Austria group, in order to present a complete picture
of the enterprise. The managed data include all revenues and operating income from all business
segments including the Wireless segment under the management of our Management Board. On June 28, 2002 we acquired Telecom Italias stake in mobilkom austria. As a result of the
acquisition, we gained full strategic and operating control of our wireless services business.
Thus, our consolidated statement of operations for the fiscal year ending 2002 reflects our equity
in earnings of mobilkom austria group through June 28, 2002, and consolidated mobilkom austria
groups results of operations for the period from June 28, 2002 until December 31, 2002. The consolidated statements of operations exclude the operations of mobilkom austria group
through June 28, 2002 and are thus not directly comparable to the consolidated financial statements
for 2003. Thus, in order to provide investors with a more comprehensive picture of the development
of our business, we are presenting supplementary to our consolidated statement of operations a
comparison between the consolidated financial data for 2003 and total managed data for the entire
fiscal year of 2002 together with a reconciliation between the total managed data for the year
ended December 31, 2002 and our consolidated statements for the same period. As of January 1, 2003 we finalized the reorganization of our operations into two distinct
operating segments, Wireline, which includes fixed line, data communications and internet services
and Wireless, consisting of the mobile communications segment and a third segment Other
activities which includes primarily various financial services that are provided by our corporate
treasury department to both business segments, Wireline and Wireless. The two business segments
also conduct business with each other which is accounted for in the form of eliminations and
summarized together with Other activities in the category Other activities & Eliminations. In
order to give shareholders a clear view of our external performance as a company, we separately
disclose these internal transactions when presenting our results for Telekom Austria. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Operating revenues:Wireline
    
    
    2,197.7
    
    
    
    2,260.0
    
    
    
    (2.8
    )Wireless
    
    
    2,030.2
    
    
    
    1,002.5
    
    
    
    102.5Other activities & Eliminations
    
    
    (258.1
    )
    
    
    (144.4
    )
    
    
    (78.7
    )Consolidated operating revenues
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    27.3Wireless  prior to consolidation
    
    
    
    
    
    
    906.9
    
    
    
    n.a.Intersegmental eliminations
    
    
    
    
    
    
    (116.8
    )
    
    
    n.a.Total managed operating revenues
    
    
    3,969.8
    
    
    
    3,908.2
    
    
    
    1.6
 Whereas our consolidated operating revenues increased by 27.3% to EUR 3,969.8 million in 2003
from EUR 3,118.1 million in 2002, our total managed operating revenues increased by only 1.6% in
2003 from EUR 3,908.2 million in 2002 as a result of the consolidation of mobilkom austria group as
of June 28, 2002. If the change in revenue recognition for certain value-added services provided by third-party
providers in response to a decision by the Austrian Supreme Court had been in effect before October
1, 2003, total managed operating revenues would have been lower by EUR 45.9 million in 2003 and EUR
58.4 million in 2002. Taking into account this effect, our total managed operating revenues would
have increased by 1.9% to EUR 3,923.9 million from EUR 3,849.8 million in 2002. The effect from the
change in revenue recognition in the fourth quarter of 2003 was a reduction in revenues in the
amount of EUR 16.0 million. The increase is driven primarily by growth in revenues from our Wireless segment which were up
by 6.3% to EUR 2,030.2 million in 2003 from total managed operating revenues of EUR 1,909.4 million
in 2002. The rise was achieved through an increase in the number of mobile customers and a higher
average usage per 92




---



##### Table of Contents



customer which reflects our focus on high value mobile customers. The increase came both from
Austria and foreign operations. The growth in the Wireless segment more than offsets the decrease
in revenues from our Wireline segment. The Other activities segment representing internally
provided financial services did not generate any revenues in 2003 or 2002. We evaluate the performance of our segments using the non-U.S.GAAP financial measure adjusted
EBITDA which is based on net income excluding interest, taxes, depreciation, amortization,
impairment charges, dividend income, equity in earnings of affiliates, other non-operating
income/expense, minority interests and the cumulative effect of changes in accounting principle.
This equals operating income before depreciation, amortization and impairment charges. The
following table provides an overview for the items that were excluded from net income to determine
consolidated adjusted EBITDA for the periods indicated. 2003
    
    
    2002(in EUR millions)Net income
    
    
    134.2
    
    
    
    12.8Adjustments:Depreciation and amortization
    
    
    1,133.2
    
    
    
    1,016.3Impairment charges
    
    
    6.8
    
    
    
    41.9Interest income
    
    
    (75.2
    )
    
    
    (88.2
    )Interest expense
    
    
    231.0
    
    
    
    244.6Equity in earnings of affiliates and dividend
income
    
    
    (19.1
    )
    
    
    (140.5
    )Other income (expense)
    
    
    0.5
    
    
    
    (2.3
    )Income tax expense
    
    
    83.1
    
    
    
    26.1Minority interests
    
    
    3.4
    
    
    
    4.9Cumulative effect of change in accounting
principle, net of tax
    
    
    11.9
    
    
    
    Adjusted EBITDA (consolidated)
    
    
    1,509.8
    
    
    
    1,115.6
 Adjusted EBITDA excludes depreciation and amortization expenses, in order to eliminate the
impact of generally long-term capital investments, that cannot be significantly influenced by our
management on a short-term basis. Management also excludes impairment charges that were recorded as
a consequence of the decline in fair value of several long-term investments and buildings below
their carrying amount. In evaluating and managing our operating activities we exclude these charges
that cannot be influenced by our key operating decision makers on a short-term basis. We may record
impairment charges in the future if there are further declines in the fair values of our
investments. Adjusted EBITDA excludes other non-operating income/expense, since these do not
reflect the operating results that we achieve from servicing our customers. Dividend income and
equity in earnings of affiliates result from investments, in which we exercise significant
influence, but do not have control As we do not control these entities, our management excludes
these results when evaluating the operating performance of our business segments. Minority
interests reflect the share in generated net income belonging to minority shareholders of fully
consolidated entities by Telekom Austria and are added back into adjusted EBITDA since our
management has to evaluate the total operating performance of these consolidated entities to make
appropriate business decisions. Adjusted EBITDA also excludes interest income and expense and the
provision for income taxes arising in connection with our capitalization and tax structures. The
cumulative effect of change in accounting principle which was caused by the adoption of SFAS 143
(Asset Retirement Obligation) as of January 1, 2003 represents the retroactive recording of fair
values of asset retirement obligations for existing tangible long-lived assets. The management
excludes this non-recurring, unusual charge when evaluating the performance of our business
segments. Our management believes adjusted EBITDA is meaningful to investors because it provides an
analysis of our operating results and our segment profitability using the same measure used by our
chief operating decision makers. Although adjusted EBITDA may be defined differently by other
companies in the telecommunications industry or present other varying financial measures, we
believe that adjusted EBITDA provides comparability in analyzing operating performance of companies
in the telecommunication industry. Adjusted EBITDA is also one of many factors used by credit
rating agencies to determine our credit ratings. There are material limitations to use measures such as adjusted EBITDA, including the
difficulty associated with comparing these performance measures as we calculate them to similar
performance measures presented by other companies, and the fact that these performance measures do
not take into account certain significant items, including depreciation and amortization,
impairment charges, dividend income, equity in earnings of affiliates or other non-operating
income/expense that directly affect our net income. Adjusted EBITDA should be considered 93




---



##### Table of Contents



in addition to, but not as a substitute for, other measures of financial performance reported
in accordance with accounting principles generally accepted in the United States of America such as
operating income and net income. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Adjusted EBITDA:Wireline
    
    
    780.5
    
    
    
    807.6
    
    
    
    (3.4
    )Wireless
    
    
    727.1
    
    
    
    300.4
    
    
    
    142.0Other activities & Eliminations
    
    
    2.2
    
    
    
    7.6
    
    
    
    (71.1
    )Adjusted EBITDA (consolidated)
    
    
    1,509.8
    
    
    
    1,115.6
    
    
    
    35.3Wireless  prior to consolidation
    
    
    
    
    
    
    349.1
    
    
    
    n.a.Intersegmental eliminations
    
    
    
    
    
    
    (0.3
    )
    
    
    n.a.Adjusted EBITDA (total
managed for 2002)
    
    
    1,509.8
    
    
    
    1,464.4
    
    
    
    3.1
 Our consolidated adjusted EBITDA increased by 35.3% in 2003 to EUR 1,509.8 million from EUR
1,115.6 million in 2002. As shown in the table above this increase is primarily a result of the
consolidation of mobilkom austria groups results of operations effective June 28, 2002 excluding
the contribution to adjusted EBITDA by the Wireless segment for the first half of 2002. In the
Wireline segment lower revenues led to a decline in adjusted EBITDA by 3.4% to EUR 780.5 million in
2003 from EUR 807.6 million in 2002. Our Wireless segment increased its contribution to our consolidated adjusted EBITDA by EUR
426.7 million to EUR 727.1 million in 2003 from EUR 300.4 million in 2002. Based on total managed
adjusted EBITDA figures the Wireless segment raised its contribution by EUR 77.6 million or 11.9%
in 2003  this considering an additional EUR 348.8 million for the first half of 2002 which is
included in our total managed adjusted EBITDA. This increase resulted from growing revenues in all
markets of our Wireless segment and a strong focus on cost-efficient operations. The increase in
the results of our wireless segment more than offset the decline in our Wireline segment and led to
the rise of adjusted EBITDA by 3.1% based on total managed adjusted EBITDA of EUR 1,464,4 million
in 2002. The following table reconciles consolidated adjusted EBITDA (and additionally total managed
adjusted EBITDA for 2002) to net income for the periods indicated. 2003
    
    
    2002(in EUR millions)Adjusted EBITDA (total managed for 2002)
    
    
    1,509.8
    
    
    
    1,464.4Wireless  prior to consolidation
    
    
    
    
    
    
    (349.1
    )Impairment charges
    
    
    (6.8
    )
    
    
    (41.9
    )Intersegmental eliminations for 2002
    
    
    
    
    
    
    0.3Adjusted EBITDA consolidated (including impairment charges)
    
    
    1,503.0
    
    
    
    1,073.7Depreciation and amortization
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )Interest income
    
    
    75.2
    
    
    
    88.2Interest expense
    
    
    (231.0
    )
    
    
    (244.6
    )Equity in earnings of affiliates  other
    
    
    19.1
    
    
    
    140.5Other
    
    
    (0.5
    )
    
    
    2.3Income before taxes, minority interests
and cumulative effect of change in accounting principle
    
    
    232.6
    
    
    
    43.8Income tax expense
    
    
    (83.1
    )
    
    
    (26.1
    )Minority interests
    
    
    (3.4
    )
    
    
    (4.9
    )Cumulative effect of change in accounting principle, net of tax
    
    
    (11.9
    )
    
    
    Net income
    
    
    134.2
    
    
    
    12.8
 94




---



##### Table of Contents



SEGMENT RESULTS As of January 1, 2003 we finalized the reorganization of our operations into two distinct
operating segments, Wireline, which includes fixed line, data communications and internet services
and Wireless, consisting of the mobile communications segment and a third segment Other
activities which includes primarily various financial services that are provided by our subsidiary
Telekom Finanzmanagement GmbH to both business segments, Wireline and Wireless. In order to give
shareholders a clear view of our external performance as a company, we separately disclose these
internal transactions when presenting our results for Telekom Austria. Wireline The Wireline segment includes mainly the operating activities of Telekom Austria AG, and
provides telecommunications services such as voice telephony on fixed networks, data communications
services, internet services, services for other carriers, and equipment sales. Due to the creation of the Wireline segment encompassing the previous fixed-line, data
communications and internet services segments, we reclassified certain amounts in the financial
statements of 2002 to conform to the current year presentation and to provide comparability. We
also introduced new categories of our Wireline operating revenues in order to integrate revenues
from our previous fixed-line, data communications and internet services segments. The Austrian fixed line voice market, measured in terms of minutes, experienced another slight
decrease during 2003 especially in national minutes due to increased migration to mobile
communication services. Nevertheless, we were able to increase our market share based on minutes,
excluding internet dial-up minutes, to 52.9% at December 31, 2003, up from 52.6% at year-end 2002
due to the continuing promotion of our second-based TikTak tariffs, which were originally
introduced in 2001. With the growing use of pre-selection of a carrier and unbundling of the local
loop, we face increasing competition for national telephony traffic on fixed networks resulting in
lower average voice tariffs. Our market share for fixed line traffic including internet dial-up remained at 55.3% due to a
shift from dial-up internet access to broadband internet access reducing the traffic minutes
generated from internet dial-up. Our ADSL broadband customer base increased by 50.0% including our
wholesale ADSL lines in 2003, attracting particularly regular users of the internet, while our
dial-up customer base increased by 16.4%. ADSL is a technology that permits a high speed
transmission of data using a standard copper access line. Revenues Revenues from our Wireline segment are derived primarily from the following sources:  

Switched voice base traffic charges for national (local and national long-distance),
fixed-to-mobile and international calls; switched voice monthly and other voice revenues
comprising initial connection fees, installation fees, monthly rental and other charges;

Public payphone services and value added services (VAS);

Data and IT-solutions;

Internet access and media;

Wholesale voice and internet including interconnection fees paid by other carriers to
access our fixed line network and related carrier services;

Wholesale data represented by our leased line services for other carriers; and

Fees from other services, including equipment sales and directory services. The following table shows revenues from our Wireline segment and percentage changes for the
periods indicated. 95




---



##### Table of Contents



2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Wireline operating revenues:Switched voice base traffic (1)
    
    
    447.3
    
    
    
    495.9
    
    
    
    (9.8
    )Switched voice monthly & other voice revenues
    
    
    567.9
    
    
    
    562.2
    
    
    
    1.0Payphones & VAS (1)
    
    
    67.5
    
    
    
    81.6
    
    
    
    (17.3
    )Data & IT-solutions
    
    
    338.3
    
    
    
    340.6
    
    
    
    (0.7
    )Internet access & media
    
    
    198.4
    
    
    
    193.7
    
    
    
    2.4Wholesale voice & Internet
    
    
    311.4
    
    
    
    305.5
    
    
    
    1.9Wholesale data
    
    
    103.8
    
    
    
    97.4
    
    
    
    6.6Other (1)
    
    
    163.1
    
    
    
    183.1
    
    
    
    (10.9
    )Total wireline operating revenues
    
    
    2,197.7
    
    
    
    2,260.0
    
    
    
    (2.8
    )
   (1)
    
    If the change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court had been in
effect before October 1, 2003, total Wireline operating revenues would have been lower by EUR
32.7 million in 2003 and EUR 42.8 million in 2002, affecting revenues from switched voice base
traffic, pay phones & value added services and other revenues. Switched voice base traffic Switched voice base traffic revenues decreased by 9.8% to EUR 447.3 million in 2003 from EUR
495.9 million in 2002. In 2003 our lower priced pay-per-second TikTak tariffs were selected by
additional customers raising the number of TikTak customers to 1.2 million customers as of December
31, 2003, which represents an increase of 48.1%. As a result, our average tariffs fell by 3.7%
driven by the decline in average national tariffs by 8.3% in 2003. The decline in average tariffs was accompanied by a further drop of 1.4% in traffic volume in
2003 compared to 2002 as a result of a decline in national traffic minutes by 2.6% in 2003, as
illustrated in the table below. 2003
    
    
    2002
    
    
    2003/2002(in millions of minutes)(1)
    
    
    (% change)Traffic minutes:National (local + national long distance)
    
    
    4,485
    
    
    
    4,607
    
    
    
    (2.6
    )Fixed-to-mobile
    
    
    855
    
    
    
    826
    
    
    
    3.5International
    
    
    484
    
    
    
    472
    
    
    
    2.5Total voice minutes
    
    
    5,824
    
    
    
    5,905
    
    
    
    (1.4
    )
   (1)
    
    All amounts exclude traffic minutes that were not generated from our customers such as
interconnection traffic that originated in networks of other providers or payphone traffic. Strong competition for fixed network services, the shift from fixed line traffic to
mobile communications traffic and the possibility of carrier pre-selection for local calls since
January 1, 2001 are the key factors in the decline of fixed line traffic. The decline in national
traffic was partially offset by an increase of fixed-to-mobile traffic. The successful promotion of
TikTak tariffs enabled us, however, to increase our market share based on minutes from 52.6% in
2002 to 52.9% in 2003, which partially offset the decline in revenues from switched voice base
traffic. The reduction in revenues from switched voice base traffic was also caused by a change in
revenue recognition for certain value-added services provided by third-party providers starting
October 1, 2003, in response to a decision by the Austrian Supreme Court. Traffic revenues would
have been lower by EUR 18.5 million in 2003 and EUR 22.5 million in 2002, if the revenue
recognition had been applied retroactively. 96




---



##### Table of Contents



Switched voice monthly and other voice revenues Revenues from our initial connection and installation fees, monthly rentals and other network
services increased by 1.0% to EUR 567.9 million in 2003 from EUR 562.2 million in 2002. In July 2003, the regulatory authority gave its approval to Telekom Austrias plan to
discontinue its Minimum Tariff. Existing customers of the Minimum Tariff were transferred to the
Standard Tariff on September 28, 2003. This move was made due to the increased usage of the Minimum
Tariff by pre-selection customers. All other tariff models of Telekom Austria remained unchanged.
The discontinuation of the Minimum Tariff caused an increase in the monthly rental (incl. 20% VAT)
from EUR 14.38 to EUR 17.44, however, at up to 6% lower tariffs for voice base traffic. This
effect, in combination with the introduction in mid-2002 of a fee to recover costs of manual
payment of telephone bills in Austria, resulted in an increase of our switched voice monthly and
other voice revenues, although our actual revenues from initial connection and installation fees
declined. These revenues are generally a function of the number and mix of standard PSTN telephone, ISDN
and the corresponding initial connection fees and monthly rental charges. Each of our traditional telephone lines, called PSTN lines, provides one access channel. We
also offer lines on new networks that provide up to 30 lines and can be used simultaneously for
voice and data transmissions at higher speeds than over normal access lines. These networks are
called integrated services digital network, or ISDN. There are two kinds of ISDN lines. Basic ISDN
lines provide two access channels each and multi ISDN lines provide 30 access channels each. The following table shows the number of our access lines and channels and percentage changes
for the periods indicated. The figures exclude payphones, but include our internal lines and
approximately 247,800 lines for qualifying low income persons at December 31, 2003. The service for
low income persons, which we have provided for many years, includes free monthly rental and one
hour of free local traffic per month. We receive a reimbursement from the federal government for
these services. 2003
    
    
    2002
    
    
    2003/2002(in thousands)
    
    
    (% change)Number of fixed lines:PSTN access lines
    
    
    2,555.8
    
    
    
    2,659.1
    
    
    
    (3.9
    )Basic ISDN access lines
    
    
    447.2
    
    
    
    430.1
    
    
    
    4.0Multi ISDN access lines
    
    
    7.8
    
    
    
    8.1
    
    
    
    (3.7
    )Total access lines
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    (2.8
    )Total access channels
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    (2.1
    )
 The total number of access lines decreased by 2.8% in 2003, primarily due to growth in the
mobile communications market and unbundling of local loops, and to a lesser extent a shift to
alternative providers such as cable television operators. The decrease in the number of PSTN lines
was partially offset by a migration of our customers to our basic ISDN lines. The number of total
access channels in the fixed network declined by approximately 2.1% in 2003 compared to 2002. Public payphone services and value added services In 2003 the revenues from our public payphone and value added services decreased by 17.3% to
EUR 67.5 million from EUR 81.6 million in 2002. The revenues from public payphones declined due to
falling demand primarily as a result of the high mobile penetration rate. The roll-out of more
attractive public multimedia stations providing access to internet, e-mail, video telephony and
various other multimedia services in 2003 could not offset this decline. Revenues from value added services decreased resulting from a change in revenue recognition
for certain value-added services provided by third-party providers, started October 1, 2003, in
response to a decision by the Austrian Supreme Court. Revenues from public payphone and value added
services would have been lower by EUR 9.7 million in 2003 and EUR 14.5 million in 2002, if the
revenue recognition had been applied retroactively. 97




---



##### Table of Contents



Data and IT-solutions In 2003 the revenues from data and IT-solutions decreased by 0.7% to EUR 338.3 million from
EUR 340.6 million in 2002. These revenues are generated from a large portfolio of data-related
services that are mainly provided to our business customers: leased line services, switched data
transmission services, corporate network services, MPLS services, data value added services and
IT-solutions. Price reductions which led to declining revenues from leased line services were partially
offset by increased revenues from corporate network services and IT-solutions. Internet access and media We are the leading internet service provider in Austria with approximately 1 million
residential customers. We had a share of approximately 42.0% of the residential internet market
(including 2.0% contributed by mobilkom austrias mobile internet customers) in the fourth quarter
of 2003. Internet access and media comprises access services (dial-up and broadband ADSL access)
and a portal business with online media sales, e-commerce and multimedia services. Our revenue generated by our internet access and portal business increased by 2.4% to EUR
198.4 million in 2003 from EUR 193.7 million in 2002. This growth was in line with the increase in
the subscriber base in Austria by 21.3% from 846,500 at the beginning of 2003 to 1,026,600 at the
end of 2003. ADSL-residential customers, also included in these figures, increased by 41.1% in the
same period, supported by a new tax benefit for ADSL access to residential customers. Business
broadband access grew even stronger by 106.9% due to our launch of business broadband services at
the end of 2002. The increase in revenues did not follow the increase in the customer base due to
lower average usage and lower average revenues per user. Our subsidiary Czech On Line, a Czech telecommunications provider with a strong focus in
internet services, which we acquired in 2000, generated overall revenues of EUR 18.5 million in
2003 up from EUR 10.9 million in 2002. Thereof, Czech On Line contributed revenues of EUR 12.7
million or 6.4% to our internet access and media business in 2003. Wholesale voice and internet Wholesale voice and internet services generate revenues by providing network services to
domestic and international carriers. These carrier services consist of termination, origination (or
carrier selection) and transit of national traffic and international termination in Austria and
abroad, international bandwidth services and internet access. Revenues increased by 1.9% to EUR 311.4 million in 2003 from EUR 305.5 million in 2002. This
growth resulted mainly from growing revenues from wholesale internet services. The strong sale of
our internet products for wholesale customers showed an increased result in 2003, raising the
number of wholesale ADSL subscriptions from 31,000 to 53,500. Revenues from wholesale voice
services, however, slightly declined due to lower interconnection tariff minutes and due to
reductions of interconnection tariffs that became effective in July 2002. Wholesale data Through our wholesale data services we generate revenues by leasing fixed lines to alternative
telephone operators, wireless service providers and providers of data services for their exclusive
and dedicated use. Revenues increased by 6.6% to EUR 103.8 million in 2003 up from EUR 97.4 million
in 2002. Strong revenue development from some large-scale projects for some of our larger wholesale
customers more than compensated the decline in the Austrian and international mass market for
leased line services. Other revenues (customer premises equipment and directory services) This category primarily includes sales and rentals of customer premises equipment and
directory services. We generate revenues from sales of telecommunications equipment including
residential, as well as mobile telephone equipment and systems for business customers, and by
providing related post-sale maintenance and services. As part of our directory services we generate
revenues from offering call-center services and the management of a database of subscriber data of
our and other fixed-line and mobile service providers subscribers, which is offered to directory
publishers. Revenues decreased by 10.9% to EUR 163.1 million in 2003 from EUR 183.1 million in
2002. 98




---



##### Table of Contents



Other revenues decreased resulting from a change in revenue recognition for certain
value-added services provided by third-party providers, beginning October 1, 2003, in response to a
decision by the Austrian Supreme Court. Other revenues would have been lower by EUR 4.5 million in
2003 and EUR 5.8 million in 2002, if the revenue recognition had been applied retroactively. Revenues from equipment slightly declined due to lower quantities of equipment sold and a
declining demand for maintenance, whereas our revenues from directory services such as directory
publication and call center services grew moderately. Our other revenues, however, declined primarily because we phased out our business to build
up, operate and maintain networks for other operators. Operating expenses The following table shows operating expenses of our Wireline segment and percentage changes
for the periods indicated. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Wireline operating expenses:Material expense
    
    
    63.3
    
    
    
    59.1
    
    
    
    7.1Employee costs, including benefits and taxes
    
    
    531.9
    
    
    
    523.1
    
    
    
    1.7Depreciation and amortization, impairment charges
    
    
    814.8
    
    
    
    922.8
    
    
    
    (11.7
    )Interconnection (1)
    
    
    319.7
    
    
    
    319.3
    
    
    
    0.1Maintenance and Repairs
    
    
    119.2
    
    
    
    130.6
    
    
    
    (8.7
    )Services received (1)
    
    
    42.5
    
    
    
    26.4
    
    
    
    61.0Other
    
    
    340.5
    
    
    
    394.0
    
    
    
    (13.6
    )Total wireline operating expenses
    
    
    2,231.9
    
    
    
    2,375.3
    
    
    
    (6.0
    )
   (1)
    
    If the change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court had been in
effect before October 1, 2003, total Wireline operating expenses would have been lower by EUR
32.7 million in 2003 and EUR 42.8 million in 2002, affecting costs from interconnection and
services received. Materials Materials consist mainly of expenses for spare parts, cables and supplies for our network and
merchandise we sell to our customers. Materials in the Wireline segment increased by 7.1% in 2003
to EUR 63.3 million from EUR 59.1 million in 2002. The increase in material expenses is primarily
due to the expansion of the ADSL network to provide better coverage and higher bandwidth in
Austria. Employee costs, including benefits and taxes Employee costs including benefits and taxes in our Wireline segment increased by 1.7% in 2003
to EUR 531.9 million from EUR 523.1 million in 2002. The increase was due to a one-time charge for civil servants accepting early retirement and
lower reversals of provisions for our voluntary retirement incentive programs (VRIPs) in 2003 as
described below. The increase was partially offset by a decrease of our average number by 1,157
employees or 9.5% to 11,027 employees in 2003 as a result of our transformation program, as
described in  Overview  Transformation program. Until the end of November 2003 the Austrian government offered to certain civil servants early
retirement at reduced future pension payments. We offered these eligible employees additional
payments to alleviate financial losses from the reduction in future pension payments and to improve
the acceptance of the offer by the government. Due to this measure our workforce could be reduced
by 650 civil servants in 2003. We incurred a contractual obligation to civil servants making use of
this opportunity and accrued EUR 47.3 million in 2003. We will not face any future liabilities in
addition to these accruals. From 1997 to 2000, we offered VRIPs to eligible employees. We made provisions for expenses
related to these programs of EUR 253.2 million in 2000. In 2003 we reversed 26.8 million of the
VRIP provisions after a reversal of EUR 57.4 million in 2002. At December 31, 2003, 120 employees
were still covered by the VRIP 99




---



##### Table of Contents



provisions. For more information about our relationship with employees, see Item 6  Relationship
with employees. Depreciation and amortization including impairment charges Depreciation, amortization including impairment charges in our Wireline segment decreased by
11.7% to EUR 814.8 million in 2003 from EUR 922.8 million in 2002 as a result of the continuing
downward trend of capital expenditures. Depreciation expenses decreased due to our efforts to cut capital expenditures relating to our
fixed line network. Amortization expenses for intangible assets remained at an insignificant level. The impairment charges for fiscal year 2003 were lower by EUR 35.1 million and primarily
relate to long-lived assets as future estimated net cash flows were below the carrying value of
related assets. In 2002, impairment losses were largely the result of an impairment charge of EUR
40.4 million for our subsidiary Czech On Line based on lower profitability expectations. Interconnection Interconnection costs increased by 0.1% to EUR 319.7 million in 2003 from EUR 319.3 million in
2002. The increase was mainly caused by higher interconnection traffic generated by international
transit. An offsetting factor for the increase in interconnection costs was the change in revenue
recognition for certain value-added services provided by third-party providers, effective October
1, 2003, in response to a decision by the Austrian Supreme Court. Interconnection costs would have
been lower by EUR 18.8 million in 2003 and EUR 23.1 million in 2002 if the revenue recognition had
been applied retroactively. Maintenance and Repairs Expenses for maintenance and repairs decreased by 8.7% to EUR 119.2 million in 2003 from EUR
130.6 million in 2002. The optimization of service contracts for our communications network
equipment and a reduction of buildings led to this decline. Services received Services received are incurred as a result of various services provided by third-parties such
as value-added services. The change in revenue recognition for certain value-added services
provided by third-party providers, starting October 1, 2003, in response to a decision by the
Austrian Supreme Court would have reduced services received by EUR 13.9 million in 2003 and EUR
19.7 million in 2002 if the revenue recognition had been applied retroactively. The increase of
services provided by third-parties for meeting the growing demand for leased line services
contributed to the increase in services received to EUR 42.5 million in 2003. Other operating expenses Other operating expenses include expenses such as energy, rental, marketing, consulting,
training and advertising expenses. Other operating expenses in the Wireline segment decreased by
13.6% in 2003 to EUR 340.5 million from EUR 394.0 million in 2002. The integration of our previous subsidiaries Datakom Austria GmbH, Jet2Web Internet Services
GmbH and Jet2Web Network Services GmbH in 2002 provided for ongoing savings in other operating
expenses. In addition, we incurred lower expenses from bad debt, generated savings from the
consolidation of our buildings and lowered our advertising expenses. Wireless The total number of customers in the mobile business segment as of December 31, 2003 grew by
6.4% compared to December 31, 2002. At the end of 2003 we had more than 4.7 million customers in our
Wireless segment. The majority of customer growth came from mobilkom austria with a penetration
rate of 89.7% in the Austrian market at the end of 2003. Our foreign subsidiaries also experienced
lower market growth in 2003, thus their contribution to the customer base as of December 31, 2003
remained almost stable at around 33%. 100




---



##### Table of Contents



We were still able to increase the total number of our mobile customers in Austria by 5.4%, or
approximately 161,800 during 2003. However, due to stronger competition and an increasing number of
Austrian mobile customers our market share decreased to 43.3% at December 31, 2003, down from 44.4%
at the end of 2002. As a result of our successful retention programs mobilkom austrias churn rate
decreased to 16.1% at year-end 2003 from 19.5% at year-end 2002 During 2003 the number of Austrian contract customers increased by 6.8% and the number of
prepaid customers increased by 3.8%. At December 31, 2003, contract customers account for 53.2% of
the total customer base of mobilkom austria compared to 52.5% at December 31,2002 as a result of
our continuing focus to increase the share of high value contract customers. mobilkom austrias subsidiary, VIPnet, a mobile operator in Croatia, added approximately
112,700 customers in the year 2003. The penetration rate in Croatia amounted to 55.0% at the end of
2003, with VIPnet holding a total market share of 50.0%. mobilkom austrias subsidiary Si.mobil, a
mobile operator in Slovenia added approximately 11,500 customers in the year 2003. Penetration in
Slovenia reached a level of 76.5% at the end of 2003 with Si.mobil holding a total market share of
23.6%. Revenues Our Wireless segment generates revenues from operations of our mobile networks. The revenues
mainly include traffic charges, monthly rental charges, equipment sales and roaming and
interconnection fees. We expect revenues from our Wireless segment to continue to grow due to increased revenues
from our international subsidiaries, primarily from the potential of market growth in Croatia. In
spite of a slow-down of the overall customer growth, we expect to increase the profitability of the
Wireless segment as a result of our focus on improving the quality of the customer base. We expect roaming revenues to decline in the long-term due to increasing pressure on roaming
tariffs. Our partnership-agreement with Vodafone should allow us to attract additional customers
and roaming visitors. This would lead to higher roaming traffic and offset, at least partially, the
decline in roaming revenues. The following table shows revenues from our Wireless segment and percentage changes for the
periods indicated. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Wireless operating revenues:Traffic revenues (1)
    
    
    1,095.6
    
    
    
    1,000.6
    
    
    
    9.5Monthly rental
    
    
    297.7
    
    
    
    283.5
    
    
    
    5.0Equipment
    
    
    176.3
    
    
    
    175.2
    
    
    
    0.6Roaming
    
    
    153.8
    
    
    
    155.9
    
    
    
    (1.3
    )Interconnection (1)
    
    
    305.0
    
    
    
    275.9
    
    
    
    10.5Other
    
    
    18.1
    
    
    
    27.7
    
    
    
    (34.7
    )Discounts
    
    
    (16.3
    )
    
    
    (9.4
    )
    
    
    (73.4
    )Total wireless operating revenues
    
    
    2,030.2
    
    
    
    1,909.4
    
    
    
    6.3
   (1)
    
    If the change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court had been in
effect before October 1, 2003, total Wireless operating revenues would have been lower by EUR
20.3 million in 2003 and EUR 25.3 million in 2002, affecting traffic revenues of mobilkom
austria and interconnection revenues of mobilkom [liechtenstein]. Our operating revenues from our Wireless segment increased by 6.3% in 2003 to EUR 2,030.2
million from EUR 1,909.4 million in 2002, with 79.1% of operating revenues generated in the
Austrian market. Traffic revenues Traffic revenues depend on the total number of customers, traffic volume, mix of prepaid and
contract customers and tariffs. Traffic revenues increased by 9.5% in 2003 to EUR 1,095.6 million
from EUR 1,000.6 million in 2002. This growth was primarily a result of the increase in the
customer bases which increased by 101




---



##### Table of Contents



5.4% at mobilkom austria, 10.3% at VIPnet, and 3.3% at Si.mobil. The following table shows the
number of customers of our Wireless segment and percentage changes for the periods indicated. 2003
    
    
    2002
    
    
    2003/2002(in thousands)
    
    
    (% change)Wireless customers:Austria
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    5.4Croatia
    
    
    1,210.5
    
    
    
    1,097.8
    
    
    
    10.3Slovenia
    
    
    361.5
    
    
    
    350.0
    
    
    
    3.3Liechtenstein
    
    
    2.5
    
    
    
    2.0
    
    
    
    24.5Total customers
    
    
    4,737.7
    
    
    
    4,451.2
    
    
    
    6.4
 In addition to the higher customer base, the average usage per customer rose by 1.7% for the
Wireless segment. This was partially offset by a decrease in tariffs due to the highly competitive
markets particularly in Austria, Slovenia and Liechtenstein. Another offsetting factor was the
change in revenue recognition for certain value-added services provided by third-party providers
starting October 1, 2003, in response to a decision by the Austrian Supreme Court. Traffic revenues
would have been lower by EUR 18.5 million in 2003 and EUR 24.6 million in 2002, if the revenue
recognition had been applied retroactively. In the Wireless segment both, contract and prepaid customers contributed to the increase in
traffic revenues for 2003. For both types of customers the customer base rose. The contract
customer base grew by 6.3%, while the number of prepaid customers increased by 6.5%. Despite the
highly competitive markets, overall average revenue per customer showed a slight increase of 0.7%. The share of data traffic revenues increased from 12.4% at year-end 2002 to 13.9% at year-end
2003. In Austria this share increased by 1.2 percentage points to 11.4% at year-end 2003. The
majority of data revenues is derived from SMS (Short Message Service) and to a lesser extent from
GPRS (General Packet Radio Service) and MMS (Multimedia Message Service). We expect that data
revenues from GPRS and MMS services at mobilkom austria will increase significantly due to a leap
in the number of GPRS users by 277.0% to 839,900 users compared to 222,800 users in 2002 and due to
a growing number of MMS users in 2003. Monthly rental We generate revenues from monthly rental fees paid by our contract customers for access to our
mobile communications network. Revenues from monthly rentals increased by 5.0% in 2003 to EUR 297.7
million from EUR 283.5 million in 2002. The rise in revenues from monthly rental is primarily
attributable to the increase in our contract customer base by 6.8% in Austria and by 5.8% in
Croatia. However, the introduction of tariff packages with lower or no monthly rental tariffs
partially offset the increase in revenues from monthly rental fees. Equipment We generate revenues from customer equipment primarily from sales of handsets to our customers
and resellers. Revenues from equipment increased by 0.6% in 2003 to EUR 176.3 million from EUR
175.2 million in 2002 primarily due to increased sales of higher priced handsets with more
functionalities like MMS or GPRS, in particular in Croatia. This effect was partially offset by a
decline in the number of gross customer additions. Roaming Roaming fees are generated when our mobile network carries a call made by a customer of
another international mobile operator. Revenues from roaming fees decreased by 1.3% in 2003 to EUR
153.8 million from EUR 155.9 million in 2002. This decline was primarily caused by mobilkom austria
lowering its roaming fees in Austria in order to stay competitive. Rising roaming revenues in
Croatia and Slovenia mainly as a result of the strong summer tourism and the cooperation with
Vodafone, however, partially offset the overall loss in revenues. Interconnection Our Wireless segment generates interconnection revenues primarily from interconnection fees
from our Wireline segment as well as from other fixed and mobile operators for calls terminating in
our mobile networks. In addition, we receive revenues from service numbers such as toll free
numbers. Our interconnection revenues 102




---



##### Table of Contents



increased significantly by 10.5% in 2003 to EUR 305.0 million from EUR 275.9 million in 2002 in
Austria, Croatia and Liechtenstein. The increase in interconnection revenues in Austria was a
result of the increase in interconnection traffic minutes and the introduction of interconnection
fees for SMS services which was partially offset by decisions of the regulatory authority which
lowered mobile termination rates in stages from EUR 0.1125 to EUR 0.1086 beginning April 1, 2003.
Interconnection revenues also increased in Croatia as a result of higher average interconnection
fees with the Croatian incumbent operator. In Liechtenstein the increase was mostly generated from
value-added services in 2003. In Slovenia additional revenues from higher charged traffic minutes
charged for interconnection were eliminated as a result of lower average interconnection fees. The change in revenue recognition for certain value-added services provided by third-party
providers starting October 1, 2003, in response to a decision by the Austrian Supreme Court reduced
interconnection revenues at mobilkom [liechtenstein] by EUR 1.8 million in 2003 and EUR 0.7 million
in 2002, if the revenue recognition had been applied retroactively. Other This category includes revenues from one-time charges such as initial connection fees and
collection services such as fees for transfer payments as well as fees for call center services,
and revenues from real estate. Revenues decreased by 34.7% in 2003 to EUR 18.1 million from EUR
27.7 million in 2002 in part as a result of special promotions and lower revenues for provided call
center services in Austria as well as lower activation fees due to lower gross additions of
subscribers at VIPnet. Discounts Discounts increased by 73.4% in 2003 to EUR 16.3 million compared to EUR 9.4 million in 2002.
These discounts include provisions for customer loyalty programs at mobilkom austria and VIPnet.
mobilkom austria had to increase its provision for customer loyalty programs and offer higher
discounts to resellers. The increase at VIPnet was driven by a higher usage of replacement programs
resulting in higher discounts to resellers. Operating expenses The following table shows operating expenses from our Wireless segment and percentage changes
for the periods indicated. 2003
    
    
    2002
    
    
    2003/2002(in EUR millions)
    
    
    (% change)Wireless operating expenses:Material expense
    
    
    254.7
    
    
    
    252.3
    
    
    
    1.0Employee costs
    
    
    167.8
    
    
    
    158.6
    
    
    
    5.8Depreciation and amortization
    
    
    325.6
    
    
    
    268.8
    
    
    
    21.1Interconnection (1)
    
    
    224.0
    
    
    
    192.6
    
    
    
    16.3Repairs
    
    
    62.0
    
    
    
    59.3
    
    
    
    4.6Services received
    
    
    250.9
    
    
    
    231.2
    
    
    
    8.5Other
    
    
    343.8
    
    
    
    365.9
    
    
    
    (6.0
    )Total wireless operating expenses
    
    
    1,628.8
    
    
    
    1,528.7
    
    
    
    6.5
   (1)
    
    If the change in revenue recognition for certain value-added services provided by
third-party providers, in response to a decision by the Austrian Supreme Court had been in
effect before October 1, 2003, total Wireless operating expenses would have been lower by EUR
20.3 million in 2003 and EUR 25.3 million in 2002, affecting interconnection costs. Materials Materials in the Wireless segment increased slightly by 1.0% in 2003 to EUR 254.7 million from
EUR 252.3 million in 2002. The higher costs were caused by the rising demand for high quality
products and higher number of handset replacements, particularly in Austria, and partially offset
by the decline in the number of gross customer additions in all companies. Employee costs, including benefits and taxes Employee costs, including benefits and taxes increased by 5.8% in 2003 to EUR 167.8 million
from EUR 158.6 million in 2002 due to headcount growth in the Wireless segment by 1.8% in terms of
full-time- 103




---



##### Table of Contents



employees at year-end to support the higher number of our mobile customers. In addition, in
Austria, the base salary increased for employees and accruals for severance benefits increased Depreciation and amortization Depreciation and amortization expenses increased by 21.1% in 2003 to EUR 325.6 million from
EUR 268.8 million in 2002. The increase in depreciation resulted from growing network-related
capital expenditures in prior years to increase capacity and maintain the quality of mobile
transmissions in all markets. However, capital expenditures in the Wireless segment were reduced by
12.6% in 2003 to EUR 300.4 million from EUR 343.6 million in 2002. For further information
regarding our capital expenditures, see  Liquidity and capital resources  Capital expenditures. Two significant factors for the rise of amortization expenses were the increase in amortizable
intangible assets and the amortization of the Austrian UMTS license. The acquisition of the 25.001%
stake in mobilkom austria led to an increase in amortizable intangible assets of EUR 121.0 million
in 2002. The amortization of the UMTS license over 14.2 years began in May 2003 after the
commercial launch of UMTS services and the generation of revenues. We recorded amortization and
depreciation expense from the use of the UMTS license and related network equipment of EUR 14.1
million in 2003. Interconnection Interconnection costs increased by 16.3% in 2003 to EUR 224.0 million from EUR 192.6 million
in 2002. The growth was in line with the higher charged interconnection traffic minutes and the
introduction of interconnection fees for SMS traffic since October 2002. The largest increase in
interconnection costs was recorded in Austria due to rising traffic volumes to one of the smaller
mobile operators, tele.ring, which has the highest interconnection tariff on the market. VIPnet
contributed to the growth in interconnection costs, due to increased average interconnection fees
and increased interconnection traffic. The change in revenue recognition for certain value-added services provided by third-party
providers starting October 1, 2003, in response to a decision by the Austrian Supreme Court reduced
the increase in interconnection costs. Interconnection costs would have been even lower by EUR 20.3
million in 2003 and EUR 25.3 million in 2002, if the revenue recognition had been applied
retroactively. Repairs Repairs increased by 4.6% in 2003 to EUR 62.0 million from EUR 59.3 million in 2002 primarily
due to increasing maintenance costs at VIPnet and more expensive service agreements at Si.mobil for
a growing amount of network and IT equipment due to continuing capital investments. mobilkom
austria recorded a decrease of repair costs in Austria as a result of decreasing software
adaptations. Services received Services received increased by 8.5% in 2003 to EUR 250.9 million from EUR 231.2 million in
2002 mainly due to an increase in roaming costs as a result of the increased roaming traffic. In
addition higher leased lines expenses in Croatia and Austria contributed to the overall rise in
costs from services received. Other operating expenses Other operating expenses in the Wireless segment decreased by 6.0% in 2003 to EUR 343.8
million from EUR 365.9 million in 2002. Lower expenses for consulting fees and lower marketing and
sales costs contributed to this decline in other operating expenses. Other operating expenses also includes net losses from retirement of long-lived assets, which
were shown in the last annual report as a separate item due to the application of SFAS No. 144, as
amended. Other activities The segment Other activities includes primarily various centralized financial services that
are provided by our subsidiary Telekom Finanzmanagement GmbH to both business segments, Wireline
and Wireless. The segment Other activities did not record any revenues either in 2002 or 2003 and
the operating expenses were insignificant in both years as well. 104




---



##### Table of Contents



5.4. LIQUIDITY AND CAPITAL RESOURCES Because we manage the liquidity for all our business segments on a total group basis and
allocate the capital resources of all our business segments, we discuss our total group liquidity
and capital resources. Over the past years, we have principally met our financing needs out of cash flow from
operating activities. In particular, we have met our working capital needs and most capital
expenditure requirements through the use of internally generated funds. The following table shows information regarding our consolidated cash flows for the periods
indicated. The figures do not include cash flows generated by mobilkom austria group prior to
consolidation beginning on June 28, 2002, except for dividends received. In the first half year of
2002 these dividends received amounted to EUR 90.7 million. Therefore, the figures for 2002 are not
directly comparable. For further details on cash flows, see the consolidated statements of cash
flows of the accompanying financial statements. Cash flow
    
    2004
    
    
    2003
    
    
    2002(in EUR millions)Cash generated from operationsNet income
    
    
    227.3
    
    
    
    134.2
    
    
    
    12.8Depreciation, amortization and impairment charges
    
    
    1,116.2
    
    
    
    1,140.0
    
    
    
    1,058.2Change in deferred taxes
    
    
    62.9
    
    
    
    59.2
    
    
    
    33.5Equity in earnings of affiliates less than (in excess of)
dividends received
    
    
    0.0
    
    
    
    1.0
    
    
    
    (45.8
    )Change in accounts receivable  trade
    
    
    (45.9
    )
    
    
    (140.3
    )
    
    
    175.5Change in accounts payable  trade
    
    
    (58.8
    )
    
    
    (58.9
    )
    
    
    11.0Change in employee benefit obligation
    
    
    (46.9
    )
    
    
    (76.6
    )
    
    
    (102.6
    )Other
    
    
    49.9
    
    
    
    161.3
    
    
    
    28.8Cash generated from operations
    
    
    1,304.7
    
    
    
    1,219.9
    
    
    
    1,171.4Cash from (used in) investing activitiesCapital expenditure, including interest capitalized
    
    
    (548.2
    )
    
    
    (599.7
    )
    
    
    (560.7
    )Acquisitions and investments, net of cash acquired
    
    
    (2.2
    )
    
    
    (86.0
    )
    
    
    (665.1
    )Other
    
    
    41.1
    
    
    
    41.8
    
    
    
    49.9Cash used in investing activities
    
    
    (509.3
    )
    
    
    (643.9
    )
    
    
    (1,175.9
    )Cash from (used in) financing activitiesProceeds from issuance of long-term debt and bonds
    
    
    
    
    
    
    775.9
    
    
    
    127.9Principal payments on long-term debt
    
    
    (568.0
    )
    
    
    (385.3
    )
    
    
    (406.3
    )Changes in short-term bank borrowings
    
    
    (6.7
    )
    
    
    (774.6
    )
    
    
    238.0Purchase of Treasury shares
    
    
    (64.2
    )
    
    
    
    
    
    
    Proceeds from sale of Treasury shares
    
    
    0.8
    
    
    
    
    
    
    
    Dividends paid
    
    
    (64.6
    )
    
    
    
    
    
    
    other
    
    
    (2.2
    )
    
    
    (22.8
    )
    
    
    42.2Cash (used in) generated from financing activities
    
    
    (704.9
    )
    
    
    (406.8
    )
    
    
    1.8Effect of exchange rate changes
    
    
    (4.2
    )
    
    
    5.4
    
    
    
    3.6Net increase in cash and cash
equivalents
    
    
    86.3
    
    
    
    174.6
    
    
    
    0.9Cash and cash equivalents at beginning of period
    
    
    201.9
    
    
    
    27.3
    
    
    
    26.4Cash and cash equivalents at end of period
    
    
    288.2
    
    
    
    201.9
    
    
    
    27.3
 105




---



##### Table of Contents



Cash generated from operations Our primary source of liquidity in 2004 was cash generated from operations which increased by
EUR 84.8 million to EUR 1,304.7 million in 2004, compared to EUR 1,219.9 million in 2003 and EUR
1,171.4 million in 2002. This increase is primarily due to higher net income. Net income increased
by EUR 93.1 million to EUR 227.3 million in 2004, compared to EUR 134.2 million in 2003 and EUR
12.8 million in 2002. For more information see  5.2. Results of operations. In 2004, cash generated from operations was reduced by a change in working capital in the
amount of EUR 158.6 million compared with EUR 184.6 million in 2003, which mainly relates to an
increase of accounts receivable by EUR 45.9 million and EUR 140.3 million in 2004 and 2003,
respectively. This increase is due to less cash drawn from our asset-backed securitization program
implemented in 2002. Comparing operating cash flow of 2003 and 2002 the change in accounts
receivable-trade caused a year on year difference of EUR 315.8 million. The change in accounts
receivable-trade contains also the amounts drawn from the qualifying special purpose entity (QSPE).
Just as in 2003, in 2004 we did not draw all of the money we were entitled to from the QSPE and
therefore reported an increase in receivables from the QSPE of EUR 49.1 million in 2004 compared to
EUR 145.4 million in 2003, decreasing our cash generated from operations. For further details see
 Off-balance sheet transactions. The percentage of contract customers in the Wireless and Wireline segment who pay their
monthly bills by direct debit is well above 90% and above 70%, respectively, which has a positive
impact on our cash flow. Additionally, accounts payable and accrued liabilities decreased by EUR 85.9 million compared
to 82.4 million in 2003 leading to a higher outflow of cash. These negative effects were, however,
partially offset by a change in the total of all other assets and liabilities of EUR 49.9 million
as well as a change in deferred taxes of EUR 62.9 million. Cash payments for voluntary retirement
incentive programs, golden handshakes and contributions to Austrian governments pensions of EUR
46.9 million were made in 2004, compared to EUR 76.6 million in 2003 and EUR 102.6 million in 2002,
respectively. We expect further measures related to the reduction of headcount to result in
additional payments for retirement of employees as well as payments for re-training. These payments
will be made through 2009 and will reduce our cash generated from operations. Cash used in investing activities Cash used in investing activities mainly consists of acquisitions of subsidiaries and capital
expenditures for property, plant and equipment and intangible assets. It decreased by EUR 134.6
million to EUR 509.3 million in 2004 from EUR 643.9 million in 2003 and EUR 1,175.9 million in
2002. In 2004 mobilkom austria AG & Co KG acquired the remaining 1% share of VIPnet d.o.o., Zagreb,
for a total price of EUR 1.66 million, after acquiring 28%, for a total purchase price of EUR 69.7
million in 2003, bringing its interest to 100%. Acquisitions of subsidiaries in 2002 primarily
relate to the purchase of the 25.001% stake in mobilkom austria AG & Co KG which was acquired for a
total purchase price of EUR 693.1 million, including cash acquired of EUR 29.5 million. The
increase in capital expenditures in 2003 resulted from the 100% consolidation of mobilkom austria
group as additions to tangible and intangible assets of mobilkom austria group are included in the
Telekom Austria cash flow statement beginning on June 28, 2002. For more information concerning
capital expenditures on a comparable basis see  Capital expenditures. Differences to capital
expenditures on a segment basis result from the elimination of intra-group transactions. Cash (used in) generated from financing activities Cash used in financing activities was EUR 704.9 million in 2004, compared with cash used in
financing activities of EUR 406.8 million in 2003 and cash generated of EUR 1.8 million in 2002. On
June 30, 2003, Telekom Austria AG and Telekom Finanzmanagement GmbH (the 100% two-tier financing
subsidiary of Telekom Austria AG) initiated a Euro Medium Term Note (EMTN) program. Under this
program we successfully placed Eurobond offerings. For further information see  Funding sources.
Two bonds were initiated in 2005, for further information see   Funding sources  Bonds. The management board and supervisory board plan to propose a distribution from unappropriated
earnings of EUR 0.24 per zero par value share to the shareholders at the AGM on May 25, 2005. On February 27, 2004, we exercised 3,326,881 American call options and on March 3, 2004, we
received the same amount of shares for these options. These treasury shares represent 0.67% of our
share capital, and were intended for the beneficiaries of our IPO stock option program as well as
for future stock option programs. 106




---



##### Table of Contents



At the AGM on June 3, 2004, the Management Board was authorized to acquire treasury stock to
the maximum extent legally permitted at a price between EUR 9 and EUR 18 per share during a period
of 18 months, ending December 31, 2005. On August 26, 2004, Telekom Austria announced the beginning of the share buyback program and
through December 31, 2004 has repurchased and held, inclusive the shares bought back in March 2004
by means of an off-market transaction, 6,255,694 of its shares, corresponding to 1.25% of its
outstanding share capital, with a total value of EUR 87.3 million as of December 31, 2004. For
further details see Item 16E. Funding sources Our principal sources of external funding are borrowings from the Austrian and international
debt capital markets. The outstanding long-term debt, other than lease obligations are summarized
as follows: At December 31,
    
    Maturity
    
    2004
    
    
    2003
    
    
    2002(in EUR millions)Bonds under EMTN Program
    
    2005-2013
    
    
    767.5
    
    
    
    745.1
    
    
    
    Other bonds
    
    2005-2008
    
    
    149.6
    
    
    
    159.7
    
    
    
    175.5Bank debt
    
    2005-2011
    
    
    1,382.9
    
    
    
    1,967.6
    
    
    
    2,347.7Other
    
    2007
    
    
    0.2
    
    
    
    0.8
    
    
    
    15.72,300.2
    
    
    
    2,873.2
    
    
    
    2,538.9Less current portion of long-term debt
    
    
    
    
    (653.0
    )
    
    
    (530.9
    )
    
    
    (459.0
    )Long-term debt, net of current portion
    
    
    
    
    1,647.2
    
    
    
    2,342.3
    
    
    
    2,079.9
 Bonds In order to give Telekom Austria access to international debt capital markets and in
preparation for entering the Eurobond market, Telekom Austria AG and Telekom Finanzmanagement GmbH
established a Euro Medium Term Note (EMTN) program, unconditionally and irrevocably guaranteed by
Telekom Austria AG in June 2003. This program allows Telekom Austria and Telekom Finanzmanagement
GmbHto issue notes up to a maximum aggregate nominal amount of EUR 2.5 billion outstanding at any
single point in time. In July 2003, Telekom Austria (through TFG) issued its inaugural bond with a nominal value of
EUR 750.0 million, 10 year maturity and a coupon of 5% under the EMTN program. The notes were
issued at a discount including issue costs of EUR 9.1 million (EUR 7.7 million as of December 31,
2004) providing Telekom Austria with funds in the amount of EUR 740.9 million. The bonds are listed
on the Luxembourg Stock Exchange and Vienna Stock Exchange. The EMTN program is updated regularly and occasionally if required for an issue. In January 2005, Telekom Austria (through TFG) issued two bonds with a nominal value of EUR
500 million each under the EMTN program  one with a 5 year maturity and a coupon of 3.375%, and
one with a 12 year maturity and a coupon of 4.25%. In 2003 EUR 7.3 million of interest, discount and issue costs were shown in other bonds
instead of bonds under the EMTN program. Bank debts As of December 31, 2004, we had unused committed lines of credit of EUR 450 million, expiring
between November 2006 and December 2007. As of December 31, 2004, 2003 and 2002, we had total outstanding debt, excluding the current
portion of lease obligations, amounting to EUR 2,303.0 million, EUR 2,878.1 million and EUR 3,281.8
million, respectively. Whereas debt incurred prior to May 1996 is guaranteed by the Federal
Republic of Austria, debt incurred thereafter is not. At December 31, 2004, EUR 857.2 million of
our EUR 2,300.2 million total long-term bank debt and bonds were covered by such guarantees. The following bank debt is not guaranteed by the Federal Republic of Austria as it was entered
into after the privatization of the Company: 107




---



##### Table of Contents



In March 2000, the Company entered into a loan agreement for EUR 145.0 million with the
European Investment Bank. As of December 31, 2004, EUR 87.0 million of the loan are outstanding in
accordance with the repayment terms. Under the terms of this agreement, the Company must observe
certain financial covenants, requiring the Company to meet certain financial ratios. Furthermore, in October 2000 the Company entered into a loan agreement for EUR 232.6 million.
As of December 31, 2004 the loan is outstanding in full in accordance with the repayment terms.
Under the terms of the contract the Company has to maintain certain investments, otherwise the loan
becomes due. The interest rates vary depending on the rating of the Company. As of December 31, 2004, EUR 295.2 million of a syndicated loan granted to mobilkom austria AG
& Co KG was outstanding and is guaranteed by Telekom Austria AG. In December 2002, VIPnets existing senior debt facility was restructured to improve terms and
conditions by entering into a syndicated loan of EUR 150.0 million. In March 2004, VIPnet entered
into a shareholder loan with TFG in the amount of EUR 70 million for the refinancing of the still
outstanding amount of this syndicated loan. In March 1999, Si.mobil entered into a loan agreement amounting to EUR 36.0 million (original
currency: Deutsche Mark 71.0 million) to finance the construction of the GSM network in Slovenia.
The interest rate is the three month LIBOR plus 1.075 %. The loan is secured by bills of exchange,
property, receivables and shares of Si.mobil. The loan is repayable until March 2007. The year-end average interest rates for the long-term debt excluding interest rate swaps are
as follows: 2004
    
    
    2003
    
    
    2002
    
    
    2001Bonds
    
    4.56%
    
    
    4.57%
    
    
    5.32%
    
    
    4.32%Bank debt
    
    4.62%
    
    
    4.96%
    
    
    3.49%
    
    
    5.42%
 Since June 2003, Telekom Austria Group is rated by Moodys Investors Service Ltd. and Standard
& Poors. Our current corporate credit ratings are noted below: Moodys
    
    StandardInvestors
    
    &Service
    
    PoorsLong-term debt
    
    Baa2
    
    BBBShort-term debt
    
    P-2
    
    A-2
 Moodys Investors Service rates our long-term corporate credit Baa2 (positive outlook). The
outlook changed from stable to positive on May 17, 2004. The rating classification of Baa means
that an issuer offers adequate financial security. However, certain protective elements may be
lacking or may be unreliable over any longer period of time. The numerical modifier 2 indicates a
mid-range ranking within the letter ranking category. The rating outlook, expressed as positive,
stable, or negative, provides an opinion regarding the likely direction of any medium-term rating
actions, typically based on an 18-month horizon. Moodys Investors Services short-term corporate credit ratings fall into the following four
categories: Prime-1 (P-1), Prime-2 (P-2), Prime-3 (P-3) and Not Prime. Issuers rated Prime-2 have a
strong ability, albeit less superior ability than Prime-1 issuers, to repay senior short-term debt
obligations. Standard & Poors rates our long-term corporate credit BBB (positive outlook). The outlook
changed from stable to positive on April 14, 2004. This exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on obligations. The lack of a
modifier (plus (+) or minus (-)) indicates a mid-range ranking within the major rating category of
BBB. The positive in the outlook indicates that a rating may be raised. Standard & Poors categorizes its short-term ratings A-1, A-2, A-3, B, C and D. Having a
short-term rating of A-2 means that Telekom Austria is somewhat more susceptible to the adverse
effects of changes in 108




---



##### Table of Contents



circumstances and economic conditions than issuers rated A-1. However, the capacity to meet the
financial commitment on our obligations is satisfactory. Our EUR 2,500 million EMTN-program is currently rated Baa2 and BBB by Moodys Investors
Service and Standard & Poors, respectively. The EUR 750 million bond issued by TFG in July 2003
and the two EUR 500 million bonds issued by TFG in January 2005 are also rated BBB by Standard &
Poors. Telekom Austria has no further agreements with nationally recognized statistical rating
organizations to provide a long-term and short-term credit rating for our Company. Please be advised that security ratings are not a recommendation to buy, sell or hold
securities. Credit ratings may be subject to revision or withdrawal by the rating agencies at any
time. You should evaluate each rating independently of any other rating. Other funding sources In order to diversify our short-term funding sources we implemented an asset-backed
securitization program with a maximum volume of currently EUR 350.0 million. For more information,
see  Off-balance sheet transactions. At the AGM on June 3, 2004, the Management Board was authorized to issue 50 million new
ordinary bearer shares with no par value in order to service convertible bonds, the issuance of
which was authorized during that meeting. For more information, see Item 10.1. Memorandum and
Articles of Association  Shares and share capital. As it is common with telecommunications companies, we typically carry current liabilities in
excess of current assets. Total current liabilities exceeded total current assets by EUR 598.2
million in 2004, compared to EUR 664.9 million in 2003 and EUR 1,665.7 million in 2002. We believe
that our cash flow from operations, together with the liquidity available to us on the Austrian and
international money and debt capital markets provide the flexibility in funding needed to cover our
expenditures in the future. Capital expenditures The
following table shows our capital expenditures  for 2002 on a total managed basis  for
the periods indicated. Capital expenditures are defined as additions to tangible and intangible
assets, excluding additions to asset retirement obligation, goodwill, brandname and customer base
as well as additions from initial consolidation. Differences to capital expenditures in the cash
flow statement result from the elimination of intra-group transactions. 2004
    
    
    2003
    
    
    2002(in EUR millions)Capital expenditures:Wireline
    
    
    280.4
    
    
    
    300.0
    
    
    
    343.4Tangible
    
    
    280.0
    
    
    
    298.0
    
    
    
    340.7Intangible
    
    
    0.4
    
    
    
    2.0
    
    
    
    2.7Wireless
    
    
    267.8
    
    
    
    300.4
    
    
    
    343.6Tangible
    
    
    225.6
    
    
    
    290.6
    
    
    
    321.8Intangible
    
    
    42.2
    
    
    
    9.8
    
    
    
    21.8Total capital expenditures
    
    
    548.2
    
    
    
    600.4
    
    
    
    687.0
 Our total capital expenditures decreased by 8.7% in 2004 to EUR 548.2 million from EUR 600.4
million in 2003 after having decreased by 12.6% in 2003 from EUR 687.0 million in 2002. In 2003 and
2002 the difference in capital expenditures as shown in the cash flow statement and shown in the
table above was due to a different scope of intangible assets. Capital expenditures in our Wireline segment fell by 6.5% to EUR 280.4 million in 2004
compared to EUR 300.0 million in 2003. Capital expenditures in the access network slightly
increased by 0.7% to EUR 105.4 million, due to the importance of broadband technologies. Core net
investments rose by 3.2% to EUR 86.5 109




---



##### Table of Contents



million because of the extension of transmission capacities, the optimization of IP infrastructure
and the replacement of a platform. Investments in buildings were reduced by 11.2% to EUR 32.8
million in 2004 due to lower expenditures for renovations of various facilities. Most substantial
reductions of investments have been realized in information technologies. Expenditures declined by
24.2% to EUR 52.1 million because we achieved synergies through the improvement of hardware and IT
projects (e.g. regarding billing systems). Capital expenditures in our Wireless segment fell by
10.9% to EUR 267.8 million in 2004 compared to EUR 300.4 million in 2003. Investments in UMTS
network equipment, GSM and GPRS equipment decreased during 2004. The higher investments in
intangible assets in 2004 were mainly due to additional licenses, the largest being the Croatian
UMTS license. We believe that capital expenditures for the financial years 2005 and 2006 will principally be used to:  

Assure sufficient capacity for mobile networks by investing in UMTS and EDGE equipment;

Extend the broadband access and optimize broadband backbone network infrastructure;

Establish a multi-service-data-network; and

Improve our information technology capabilities. We are in the process of evaluating the technological and financial implications of a
migration to NGN with particular consideration of existing investments. The costs relating to the
build-out of NGN and its implications on our business are expected to be substantial. The time
frame for its development will depend on various factors including customer needs and competition.
At this stage, however, we are not in a position to quantify the capital expenditure requirements
or to give a time horizon for its implementation. Additionally, we may make further investments in other markets with significant growth
potential, in particular in the field of mobile communications. We have already taken further steps
in this direction by entering into call option agreements for the purchase of 100% of MobilTel AD,
the leading Bulgarian mobile operator, and increasing our shares of VIPnet to 100%. Net debt The following table shows the development of net debt at year end. 2004
    
    
    2003
    
    
    2002(in EUR millions)Long-term debt
    
    
    1,647.2
    
    
    
    2,342.3
    
    
    
    2,079.9Short-term debt
    
    
    751.1
    
    
    
    631.3
    
    
    
    1,309.9Less: Short-term portion of capital and cross
border lease
    
    
    (95.3
    )
    
    
    (95.5
    )
    
    
    (107.9
    )Capital lease obligations
    
    
    1.6
    
    
    
    2.1
    
    
    
    7.3Payables to related parties
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.4Receivables from related parties
    
    
    0.0
    
    
    
    0.0
    
    
    
    (0.1
    )Cash and cash equivalents,
short-term and long-term investments
    
    
    (312.9
    )
    
    
    (226.4
    )
    
    
    (46.6
    )Financial instruments, included in other assets
    
    
    (17.8
    )
    
    
    (16.5
    )
    
    
    (38.7
    )Net debt of Telekom Austria
    
    
    1,973.9
    
    
    
    2,637.3
    
    
    
    3,204.2
 A reduction in additions to property, plant and equipment and improved profitability further
reduced net debt by EUR 663.4 million to EUR 1,973.9 million in 2004. As shown in the table above, long-term debt decreased by EUR 695.1 million. Existing long-term
debt was repaid in accordance with the redemption schedule or reclassified to short-term debts,
which increased by EUR 119.8 million accordingly. The development of net debt includes the impact of the sale of receivables to a Qualifying
Special Purpose Entity (QSPE) which is not related to Telekom Austria. In 2004, cash was received
from the QSPE in the amount of EUR 17.6 million compared to cash outflows to the QSPE which totaled
EUR 112.7 million in 2003. For more information, see  Off-balance sheet transactions. 110




---



##### Table of Contents



Contractual obligations and commercial commitments The following table shows our contractual obligations. Total
    
    
    Up to 1 year
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 years(in EUR millions)Contractual Obligations:Long-term debt
    
    
    2,300.2
    
    
    
    653.0
    
    
    
    344.4
    
    
    
    536.7
    
    
    
    766.1Capital lease obligations
    
    
    1.7
    
    
    
    1.4
    
    
    
    0.3
    
    
    
    
    
    
    
    Operating leases
    
    
    217.3
    
    
    
    42.7
    
    
    
    73.7
    
    
    
    60.6
    
    
    
    40.2Cross border leases
    
    
    1,135.3
    
    
    
    94.2
    
    
    
    231.8
    
    
    
    271.0
    
    
    
    538.3Purchase Obligations (1)
    
    
    1,754.3
    
    
    
    538.5
    
    
    
    630.8
    
    
    
    585.0
    
    
    
    0.0Total obligations
    
    
    5,408.8
    
    
    
    1,329.8
    
    
    
    1,281.0
    
    
    
    1,453.3
    
    
    
    1,344.6
  (1)
    
    Purchase Obligations include purchase commitments for fixed assets and other non-redeemable
contractual commitments such as service agreements and interconnection obligations.
Interconnection obligations can only be estimated for a period of five years. Off-balance sheet transactions On January 16, 2002, in order to diversify our short-term funding sources, we entered into a
revolving period securitization program. Under the program we sell receivables to a qualifying
special purpose entity (QSPE) incorporated in Dublin, Ireland, which is neither affiliated with us
nor under our control. We retain servicing responsibilities relating to the sold receivables.
Solely for the purpose of credit enhancement from the perspective of the QSPE, we retained
interests in the sold receivables in the amount of EUR 9.1 million as of December 31, 2004. These
retained interests were initially measured at estimated fair values, which we believed approximate
historical carrying values, and were subsequently measured based on a periodic evaluation of
collections and delinquencies. In 2004, we recorded an increase in receivables from the trust by
EUR 49.1 million. The net cash paid to Telekom Austria as of December 31, 2004 and 2003, was EUR
155.5 million and EUR 170.0 million, respectively. In 2004, we sold EUR 71.9 million more
receivables to the program than in 2003. In December 2003, Telekom Austria and mobilkom austria group increased the maximum amount of
receivables they each may sell freely to the QSPE from EUR 250.0 million to EUR 300.0 million and
from 80.0 million to EUR 150.0 million, respectively. However, the total amount of receivables sold
to the QSPE by Telekom Austria and mobilkom austria group together was increased by EUR 60.0
million to EUR 350.0 million. The QSPE has the right to terminate the agreement in the event that
the default ratio of Telekom Austrias receivables and of mobilkom austria groups receivables
exceeds a certain percentage. During the year ended December 31, 2004 net cash received from the
QSPE totaled EUR 17.6 million, in 2003 EUR 112.7 million were paid. Research and development Our consolidated research and development expenses amounted to EUR 42.4 million, EUR 42.8
million and EUR 30.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.
For a description of our research and development activities see Item 4.2. Business overview 
Research and development. Foreign exchange rate risk With effect from January 1, 1999, the Euro was adopted by Austria and eleven other members of
the European Union as their common legal currency. On March 1, 2002, the Euro became the sole legal
tender for Austria and the Austrian Schilling was withdrawn from circulation. We raise funds in the domestic and international money and debt markets. We hedge a high
proportion of foreign exchange rate risks on our debt portfolio to Euro using currency swap
contracts. 111




---



##### Table of Contents



We conduct our business primarily in Austria and, therefore, our operating and investing cash
flows were substantially denominated in Euro. We are exposed to foreign exchange risks related to
debt, payables and anticipated foreign exchange payments denominated in currencies other than the
Euro. Anticipated foreign exchange payments relate primarily to expense payments, principally to
international third party telecommunications carriers and capital expenditures. We evaluate the
volume and value of these transactions on an ongoing basis to identify the level of foreign
exchange rate risk associated with these transactions. Most of our debt, payables and expenses are
denominated in Euro. For a detailed discussion of our foreign exchange rate risk, see Item 11  Exchange rate
risk. 112




---



##### Table of Contents



Item 6. Directors, Senior Management and Employees Management Board members The current members of our Management Board are: Name
    
    Age
    
    Term of appointment
    
    Area of responsibilityHeinz Sundt
    
    57
    
    April 11, 2000 - April 10, 2007
    
    Chairman of the Board, Chief Executive Officer (CEO)Stefano Colombo
    
    44
    
    April 11, 2000 - April 10, 2007
    
    Chief Financial Officer (CFO), Vice Chairman1Rudolf Fischer
    
    51
    
    November 1, 1998 - April 10, 20082
    
    Chief Operating Officer Wireline (COO Wireline)Boris Nemsic
    
    47
    
    July 1, 2002 - April 10, 20082
    
    Chief Operating Officer Wireless (COO Wireless), Vice Chairman 3
and Chief Executive Officer of mobilkom austria AG & Co KG
  1
    
    until April 10, 20052
    
    If the Supervisory Board does not inform the respective member of Management Board,
by April 10, 2007 that his mandate for the Management Board will not be extended, the
respective mandate is automatically extended for a further two years and thus ends on April
10, 2010.3
    
    from April 11, 2005 Heinz Sundtwas born in 1947 and attended the School of International Trade in Vienna
(Hochschule für Welthandel). He started his career at the Länderbank in 1967. From 1969 through
1986, he held several management positions in the marketing and sales departments at IBM Austria
and from 1986 through 1989 was the head of the Telecom and Network Divisions. In 1989, Mr. Sundt
became head of marketing and sales at Neupack GmbH, a subsidiary of Mayr Melnhof. In January 1996,
Mr. Sundt became the head of mobilkom austria AG & Co KG and led the development of the mobile
communications division within Telekom Austria. Mr. Sundt became Chief Executive Officer (CEO)
and Chairman of the Management Board of Telekom Austria in April 2000. Stefano Colombowas born in 1961 and graduated from the Luigi Bocconi University in Milan. He
began his career in the corporate finance department of Mediobanca. In 1990, he became the
assistant to the Chief Financial Officer of Enimont. In 1994, he became the Chief Financial Officer
of Olivetti Telemedia. From 1996 to 1999 he was the head of Carrera Optyl in Linz, Austria, a
sub-division of the Italian eyeglass producer Safilo. He became the Chief Financial Officer of the
eyeglass company Marcolin, the producer of Dolce & Gabbana and Chloe eyeglasses, in 1999, and
coordinated Marcolins initial public offering. Mr. Colombo became Chief Financial Officer (CFO)
and a member of the Management Board of Telekom Austria in April 2000. Additionally, he was
Vice-Chairman of the Management Board of Telekom Austria from April 2000 to April 2005. Rudolf Fischerwas born in 1953. After completing his studies at the Vienna University of
Economics and Business Administration, Mr. Fischer began his career in 1974 in the technical
department of Alcatel Austria. In 1983, he became the head of Accounting and Taxes and in 1988 he
also became the head of Controlling. From 1989 through 1993, Mr. Fischer was head of AOSA, a joint
venture between Siemens and Alcatel, and was involved in the expansion of the Austrian
telecommunications infrastructure. In 1994, he became the Chairman of the board at United Telecom
Investment B.V., where he headed the largest local network operator in Hungary. In 1996, he was
appointed President of the association of local telecommunications operators. Mr. Fischer has been
Chief Technical Officer and a member of the Management Board at Telekom Austria since November 1998
and Chief Operating Officer Wireline (COO Wireline) since November 2001. Boris Nemsicwas born in 1957. In 1980 he graduated from the Technical University of Sarajevo
and in 1990 obtained his PhD from the Technical University of Vienna. He began his professional
career in 1980 in radio broadcasting and started working in 1983 at Sarajevo Technical University.
From 1988 to 1990 he was employed as an Assistant Lecturer at the Institute for Telecommunications
and Radio Frequency Engineering, Vienna. From 1990 to 1997 he managed the Department for Mobile
Communications Development at ASCOM in Vienna and Solothurn (Switzerland), and headed the hardware
and software development at BOSCH Telecom in Vienna and Berlin. Starting in 1997, Boris Nemsic was
director of network planning at mobilkom austria AG & Co KG. In November 1998, he became Chief
Executive Officer of VIPnet, the first private mobile communications operator in Croatia. In May
2000, Mr. Nemsic was appointed Chief Executive Officer of mobilkom austria AG & Co KG. Boris Nemsic
was member of GSM and UMTS core preparatory groups and is an expert of the European Commission in
the field of telecommunications. Mr. Nemsic joined the Management 113




---



##### Table of Contents



Board of Telekom Austria on July 1, 2002 as Chief Operating Officer Wireless (COO Wireless).
He became Vice Chairman of the Management Board of Telekom Austria on April 11, 2005. In 2004, remuneration expenses for the members of the Management Board amounted to EUR 1.4
million and in addition attributable bonuses of EUR 0.8 million. Furthermore, EUR 1.5 million
resulting from the stock option program 2000 where paid out to members of the Management Board in
February 2004. The actual amount of bonuses will depend on the extent of achievement of specified
performance goals and will be determined in 2005. In 2003, the amount of remuneration was EUR 1.4
million and in addition attributable bonuses of EUR 0.7 million were paid in 2004. At the Supervisory Board meeting on October 12, 2004 Mr. Sundt and Mr. Colombo were
reappointed as members of the Management Board for the period from April 11, 2005 to April 10,
2007. Mr. Sundt continues to serve as the CEO and Mr. Colombo continues to serve as the CFO. Mr.
Fischer and Mr. Nemsic were reappointed as members of the Management Board for the period from
April 11, 2005 to April 10, 2008. If the Supervisory Board informs Mr. Fischer or Mr. Nemsic in
writing by April 10, 2007 that their mandates for the Management Board will not be extended, their
respective term ends on April 10, 2008. If such communication by the Supervisory Board is not made
by this date, the respective mandate for the Management Board is automatically extended for a
further two years and thus ends on April 10, 2010. Mr. Nemsic was appointed Deputy Chairman of the
Management Board as of April 11, 2005 and replaced Mr. Colombo in this position. The Supervisory Board also resolved that the management contracts of our Board Members shall
be extended for the same period as the respective mandates. Modifications of contracts are
currently being negotiated between the individual members of the Management Board and the Chairing
of the Supervisory Board. According to the management contract concluded before October 12, 2004
(i) Mr. Sundt is entitled to resign from the board and to receive his current compensation until
April 10, 2005, without being entitled to an annual bonus for the period after his resignation in
the event ÖIAG reduces its shareholding in us below 20%, and ceases to hold more shares than any
remaining strategic shareholders or ceases to be entitled to appoint our CEO and the majority of
our Supervisory Board, and (ii) Mr. Nemsic is entitled to resign from the board and to receive his
current compensation until April 10, 2005, without being entitled to an annual bonus for the period
after his resignation, in the event we no longer control mobilkom austria AG & Co KG. The Chairing
Committee recently offered all members of our management board the right to resign and to receive
their current compensation until the end of their contracts in the event of a significant change
with regard to ÖIAGs shareholding. In connection with our initial public offering, we instituted a stock option program for
members of the Management Board and senior management of Telekom Austria, mobilkom austria AG & Co
KG, and other controlled subsidiaries. This stock option plan was exercised and expired in February
2004. Telekom Austria has established a new stock option plan as
described below under  Stock
option plan. No Management Board member owns more than 1% of our outstanding share volume. Supervisory Board members The current members of our Supervisory Board are presented in the table below: Name
    
    Member since / re-elected
    
    Principal occupationPeter Michaelis (Chairman)
    
    June 28, 2001 / June 4, 2003
    
    Speaker of the Management Board of ÖIAGEdith Hlawati (Vice Chairperson)
    
    June 28, 2001 / June 4, 2003
    
    AttorneyHans Haider
    
    June 4, 2003
    
    CEO VerbundStephan Koren
    
    September 17, 1999 / June 4, 2003
    
    CEO Österreichische Postsparkasse AGHarald Sommerer
    
    June 4, 2003
    
    Member of Management Board of AT&SHarald Stöber
    
    June 4, 2003
    
    CEO Arcor AG & Co.Rainer Wieltsch
    
    June 12, 2002 / June 4, 2003
    
    Member of Management Board of ÖIAGOtto G. Zich
    
    September 17, 1999 / June 4, 2003
    
    Former General Director Sony EuropeWalter Hotz
    
    December 9, 2003
    
    Employee representativeMichael Kolek
    
    March 20, 2002
    
    Employee representativeFranz Kusin
    
    August 6, 2004
    
    Employee representativeWillhelm Eidenberger
    
    April 30, 2001
    
    Employee representative
 The members of our Supervisory Board receive annual compensation and attendance fees
determined by the AGM. In 2004, the members of the Supervisory Board received an aggregate
compensation including attendance fees of EUR 0.1 million. The compensation of the Supervisory
Board members for 2004 will be determined at the AGM on May 25, 2005. No Supervisory Board member
owns more than 1% of our outstanding shares. Edith Hlawati is a member of the law firm
Cerha, Hempel, Spiegelfeld, Hlawati, which rendered services to us in 2001, 2002, 2003 and 2004.
For further information see note (7) of the accompanying financial statements. The members of the Supervisory Board, who are not employee representatives, are appointed to a
limited term until the AGM in 2008. At this meeting, shareholders will vote on whether to extend
the term of the 114




---



##### Table of Contents



Supervisory Board members. However, employee representatives are appointed for an unlimited
term, as long as they hold their function as employee representative. The members of the Supervisory Board can be contacted at the business address of Telekom
Austria. Audit Committee and other Supervisory Board Committees There are three Supervisory Board committees: a Financial Committee that also acts as Audit
Committee, a Chairing Committee and a Committee for Corporate Structure. Set forth below is a table
with the current members of each committee. For a comprehensive discussion of the functions of our
committees, please refer to Item 10.1. Memorandum and articles of association  Corporate
governance. Name of committee
    
    Current membersAudit Committee, Financial Committee
    
    Rainer Wieltsch, Harald Sommerer, Michael KolekChairing Committee
    
    Peter Michaelis, Edith HlawatiCommittee for Corporate Structure
    
    Peter Michaelis, Rainer Wieltsch, Harald Sommerer, Harald Stöber, Michael Kolek, Walter Hotz
 Stock option plans On October 4, 2000, Telekom Austrias shareholders approved a stock option plan (Stock Option
Plan 2000) and we granted a total of 4,686,881 options to eligible employees. Each option entitled
its grantee to receive, at the grantees choice, either cash equal to the difference between the
average quoted price of our shares during the five trading days preceding the options exercise and
the initial public offering price of EUR 9 or shares at an exercise price of EUR 9. One option was
exercisable for one share. The options could be exercised on specific dates until February 27, 2004
as long as the average share price during the five days prior to exercise exceeded the initial
public offering price by 30% or more. Of these options, 3,230,718 were timely exercised and all
other options expired. On November 21, 2000, in order to limit our exposure under the Stock Option
Plan 2000, we purchased 4,686,881 American call options for a premium of EUR 15.3 million. The
strike and execution price of each call option was EUR 9 and settlement was either physical
delivery of the shares or, at our request, cash. In 2002 and 2003 we sold 1,360,000 options. On
February 27, 2004, we exercised the remaining American call options and received 3,326,881 shares
on March 3, 2004, representing 0.67% of our share capital. For the Stock Option Plan 2000 we used
89,748 shares. For further information see note (20 and 23) of the accompanying financial
statements. In 2003 our shareholders authorized the framework of a new stock option plan since our old
stock option plan was due to expire on February 27, 2004. Under the current stock option plan our
Management Board and executive officers are eligible to participate. The current stock-option plan
intends to grant the options in three annual tranches beginning in 2004. The first tranche and the
second tranche have been issued in April 2004 and in January 2005 respectively. The details of the
third tranche have not been determined yet. Under the first and the second tranche we granted
non-transferable options exercisable for up to an aggregate of 2,392,925 shares in the tranche 2004
 thereof 2,363,925 options were still exercisable on December 31, 2004  and options for 2,858,460
shares in the tranche 2005. Our shareholders approved an increase of our share capital by up to 10
million shares to cover the shares to be issued upon the exercise of the options. In connection
with the issue of the first tranche, the Management Board decided on March 23, 2004 to increase the
share capital by up to EUR 6,543,000 to service the options issued in 2004. In connection with the
issue of the second tranche in 2005, the Management Board decided on December 13, 2004 to increase
the share capital by up to EUR 7,415,400 on the same conditions as stated above. Each member of our Management Board received 96,000 options out of the tranche 2004 and 99,100
options out of the tranche 2005, respectively. The shareholder resolution allows us to determine whether the options will be settled in cash
or shares. Each option entitles the holder at our choice to receive either shares at the exercise
price, a combination of shares and cash, or only cash. The shares used for the settlement may
either be treasury shares or new shares from an increase in our share capital as described above.
The cash portion is calculated based on the difference between the closing price of our shares on
the Vienna Stock Exchange on the day of the exercise of the option and the exercise price. The
exercise price is determined as the average closing price of our shares on the Vienna Stock
Exchange during a period of twenty trading days ending two trading days before the granting of
options; the exercise price for the tranche issued in 2004 is EUR 11.92, and for the tranche issued
in 2005 EUR 13.98. 115




---



##### Table of Contents



To be eligible to receive options, plan members must acquire and hold an investment in our
shares until the options are exercised. With regard to the tranche issued in 2004, each grantee
will receive 15 options for every share purchased, up to a maximum amount of options specified by
the plan. With regard to the tranche issued in 2005, each grantee will receive 20 options for every
share purchased, up to a maximum amount of options specified by the plan, except for the members of
the Management Board who will receive 15 options for every share purchased, up to a maximum amount
of options specified by the plan. The options may only be exercised during an exercise period of
approximately three years after a 12-month vesting period for the tranche issued in 2004 and a
vesting period of approximately 14-months for the tranche issued in 2005, both after an exercise
hurdle has been met. The exercise hurdle is a specific level of earnings per share for the year
2004 and 2005, as determined annually by the Supervisory Board for the Management Board. In turn,
upon approval by the Supervisory Board, for the options held by the Management Board determines the
exercise hurdle for the other eligible executive officers. The last exercise date for options
granted under the new stock option plan with regard to the tranche issued in 2004 is May 30, 2008
and with regard to the 2005 tranche is May 29, 2009. The exercise hurdle (on the basis of earnings per share for the year 2004) for the first
tranche of stock options issued in 2004 was met and therefore the options of the first tranche 2004
can be exercised from April 20, 2005 until May 30, 2008. On March 15, 2005, the Management Board
decided to settle all options of the first tranche 2004 in cash only. This would have an effect of
a decrease in stockholders equity of EUR 4.5 million as of December 31, 2004 and a rise in
liabilities of EUR 5.5 million together with a rise of employee costs by EUR 1.0 million, if
applied retroactively. The decision of the Management Board of March 23, 2004, to increase the
share capital by up to EUR 6.5 million to service the stock options of the first tranche issued in
2004 will therefore not be realized. Employees The following table shows the year-end number of our employees in full time equivalents for
the last three years excluding personnel representatives, civil servants who opted for early
retirement, employees on parental and other leave, trainees, and employees on military duty and
vacation replacements. 2004
    
    
    2003
    
    
    2002Number of Employees (year-end)Wireline
    
    
    9,682
    
    
    
    10,234
    
    
    
    11,359Wireless
    
    
    3,625
    
    
    
    3,656
    
    
    
    3,592Total
    
    
    13,307
    
    
    
    13,890
    
    
    
    14,951
 Civil servants The employment of civil servants is regulated by the Post Restructuring Act and related laws.
Our employees were taken over from the Republic of Austrias civil administration upon the
formation of Post- und Telekom Austria AGon May 1, 1996. After May 1, 1996, employees newly hired
by us were no longer given civil servant status but are instead private law employees. In Austria,
civil servants employment cannot be terminated without their consent unless this termination is
made for gross breach of their civil servant duties as defined in the Civil Servants Employment
Act. Employment, compensation and pension provisions that relate generally to federal civil
servants remain in effect for the approximately 51% of our workforce that have civil servant status
as of December 31, 2004. The Post Restructuring Act transferred the function of disciplinary authority, which used to
lie with the Republic of Austrias civil service, to the Management Board of Telekom Austria in May
1996. The CEO of Telekom Austria in his function as head of disciplinary authority is not bound by
the instructions of any authority of the Republic of Austria and there is only a limited right of
appeal for these civil servants to the courts. The CEO of Telekom Austria is empowered to issue
decrees under the Civil Servants Employment Act to adjust the civil servants compensation,
provided these measures comply with the collective bargaining agreement that governs the salary
increases of our private sector employees. Pension provisions for our civil servants are the responsibility of the Republic of Austria in
accordance with the provisions of the Pensions Act 1965. We are relieved from direct payment to
retired civil servants but must make monthly compensation contributions to the Republic of Austria
towards expenses incurred with respect to pension payments. In 2004, this contribution amounted to
30.1% of the cost of salaries of our active civil 116




---



##### Table of Contents



servants. In return, we withhold a pension contribution between 11.05% and 12.55% from the
gross salaries of our civil servants. Beginning in October 2005, the contribution will be reduced
to 28.3%. Private law employees At December 31, 2004, approximately 49% of all our employees were private law employees. This
group consists of employees who were privately employed by the Republic of Austria and those
employees who since May 1, 1996 have been employed on the basis of private law employment
contracts. The Employment Act and our collective bargaining agreement apply to these employees. We
have full autonomy to conduct all relevant negotiations with the employees trade unions. Under the
Post Restructuring Act the rights of employees who were formerly privately employed by the Republic
of Austria, such as protection against termination, have not been limited. The collective bargaining agreement currently in force determines primarily salaries and
wages, working hours, overtime pay, holidays, parental leave and termination. The agreement
provides for special termination provisions for employees who have been employed with Telekom
Austria for more than 10 years. The agreement applies to our subsidiaries and affiliates. The collective bargaining agreement includes an increase of 2.4% in annual salary for all
employees in 2005. This compares with an increase of 1.9% in 2004 and 2.0% in 2003. In 2000 and 1999, we sponsored a defined contribution plan, which was offered in 2001 to all
our Austrian employees. The contributions to this plan are based on a percentage of the
compensation not exceeding 5% of the salaries. The annual cost of this plan amounted to
approximately EUR 9.2 million in 2004. Inter-company representation of interests Based on the Postal Works Constitution Act, Telekom Austria has introduced personnel
committees and central committees to represent the interests of employees, in addition to on-site
employee representatives. Their rights of co-determination, in particular rights of consent, are
similar to the provisions of the Labor Constitution Act which applies to all business enterprises
in Austria. Personnel representatives have a better protection against termination of employment
than regular employees. Adjustment measures with regard to personnel Under special framework legislation for civil servants out-sourced to state-owned companies,
we offered our civil servant employees who have reached the age of 55 an early retirement option
pursuant to a social compensation plan. Approximately 3,500 have entered one of these programs
since 1997. At December 31, 2004, 118 employees were covered by the provisions made for our
voluntary retirement incentive program. Transfer of employees We transferred all our personnel of Telekom Austria AG including all civil servants and
private law employees except the Management Board members to a wholly owned subsidiary named
Telekom Austria Personalmanagement GmbH(TAP) by way of a spin-off as of June 30, 2000. Our
management has and will continue to analyze the number of employees who are needed at Telekom
Austria and who are, therefore, being transferred back to Telekom Austria. The re-transfer started
on August 1, 2001. The proportion of civil servants amounted to 54% in 2003 and decreased to 51% in
2004. Department heads are now merely private law employees. Should Telekom Austria temporarily require additional personnel, this need will be covered
primarily by leasing personnel resources from TAP, as long as this procedure is reasonable from a
business standpoint. In the future, TAP will lease their personnel to other companies. Relationship with employees As a necessary result of our transformation program, we have significantly reduced the number
of our employees. Although we generally consider our relationship with our employees to be good,
many of our employees have expressed dissatisfaction with the speed and depth of our personnel
reduction. 117




---



##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions We have three major shareholders. ÖIAG, an industrial holding company wholly owned by the
Republic of Austria, owns 30.2% of our share capital. Capital Research & Management Company,
Delaware, USA, notified us that it held 7.2 % of our shares on December 31, 2004 (5.7% in 2003),
Capital Group International, Inc., California, USA, held 5.6% of our shares on December 31, 2004.
However, below these two companies are numerous investment companies operating independently in
their day to day business. For this reason, we consider the share capital held by Capital Research
& Management Company and Capital Group International, Inc. as free float. In December 2004, ÖIAG reduced its shareholding in Telekom Austria by 17%, from 47.2% to 30.2%
of our share capital. As a result, the free float in Telekom Austrias share capital has increased
to 69.8% as of December 31, 2004. Also, Telecom Italia International (renamed from STET International Netherlands in May 2002),
a joint subsidiary of STET International and Telecom Italia, sold its remaining 14.8% interest in
us on January 21, 2004. Relationship with the Republic of Austria and ÖIAG The Republic of Austria exercises its ownership rights in ÖIAG through the Federal Minister of
Finance. The business of ÖIAG is managed by its Management Board. This board is subject to
supervision by ÖIAGs Supervisory Board but is independent from and not subject to instructions
from the Supervisory Board or the Republic of Austria as shareholder, though it is subject to their
approval for some major transactions. The Supervisory Board of ÖIAG consists of 15 members. Ten
members are managers or business experts whose successors are elected by the Supervisory Board
members themselves to assure their independence. Five members, chosen from the workers council of
major subsidiaries of ÖIAG, are nominated by the Austrian Chamber of Labor and appointed by the
AGM. By law, ÖIAG and Telekom Austria may not form a controlled group. The Austrian government announced in its privatization mandate to ÖIAG in April 2003 that
privatization of ÖIAGs stake in us should pay due regard to (1) protecting jobs in Austria, (2)
ensuring that the decision making process for the privatized companies remains in Austria, (3)
preservation and expansion of existing research and development capacities by creation of an
Austrian core-shareholder-structure and (4) considering the interests of the Austrian capital
markets. According to the privatization mandate, the Austrian government intends to privatize up to
100% of its shareholding in us by 2006. As a result of this privatization mandate, ÖIAG issued in July 2003 an exchangeable bond of
EUR 325 million payable in 2006. It is exchangeable into EUR 25 million of our shares,
corresponding to 5% of our share capital to professional investors outside of the United States
under Regulation S of the Securities Act of 1933. The exchange price has been set at EUR 13 for
each Telekom Austria AG share. In December 2004, ÖIAG reduced its share holding in us by 17% with a
private placement of shares and currently holds 30.2% of our shares. Pension contributions for civil servants The Republic of Austria administers the pension and salary payments for civil servants. Civil
servants employed by Telekom Austria are entitled to pension benefits provided by the Republic. We
in turn are required to make payments to the Republic as a contribution to these pension costs. For
further information, please see  Item 5.1. Overview  Certain factors and trends affecting
our financial results  Claims against the Republic of Austria. The Republic of Austria as regulator The Republics role of supervising the telecommunications market in Austria through the
regulatory authority is independent of its role as an indirect shareholder of Telekom Austria. As a telecommunications operator with a significant market share in Austria, we are required
to provide certain telephone services for qualifying low-income customers free of charge. We
receive reimbursements from the Republic for these services. The relevant contract terminates in
2007. 118




---



##### Table of Contents



The Republic of Austria as customer The Republic of Austria is our largest customer and purchases products and services based on
our standard pricing and tariff policies. Nevertheless, the provision of services to the Austrian
government does not constitute a material part of our revenues. Thus, our internal reporting
systems are not set up to specifically track business with the various departments and agencies.
However, we estimate that in 2004 our overall revenues from this business amounted to less than 3%
of our total revenues. On March 31, 2003, as the result of tender procedures concerning a new framework agreement for
voice telephony services via a fixed and mobile telephone network to all the government agencies,
the Republic of Austria, represented by the Federal Procurement Limited Liability Company
(Bundesbeschaffung GmbH), awarded the larger part of the contract to us. mobilkom austria AG & Co
KG is providing the mobile telephony services as a subcontractor of Telekom Austria. Therefore, the
previous framework agreement was terminated as of June 30, 2003. The duration of the new agreement
will be for a minimum period of 30 months. Federal guarantees for Telekom Austria and mobilkom austria group loans All our long-term loans incurred under the Telecommunications Investment Act that existed and
were transferred to Post und Telekom Austria AGat the time of Post und Telekom Austria AGs
creation as a private law stock corporation on May 1, 1996, were guaranteed by the Republic of
Austria. Part of Post und Telekom Austria AGs loans were transferred to mobilkom austria in
October 1996. As of December 31, 2004, EUR 857.2 million of our total EUR 2,300.2 million long-term debt
benefited from these guarantees. None of our debt incurred since May 1, 1996 is subject to such
guarantees. Relationship with Österreichische Post In May 1998, Telekom Austria and Österreichische Postentered into a framework agreement
determining the services that both parties render to each other, whereby Österreichische Post
provides us mainly with distribution and sales of our products and services through post offices,
postal services, and rented buildings. We provide Österreichische Post, a 100% subsidiary of ÖIAG,
primarily with information technology support services, voice telephony services and technical
services. The prices of services are based on market prices or comparable service offers from third
parties, if available. The contractual relationship with Österreichische Postwas amended and
updated several times. In 2003, Österreichische Postterminated some services rendered by Telekom
Austria under the agreement. However, in September 2003 Österreichische Postand Telekom Austria
confirmed that the majority of services rendered by Telekom Austria under the agreement will be
provided until the end of September 2005. In 2004, both parties reconfirmed that data services will
be provided until the end of 2007. It is expected that the contract concerning telephony services
shall be extended till 2006. During the last 12 month Österreichische Postinvited to tender for
the several other services like SAP applications or the supply for desktop and messaging services.
In connection with these proceedings Österreichische Postterminated services. Telekom Austria was
not able to award the contract for desktop services but expects to win the contract for messaging
services. In late 2003, the provisions regarding distribution and sales of our products and
services through post offices were amended to allow the distribution of our products in post
offices and through other sales channels of Österreichische Post. For further information see note
(7) of the accompanying financial statements. 119




---



##### Table of Contents



Item 8. Financial Information 8.1 CONSOLIDATED FINANCIAL STATEMENTS See Item 18. Financial Statements and pages F-1 through F-57. 8.2 OTHER INFORMATION Litigation Telekom Austria and its subsidiaries are involved in a number of legal proceedings in the
ordinary course of business. The following is a summary of litigation matters outside the ordinary
course of business. Telekom Austria One of our former competitors now in bankruptcy has brought four claims for damages against us
relating to alleged default in providing hardware and services. We reached a settlement in
September 2002 with the insolvency administrator who filed two of these claims with an amount in
controversy totaling EUR 5.2 million. In the meantime, one of these claims has been withdrawn by
the debtor. The remaining case for a claim of EUR 58.1 million has been decided in our favor by the
Civil Court, which is the court of first instance in Austria. The claimant has appealed and the
appeal is still pending. The Vienna public prosecutors office is investigating whether legal proceedings should be
opened against our management in connection with allegations published in the Austrian press to the
effect that our civil servants, like other civil servants of other presently or formerly
state-owned Austrian enterprises, have been granted early retirement on medical grounds based upon
fraudulent medical certificates. We have publicly stated that in managements view we have fully
complied with applicable law and are fully cooperating with the investigation. In addition, the
audit court of the Republic of Austria, the Rechnungshof, has began an investigation into the early
retirement practices of several current and formerly state owned enterprises, including us, to
determine whether there has been any abuse of the current legal framework for early retirement. As
the authority of the Rechnungshofto review our retirement policy is not clear, we denied any
access to our files; in 2003 the Rechnungshofhas started proceedings with the Austrian
Constitutional Court to render a ruling on whether it has the right of access to our files. These
proceedings are still pending. On September 11, 2000, we received a complaint filed by United Telekom Austria (UTA) with the
European Commission, General Directorate for Competition against us and the Republic of Austria
concerning our tariff and discount system, alleging that we abuse our dominant market position. We
replied to this complaint on October 9, 2000, denying the allegations. To date, we have not
received a further response. A directory service provider raised a claim in Belgium against us that we have abused our
dominant position with regard to the supply of directory data. The claimant alleges that he has a
right to obtain these data for free. Management believes that in case that this claimant is
successful, an impact on our prices for the supply of directory data will result. mobilkom austria AG & Co KG Six claims have been brought against our subsidiary mobilkom austria AG & Co KG relating to
alleged health problems caused by the emission of radiation through mobile communications
transmitting and receiving stations. Some of these claims also seek damages for the alleged
decrease in the value of the plaintiffs real estate. In the first of the six proceedings, an
initial ruling has been made, only pertaining to the gathering of expert reports through the
appellate court, and a later date was set for the remaining five proceedings. In three of these
proceedings, the parties agreed to suspend the case until a decision had been reached in the first
proceedings. In the other two proceedings, the claimants failed to gain a provisional injunction.
The claimants have appealed. In one of these two cases the Court of Appeal rendered a decision,
which is now effective. The right of forbearance has been rejected because the claimant could not
prove that health problems are caused by electromagnetic radiation from our base transceiver
station. One claim has been rejected by the Court of Appeal. Six claims are still pending in which
mobilkom austria AG & Co KG is alleged to be responsible for a decrease of value of property
adjoining transmitting and receiving stations. mobilkom austria AG & Co KG is involved in a number of proceedings before the Supreme
Administrative Court for alleged breaches of environmental or zoning laws. In one of these cases, a
decision was rendered by 120




---



##### Table of Contents



the lower court obliging mobilkom austria AG & Co KG to remove a mobile communications
transmitting and receiving station. mobilkom austria AG & Co KG has appealed against this decision. A competitor in the bidding process for the license granted to our subsidiary Si.mobil by the
Slovenian government filed a claim to nullify the license granted to Si.mobil and the Concession
Agreement entered into between Si.mobil and the Slovenian government in 1998. The Slovenian Supreme
Court nullified the license decision for failure to comply with form requirements, whereupon the
government issued a new license decision complying with the procedural instructions of the Supreme
Court. The former competitor in the bidding process thereupon appealed the new license decision.
This appeal has been pending since 1999. Management believes that this claim has a low likelihood
of success. A labor union group has instituted legal action to avoid our new achievement-orientated
payment-model at mobilkom austria AG & Co KG introduced in January 1, 2004. The claim is based on
the view that such payment model arrangements require an agreement among us and employee
representatives. The trade union group argues that in the absence of such an agreement the payment
model is not enforceable and the former payment model should be applied. We expect the court of
first instance to decide by the end of 2005. The same labor union group instituted legal action with the aim that our computer program to
design duty rosters can no longer be used. This computer program replaced our former program which
was also computer based. The trade union argues that the launch of this new program would have
required an agreement between management and employee representatives. In the absence of such an
agreement the former computer program should be used to design our duty roster. We expect the court
of first instance to decide by the end of 2005. Some contractual settlements in our collective agreement concern special payments for
employees who work on Sunday, on bank holidays or at night. The labor union group has taken legal
action because of different legal positions between them. Because of an out-of-court settlement
with the labor union group, the legal proceedings against mobilkom austria AG & Co KG have been
discontinued in 2004. In 2000, mobilkom austria AG & Co KG and five mobile operators successfully bid for UMTS
licenses. mobilkom austria AG & Co KG was awarded a license. It was not made clear whether the
amount paid was a net amount or one which included value added tax (VAT). Therefore, mobilkom
austria AG & Co KG together with the other mobile operators who had received a license believed
they had paid a gross amount, including VAT. In order to be able to claim a VAT refund from the
Republic of Austria mobilkom austria AG & Co KG and other mobile operators asked for an invoice for
the license which would allow them to claim the refund. Since the Republic of Austria refuses to
issue an invoice mobilkom austria AG & Co KG and each of the other mobile operators filed a claim
for a refund with the court which has jurisdiction over each of the mobile operators. For
simplicity reasons several claims have been joined to one proceeding. Since European Community law
is applicable the Austrian court has stayed the proceeding and the national court is now in process
of asking the European Court of Justice for clarification (Preliminary Rulings). The ruling of the
European Court is binding on the Austrian Court, which will continue the proceeding and decide on
the merits once the ruling is issued. mobilkom austria AG & Co KG also has filed a claim against
the regulatory authority regarding the same issue, but, as agreed by both parties, this claim will
be stayed until the decision in the other proceeding against the Republic of Austria is rendered. A consumer organization brought action against mobilkom austria AG & Co KG opposing the
provision in its General Terms and Conditions requiring prepaid customers to recharge their account
within a certain period of time, otherwise their number would be deactivated and the remaining
credit on the voucher is lost. Regulatory matters regarding Telekom Austria and mobilkom austria AG & Co KG mobilkom austria AG & Co KG has filed a number of appeals against decisions of the regulatory
authority on interconnection, the determination of significant market power (SMP) until 2001, and
tariff approval for its A1-Total product which concerns the provision of voice telephony through
fixed lines. These appeals were pending at the Supreme Administrative Court and the Constitutional
Court on December 31, 2004. Since mid 2001, until October 2004, the regulatory authority did not
consider mobilkom austria AG & Co KG to have SMP. In December 2004, mobilkom austria AG & Co KG has filed two complaints (one at the Supreme
Administrative Court, the other at the Constitutional Court) against the decision of the regulatory
authority from October 2004 determining SMP in the market for termination in each individual
mobile network. Other operators have appealed as well. 121




---



##### Table of Contents



Mobile Number Portability is regulated by the Telecommunications Act 2003. In August 2004
regulatory authority has decided that Mobile Number Portability should come into force on October
16, 2004. Regulatory authority ruled by notice the relationship between mobilkom austria AG & Co KG
and Hutchison 3G Austria GmbH as well as mobilkom austria AG & Co KG and tele.ring Telekom Service
GmbH with regard to Mobile Number Portability. The decision requires mobilkom austria AG & Co KG to
charge at a maximum a certain amount for each piece of information provided based on the individual
costs of porting. In February 2005 the Administrative Court has repealed the decision between
mobilkom austria AG & Co KG and Hutchison 3G Austria GmbH. As a consequence, the regulatory
proceeding is again pending, and negotiations with the operator are ongoing. However, it is
unlikely that this has significant effects on the provision of the service. On December 19, 2004, National regulatory authority has decided that mobikom austria is not
allowed to charge more than a certain amount for the actual porting. mobilkom austria AG & Co KG
has taken legal action and has appealed against this decision. Furthermore, there are also legal actions pending between mobilkom austria AG & Co KG and
tele.ring Telekom Service GmbH, based on private and competition law. tele.ring, a competitor of
mobilkom austria AG & Co KG, brought an action against mobilkom austria AG & Co KG with regard to
the porting costs charged to consumers. tele.rings claims with regard to messages used by mobilkom
austria AG & Co KG in its advertising were rejected by the court. mobilkom austria AG & Co KG took
action against competitor tele.ring with regard to their advertisement, alleging a breach of
competition law. mobilkom austria AG & Co KG obtained an injunction with regard to a part of this
claim and with regard to massages used by mobilkom austria AG & Co KG in its advertisement.
mobilkom austria AG & Co KG took action against competitor tele.ring with regard to their
advertisement alleging a breach of competition law. In March and April 2005 Telekom Austria has filed three complaints at the Supreme
Administrative Court against the decision of the regulatory authority determining significant
market power in the markets for publicly available local and/or national telephone services
provided at a fixed location for residential and non-residential customersand in the market for
publicly available international telephone services provided at a fixed location for
non-residential customers. Dividends Declaration of dividends A dividend payment requires the adoption of a resolution by the AGM on the distribution of
profits. The holders of our ordinary shares are entitled to dividends in proportion to their
participation in our share capital. Our fiscal year corresponds to the calendar year. Austrian law provides that within the first
five months of each fiscal year, the Management Board must prepare financial statements, including
a balance sheet, income statement and the notes thereto, consolidated financial statements, and a
management report for the previous fiscal year and, after completion of the audit, submit them to
the Supervisory Board together with a proposal for the payment of dividends. The Supervisory Board
is required to examine the financial statements, the proposal for the payment of dividends and the
management report, and to present its findings to the AGM. If the Supervisory Board approves the financial statements, they are adopted unless the
Management Board and the Supervisory Board decide to have them approved by the AGM. Unless that is
the case, the AGM is bound by the adopted annual financial statements approved by the Management
Board and the Supervisory Board. The AGM decides the payment of dividends. According to our Articles of Association,
shareholders at the AGM may also resolve that all or part of the net income be retained. The
amendments to the financial statements required by a retention are made by the Management Board.
Under Austrian law, we may pay dividends only from net income as shown in the annual financial
statements prepared according to Austrian GAAP by Telekom Austria AG. The AGM is not obligated to
follow the Management Boards proposal on dividends and is not bound by the findings and
recommendations of the Supervisory Board. The shareholder may receive final or interim dividends. The Management Board may authorize the
payment of interim dividends with the approval of the Supervisory Board but does not require the
shareholders approval to do so. 122




---



##### Table of Contents



Payment of dividends Unless otherwise decided by the AGM, dividends declared for distribution by the AGM become due
and payable 30 days after the date of the AGM at which they were approved. Our Articles of
Association provide that dividends that are not collected within three years after the due date are
forfeited in favor of Telekom Austria. 123




---



##### Table of Contents



Item 9. The Offer and Listing 9.1 MARKETS Our shares are listed on the Vienna Stock Exchange and the New York Stock Exchange (NYSE). The
shares are also traded on the German stock exchanges in Berlin, Düsseldorf, Frankfurt, Munich and
Stuttgart. Options on the shares are traded on the Austrian Options Exchange (ÖTOP). In November
2000, the total number of shares sold in the initial public offering amounted to 112,000,000, or
22.4% of the total outstanding shares. The offer price was EUR 9 per share and USD 15.2874 per
American Depositary Shares, or ADS. Each ADS represents two shares of common stock and trade under
the symbol TKA on the NYSE. The depositary for the ADSs is The Bank of New York. Telekom Austrias shares are traded on Xetra (electronic exchange trading platform) in
addition to being traded on the auction market. Xetra is an electronic exchange trading platform
operated by rules and regulations. Xetra is available daily between 8:30 a.m. and 5:45 p.m. to
brokers and banks that have been admitted to Xetra. Private investors can trade on Xetra through
their banks or brokers. The stock exchange trading in Austria was regulated by the Stock Exchange Act of 1989 (BGBl.
Nr. 555/1989), which has been amended several times since its enactment. The Financial Market
Authority (Finanzmarktaufsicht)) monitors trading activities on the Vienna Stock Exchange. In 2004, Telekom Austria ADSs reached a high of USD 38.50 and a low of USD 24.82 on the NYSE.
On the Vienna Stock Exchange Telekom Austria shares reached a high of EUR 14.40 and a low of EUR
9.80 in 2004. From January through April 6, 2005, our ADSs reached a high of USD 40.50 and a low of USD
36.70 on the NYSE. On the Vienna Stock Exchange Telekom Austria shares reached a high of EUR 15.60
and a low of EUR 13.86 in 2005. The table below indicates the price range of the high and low prices for our shares on the
Vienna Stock Exchange and for the ADS on the NYSE1. New York
    
    
    ViennaHigh
    
    
    Low
    
    
    High
    
    
    LowUSD
    
    
    EUR2000
    
    
    14.44
    
    
    
    9.63
    
    
    
    9.00
    
    
    
    5.712001
    
    
    16.70
    
    
    
    9.50
    
    
    
    9.48
    
    
    
    5.382002
    
    
    20.04
    
    
    
    14.46
    
    
    
    9.95
    
    
    
    7.242003
    
    
    24.72
    
    
    
    18.90
    
    
    
    11.10
    
    
    
    8.60First Quarter
    
    
    21.95
    
    
    
    18.90
    
    
    
    10.25
    
    
    
    8.79Second Quarter
    
    
    23.30
    
    
    
    19.35
    
    
    
    10.15
    
    
    
    8.60Third Quarter
    
    
    24.40
    
    
    
    20.15
    
    
    
    11.10
    
    
    
    9.00Fourth Quarter
    
    
    24.72
    
    
    
    20.71
    
    
    
    10.08
    
    
    
    8.982004
    
    
    38.50
    
    
    
    24.82
    
    
    
    14.40
    
    
    
    9.80First Quarter
    
    
    30.42
    
    
    
    24.82
    
    
    
    11.99
    
    
    
    9.80Second Quarter
    
    
    30.84
    
    
    
    26.37
    
    
    
    12.82
    
    
    
    10.70Third Quarter
    
    
    35.50
    
    
    
    26.15
    
    
    
    14.40
    
    
    
    10.80Fourth Quarter
    
    
    38.50
    
    
    
    27.75
    
    
    
    14.10
    
    
    
    11.27October
    
    
    30.40
    
    
    
    27.75
    
    
    
    11.94
    
    
    
    11.27November
    
    
    34.60
    
    
    
    30.05
    
    
    
    12.98
    
    
    
    11.82December
    
    
    38.50
    
    
    
    34.40
    
    
    
    14.10
    
    
    
    12.752005First Quarter
    
    
    40.50
    
    
    
    36.70
    
    
    
    15.48
    
    
    
    13.86January
    
    
    38.84
    
    
    
    36.70
    
    
    
    14.80
    
    
    
    13.86February
    
    
    40.35
    
    
    
    37.90
    
    
    
    15.48
    
    
    
    14.44March
    
    
    40.50
    
    
    
    37.26
    
    
    
    15.48
    
    
    
    14.26April (through 6)
    
    
    39.80
    
    
    
    38.80
    
    
    
    15.60
    
    
    
    15.03
  1
    
    Intraday high and low; Source: Reuters, Bank of New York 124




---



##### Table of Contents



Item 10. Additional Information 
 10.1. MEMORANDUM AND ARTICLES OF ASSOCIATION Overview Telekom Austria is registered under the number FN 144477 t in the companies register of the
commercial court of Vienna with its seat in Vienna, Austria. Our Articles of Association state that our object is to provide telecommunications services
and to create conditions which will promote the development of telecommunications services in
Austria. These services include telephone voice services, automatic data processing and information
technology, the planning, construction, maintenance and operation of infrastructure facilities and
networks and the installation of communications facilities and terminals. We may also conduct
activities associated with these services. The articles authorize us to take all actions necessary
to achieve our objective, except that we are not permitted to carry out banking activities. Shares and share capital Our share capital amounts to EUR 1,090,500,000 and is divided into 500 million no par value
shares (Stückaktien) each representing a pro rata amount of EUR 2.181 of the share capital. Pursuant to the amendment to our Articles of Association voted on at our ordinary AGM held on
June 12, 2002, all of our shares are bearer shares. Our bearer shares are freely transferable. All
shares have been admitted to trading on the Vienna Stock Exchange and will be represented by one or
more global certificates deposited with Österreichische Kontrollbank AG, the Austrian central
depositary. The shares can only be transferred in book-entry form. Under our Articles of
Association, our shareholders do not have a right to receive individual share certificates in
bearer form. We may, however, issue global certificates and interim certificates. On June 4, 2003, our shareholders authorized us to increase the share capital of Telekom
Austria AG by up to EUR 21,810,000 by issuing up to 10 million new ordinary bearer shares or new
ordinary registered shares with no par value in order to serve stock options to be granted to
employees, directors and members of the Management Board of the Company or of an affiliated company
for a period of five years. Our Articles of Association were modified accordingly. The statutory
rights of existing shareholders to subscribe for additional shares issued by the Company for cash
on a pro ratabasis are excluded with respect to this capital increase. In connection with the
issue of the first tranche of options pursuant to our stock option plan (see also Item 6  Stock
option plans) the Management Board decided on March 23, 2004 to increase the share capital by up to
EUR 6,543,000 on the condition that the options issued in 2004 are served. In connection with the
issue of the second tranche of options pursuant to our stock option plan, the Management Board
decided on December 13, 2004 to increase the share capital by up to EUR 7,415,400 on the condition
that the options issued in 2005 are served. The Supervisory Board consented to both resolutions of
the Management Board. The exercise hurdle (on the basis of earnings per share for the year 2004) for the first
tranche of stock options issued in 2004 was met and therefore the options of the first tranche 2004
can be exercised from April 20, 2005 until May 30, 2008. On March 15, 2005, the Management Board
decided to settle all stock options of the first tranche issued in 2004 in cash only. The decision
of the Management Board of March 23, 2004 to increase the share capital by up to EUR 6.5 million to
service the stock options of the first tranche issued in 2004 will therefore not be realized. In addition, on June 3, 2004, our shareholders authorized the Management Board to acquire
Telekom Austrias bearer or registered shares, up to 10% of the share capital of the Company,
during a period of 18 months from the date of this resolution at a minimum price of EUR 9 and a
maximum price of EUR 18 per share. The Management Board received the following authorizations for
use of the repurchased shares:  

To service stock options to be granted to employees, directors and members of the
Management Board of the Company or of an affiliated company;

To service convertible bonds;

To use as consideration for the acquisition of enterprises, businesses or parts
thereof, including acquisitions abroad;

If the shares are not used for the above mentioned purposes, to resell them in
accordance with Paragraph 65, Sec. 1b of the Stock Corporation Act, within a period of
five years in any way 125




---



##### Table of Contents



permitted by law, also other than over the stock exchange; the Management Board is free
to decide the manner in which the shares shall be sold and may in its free discretion
sell to any purchaser chosen by them. Shares not used for one of these points may be drawn-in with prior approval by the AGM. On June 3, 2004 our shareholders authorized the Management Board to issue convertible bonds
with the right of subscription for and/or conversion into an amount up to 90,000,000 shares of the
Company. The authorization is for issuance of bonds in several tranches during the period of five
years from the shareholders authorization. The Management Board may use conditional capital or own
shares to service the convertible bonds. The Management Board is entitled to partially or entirely
exclude the subscription rights of the existing shareholders with respect to the convertible bonds,
as long as this is objectively justified and in the interest of the Company. For this reason,
particularly fractional amounts resulting from the ratio of subscription can be excluded from the
subscription rights of the shareholders. Issue price and terms and conditions of the shares shall
be determined by the Management Board. In particular, the Management Board is free to satisfy the
option either entirely in cash based on the average market price of the shares or a combination of
cash and shares in Telekom Austria AG. Further, our shareholders agreed during the AGM on June 3,
2004 to increase our share capital according to Paragraph 159 (2), Sec. 1 of the Stock Corporation
Act (Contingent Capital Increase) by up to EUR 109,050,000 by issuing up to 50,000,000 new ordinary
bearer shares with no par value in order to service convertible bonds, the issuance of which was
authorized during that meeting. The capital increase shall only be effected to the extent that
holders of convertible bonds exercise their subscription right and/or conversion right with respect
to shares of the Company. On March 15, 2005, the Management Board decided to settle all options of the first tranche
2004 in cash only. See also  Item 6  Stock Option Plans. The issue price is calculated on the basis of the average of the closing price on the Vienna
Stock Exchange for the 20 trading days prior to the day of allotment of convertible bonds plus a
premium of 25% or a respective higher premium, which shall be deemed to meet the expectations of
the development of the share price of the Company under consideration of similar transactions on
the relevant market, whereas the duration, interest and volume of a transaction shall be decisive
when determining the similarity of the respective transaction. The newly issued shares of the
conditional capital increase shall be entitled to dividends for the full fiscal year in which they
were issued. On February 27, 2004, we exercised 3,326,881 American call options and on March 3, 2004, we
received the same amount of shares for these options. These treasury shares represent 0.67% of our
share capital, and were intended for the beneficiaries of our IPO stock option program as well as
for future stock option programs. Under the IPO program 3,230,718 outstanding stock options were
exercised on February 27, 2004, and 89,748 of the shares bought back were used. For further
information see Item 6  Stock option plans. On March 24, 2004 Telekom Austria announced its
intention to commence a share buyback program. The program was amended on June 24, 2004 according
to the respective resolutions of the AGM of June 3, 2004. On August 26, 2004 Telekom Austria
announced the beginning of the share buyback, which is currently underway. Telekom Austria has
according to the share buyback program of 2004 repurchased 3,018,561 of its shares corresponding to
0.60 % of its share capital by December 31, 2004, in addition to the exercise of the American call
options. Following these transactions, the total amount of shares bought back and currently held by
Telekom Austria is 6,255,694 with a total value of EUR 87,266,931.30. For Details see Item 16E. Corporate governance As required under the Austrian Stock Corporation Act, Telekom Austria has a two-tier board
system comprising the Management Board (Vorstand) and the Supervisory Board (Aufsichtsrat). The
functions of management and supervision are strictly separated and no individual may simultaneously
be a member of both boards. The Management Board represents the Company in day-to-day business
matters, and is not subject to instructions from the Supervisory Board or the shareholders. The
Supervisory Board appoints and removes the members of the Management Board and oversees the
Management Boards activities. The AGM has the power to elect and remove Supervisory Board members. Our Supervisory Board consists of up to eight members elected by the AGM and four members
appointed by our workers council under mandatory provisions of the Austrian Labor Constitution
Act. 126




---



##### Table of Contents



ÖIAG owns about 30.2% of our share capital and is in a position to control us. In addition, we hold a AGM once a year. At this meeting, the shareholders vote on the
distribution of net profits, the compensation of the members of the Supervisory Board, the
appointment of our independent auditors and on other significant corporate transactions. With the publication of the annual report 2003, we announced our voluntary compliance with the
Austrian Corporate Governance Code. The respective declaration has been published on our corporate
website at www.telekom.at. In accordance with the Austrian Code, our adherence to the rules
stipulated in the Code was externally evaluated and no facts were discovered that contradicted the
declaration of the Management Board and Supervisory Board concerning compliance with the Austrian
Code of Corporate Governance. Management Board (Vorstand) Since our Articles of Association were amended at the ordinary AGM on June 28, 2001, our
Management Board may consist of two to four members nominated by the Supervisory Board. The
Supervisory Board can appoint a member to be chairman of the board and another to be vice chairman.
At the AGM in 2004 an age-limit of 65 was set for the appointment as member of the Management
Board. We are represented by and act through the members of our Management Board. Under the Articles
of Association, any two members of the Management Board, one member of the Management Board and one
holder of a general power-of-attorney (Prokuristen), or any two holders of a general
power-of-attorney can legally bind the Company to the extent permitted by law. The members of the Management Board are appointed, and may be re-appointed, for a term of up
to five years each. Under certain circumstances, such as a serious breach of duty or a vote of no
confidence by the AGM, a member of the Management Board may be removed by the Supervisory Board
prior to the expiration of the term. The Supervisory Board appoints the chairman of the Management
Board and a deputy chairman. Decisions are made by a simple majority of the votes cast. At least half of all members of the
Management Board including the chairman or the deputy chairman must be present in order to
constitute a quorum. The chairman has the casting vote in case of a tie. The Management Board manages the Company on a day-to-day basis within the limitations set
forth by law, the Articles of Association, the Supervisory Board, the rules of procedure or
specific resolutions of the AGM. The Management Board must act in the best interest of the Company,
while also taking into account the interests of its shareholders, employees, and the public. In
carrying out these duties, the members of the Management Board must exercise the standard of care
of a diligent and prudent business person. In addition to exercising management functions, the Management Board is responsible for the
financial books and records of the Company. The Management Board must report to the Supervisory
Board on a regular basis, at least every quarter, and outline the course of business and the
situation of the group. The Management Board also reports to the chairman of the Supervisory Board
when necessary on an important matter. The Management Board must provide a report at the request of
at least two members of the Supervisory Board. Without the approval of the Supervisory Board, members of the Management Board are not allowed
to engage in commercial activities or any business transaction in Telekom Austrias lines of
business for their own or a third partys account. If a member of the Management Board violates
these principles, the Company is entitled to claim damages or to demand that the business
transaction made by the board member in his own name be transferred to the Company. Supervisory Board (Aufsichtsrat) Our Supervisory Board consists of up to eight members elected by the AGM and four members
appointed by our workers council under mandatory provisions of the Austrian Labor Constitution
Act. One-third of the share capital present at the AGM has the statutory right to elect the third
new member of the Supervisory Board if at least three members of the Supervisory Board are to be
elected. No member of the Supervisory Board may be appointed for a longer period than four years,
until the AGM deciding on the discharge of the board members for the fourth year following their
appointment. The Supervisory Board elects one chairman and one or more deputy chairmen. The Supervisory
Board has a financial sub-committee that prepares the resolutions of the Supervisory Board
regarding the annual financial 127




---



##### Table of Contents



statements, and may create other subcommittees for special tasks. Our Articles of Association
require that at least half of the members of the Supervisory Board, including the chairman or one
of his deputies must be present at a meeting in order to constitute a quorum. Resolutions of the
Supervisory Board are passed by a simple majority of the votes cast. The chairman has the casting
vote in case of a tie. The Supervisory Board supervises the management of Telekom Austria. The Supervisory Board may
at any time request a report by the Management Board concerning company matters. The Supervisory
Board may inspect and review all books and documents of the Company as well as assets, cash
accounts and stock in trade. According to Austrian law, the following transactions and matters may
be decided by the Management Board only with the approval of the Supervisory Board:  

Acquisition and sale of participating interests as well as the acquisition, sale and
termination of businesses and establishments;

Acquisition, sale and encumbrance of real estate;

Establishing and closing down of branches;

Material investments;

Taking and granting material loans and credits;

Commencement and termination of lines of business and types of production;

Determination of general principles of business policy;

Determination of principles for granting of profit shares or commissions on turnover and
pension commitments to managers and senior employees;

Stock options for employees and key employees of the Company or affiliated companies as
well as for members of the Management Board and the Supervisory Board of the Company or
affiliated companies and

Granting of general powers-of-attorney The rules of procedure of our Management Board may provide for additional situations where a
Supervisory Board approval is required. Failure of the Management Board to obtain the prior approval of the Supervisory Board does not
affect the enforceability of transactions towards third parties but may render the Management Board
liable for any resulting damages. Supervisory Board Committees The Supervisory Board has established the Financial Committee, which also acts as our Audit
Committee, the Corporate Structure Committee and the Chairing Committee. The Financial Committee, whose duties, responsibilities and processes is set out in separate
by-laws, fulfill the requirements of the Austrian Corporate Governance Code and take into account
the Sarbanes-Oxley requirements. On November 18, 2003, our Supervisory Board extended the
responsibility of our Financial Committee (Finanzausschuss) to become an Audit Committee meeting
the requirements under the Sarbanes-Oxley Act. Our Audit Committee now comprises two shareholder
representatives and one employee representative. The Sarbanes-Oxley Act requires that all members
of the Audit Committee be independent. Our financial expert, Harald Sommerer, is independent as
described in Item 16 A. The SECs regulations implementing the Sarbanes-Oxley Act permit the
representative of a foreign governmental entity that is an affiliate of the issuer to become a
member of the Audit Committee. The chairman of our Audit Committee is the CFO of our main
shareholder, ÖIAG, which administers the government interests in us. The SECs regulations also
permit employee representatives, who have been elected in accordance with the Austrian
Co-determination Act and who, due to their employment with us, are not independent, to serve on the
Audit Committee. The Audit Committeeoversees our internal and external accounting processes. On the basis of
reports provided by the independent auditors, it will review our quarterly and annual financial
statements, and informs the Supervisory Board about its recommendation whether or not to approve
the annual financial statements. 128




---



##### Table of Contents



In addition, the Audit Committee will oversee our internal control system and the procedures
for assessing, monitoring and managing risk. The Audit Committee is responsible for liaising
between us and the independent auditors. In particular, it awards the audit contract to the
independent auditors elected by the AGM and determines the focal points of their audit as well as
their fee. In addition, the Audit Committee monitors the auditors independence. In accordance with the requirements of the Sarbanes-Oxley Act, the Supervisory Board has
designated Harald Sommerer the independent financial expert of the Audit Committee. The Chairing Committee(Präsidium) comprising of the chairperson and the deputy chairperson of
the Supervisory Board, determines the bonus and other compensation related matters of the
Management Board, and is responsible for much of the governance process of the Supervisory Board. The Corporate Structure Committeeadvises the Management Board by optimizing the corporate
structure and making the organisational structure of the group more flexible. Annual General Meeting (Shareholders meeting) The AGMs must decide on major corporate matters such as the distribution of net profits, the
discharge of the members of the Management and Supervisory Boards and the appointment of
independent auditors. Our Management Board is required to convene an ordinary AGM within the first
eight months of our fiscal year. A resolution of the AGM is required for approval of matters such
as amendments to the Articles of Association, modification of shareholders rights, approval of
mergers, increases or decreases in share capital, the creation of a new class of shares and the
authorization of the issuance of convertible bonds and similar securities. AGMs are held at Telekom Austrias registered seat in Vienna, Austria, or at a place of
business within Austria or at the capital of an Austrian Federal District. The time and place must
be provided in the invitation notice to the AGM. AGMs are called by the Management Board or the Supervisory Board. The notice must be published
and must state the name of the Company as well as the time and place of the AGM. At least 14 days
must elapse between the day of the last publication of the invitation notice and the day of the
AGM. Attendance and exercise of voting rights at ordinary and extraordinary AGMs are subject to
certain conditions. In order to attend a AGM and vote shares, shareholders must register at least
three days prior to the meeting and deposit a certificate (Hinterlegungsbescheinigung) evidencing
their shares until the end of the AGM with an Austrian notary public, with the main office of an
Austrian credit institution, with any other Austrian or foreign credit institution specified in the
invitation notice, or with Telekom Austria. The shares can also be deposited with a depository bank
designated by us, in a blocked account until the end of the AGM. Our Articles of Association
provide that shareholders must have at least 14 days after the publication date of the invitation
notice to the AGM to effect the deposit. If the last day of this period is a Sunday or public
holiday, the deposit may be made on the next business day. The certificate must be deposited to
allow at least three business days between the day of deposit and the day of the AGM. Saturdays,
Good Friday and December 24 are not deemed to be business days for purposes of this provision. AGMs are chaired by the chairman of the Supervisory Board or, in his absence, by one of the
deputy chairmen. In their absence, the notary public present at the AGM to draft and authenticate
the minutes of the meeting has to hold an election for the chairman of the meeting. The chairman
leads the proceedings and determines the form of voting. The order of the agenda items follows the
order set out in the notice. The chairman, however, may deviate from that order and may conduct the
discussion and voting accordingly. The Stock Corporation Act and our Articles of Association do not require that a specific
percentage of our share capital be present to form a quorum. Resolutions of the AGM are passed by
simple majority of the votes cast, if not otherwise provided for by law or the Articles of
Association. Whenever permitted by law, our Articles of Association have reduced all qualified
majorities to simple majority. The following matters require a vote of 75% of the votes
represented, which cannot be decreased by the Articles of Association:  

Amendment of the business purpose;

Increase of the share capital with a simultaneous exclusion of preemptive rights;

Authorized capital/conditional capital; 129




---



##### Table of Contents





Decrease of share capital;

Dissolution, and continuation of the Company after dissolution;

Transformation into a company with limited liability (GmbH);

Mergers and spin-offs;

Transfer of all of the Companys assets; and

Profit and business transfer agreements. Shareholders rights Our bearer shares are freely tradable. We know of no existing limitations that limit the
rights of non-Austrians to own our bearer shares or to exercise voting rights in accordance with
the procedures described above. In the ordinary AGM of June 12, 2002, our shareholders passed a resolution which provided for
the conversion of all outstanding registered shares into bearer shares, by amendment of Sec. 4 of
our Articles of Association. The amendment to our Articles of Association was submitted to the
Commercial Register of Vienna for registration and duly registered on June 20, 2002. All of the
converted shares are admitted for trading on the Vienna Stock Exchange, effective November 6, 2002. Provided the shareholders shares have previously been deposited as described above, each
shareholder has the right to attend the AGMs, to ask questions in connection with any matter on the
agenda set out in the invitation notice and to vote upon any resolution. Each shareholder is
entitled to one vote per share. Each shareholder entitled to vote may exercise his voting rights by
written proxy. The proxies must be deposited with and remain in the custody of the Company. A shareholder or group of shareholders whose shares in the aggregate represent at least 1/5 of
our nominal share capital, is entitled to request the enforcement of claims for damages by the
Company against members of the Management Board, the Supervisory Board, or third parties if it is
determined that these persons have engaged in illegal conduct. A minority shareholder or group of
shareholders whose shares in aggregate represent at least 1/10 of our nominal share capital is
entitled to:  

Request a special audit of transactions in connection with the creation of Telekom
Austria or with the management thereof, if the transaction was carried out within the last
two years and, if such request has been rejected by a shareholders resolution, to apply to
a court to request the appointment of special auditors;

Veto the appointment of auditors and petition the court to request the appointment of
other auditors for a special audit;

Request the adjournment of the AGM if certain items of the annual financial statements
are objected to by minority shareholders;

Veto the appointment of auditors for cause. This veto right may also be exercised by any
shareholder or group of shareholders holding shares with a total nominal value of at least
EUR 700,000;

Petition the court to request the revocation for cause of members of the Supervisory
Board nominated by the shareholders; and

Request separate consolidated financial statements for companies within our group
prepared according to Austrian or foreign accounting principles. This right may also be
exercised by any shareholder or group of shareholders holding shares with an aggregate
nominal value of at least EUR 1,400,000. A minority shareholder or group of shareholders whose shares in aggregate represent at least
1/20 of our nominal share capital is entitled to: 130




---



##### Table of Contents





Request that a AGM be called or, upon court approval, to call the meeting themselves if
the Management Board or the Supervisory Board does not comply with this request;

Request that a topic be put on the agenda of the AGM;

Enforce damages against the Management Board, Supervisory Board or shareholders if audit
reports reveal facts or actions that may constitute a basis for liability;

Petition the court to request the appointment or revocation for cause of liquidators,
and request a special audit of the annual financial statements during the liquidation
period and apply to a court to request the appointment of auditors. This right may also be
invoked by any shareholder or group of shareholders holding shares with a total nominal
value of at least EUR 350,000;

Appeal against a shareholders resolution if by this resolution the depreciation
adjustments and reserves have been affected to an extent exceeding the maximum amounts
permissible under the Stock Corporation Act or our Articles of Association; and

Request separate consolidated financial statements for companies within our group
prepared according to Austrian or foreign accounting principles. This right may also be
exercised by any shareholder or group of shareholders holding shares with an aggregate
nominal value of at least EUR 700,000. To be valid, every resolution adopted at a AGM must be recorded in the minutes prepared by an
Austrian notary public who must be present at the meeting and authenticates the minutes after they
have been signed by the chairman of the meeting. Important rules regarding acquisitions Each domestic or foreign shareholder of a company listed on the Vienna Stock Exchange must
notify the Exchange, the Austrian Federal Securities Authority and Telekom Austria itself within
seven days of any acquisition or disposition of direct or indirect interests that results in that
shareholders voting rights exceeding, equaling, or falling below the following thresholds: 5, 10,
15, 20, 25, 30, 35, 40, 45, 50, 75 or 90% of the voting rights of Telekom Austria. The Company is
required to publish any such event or a reference to where that information can be found in the
Austrian newspaper, Wiener Zeitung, within nine days of notification. The same applies to shares
that are subject to option and trust arrangements and to banks that exercise voting rights on
behalf of beneficial owners. Under certain circumstances, the acquisition of shares may be subject to approval by the
Austrian Cartel Court or the European Commission. Differences in Telekom Austria AGs corporate governance and New York Stock Exchange corporate
governance practices In 2004, the SEC approved the NYSEs new corporate governance rules for listed companies.
Under these new rules, as a NYSE-listed foreign private issuer, Telekom Austria must disclose any
significant ways in which its corporate governance practices differ from those followed by U.S.
companies under NYSE listing standards. We believe the following to be the significant differences
between our corporate governance practices and NYSE corporate governance rules applicable to US
companies. Independent Directors. Under NYSE listing rules applicable to U.S. companies, independent
directors must comprise a majority of the board of directors. In line with the Austrian Stock
Corporation Act, Telekom Austria has a two-tiered board system comprising the Management Board
(Vorstand) and the Supervisory Board (Aufsichtsrat). The functions of the two boards are strictly
separated and no individual may simultaneously serve on both boards. The Management Board,
representing the Company in day-to-day matters, is not subject to instruction from the Supervisory
Board or the shareholders. The Supervisory Board appoints and removes members of the Management
Board, and oversees the Management Boards activities. The Supervisory Board consists of twelve
members, with four being appointed by our workers council as per the Austrian Labor Constitution
Act and the balance appointed by the AGM. Currently, Telekom Austrias Supervisory Board consists
of one independent director. This director does not have material relationship with the Company.
Seven of the Supervisory Board Members appointed by the General Meeting of the shareholders are not
independent within the meaning of the NYSEs new corporate governance rules. Non-management Directors Meetings. Pursuant to NYSE listing standards, non-management
directors must meet on a regular basis without management present and independent directors must
meet separately at least 131




---



##### Table of Contents



once per year. Our non-management directors, who make up the Supervisory Board meet as often
as the interests of the Company require, and at least once per quarter, as laid out in Telekom
Austrias Articles of Association. Usually the Management Board is present at the meetings of our
Supervisory Board in line with corporate governance practice in Austria. Nominating/Corporate Governance Committee. Under NYSE standards, US companies listed on the
NYSE are required to have a Nominating/Corporate Governance Committee composed entirely of
independent directors. In addition to identifying individuals qualified to become board members,
this committee must develop and recommend to the board a set of corporate governance principles.
Pursuant to NYSE standards, this committee should also adopt a written charter. Telekom Austria has
a Supervisory Board which operates according to the written Articles of Incorporation of Telekom
Austria. This Board is responsible for nominating the members of the Management Board, and consists
only of members who are fully independent of the Management Board. The Telekom Austria Supervisory
Board has a written charter. Compensation Committee. Under NYSE standards, US companies listed on the NYSE are required to
establish a Compensation Committee composed entirely of independent directors. In addition to the
review and approval of corporate goals relevant to CEO compensation and evaluation of the CEO
performance in light of those given, this committee must determine and approve the CEOs
compensation and make recommendations to the Board of Directors with respect to non-CEO
compensation, incentive-compensation plans and equity-based plans. At Telekom Austria, a
sub-committee of the Supervisory Board, the Chairing Committee (Präsidium), approves compensation
matters. This Chairing Committee consists of the chairperson of the Supervisory Board and the
deputy chairperson of the Supervisory Committee, and the committee determines the bonus and other
compensation-related matters of the Management Board.The basis compensation of the members of the
Management Board is laid down in their agreements entered into with their appointment. Every year
the Chairing Committee agrees with the members of the Management Board on certain objectives to be
met in the current fiscal year and evaluates if and to which extent these targets have been met.
Furthermore, the Chairing Committee agrees with the Management Board members on stock option
programs. Audit Committee Composition and Responsibilities. US companies listed on the NYSE are required
to establish an Audit Committee that satisfies the requirements of Rule 10A-3 under the 1934 Act.
In particular, NYSE sections 303A(6) and 303A(7) require member companies to have at least a
three-person Audit Committee composed entirely of independent directors and the committee is
required to adopt a written charter. Among others, this committee should have the responsibility
for the preparation of an Audit Committee report, the appointment, compensation, retention,
oversight of the external auditors, establishing procedures for the receipt and treatment of
(anonymous) complaints, discovery with management and the external auditors and setting hiring
policies for employees or former employees of the external auditors. Telekom Austrias Supervisory
Board has a standing Financial Committee (Finanzausschuss). On November 18, 2003, our Supervisory
Board extended the responsibility of our Financial Committee to become an Audit Committee meeting
the requirements of the Sarbanes-Oxley Act. Our Audit Committee now comprises two shareholder
representatives and one employee representative. The Sarbanes-Oxley Act requires that all members
of the Audit Committee be independent. Our financial expert, Harald Sommerer, is independent as
described in Item 16 A and membership of the committee is fully separate from that of the
Management Board. The SECs regulations implementing the Sarbanes-Oxley Act permit the
representative of foreign governmental entity that is an affiliate of the issuer to become a member
of the Audit Committee. The chairman of our Audit Committee is the CFO of our main shareholder,
ÖIAG, which administers the government interests in us. The SECs regulations also permit employee
representatives, who have been elected in accordance with the Austrian Labor Constitution Act and
who, due to their employment with us, are not independent, to serve on the Audit Committee. The
Audit Committee oversees our internal and external accounting processes. On the basis of reports
provided by the independent auditors, it will review our quarterly and annual financial statements,
and informs the Supervisory Board about its recommendation whether or not to approve the annual
financial statements. In addition, the Audit Committee will oversee our internal control system
and the procedures for assessing, monitoring and managing risk. The Audit Committee is responsible
for liaising between us and the independent auditors. In particular, it awards the audit contract
to the independent auditors elected by the AGM and determines the focal points of their audit as
well as their fee. In addition, the Audit Committee monitors the auditors independence. In
accordance with the requirements of the Sarbanes-Oxley Act, the Supervisory Board has designated
Harald Sommerer the financial expert of the Audit Committee. Adoption and Disclosure of Corporate Governance Guidelines. US companies listed on the NYSE
are required to adopt and disclose corporate governance guidelines. In implementing the provisions
of the Sarbanes-Oxley Act, Telekom Austria has, among other things, established a Disclosure
Committee that is responsible for reviewing and approving all information included in this annual
report as well as in our quarterly earnings releases. In addition, the Disclosure Committee defines
the framework and the principles of documentation of 132




---



##### Table of Contents



internal control for financial reporting. We have also introduced a procedure that enables the
management of our business units to certify their compliance with our internal control system and
the financial figures they submit. On the basis of this procedure, the CEO and the CFO of Telekom
Austria AG certify the appropriateness of our financial statements to the SEC, as required by the
Sarbanes-Oxley Act. Code of business conduct and ethics. NYSE listing standards require US companies to adopt a
code of business conduct and ethics for directors, officers and employees, and promptly disclose
any waivers of the code for directors or executive officers. The code should provide for the
reporting of violations of its provisions or of laws and regulations. Telekom Austria has
introduced a Code of Ethics for financial matters that applies to the CEO, CFO, COO Wireline, COO
Wireless, principal accounting officer, principal controller and all other persons performing
similar functions. The code of ethics is available on our corporate website at www.telekom.at. Annual Certification by the Chief Executive Officer. A CEO of a US company listed on the NYSE
must annually certify that he or she is not aware of any violation by the Company of NYSE corporate
governance standards. In accordance with NYSE listing rules applicable to foreign private issuers,
Telekom Austria is not required to provide the NYSE with this annual compliance certification.
However, in accordance with rules applicable to both US companies and foreign private issuers, the
chairman of the Management Board is required to promptly notify the NYSE in writing after any
executive officer becomes aware of any material non-compliance with the NYSE corporate governance
standards applicable to Telekom Austria. Preemptive rights According to the Stock Corporation Act, shareholders generally have statutory rights to
subscribe for additional shares issued by the Company for cash on a pro ratabasis. These
preemptive rights must be exercisable during a period of at least two weeks. The Management Board
is required to publish a notice of the commencement and duration of this period in the Austrian
newspaper Wiener Zeitung. Preemptive rights not exercised within this period lapse. In case of an increase of share capital, the shareholders exercise their preemptive rights by
notifying Telekom Austria and delivering a duly executed subscription application in the form
required by the Stock Corporation Act. We may also issue new shares to a bank who undertakes to
offer the new shares to the shareholders who would otherwise have direct preemptive rights. In this
case the shareholders will have the same rights against the bank. Preemptive rights may be
transferred and, if applicable, by delivery of a coupon evidencing the transferred rights. If the
shares to which the preemptive rights relate are held in a clearing system, the rights may be
transferred in accordance with the rules of that clearing system. Statutory preemptive rights may be excluded by a resolution of the AGM when deciding on a
capital increase only or the shareholders may authorize the Management Board, with the consent of
the Supervisory Board, to exclude these rights when issuing new shares out of authorized capital.
If the shareholders authorize the Management Board to effect capital increases by means of
authorized capital with exclusion of preemptive rights, the shareholders cannot later prevent such
exclusion in the context of any individual use of authorized capital. If preemptive rights are to
be excluded, the Management Board is required to report the reason for the exclusion of preemptive
rights to the shareholders. Stock options are considered an adequate reason for the exclusion of
the shareholders preemptive rights according to the Stock Corporation Act. The exclusion of the
shareholders preemptive rights requires a majority of at least 75% of the votes represented at the
AGM. The intention to exclude the preemptive rights has to be notified to the shareholders together
with the invitation notice at least 14 days before the AGM. In the ordinary AGM on June 4, 2003 our shareholders authorized us to increase the share
capital of Telekom Austria AG by up to EUR 21,810,000 by issuing up to 10 million new ordinary
bearer shares or new ordinary registered shares with no par value in order to serve stock options
to be granted to employees, directors and members of the Management Board of the Company or of an
affiliated company for a period of five years and our Articles of Association were modified
accordingly. With regard to this capital increase the statutory rights of existing shareholders to
subscribe for additional shares issued by the Company for cash on a pro ratabasis is excluded. For
further information see Item 6  Stock option plans. 133




---



##### Table of Contents



Repurchase of shares Under the Stock Corporation Act, we may repurchase our own shares only for limited
circumstances, including:  

Prevention of substantial damage to the Company;

Allocation of shares to employees; key employees or members of the Management or the
Supervisory Boards; the repurchase must be authorized by a resolution of the AGM; not
exceeding 18 months and must identify the price range and the number of shares to be
repurchased;

Compensation for minority shareholders as permitted by law; and

Share buyback program for up to 10% of the share capital based on an authorization of
the management by a shareholders resolution for a duration of up to 18 months, whereby the
price range and duration must be specified. At the AGM on June 3, 2004, our shareholders authorized the Management Board to acquire up to
10% of the share capital of Telekom Austria, during a period of 18 months from the day of this
resolution at a minimum price of EUR 9 and a maximum price of EUR 18 per share. The Management
Board received authorization to use the purchased shares to:  (i)

service stock options to be granted to employees, directors and members of the Management Board
of the Company or of an affiliated company;(ii)

service convertible bonds;(iii)

as consideration for acquisitions; and(iv)

if the repurchased shares are not used for the above-mentioned purposes, to re-sell the shares
in any way permitted by law, also over the counter and to any purchaser as chosen by us. On August 26, 2004 Telekom Austria announced the beginning of its current share buyback
program which is open until December 2, 2005.  

Authorization to buy back up to 30 million shares, i.e. up to 6% of the current common
stock outstanding listed on the Vienna Stock Exchange;

Authorized price range between EUR 9 and EUR 18;

The authorization by the AGM also extends to the use of the repurchased shares:  

To service stock options to be granted to employees, directors and
members of the Management Board of the Company or of an affiliated company;

To service convertible bonds;

As consideration for acquisitions; and

If the repurchased shares are not used for the above mentioned
purposes, to sell the shares in any way permitted by law, also over the counter
and to any purchaser as chosen by us. Shares not used for one of these points may be drawn-in with prior approval by the AGM. For further information see Item 16E. Liquidation In the event of the liquidation of Telekom Austria, the assets remaining after the payment of
all outstanding debts will be distributed among the shareholders. The distribution will be made in
proportion to the shareholdings of each shareholder, unless there are multiple classes of shares
with different rights to participate in the liquidation proceeds. If the capital contributions have
not been made in the same proportion for all shares, the capital contributions will first be repaid
to the shareholders and then the remainder of the proceeds, if any, will be distributed in
proportion to shareholdings. 134




---



##### Table of Contents



If our assets are not sufficient to repay the amount of capital paid in, the shareholders will
bear the loss in proportion to their participation in the share capital. Outstanding payments or
contributions will be collected by Telekom Austria. Takeover rules Public offers for a part or all of the shares of Austrian companies listed on the Vienna Stock
Exchange are subject to the rules of the Austrian Takeover Act. The law differentiates between
voluntary offers and compulsory offers. A compulsory offer must be made when a shareholder or a group of shareholders or any third
person or persons acting in concert have gained a direct or indirect controlling interest over a
listed company. According to the Takeover Act a direct or indirect controlling interest is
established by:  

Ownership of the majority of the target companys voting rights;

The right to appoint or dismiss the majority of the members of the Management Board or
Supervisory Board; or

The ability to exert a controlling influence over the business of the target company. The Takeover Commission has issued an ordinance giving additional guidance as to other
situations in which a rebuttable presumption of controlling interest exists. According to this
ordinance, the rebuttable presumption of controlling interest means the acquisition of:  

30% of the voting rights of a company; or

Between 20% and 30% of the voting rights of a company if this amount would have
comprised a majority of the votes present at the last three consecutive AGM. The Takeover Commission has also issued an ordinance according to which a bidder with a
controlling interest without a majority of votes is required to make a compulsory offer each time
it acquires at least a further 2% of the targets shares within a period of 12 months. The offer price for a compulsory offer must be at least equal to the average stock price
during the last six months and must be at least equal to the highest share price paid by the bidder
during the last 12 months less a discount of no more than 15%. Such a discount may be excluded by
the Articles of Association. In the ordinary AGM on June 4, 2003, our shareholders modified our
Articles of Association accordingly and excluded the discount of a compulsory takeover bid. A
compulsory offer must comprise a cash payment for the shares, although other shares may also be
offered as consideration. However, it is in the sole discretion of the shareholder to accept other
than cash consideration. The Takeover Act requires that the bidder prepare offer documents which must be examined by an
independent expert before being filed with the Takeover Commission and the target company. The
management of the target company has to issue a statement on the offer. Any higher bid or other
competitive bids have to follow the same rules. From the time of the publication by a bidder of its
intention to submit a public offer, a target company, may not generally undertake measures to
jeopardize the offer. The bidder must refrain from selling any shares in the target company. The
violation of any material legal provisions may result in the suspension of voting rights and fines
imposed by the Takeover Commission. Material contracts For a summary of our agreements with our major shareholders, see Item 7. Exchange controls We know of no Austrian laws, decrees, regulations or other legislation that limits the import
or export of capital or the payment of dividends to shareholders or ADS holders who do not reside
in Austria. 135




---



##### Table of Contents



10.2. TAXATION Austrian taxation The following description of the material Austrian tax consequences of ownership of Telekom
Austrias shares or ADSs is based on current law and practice as to matters of Austrian taxation.
It does not purport to be a complete analysis of all potential tax effects relevant to a decision
to invest in the shares or ADSs and makes no claim to fully present all of the tax considerations
related to the acquisition and disposition of the shares or ADSs. Potential purchasers of shares or
ADSs should consult their own lawyers or tax advisors with respect to the tax consequences of the
purchase, the ownership and the disposition of the shares or ADSs and the procedures required for a
potential refund of Austrian withholding tax. Only the investors own advisors are in a position to
appropriately consider the particular tax situation of that person. All individuals resident in Austria are subject to Austrian income tax on their worldwide
income (unlimited tax liability). Non-residents are taxed on income from certain sources in Austria
only (limited tax liability). Corporations resident in Austria (domestic corporations) are subject to corporate income tax
on their worldwide income whether or not remitted to Austria. Non-resident corporations (foreign
corporations) engaged in a trade or business in Austria are taxed on certain Austrian source
investment and other passive income and on income that is effectively connected with the conduct of
a trade or business in Austria. Non-resident corporations not engaged in an Austrian trade or
business are taxed only on certain Austrian source investment and other passive income. For Austrian tax purposes and for purposes of the Austria-United States treaty, holders of
ADRs evidencing ADSs will be treated as owners of the shares represented by those ADSs. Taxation of dividends Residents of Austria Dividends distributed by an Austrian stock corporation to its shareholders are subject to
withholding tax (Kapitalertragsteuer) to be withheld by the company at a rate of 25% of the
dividends. The company or the bank paying the dividend on behalf of the company must give each
shareholder a receipt indicating the amounts of the dividend income and of the withholding tax, the
payment date and the period for which the dividends have been paid and information about which tax
office the withholding tax amount was transferred to. For individuals subject to unlimited tax liability in Austria, the withholding tax is in
principle treated as a final payment of income tax. If the individuals income tax to be levied on
dividends calculated according to the income tax schedule is lower than the withholding tax, any
excess amount will be refunded to the shareholder. In such cases, reduced rates of income tax
amounting to one half of the average income tax rate apply. For corporations subject to unlimited tax liability in Austria, dividend income is tax exempt
and any withholding tax withheld will be set off against corporate income tax under the Austrian
Corporate Income Tax Act. If the corporate income tax payable is lower than the sum of all amounts
to be set off, the difference is credited to the corporation. Withholding tax does not have to be
withheld if a corporation subject to unlimited tax liability in Austria directly owns at least 25%
of the share capital of the corporation paying out the dividend. Non-residents of Austria The standard rate of dividend withholding tax under Austrian law is 25% of the dividend. Austria currently has double taxation treaties with more than 50 countries including the
United Kingdom, the United States, France, Germany, Japan, The Netherlands and Switzerland. These
treaties basically follow the scheme of the model convention of the Organization of Economic
Co-operation and Development (OECD). As a general rule, the withholding tax in many of these
treaties is reduced to 15%. Most Austrian treaties provide for a tax credit system with regard to
the double taxation of dividends so that Austrian tax payable in accordance with the relevant
treaty will be treated as a credit against tax payable on the dividend in the country of residence
of the recipient. Relief at source may be available if the Austrian ministry of finance has not issued any
special decree prohibiting its application under the relevant tax treaty. If available, the
shareholder will have to provide a certificate of residence to prove that he is a resident in the
state with which the applicable tax treaty was concluded. Special decrees have been issued with
respect to some tax treaties concluded by Austria, under which 136




---



##### Table of Contents



the full amount of withholding tax must initially be deducted. The shareholder is then
entitled, under Section 240 of the Federal Administrative Code, to claim a refund of the tax
withheld in excess of the rate provided for in the applicable tax treaty. Special tax rules for U.S. shareholders For purposes of the following discussion, the U.S. treaty refers to the current income tax
treaty between Austria and the United States. A U.S. holder described below under United States
federal income taxation will be an eligible U.S. shareholder or ADS holder for the purposes of the
U.S. treaty if the U.S. investor:  

Is a resident of the United States, for purposes of the U.S. treaty;

Does not hold the shares or ADSs in connection with the conduct of business through a
permanent establishment, or the performance of services through a fixed base in Austria;
and

Is otherwise eligible for benefits under the U.S. treaty with respect to income and gain
from the ordinary shares or ADSs. Dividends paid by an Austrian corporation to an U.S. holder are subject to Austrian dividend
withholding tax (Kapitalertragsteuer) to be withheld by us. The standard dividend withholding tax
under Austrian law is 25% of the amount of the dividend. If you are an eligible U.S. shareholder or
ADS holder and are the beneficial owner of the dividends received, the U.S. treaty limits the rate
of Austrian tax to 15% of the gross amount of the dividends. The U.S. treaty further limits the
rate of Austrian income tax further to 5% of the gross amount of the dividends if the beneficial
owner is a company (not a partnership) that directly owns at least 10% of our voting stock. Withholding tax relief at the source is not available under the U.S. treaty. In order to
obtain a reduced rate of withholding taxes under the U.S. treaty, an eligible U.S. shareholder or
ADS holder will generally have to file an application with the Austrian tax authority requesting
the reduced rate of withholding taxes together with a certification by the U.S. tax authority that
the shareholder or ADS holder is a U.S. resident under the U.S. treaty. The Austrian Federal
Ministry of Finance has established a simplified system for the refund of Austrian withholding
taxes under the regime of double taxation treaties (including the U.S. treaty) under which a new
tax form is to be used for applications requesting the reduced tax rate. This form is available in
both German and English and may be downloaded from the website of the Federal Ministry of Finance
(www.bmf.gv.at). Taxation of capital gains Residents of Austria Capital gains from the sale of shares or ADSs by resident individuals are taxable as income
if:  

A shareholder sells shares or ADSs within 12 months of purchase (deemed speculative by
tax legislation);

In the absence of speculative transactions, a shareholder held a substantial
shareholding of at least 1% of the share capital at any time during a five year period
prior to the sale of the shares or ADSs.

The shares or ADSs are part of a domestic business property. For individuals speculative gains are subject to taxation as income at regular rates if such
gains exceed EUR 440 in one year. All other taxable capital gains mentioned above that are
recognized by individuals are subject to reduced rates of income tax amounting to one-half of the
average income tax rate. Capital gains generated from shares or ADSs that are business-connected
property are generally subject to taxation as income at regular income tax rates. Reduced rates of
income tax amounting to one half of the average income tax rate are applicable only when the shares
are sold after a 12-month period from purchase has elapsed. Corporations subject to unlimited tax liability in Austria are subject to corporate income tax
on any capital gains realized from a sale of shares or ADSs. If an Austrian resident shareholder changes his permanent residence to a foreign country,
Austria may lose its right of taxation according to treaty rules although domestic legislation in
principle provides for Austrias right of taxation if the shareholder owned at least 1% of the
share capital at any time during a five year period prior to the sale of the shares or ADSs. A
change of residence of this type is therefore considered a sale under 137




---



##### Table of Contents



Austrian income tax law, and shareholders risk incurring taxable income in case of the change
of residence. Essentially, the transfer of residence to another EU member state will not lead to a
taxation of unrealized capital gains unless the assets are sold or later moved to a non-member
state. EEA countries are treated like EU Member States if there is effective administrative
assistance. Non-residents of Austria Under current Austrian law, any capital gains resulting from the disposal of shares or ADSs by
a non-resident shareholder are not subject to taxation in Austria. If, however, within the five
years prior to the disposal, a non-resident shareholders shareholding has at any time equaled or
exceeded 1% of the companys issued share capital, the non-resident will be subject to tax on those
capital gains unless an applicable double taxation treaty provides relief. Dividends paid in the
assessment period of the year of disposal which were subject to withholding tax are not taxable as
capital gains. Under the U.S. treaty, gains from the disposal of shares or ADSs by an eligible U.S.
shareholder or ADS holder are explicitly exempt from tax in Austria. Taxation of other income  Inheritance and gift tax Residents of Austria Inheritance and gift tax is levied on inheritances, gifts and special purpose donations, as
defined in the Inheritance and Gift Tax Act. The rate of gift tax varies from 2% to 60% depending
upon the value of the donated shares and upon the relationship of the beneficiary to the deceased
or the donor. The tax is imposed on total market value transferred. Various tax exemptions apply
for family members and relatives. Beginning with the year 2001, no tax is levied upon inherited
shares if the testators shareholding was below 1% of the companys issued share capital. Non-residents of Austria Shares or ADSs held by non residents are not subject to Austrian inheritance and gift tax on a
transfer to another non-resident of Austria by reason of death or donation. In all other cases, the
transfer of shares or ADSs due to death or as a gift by shareholders is subject to inheritance and
gift tax. Special rules may apply under an applicable double taxation treaty. If no such treaty applies,
foreign inheritance and gift taxes can be credited against the Austrian inheritance and gift tax by
the Austrian ministry of finance if reciprocal treatment is available. Reciprocity exists if the
foreign country does not levy inheritance or gift tax on assets located in Austria or if the
foreign country allows Austrian inheritance and gift tax as a credit against its own inheritance
and gift tax. Applications for such credit must be filed with the Austrian ministry of finance. Under the current Estate and Gift Tax Treaty between Austria and the United States, transfers
of shares or ADSs by eligible U.S. shareholders or ADS holders are not subject to Austrian tax. For more detailed information, reference is made to the double taxation treaty, if any,
concluded with the non-resident shareholders country of residence. United States federal income taxation The following discussion describes the material U.S. federal income tax consequences of the
acquisition, ownership and sale of Telekom Austrias shares, or by ADSs evidenced by ADRs that are
generally applicable to the U.S. holders described below. For these purposes, you are considered a
U.S. holder if you are a beneficial owner of shares or ADSs and are, for U.S. federal income tax
purposes, one of the following:  

A citizen or resident of the United States;

A corporation, or other entity taxable as a corporation, created or organized under the
laws of the United States or of any political subdivision of the United States; or

An estate or trust the income of which is includible in gross income for U.S. federal
income tax purposes regardless of its source. This discussion only applies to shares or ADSs held by a U.S. holder as capital assets for
U.S. federal income tax purposes. 138




---



##### Table of Contents



This discussion is based on the tax laws of the United States currently in effect, including
the Internal Revenue Code of 1986, as amended, Treasury Regulations, administrative announcements,
and judicial decisions, as well as the U.S. treaty. These laws may change, possibly with
retroactive effect. This discussion does not address U.S. state, local or non-U.S. tax
consequences. This discussion is based in part upon representations of the depositary and assumes
that each obligation provided for in, or otherwise contemplated by, the deposit agreement and any
related agreement will be performed in accordance with its respective terms. The U.S. Treasury has
expressed concerns that parties to whom ADRs are pre-released may be taking actions that are
inconsistent with the claiming, by U.S. holders of ADRs, of foreign tax credits for U. S. federal
income tax purposes. Such actions would also be inconsistent with the claiming of the reduced rate
of tax; described below; applicable to dividends received by certain non-corporate U.S. holders.
Accordingly, the analysis of the creditability of Austrian taxes and the availability of the
reduced tax rate for dividends received by certain non-corporate U.S. holders, each described
below, could be affected by actions taken by the parties to whom the ADRs are pre-released. Please note that this discussion does not address all of the tax consequences that may be
relevant in light of your particular circumstances. In particular, it does not address purchasers
subject to special rules, including:  

Persons subject to the alternative minimum tax;

Tax-exempt entities;

Dealers and traders in securities or foreign currencies;

Certain financial institutions;

Persons who own the shares or ADSs as part of an integrated investment, including a
straddle, hedging or conversion transaction, comprised of shares or ADSs and one or more
other positions for tax purposes;

Persons whose functional currency is not the U.S. dollar; or

Persons who actually or constructively own 10% or more of our voting stock. U.S. holders should consult their tax advisors with regard to the application of U.S. federal
income tax laws to the shares or ADSs, whether they are eligible for benefits under the U.S. treaty
and any tax consequences arising under the laws of any U.S. state, local or non-U.S. taxing
jurisdictions. For U.S. federal income tax purposes, owners of ADRs evidencing ADSs will be treated
as owners of the shares represented by those ADSs. Taxation of dividends Distributions (other than certain pro rata distributions of shares or rights to acquire
shares) received on the shares or ADSs, including the amount of any Austrian tax withheld, will
generally constitute foreign source dividend income for U.S. federal income tax purposes to the
extent such distributions are made from our current or accumulated earnings and profits, as
determined in accordance with U.S. federal income tax principles. U.S. holders will not be entitled
to claim a dividends received deduction for dividends paid on the shares or ADSs. The amount of any
cash distribution paid in Euro, including the amount of any Austrian tax withheld, will be equal to
the U.S. dollar value of such Euro on the date the dividend distribution is received by the U.S.
holder in the case of shares or by the Depository in the case of ADSs regardless of whether the
payment is in fact converted into U.S. dollars. Gain or loss, if any, recognized on the sale or
other disposition of such Euro will be U.S. source ordinary income or loss. Subject to applicable
limitations that may vary depending upon a U.S. holders individual circumstances, dividends paid
to noncorporate U.S. holders in taxable years beginning before January 1, 2009 will be taxable at a
maximum tax rate of 15%. Noncorporate U.S. holders should consult their own tax advisor to
determine whether they are subject to any special rules that limit their ability to be taxed at
this favorable rate.  

Subject to certain limitations and restrictions, Austrian taxes withheld from
distributions will be eligible for credit against a U.S. holders U.S. federal income tax
liability. To the extent a refund of the tax withheld is available to you under Austrian
law or under the U.S. treaty, the amount of tax withheld that is refundable will not be
eligible for credit against your U. S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. Prospective purchasers should consult their tax advisor concerning the
foreign tax credit implications of the payment of these withholding taxes. 139




---



##### Table of Contents



Taxation of capital gains A U.S. holder will recognize a capital gain or loss for U.S. federal income tax purposes on
the sale or exchange of shares or ADSs in the same manner as such holder would on the sale or
exchange of any other shares held as capital assets. As a result, a U.S. holder will generally
recognize a capital gain or loss for U.S. federal income tax purposes equal to the difference
between the amount realized and your adjusted basis in the shares or ADSs. The gain or loss will
generally be U.S. source income or loss. Information reporting and backup withholding Payment of dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are subject to information reporting and to
backup withholding unless the U.S. holder is a corporation or other exempt recipient or, in the
case of backup withholding; the U.S. holder provides a correct taxpayer identification number and
certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a
credit against such holders U.S. federal income tax liability and may entitle the holder to a
refund, provided that the required information is furnished to the Internal Revenue Service. 140




---



##### Table of Contents



10.3. DOCUMENTS ON DISPLAY We are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and file periodic reports and other information with SEC. We filed a
registration statement on Form F-1 under the Securities and Exchange Act which includes documents
described in this Annual Report. We have filed and will continue to file our annual reports on Form
20-F and have furnished our interim reports and other material information on Form 6-K. A copy of our United States public filings, including the exhibits and schedules thereto, may
be read and copied at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549, United States. Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. Our previous filings are also available for reading and copying
at our offices and the offices of the New York Stock Exchange at 20 Broad Street, New York, New
York 10005, United States. In November 2002, we started to be an electronic filer. The SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC. The annual reports
of Telekom Austria may be obtained, and are available for inspection, during regular business hours
at Telekom Austrias registered office, Lassallestraße 9, A-1020 Vienna, Austria. We also maintain
an internet site at www.telekom.at. Our website and the information contained therein or connected
thereto shall not be deemed to be part of this document. Our shares have been admitted to listing with the Vienna Stock Exchange (Austria). As a result
of the Vienna Stock Exchange listing of our ordinary shares, we are subject to the informational
reporting requirements of the Austrian Exchange Act of 1989, as amended. In accordance with this
law, we are required to file three quarterly reports, our annual business reports, our approved
financial statements, notice of our AGM and of dividend distributions, issuance of new shares and
exercise of subscription or conversion rights, modification of shareholders rights, substantial
modifications in stake holdings formerly published if known to the corporation, the Austrian paying
agent, buyback programs relating to the listed shares and any new facts likely to have a
significant influence on the share price. Most of these filing requirements comprise an additional
communication to the Austrian Financial Market Authority. All the information mentioned above is
publicly available and may be inspected and copies thereof may be obtained at the Vienna Stock
Exchange, Wallnerstraße 8, A-1014 Vienna, Austria. Information relating to quarterly reports,
annual reports, shareholders meetings and notices of new price sensitive facts can also be found
on the Vienna Stock Exchanges website www.wienerboerse.at under the icons Investor center,
Investor relations and Corporate calendar. 141




---



##### Table of Contents



Item 11.  Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks, including interest rate and foreign currency exchange rate
risk associated with underlying assets, liabilities and anticipated transactions. We selectively
enter into derivative financial instruments to manage the related risk exposures pursuant to our
policies in areas such as counterparty exposure and hedging practices. These policies have been
approved by our senior management. We do not hold or issue derivative financial instruments for
trading or speculative purposes. We invest excess liquidity in instruments with counterparties approved by our Debt Management
Committee which in the case of all long-term instruments and derivatives are counterparties with a
rating of A- or higher from Standard & Poors Ratings Group or an equivalent rating from another
globally recognized rating agency. The following discussion and tables, which constitute forward-looking statements that
involve risk and uncertainties, summarize our market-sensitive financial instruments including
their fair value, maturity and contract terms. These tables address market risk only and do not
present other risks which we face in the normal course of business, including country risk, credit
risk and legal risk. Interest rate risk We regard changing interest rates as our major market risk exposure. A high proportion of our
long-term debt has fixed rates of interest, mitigating our exposure to fluctuating interest rates.
However, the fair value of our fixed rate debt increases when market rates are below the rates
fixed on these loans. We achieve fixed rates on our borrowings either directly through the use of
fixed rate debt or indirectly through the use of interest rate swaps. Under interest rate swaps, we
agree with other parties to exchange, at specified intervals, the difference between fixed-rate and
floating-rate amounts calculated by reference to an agreed notional principal amount. The following tables summarize the nominal and fair values, maturity and contract terms of our
interest rate sensitive financial instruments at December 31, 2004 for Telekom Austria on a
consolidated basis. In the tables that follow, average pay rate represents the weighted average
interest rate applicable as at December 31, 2004. This interest rate is applied to the notional
principal amount under the relevant interest rate swap contract to determine the amount of interest
that we must pay. Average receive rate represents the weighted average interest rate applicable
at December 31, 2004. Again, this interest rate is applied to the notional principal amount under
the relevant interest rate swap contract to determine the amount of interest that we receive. The
notional principal amounts under the relevant contracts are the amounts used notionally to
calculate the amount of interest to be paid or received as appropriate and are not actually
received by either party and are not, therefore, repayable under the terms of the contract. Assets subject to interest rate risk at December 31, 2004Maturities, year ended December 31,2010 and
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter
    
    
    Total
    
    
    Value(in EUR thousands, except percentages)ASSETS:Cash at bank and in hand:Fixed rate
    
    
    288,195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288,195
    
    
    
    288,195Average interest rate (%)(1)
    
    
    2.34
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.34
    %Short-term investments:Fixed rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-current investments:Securities available for sale
    
    
    19,656
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,656
    
    
    
    19,656
   (1)
    
    Weighted average of the year end interest rates applicable to the outstanding amounts. 142




---



##### Table of Contents



Liabilities and related derivative instruments subject to interest rate risk at December 31, 2004Maturities, year ended December 31,2010 and
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter
    
    
    Total
    
    
    Value(in EUR thousands, except percentages)LIABILITIES:Bank OverdraftsFixed Rate
    
    
    2,775
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,775
    
    
    
    2,775Interest rate (%)(1)
    
    
    2.21
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.21
    %Bonds:Fixed rate
    
    
    10,565
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    761,200
    
    
    
    771,765
    
    
    
    845,660Average interest rate (%)(1)
    
    
    6.50
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.00
    %
    
    
    5.02
    %Variable rate
    
    
    145,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,346
    
    
    
    145,346Average interest rate (%)(1)
    
    
    2.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.26
    %Loans:Fixed rate
    
    
    448,860
    
    
    
    199,220
    
    
    
    6,850
    
    
    
    185,403
    
    
    
    236,299
    
    
    
    
    
    
    
    1,076,632
    
    
    
    1,128,470Average interest rate (%)(1)
    
    
    5.71
    %
    
    
    6.65
    %
    
    
    7.00
    %
    
    
    5.50
    %
    
    
    4.85
    %
    
    
    
    
    
    
    5.67
    %Variable rate
    
    
    48,251
    
    
    
    44,618
    
    
    
    93,677
    
    
    
    51,234
    
    
    
    63,756
    
    
    
    4,914
    
    
    
    306,450
    
    
    
    306,450Average interest rate (%)(1)
    
    
    2.70
    %
    
    
    2.50
    %
    
    
    2.34
    %
    
    
    3.70
    %
    
    
    3.70
    %
    
    
    3.73
    %
    
    
    2.95
    %SWAP AGREEMENTS:Euro interest rate swap
agreements:Variable to fixed (2)
    
    
    145,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,346
    
    
    
    (6,094
    )Average pay rate (%)
    
    
    6.66
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.66
    %Average receive rate (%)(3)
    
    
    2.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.26
    %Fixed to variable (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    300,000
    
    
    
    (11,200
    )Average pay rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.02
    %
    
    
    3.02
    %Average receive rate (%)(3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.00
    %
    
    
    5.00
    %Foreign currency swap
agreements:Buy Euro
    
    
    176,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,635
    
    
    
    15,849Average fixed interest rate (%)
    
    
    7.65
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.65
    %Sell Swiss Franc
    
    
    194,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,439Average fixed interest rate (%)
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %Foreign currency forward
contract
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Notional amount in EUR
    
    
    4,399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,399
    
    
    
    (216
    )Notional amount in USD
    
    
    5,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,700
   (1)
    
    Weighted average of the year end interest rates applicable to the outstanding amounts.(2)
    
    Represents notional amounts.(3)
    
    Weighted average of the year-end interest rates 143




---



##### Table of Contents



Exchange rate risk The table below provides information for Telekom Austria on a consolidated basis at December
31, 2004 relating to liabilities subject to foreign exchange rate risk and foreign currency
derivative instruments which have been entered into in connection with principal and interest debt
payments denominated in foreign currencies. Liabilities and related derivative instruments subject toforeign exchange rate
risk at December 31, 2004Maturities, year ended December 31,2010 and
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    thereafter
    
    
    Total
    
    
    Value(in EUR thousands, except percentages)LIABILITIES:Loans:Fixed rate
    
    
    194,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,439
    
    
    
    204,564Average interest rate(%)(1)
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %Variable rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average interest rate(%)(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency swap
agreements:Buy Euro
    
    
    176,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,635
    
    
    
    15,849Average fixed interest rate(%)
    
    
    7.65
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7.65
    %Sell Swiss Franc
    
    
    194,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,439Average fixed interest rate(%)
    
    
    5.47
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.47
    %
   (1)
    
    Weighted average of the interest rates applicable to the outstanding amount. The fair value of loans and other debt, including bonds, finance leases and liabilities
to banks, is estimated based on the present value of fixed-rate instruments using market rates. The
carrying amount of short-term positions approximates fair value because of their short maturity.
The fair value of securities available for sale is based on quoted market rates. The fair value of
derivative instruments generally reflects the estimated amount we would receive or pay to terminate
the contracts at the reporting date, taking into account the current unrealized gains and losses of
open contracts. The estimated fair values of derivatives used to hedge or modify our risk will vary
substantially with future changes in interest rates or with fluctuations in foreign exchange rates.
These fair values should not be viewed in isolation, but rather in relation to the fair values of
the underlying hedged transactions and the overall reduction in our exposure to adverse
fluctuations in interest and foreign exchange rates. 144




---



##### Table of Contents



Item 12.  Description of Securities Other than Equity Securities Not applicable 
 PART II 
 Item 13.  Defaults, Dividend Arrearages and Delinquencies None 
 Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds None 
 Item 15.  Controls and Procedures The Company, under the supervision and with the participation of the Companys management,
including the CEO and the CFO, performed an evaluation of the effectiveness of the Companys
disclosure controls and procedures. Based on this evaluation, the Companys CEO and CFO concluded
as of the end of the period covered by this report that the Companys disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities Exchange Act of 1934, within the
time periods specified in the SECs rules and forms. The Companys management necessarily applied
its judgment in assessing the costs and benefits of such controls and procedures, which by their
nature can provide only reasonable assurance regarding managements control objectives. There have
been no significant changes in the Companys internal controls over financial reporting during the
fiscal year 2004, which have materially affected or are reasonably likely to materially affect the
Companys internal controls over financial reporting. Item 16. [Reserved] 
 Item 16A. Audit Committee Financial Expert Our Supervisory Board has determined that our Audit Committee currently includes one financial
expert: Harald Sommerer. On November 18, 2003, our Supervisory Board created an Audit Committee in accordance with the
provisions of the Sarbanes-Oxley Act also serving as Financial Committee (Bilanzausschuss) under
the Austrian Stock Corporation Act. Our Audit Committee consists of three members of the
Supervisory Board, one of which  Mr. Harald Sommerer  is the financial expert in accordance with
the Sarbanes-Oxley Act. Mr. Sommerer is independent pursuant to the Sarbanes-Oxley Act. Mr. Rainer
Wieltsch also being CFO of ÖIAG acts as chairman of the Audit Committee and Mr. Michael Kolek being
employee representative in our Supervisory Board was also appointed as a member of the Audit
Committee. Mr. Wieltsch and Mr. Kolek are not independent pursuant to the Sarbanes-Oxley Act. Mr Sommerer, born in 1967, is qualified to serve as financial expert on our Audit Committee
due to his education and experience: Education:  

1986-1990: Vienna University of Economics and Business Administration, Master in Social
and Economic Sciences 145




---



##### Table of Contents





1990-1994: Vienna University of Economics and Business Administration, PhD in Social and
Economic Sciences

1995-1997: J. L. Kellogg Graduate School of Management, Northwestern University,
Evanston Illinois, USA, Master of Management Professional Experience:  

1997-1998: board member (mergers & acquisitions, finance management) since 1997: AT&S
Austria Technology & Systems Engineering, Leoben.

1998-2001: board member (mergers & acquisitions, finance management, purchasing, human
resources, investor relations, internal communication) of AT&S Austria Technology & Systems
Engineering.

1998-2004: CFO (supply-chain management, IT, accounting/controlling, treasury, human
resources, investor relations, M & A, legal/insurance, taxes, revision) AT&S Austria
Technology & Systems Engineering.

Since April 2004: CEO (supply-chain management, human resources, investor relations)
AT&S Austria Technology & Systems Engineering. 
 Item 16B. Code of Ethics We have adopted a code of ethics for financial matters that applies to the CEO, CFO, COO
Wireline, COO Wireless, principal accounting officer, principal controller and all other persons
performing similar functions. The code of ethics is available on our corporate website at
www.telekom.at. 
 Item 16C. Principal Accountant Fees and Services In January 2003, the U.S. Securities and Exchange Commission adopted rules requiring
disclosure of fees billed by a public companys accountants in each of a companys two most recent
fiscal years. Fees billed to us for professional services by our principal accountants KPMG Alpen-Treuhand
GmbH, Wirtschaftsprüfungs- und Steuerberatungs Gesellschaft(KPMG) for Telekom Austria for the
fiscal years 2003 and 2004 and mobilkom austria group for 2004 and Grant Thornton
Wirtschaftsprüfungs- und Steuerberatungs-GmbH(Grant Thornton) for mobilkom austria group for 2003,
were as follows: For fiscal
    
    
    For fiscalyear ended
    
    
    year endedType of Fees
    
    December 31, 2004
    
    
    December 31, 2003(EUR in millions)Audit Fees
    
    
    2.6
    
    
    
    3.2Audit-Related Fees
    
    
    0.3
    
    
    
    0.3Tax Fees
    
    
    0.3
    
    
    
    0.3All Other Fees
    
    
    0.0
    
    
    
    0.0Total
    
    
    3.2
    
    
    
    3.8
 In the above table, Audit Fees are the aggregate fees billed by KPMG and Grant Thornton for
professional services in connection with the audit of our consolidated annual financial statements,
as well as audits of our statutory financial statements. Audit-Related Fees are fees billed by
KPMG and Grant Thornton for accounting advice on actual or contemplated transactions, due diligence
engagements related to acquisitions or dispositions, attestation services not required by statute
or regulation, internal control reviews and assistance with internal control reporting requirements
and other agreed-upon procedures. Tax Fees are fees for tax advice on actual or contemplated
transactions, international tax compliance and state and local tax compliance. Audit Committee pre-approval policies Our independent auditors are appointed by the AGM based on a proposal from the Supervisory
Board. On June 3, 2004, the AGM appointed KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und 146




---



##### Table of Contents



Steuerberatungsgesellschaftto serve as independent auditors for 2004. On November 18, 2004
the Audit Committee recommended to appoint KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und
Steuerberatungsgesellschaftto serve as independent auditors for 2005. In future the Audit
Committee of the Supervisory Board will propose its recommendation on the selection of independent
auditors to the Supervisory Board. Subsequent to the auditors appointment, the Audit Committee
awards the contract and in its sole authority approves the scope and terms of the audit and all
audit engagement fees as well as monitors the auditors independence. In order to ensure the integrity of independent audits, our Audit Committee established a
policy to approve all audit and permissible non-audit services provided by our independent auditors
prior to the auditors engagement. As a part of this approval process, the Audit Committee adopted
pre-approval policies and procedures pursuant to which the Audit Committee pre-approves certain
types of services to be performed by our independent auditors in the Audit Committee meeting on
December 15, 2003. Under the policies, the Audit Committee is required to pre-approve the audit and
non-audit services performed by the independent auditors in order to ensure that the provision of
such services does not impair the auditors independence. Unless a type of service to be provided
by the independent auditors has received general pre-approval, it will require specific
pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will
require specific pre-approval by the Audit Committee. Pre-approved non-audit services will require
specific pre-approval if the annual aggregate amount of fees earned by the auditors for those
services exceeds 35% of the annual fees paid to the auditors for audit services. In December 2003, the Audit Committee retroactively approved the performance by KPMG and Grant
Thornton of the following categories of audit and permitted non-audit services for the fiscal year
2003 and simultaneously pre-approved the services for 2004. In March 2005, the Audit Committee
pre-approved the performance by KPMG of the following categories of audit and permitted non-audit
services for the fiscal year 2005: Audit services  

Audits for subsidiaries and services associated with SEC registration statements

Statutory audits of our financial statements Audit-related Services  

Accounting advice relating to actual transactions or events

Internal control reviews and assistance with internal reporting requirements

Due diligence relating to contemplated acquisitions and dispositions

Accounting advice relating to contemplated transactions or events

Attestation services not required by statute or regulation (EMTN Program including
insurance premium) Tax services  

Tax planning and advice

State and local tax compliance

International tax planning and advice

International tax compliance

Review of state, local and international income and other tax returns Other Services No other services were pre-approved by the Audit Committee. 147




---



##### Table of Contents



Item 16D.  Exemptions from the Listing Standards for Audit Committees Not applicable 
 Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers. Under the Stock Corporation Act, we may repurchase our own shares only for limited
circumstances, including:  

Prevention of substantial damage to the Company;

Allocation of shares to employees; key employees or members of the Management or the
Supervisory Boards; the repurchase must be authorized by a resolution of the AGM; not
exceeding 18 months and must identify the price range and the number of shares to be
repurchased;

Compensation for minority shareholders as permitted by law; and

Share buyback program for up to 10% of the share capital based on an authorization of
the management by a shareholders resolution for a duration of up to 18 months, whereby the
price range and duration must be specified. In the ordinary AGM on June 3, 2004, our shareholders authorized the Management Board to
acquire up to 10% of the share capital of Telekom Austria, during a period of 18 months from the
day of this resolution at a minimum price of EUR 9 and a maximum price of EUR 18 per share. The
Management Board received authorization to:  

Use the purchased shares to serve stock options to be granted to employees, directors
and members of the Management Board of the Company or of an affiliated company;

To use the purchased shares to serve convertible bonds;

To use the purchased shares as consideration for acquisitions; as well as

To sell own shares in any way permitted by law, also over the counter and to any
purchaser as chosen by us. Shares not used for one of these points may be drawn-in with prior approval by the AGM. This shareholder resolution replaced the shareholder resolution with regard to the share
buyback of June 4, 2003. On March 24, 2004 Telekom Austria announced a share buyback program which was amended on June
24, 2004 according to the respective resolutions of the AGM of June 3, 2004. On August 26, 2004
Telekom Austria announced the beginning of the share buyback currently underway. Details to the
resolution of June 24, 2004 for the share buyback program are the following:  

Buyback of up to 30 million shares, i.e. up to 6% of the current common stock;

Price margin: EUR 9 to EUR 18;

Duration of authorization by the AGM: to December 2, 2005;

The buyback takes place via the stock exchange. The authorization by the AGM also extends to the use of the repurchased shares:  

To serve stock options to be granted to employees, directors and members of the
Management Board of the Company or of an affiliated company,

To serve convertible bonds, 148




---



##### Table of Contents





As consideration for acquisitions as well as to sell own shares in any way permitted by
law, also over the counter and to any purchaser as chosen by us. On November 21, 2000, in order to limit our exposure under the Stock Option Plan 2000, we
purchased 4,686,881 American call options. The strike and execution price of each call option was
EUR 9. In 2002 and 2003 we sold 1,360,000 options. In accordance with the authorization by the AGM
of June 4, 2003, we exercised the remaining American call options on February 27, 2004 and received
3,326,881 shares on March 3, 2004, representing 0.67% of our share capital. For the Stock Option
Plan 2000 we used 89,748 shares. For further information see note (20 and 23) of the accompanying
financial statements. The following table shows the relevant data concerning our purchase of equity securities
during the financial year 2004: Purchase of equity securitiesNumber of
    
    
    Weighted
    
    
    
    
    
    
    Maximum numbershares
    
    
    average price
    
    
    Total number of
    
    
    of sharesPeriod
    
    purchased
    
    
    per share (EUR)
    
    
    shares purchased
    
    
    purchased1.  31. January 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000,0001.  29. February 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000,0001.  31. March 2004
    
    
    3,326,881
    (4)
    
    
    9.00
    
    
    
    3,326,881
    
    
    
    46,762,867
    (5)1.  30. April 2004
    
    
    
    
    
    
    
    
    
    
    3,326,881
    
    
    
    46,762,8671.  31. May 2004
    
    
    
    
    
    
    
    
    
    
    3,326,881
    
    
    
    46,762,8671.  30. June 2004
    
    
    
    
    
    
    
    
    
    
    3,326,881
    
    
    
    46,762,8671.  31. July 2004
    
    
    
    
    
    
    
    
    
    
    3,326,881
    
    
    
    46,762,8671.  31. August 2004
    
    
    262,754
    
    
    
    11.51
    
    
    
    3,589,635
    
    
    
    46,500,1131.  30. September 2004
    
    
    2,467,041
    
    
    
    11.29
    
    
    
    6,056,676
    
    
    
    44,033,0721.  31. October 2004
    
    
    288,766
    
    
    
    11.53
    
    
    
    6,345,442
    
    
    
    43,744,3061.  30. November 2004
    
    
    
    
    
    
    
    
    
    
    6,345,442
    
    
    
    43,744,3061.  31. December 2004
    
    
    
    
    
    
    
    
    
    
    6,345,442
    
    
    
    43,744,306Total (1)(2)(3)
    
    
    6,345,442
    (6)
    
    
    10.11
    (6)
    
    
    6,345,442
    (6)
   (7)
    
    The plan was first announced on June 4, 2003 and amended on June 3, 2004.(8)
    
    Shareholders approved to buy back up to 10% of the share capital i.e. EUR 50 million shares.(9)
    
    The authorization for the plan ends on December 2, 2005.(10)
    
    Out of this sum, 89,748 shares were used to serve stock option programs.(11)
    
    In this sum, 89,748 shares are included which were used to serve stock option programs.(12)
    
    On December 31, 2004, we held 6,255,694 treasury shares bought at an average price of EUR
10.13. 
 PART III 
 Item 17.  Financial Statements Not applicable 
 Item 18.  Financial Statements See pages F-1 through F-57, which are included in the appendix. 
 Item 19.  Exhibits Documents filed as exhibits to this Report:  1.1

The Articles of Association of Telekom Austria AG. 149




---



##### Table of Contents



1.2

The By-laws of Telekom Austria AG incorporated by reference to Exhibit 3.2 of the
Registration Statement filed on Form F-1 on October 31, 2000.8.1

Subsidiaries as of the date of this filing (Structure of Telekom Austria Group).12.1

Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.12.2

Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.13.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 150




---



##### Table of Contents



SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf. TELEKOM AUSTRIA AGBy
    /s/ Heinz SundtName:
    Heinz SundtTitle:
    Chief Executive Officer By
    /s/ Stefano ColomboName:
    Stefano ColomboTitle:
    Chief Financial Officer Dated: April 13, 2005 151




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageTelekom Austria AktiengesellschaftConsolidated Financial StatementsReports of independent registered public accounting firms
    
    
    F-2Consolidated balance sheets as of December 31, 2004 and 2003
    
    
    F-4Consolidated statements of operations for the years ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated statements of changes in stockholders equity for the years ended
December 31, 2004, 2003 and 2002
    
    
    F-7Notes to consolidated financial statements
    
    
    F-8
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Supervisory Board and
Stockholders
Telekom Austria Aktiengesellschaft: We have audited the accompanying consolidated balance sheets of Telekom Austria Aktiengesellschaft
and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
income, stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2004, These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the financial statements
of mobilkom austria AG & Co KG and mobilkom austria AG and subsidiaries (collectively
mobilkom) as of December 31, 2003 and 2002, wholly-owned consolidated subsidiaries (74.999%
owned unconsolidated subsidiaries from January 1, 2002 to June 28, 2002) whose total assets as of
December 31, 2003 constitute 35.6 percent of total consolidated assets and whose revenues for the
year ended December 31, 2003 and for the period June 28, 2002 to December 31, 2002, respectively,
constitute 48.9 percent and 30.7 percent of total consolidated revenues. Those statements were
audited by other auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for mobilkom, is based solely on the report of the other auditors. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors provide a reasonable
basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the financial
position of Telekom Austria Aktiengesellschaft and subsidiaries as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004 in conformity with accounting principles generally accepted in the
United States of America. As discussed in note 1 to the consolidated financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 123 Accounting for Stock-Based Compensation
effective January 1, 2004, Statement of Financial Accounting Standards No. 143
Accounting for Asset Retirement Obligations effective January 1, 2003 and Statements of
Financial Accounting Standards No. 141 Business Combinations and No. 142 Goodwill and Other
Intangible Assets effective January 1, 2002. KPMG Alpen-Treuhand GmbH
Wirtschaftsprüfungs- und Steuerberatungsgesellschaft -s- KPMG Alpen-Treuhand GmbH Vienna, Austria
March 3, 2005 F-2




---



##### Table of Contents



Report of Independent
Registered Public Accounting Firm The Supervisory Board and Stockholders
mobilkom austria AG & Co KG andmobilkom austria AG: We have audited the consolidated balance sheets of mobilkom austria AG & Co KG and mobilkom
austria AG and subsidiaries (collectively mobilkom), wholly-owned consolidated subsidiaries of Telekom Austria Aktiengesellschaft (74.999% owned
unconsolidated subsidiaries from January 1, 2002 to June 28, 2002), as of December 31, 2003 and
2002, and the related consolidated statements of income, stockholders equity and comprehensive
income, and cash flows for each of the years in the two year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of mobilkom as of December 31, 2003 and 2002, and the
results of its operations and its cash flows in the two year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, mobilkom adopted the provisions of
Statement of Financial Accounting Standards No. 143 Accounting for Asset Retirement Obligations
effective January 1, 2003 and Statements of Financial Accounting Standards No. 141 Business
Combinations and No. 142 Goodwill and Other Intangible Assets effective January 1, 2002. Grant Thornton
Wirtschaftsprüfungs- und Steuerberatungs-GmbH -s- Grant Thornton Vienna, Austria
February 12, 2004 F-3




---



##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED BALANCE SHEETS
(in EUR 000s, except per share information) December 31,
    
    
    December 31,Notes No
    
    
    2004
    
    
    2003ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    288,195
    
    
    
    201,926Short-term investments
    
    
    
    
    
    
    10,540
    
    
    
    6,867Accounts receivable  trade, net of allowances of EUR 73,463 and EUR 76,831
as of December 31, 2004 and 2003
    
    
    (6
    )
    
    
    408,820
    
    
    
    429,919Accounts receivable sold, net of allowances of EUR 21,150 and EUR 15,407
as of December 31, 2004 and 2003
    
    
    
    
    
    
    173,350
    
    
    
    129,953Receivables due from related parties
    
    
    (7
    )
    
    
    85
    
    
    
    1,549Inventories
    
    
    (8
    )
    
    
    83,110
    
    
    
    83,535Deferred tax assets
    
    
    (21
    )
    
    
    59,939
    
    
    
    45,633Prepaid expenses
    
    
    
    
    
    
    100,169
    
    
    
    91,177Taxes receivable
    
    
    
    
    
    
    3,702
    
    
    
    9,739Assets held for sale
    
    
    (11
    )
    
    
    2,660
    
    
    
    5,560Other current assets
    
    
    
    
    
    
    143,338
    
    
    
    118,963TOTAL CURRENT ASSETS
    
    
    
    
    
    
    1,273,908
    
    
    
    1,124,821Property, plant and equipment, net
    
    
    (10
    )
    
    
    3,888,691
    
    
    
    4,457,666Goodwill
    
    
    (9
    )
    
    
    596,565
    
    
    
    597,577Other intangible assets, net
    
    
    (9
    )
    
    
    667,337
    
    
    
    711,988Investments in affiliates
    
    
    (3
    )
    
    
    3,570
    
    
    
    3,555Other investments
    
    
    
    
    
    
    133,239
    
    
    
    143,630Deferred tax assets
    
    
    (21
    )
    
    
    19,436
    
    
    
    94,349Other assets
    
    
    
    
    
    
    659,761
    
    
    
    762,679TOTAL ASSETS
    
    
    
    
    
    
    7,242,507
    
    
    
    7,896,265LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesShort-term borrowings
    
    
    (12
    )
    
    
    751,139
    
    
    
    631,321Accounts payable  trade
    
    
    
    
    
    
    534,498
    
    
    
    589,368Accrued liabilities
    
    
    (13
    )
    
    
    194,319
    
    
    
    231,778Payables to related parties
    
    
    
    
    
    
    22,924
    
    
    
    23,657Deferred income
    
    
    (14
    )
    
    
    168,984
    
    
    
    150,378Income taxes payable
    
    
    
    
    
    
    18,005
    
    
    
    7,650Other current liabilities
    
    
    
    
    
    
    182,217
    
    
    
    155,563TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    1,872,086
    
    
    
    1,789,715Long-term debt, net of current portion
    
    
    (16
    )
    
    
    1,647,171
    
    
    
    2,342,288Lease obligations, net of current portion
    
    
    (17
    )
    
    
    761,132
    
    
    
    861,300Employee benefit obligations
    
    
    (18
    )
    
    
    109,984
    
    
    
    155,960Other liabilities and deferred income
    
    
    (19
    )
    
    
    110,504
    
    
    
    107,629Stockholders equityShare capital, no par value shares, 560,000,000 authorized (2003: 510,000,000),
500,000,000 issued (2003: 500,000,000),
493,744,306 outstanding (2003: 500,000,000)
    
    
    
    
    
    
    1,090,500
    
    
    
    1,090,500Treasury stock
    
    
    
    
    
    
    (63,353
    )
    
    
    Additional paid in capital
    
    
    
    
    
    
    458,137
    
    
    
    453,371Retained earnings
    
    
    
    
    
    
    1,266,551
    
    
    
    1,103,867Accumulated other comprehensive loss
    
    
    
    
    
    
    (10,205
    )
    
    
    (8,365
    )TOTAL STOCKHOLDERS EQUITY
    
    
    (23
    )
    
    
    2,741,630
    
    
    
    2,639,373TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    
    
    
    
    
    7,242,507
    
    
    
    7,896,265
 see accompanying notes to consolidated F-4




---



##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF OPERATIONS
(in EUR 000s, except per share information) twelve months endedDecember 31,Notes No
    
    
    2004
    
    
    2003
    
    
    2002Operating revenues (a)
    
    
    (24
    )
    
    
    4,056,268
    
    
    
    3,969,750
    
    
    
    3,118,064Operating expenses (b)Materials
    
    
    
    
    
    
    (324,518
    )
    
    
    (297,084
    )
    
    
    (196,434
    )Employee costs, including benefits and taxes
    
    
    
    
    
    
    (673,688
    )
    
    
    (699,348
    )
    
    
    (600,718
    )Depreciation and amortization
    
    
    
    
    
    
    (1,114,830
    )
    
    
    (1,133,148
    )
    
    
    (1,016,312
    )Impairment charges
    
    
    
    
    
    
    (1,334
    )
    
    
    (6,825
    )
    
    
    (41,871
    )Other operating expenses
    
    
    (25
    )
    
    
    (1,489,224
    )
    
    
    (1,463,521
    )
    
    
    (1,205,354
    )OPERATING INCOME
    
    
    
    
    
    
    452,674
    
    
    
    369,824
    
    
    
    57,375Other income (expense)Interest income (c)
    
    
    
    
    
    
    70,016
    
    
    
    75,167
    
    
    
    88,191Interest expense (d)
    
    
    
    
    
    
    (188,818
    )
    
    
    (230,979
    )
    
    
    (244,628
    )Equity in earnings of affiliates
    
    
    
    
    
    
    552
    
    
    
    19,112
    
    
    
    140,543Other, net
    
    
    (26
    )
    
    
    15,656
    
    
    
    (567
    )
    
    
    2,330INCOME BEFORE INCOME TAXES, MINORITY
INTERESTS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    350,080
    
    
    
    232,557
    
    
    
    43,811Income tax expense
    
    
    (21
    )
    
    
    (122,186
    )
    
    
    (83,036
    )
    
    
    (26,112
    )Minority interests
    
    
    
    
    
    
    (631
    )
    
    
    (3,422
    )
    
    
    (4,910
    )INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    227,263
    
    
    
    146,099
    
    
    
    12,789Cumulative effect of change in accounting principle,
net of tax of EUR 6,071 in 2003
    
    
    (15
    )
    
    
    
    
    
    
    (11,858
    )
    
    
    NET INCOME
    
    
    
    
    
    
    227,263
    
    
    
    134,241
    
    
    
    12,789Basic and fully diluted earnings per share
    
    
    (23
    )
    
    
    0.46
    
    
    
    0.27
    
    
    
    0.03Basic and fully diluted earnings per share excluding
cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.46
    
    
    
    0.29
    
    
    
    0.03a) includes revenues from related parties of
    
    
    
    
    
    
    62,102
    
    
    
    89,506
    
    
    
    147,990b) includes operating expenses from related parties of
    
    
    
    
    
    
    124,699
    
    
    
    128,694
    
    
    
    192,153c) includes interest income from related parties of
    
    
    
    
    
    
    57
    
    
    
    1
    
    
    
    4,992d) includes interest expense from related parties of
    
    
    
    
    
    
    1
    
    
    
    30
    
    
    
    938
 see accompanying notes to
consolidated financial statements F-5




---



##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in EUR 000s, except per share information) twelve months endedDecember 31,Notes No
    
    
    2004
    
    
    2003
    
    
    2002Cash generated from operationsNet income
    
    
    
    
    
    
    227,263
    
    
    
    134,241
    
    
    
    12,789Adjustments to reconcile net income to cash
generated from operationsDepreciation, amortization and impairment charges
    
    
    
    
    
    
    1,116,164
    
    
    
    1,139,973
    
    
    
    1,058,183Write-offs from investments
    
    
    
    
    
    
    716
    
    
    
    2,840
    
    
    
    Employee benefit obligation  non cash
    
    
    
    
    
    
    908
    
    
    
    307
    
    
    
    (49,840
    )Allowance for doubtful accounts
    
    
    
    
    
    
    23,597
    
    
    
    30,629
    
    
    
    39,184Change in deferred taxes
    
    
    
    
    
    
    62,938
    
    
    
    59,241
    
    
    
    33,498Equity in earnings of affiliates less than (in excess of) dividends received
    
    
    
    
    
    
    (15
    )
    
    
    1,027
    
    
    
    (45,801
    )Stock compensation
    
    
    (20
    )
    
    
    4,766
    
    
    
    
    
    
    
    Asset retirement obligation  accretion expense
    
    
    
    
    
    
    5,829
    
    
    
    1,336
    
    
    
    Settlement of asset retirement obligation
    
    
    
    
    
    
    (2,248
    )
    
    
    
    
    
    
    Cumulative effect of change in accounting principle, net of tax
    
    
    (15
    )
    
    
    
    
    
    
    11,858
    
    
    
    (Gain) / loss on sale of investments
    
    
    
    
    
    
    (5,163
    )
    
    
    (17,903
    )
    
    
    195Loss on disposal / retirement of equipment
    
    
    
    
    
    
    28,788
    
    
    
    41,571
    
    
    
    17,280Other
    
    
    
    
    
    
    (252
    )
    
    
    (660
    )
    
    
    1,463,291
    
    
    
    1,404,460
    
    
    
    1,065,488Changes in assets and liabilities, net of effect of business acquiredAccounts receivable  trade
    
    
    
    
    
    
    (45,898
    )
    
    
    (140,331
    )
    
    
    175,522Due from related parties
    
    
    
    
    
    
    1,464
    
    
    
    5,813
    
    
    
    3,759Inventories
    
    
    
    
    
    
    425
    
    
    
    5,765
    
    
    
    6,052Prepaid expenses and other assets
    
    
    
    
    
    
    (19,526
    )
    
    
    71,506
    
    
    
    (9,020
    )Accounts payable  trade
    
    
    
    
    
    
    (58,814
    )
    
    
    (58,944
    )
    
    
    10,979Employee benefit obligation
    
    
    
    
    
    
    (46,883
    )
    
    
    (76,649
    )
    
    
    (102,565
    )Accrued liabilities
    
    
    
    
    
    
    (27,104
    )
    
    
    (23,487
    )
    
    
    3,881Due to related parties
    
    
    
    
    
    
    (731
    )
    
    
    (13,358
    )
    
    
    17,088Other liabilities and deferred income
    
    
    
    
    
    
    38,433
    
    
    
    45,100
    
    
    
    230(158,634
    )
    
    
    (184,585
    )
    
    
    105,926Cash generated from operations
    
    
    
    
    
    
    1,304,657
    
    
    
    1,219,875
    
    
    
    1,171,414Cash from (used in) investing activitiesCapital expenditures, including interest capitalized
    
    
    
    
    
    
    (548,169
    )
    
    
    (599,684
    )
    
    
    (560,742
    )Acquisitions and investments, net of cash acquired
    
    
    
    
    
    
    (2,180
    )
    
    
    (85,989
    )
    
    
    (665,128
    )Final consolidation of subsidiary
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    Proceeds from sale of equipment
    
    
    
    
    
    
    36,213
    
    
    
    17,300
    
    
    
    49,819Purchase of investments  short-term
    
    
    
    
    
    
    (51,609
    )
    
    
    (79,750
    )
    
    
    (1,629
    )Purchase of investments  long-term
    
    
    
    
    
    
    (1,997
    )
    
    
    (601
    )
    
    
    (1,107
    )Proceeds from sale of American call options
    
    
    
    
    
    
    
    
    
    
    957
    
    
    
    2,609Proceeds from sale of investments  short-term
    
    
    
    
    
    
    51,909
    
    
    
    80,108
    
    
    
    6Proceeds from sale of investments  long-term
    
    
    
    
    
    
    6,502
    
    
    
    23,599
    
    
    
    225Cash used in investing activities
    
    
    
    
    
    
    (509,331
    )
    
    
    (643,855
    )
    
    
    (1,175,947
    )Cash from (used in) financing activitiesPrincipal payments on bonds
    
    
    
    
    
    
    (2,180
    )
    
    
    (22,765
    )
    
    
    (72,673
    )Proceeds from issuance of long-term debt and bonds
    
    
    
    
    
    
    
    
    
    
    775,948
    
    
    
    127,857Principal payments on long-term debt
    
    
    
    
    
    
    (568,110
    )
    
    
    (385,330
    )
    
    
    (406,294
    )Changes in short-term bank borrowings
    
    
    
    
    
    
    (6,707
    )
    
    
    (774,644
    )
    
    
    237,973Changes in financing with Mobilkom Austria
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,921Purchase of treasury stock
    
    
    
    
    
    
    (64,161
    )
    
    
    
    
    
    
    Proceeds from sale of treasury stock
    
    
    
    
    
    
    808
    
    
    
    
    
    
    
    Dividends paid
    
    
    
    
    
    
    (64,579
    )
    
    
    
    
    
    
    Cash provided by (used in) financing activities
    
    
    
    
    
    
    (704,929
    )
    
    
    (406,791
    )
    
    
    1,784Effect of exchange rate changes
    
    
    
    
    
    
    (4,128
    )
    
    
    5,360
    
    
    
    3,693Net increase in cash and cash equivalents
    
    
    
    
    
    
    86,269
    
    
    
    174,589
    
    
    
    944Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    201,926
    
    
    
    27,337
    
    
    
    26,393Cash and cash equivalents at end of period
    
    
    
    
    
    
    288,195
    
    
    
    201,926
    
    
    
    27,337
 see accompanying notes to consolidated
financial statements F-6




---



##### Table of Contents



TELEKOM AUSTRIA AG
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in EUR 000s, except per share information) Common stock
    
    
    Treasury stock
    
    
    
    
    
    
    
    
    
    
    Accumulated otherNumber of
    
    
    
    
    
    
    Number of
    
    
    
    
    
    
    Additional paid
    
    
    Retained
    
    
    comprehensive
    
    
    Total stockholdersshares
    
    
    Par value
    
    
    shares
    
    
    at cost
    
    
    in capital
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalance January 1, 2002
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    
    
    
    
    
    
    
    
    451,677
    
    
    
    956,837
    
    
    
    1,380
    
    
    
    2,500,394Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,789
    
    
    
    
    
    
    
    12,789Net unrealized loss on
securities, net of
EUR 362 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (687
    )
    
    
    (687
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,496
    )
    
    
    (6,496
    )Unrealized net gain of hedging
activities, net of
EUR (1,386) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,719
    
    
    
    2,719Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,325Sale of call options, net of
EUR (424) income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    821
    
    
    
    
    
    
    
    
    
    
    
    821Balance December 31, 2002
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    
    
    
    
    
    
    
    
    452,498
    
    
    
    969,626
    
    
    
    (3,084
    )
    
    
    2,509,540Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,241
    
    
    
    
    
    
    
    134,241Net unrealized gains on
securities, net of
EUR (1,141) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,214
    
    
    
    2,214Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,690
    )
    
    
    (10,690
    )Unrealized net gain on hedging
activities,
net of EUR (1,646) deferred
income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,195
    
    
    
    3,195Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128,960Sale of call options, net of
EUR (451) income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    873Balance December 31, 2003
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    
    
    
    
    
    
    
    
    453,371
    
    
    
    1,103,867
    
    
    
    (8,365
    )
    
    
    2,639,373Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    227,263
    
    
    
    
    
    
    
    227,263Net unrealized gains on
securities, net of
EUR (565) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,096
    
    
    
    1,096Net realized loss on
securities, net of
EUR 1,368 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,655
    )
    
    
    (2,655
    )Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,581
    )
    
    
    (4,581
    )Unrealized net gain on hedging
activities,
net of EUR (2,077) deferred
income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,032
    
    
    
    4,032Realized net gain on hedging
activities,
net of EUR (138) deferred
income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268
    
    
    
    268Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,423Distribution as dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,579
    )
    
    
    
    
    
    
    (64,579
    )Stock options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,766
    
    
    
    
    
    
    
    
    
    
    
    4,766Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    (6,345,442
    )
    
    
    (64,161
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,161
    )Issue of treasury shares to
employees
    
    
    
    
    
    
    
    
    
    
    89,748
    
    
    
    808
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    808Balance December 31, 2004
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    (6,255,694
    )
    
    
    (63,353
    )
    
    
    458,137
    
    
    
    1,266,551
    
    
    
    (10,205
    )
    
    
    2,741,630
 see accompanying notes to consolidated
financial statements F-7




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in EUR 000s) (1)   THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Description of business, organization and relationship with the Federal Republic of Austria Telekom Austria AG and subsidiaries (the Company or Telekom Austria) is engaged as a full
service telecommunications provider of long distance, local and wireless services, corporate data
communications services as well as internet services. The Company also provides services through
pay phones and supplies telephones and technical equipment for telephone communications. These
activities are conducted and operated primarily in Austria. Telecom Italia owned 29.78% of Telekom Austria until its sale of 75,000,000 shares on November
4, 2002 in a private placement, thereby reducing its level of ownership to 14.78% as of December
31, 2002 and 2003, respectively. On January 21, 2004 Telecom Italia sold all of its residual
shareholding of 73.9 million shares or 14.78%. The Federal Republic of Austria, through Österreichische Industrie-Holding AG (ÖIAG), is a
significant shareholder of the Company. In December 2004, ÖIAG sold 85 million shares of the
Company in a private placement to institutional shareholders and reduced its holding from 47.17% to
approximately 30.17% of voting common shares. In addition to the related party transactions
described in note (7), the Federal Republic of Austria authorizes and supervises the Rundfunk und
Telekom Regulierungs  GmbH (RTR), which regulates certain activities of the Company. The
government holds the taxing authority for the Austrian operations of Telekom Austria and imposes
taxes such as income and value added taxes on the Company. All of the Companys interests in mobile communications business are held through mobilkom
austria AG & Co KG and mobilkom austria AG and its subsidiaries; collectively these companies are
referred to as mobilkom austria. Prior to June 28, 2002, the Company held a 74.999% interest in mobilkom austria. Due to
certain substantive participation rights held by the minority shareholder, the Companys investment
in mobilkom austria was accounted for under the equity method. These participation rights included
significant blocking rights over operating decisions including operating budgets, capital spending,
senior management positions, strategy decisions and dividend distributions. On June 28, 2002, the Company acquired the remaining 25.001% equity interest in mobilkom
austria, thereby bringing its total interest in mobilkom austria to 100%. Consequently, the Company
has consolidated mobilkom austria effective June 28, 2002. The consolidated statement of operations
for the year ending December 31, 2002 reflects the Companys equity in earnings of mobilkom austria
through June 28, 2002 and mobilkom austrias results of operations for the period June 28, 2002
until December 31, 2002. Basis of presentation The consolidated financial statements of Telekom Austria have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP). The Company has reclassified certain amounts in prior year financial statements to conform to
the current years presentation. F-8




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) In September 2003, the Austrian Supreme Court ruled that no contractual relationship exists
between value-added service providers (VASP) and the Company, with the contractual relationship
being established directly between the VASP and the customers. The Company is no longer considered
the primary obligor and ceased reporting revenues on a gross basis beginning on October 1, 2003.
Had the ruling been in effect for all of 2003 and 2002, revenues and expenses in the accompanying
consolidated statements of operations would have been lower by EUR 45,886 and EUR 51,206,
respectively. Had the enacted regulation and the VASP ruling been in effect for all of 2003 and
2002 revenues and expenses would have been adjusted as follows: Year ended December 31,2003
    
    
    2003
    
    
    2002
    
    
    2002pro-forma
    
    
    as reported
    
    
    pro-forma
    
    
    as reportedRevenues
    
    
    3,923,864
    
    
    
    3,969,750
    
    
    
    3,066,858
    
    
    
    3,118,064Operating expenses
    
    
    (3,554,040
    )
    
    
    (3,599,926
    )
    
    
    (3,009,483
    )
    
    
    (3,060,689
    )Operating income
    
    
    369,824
    
    
    
    369,824
    
    
    
    57,375
    
    
    
    57,375
 Principles of consolidation The consolidated financial statements include the accounts of Telekom Austria AG and all
subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation. Investments in companies in which the Company has significant influence, but less than a
controlling financial interest, are accounted for using the equity method. Under the equity method,
only the Companys investments in and net amounts due to and due from the equity investee are
included in the consolidated balance sheet. The Companys share of the investees earnings is
included in the consolidated operating results and only dividends, cash distributions, loans or
other cash received from or paid to the investee are included in consolidated cash flows. Cash and cash equivalents The Company considers cash in banks and highly liquid investments with original maturities of
three months or less to be cash and cash equivalents. Money market deposits with original
maturities of more than three months are classified as short-term investments along with marketable
securities. Marketable securities Marketable debt and equity securities, other than investments accounted for by the equity
method, are classified as either available-for-sale or held-to-maturity. Securities classified as
available-for-sale are reported at fair value at the balance sheet date and held-to-maturity
securities are reported at amortized cost. Unrealized gains and losses on available-for-sale
securities are included in accumulated other comprehensive income, net of applicable deferred tax. Inventories Inventories consist of merchandise sold in retail shops and material and spare parts used for
the construction of networks, mainly for the Companys own use. Inventories are valued at the lower
of cost or market, cost being determined on the basis of weighted average cost. F-9




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Property, plant and equipment Property, plant and equipment are stated at cost, which includes certain costs that are
capitalized during the installation and expansion of the telecommunications network including
material, payroll, direct overhead and interest costs as well as the present value of estimated
asset retirement obligations. Value added tax (VAT), which is charged by suppliers and refunded
by the tax authorities, is not included in cost. Plant and equipment under capital leases are
stated at the lower of the present value of minimum lease payments or fair value. Depreciation on plant and equipment is calculated using the straight-line method and the
estimated useful lives of the assets. Plant and equipment under capital leases and leasehold
improvements are amortized using the straight-line method over the lease term or the estimated
useful life of the asset, whichever is shorter. The useful lives are: YearsTransmission equipment
    
    
    3  20Cables and wires
    
    
    10  20Communications equipment
    
    
    4  10Software
    
    
    3  8Furniture, fixtures and other
    
    
    3  8Buildings and leasehold improvements
    
    
    10  50
 Maintenance and repairs are expensed as incurred while replacements and improvements are
capitalized. The cost and accumulated depreciation of assets sold or retired are removed from the
accounts, and any resulting gain or loss is reflected in other operating expenses. Goodwill and other intangible assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are
tested for impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142
at least annually, but also on an interim basis if an event or circumstance indicates that an asset
may be impaired. Other intangible assets with estimable useful lives are amortized over their
respective useful lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 144, (Accounting for the Impairment or Disposal of Long-Lived Assets). The goodwill impairment test is a two-step evaluation. The first step requires the Company to
compare the fair value and carrying value of any reporting unit to which goodwill has been
allocated. If the fair value of the reporting unit is less than its carrying value, an indication
of goodwill impairment exists and the second step of the impairment test must be performed. In the
second step, the implied fair value of goodwill, determined by allocating the aggregate fair value
of the reporting unit to all identifiable tangible and intangible assets, is compared to its
carrying amount. Any shortfall in fair value of goodwill compared to carrying value is recognized
as an impairment loss. In each reporting period, the Company is required to reevaluate its decision that a
nonamortizable intangible asset has an indefinite useful life. If a nonamortizable intangible asset
is subsequently determined to have a finite useful life, the intangible asset is written down to
the lower of its fair value or carrying amount and amortized prospectively based on its remaining
useful life. The impairment test is a comparison of the fair value of the intangible asset with its
carrying value. Any excess of carrying value over fair value is recognized as an impairment loss. F-10




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Amortizable intangible assets are stated at cost and are amortized using the straight-line
method over their estimated useful lives, as shown below: YearsWireless and wireline licenses
    
    
    10  15Patents and proprietary rights
    
    
    4  20Subscriber base
    
    
    6Other
    
    
    10  30
 Impairment of long-lived assets and long-lived assets to be disposed of Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the asset. If the carrying value of such assets
exceeds the undiscounted cash flows an impairment will be recognized. The amount of the impairment
to be recognized is measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Long-lived assets or disposal groups to be sold are classified as held
for sale if all the criteria for reclassification in accordance with SFAS 144 are met and are
reported at the lower of the carrying amount or estimated proceeds less cost to sell. Internally developed software Certain direct and indirect development costs associated with internally developed software,
including direct costs of materials and services, and payroll costs for employees devoting time to
the software projects, are capitalized once the project has reached the application development
stage. The costs are amortized using the straight-line method over a period not exceeding four
years, beginning when the asset is substantially ready for use. Costs incurred
during the preliminary project stage, maintenance and training costs and research and
development costs are expensed as incurred. Advertising and promotional costs Advertising and promotional costs are expensed as incurred and totaled EUR 198,138, EUR
198,362 and EUR 153,737 for the years ended December 31, 2004, 2003 and 2002, respectively. Research and development costs Research and development costs are expensed as incurred and amounted to EUR 42,387, EUR 42,759
and EUR 30,338 for the years ended December 31, 2004, 2003 and 2002, respectively, and are
classified in the consolidated statement of operations according to the nature of the expense. F-11




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Income taxes Income taxes are accounted for using the liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amount of an existing asset or liability and its respective tax basis and
operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized as income or expense in the period that includes
the enactment date. Investment tax credits are recognized as a reduction of income taxes in the period in which
those credits are granted. Deferred income taxes on investments in pass-through enterprises are provided on the excess of
the financial statement carrying amount of the investment, including the goodwill within the
pass-through enterprise, over the tax basis of the investment. The Company recognizes deferred tax liabilities or assets for differences between the assigned
values and the tax bases of assets and liabilities recognized in a business combination. If a
valuation allowance is recorded on a deferred tax asset for an acquired entitys deductible
temporary differences or operating loss or tax credit carryforwards at the acquisition date, the
tax benefits recognized in subsequent years due to a reassessment of that valuation allowance are
applied (i) first to reduce to zero any goodwill related to the acquisition, (ii) second to reduce
to zero other non-current intangible assets related to the acquisition, and (iii) third to reduce
income tax expense. Earnings per share Basic earnings (loss) per share are computed by dividing consolidated net income (loss) by the
weighted average number of common shares outstanding for the year. Diluted earnings per share are calculated by dividing net income by the weighted average
number of common shares outstanding for the year, adjusted by the effect of the options granted
under the stock option plans. In order to have access to shares for employee compensation purposes for the stock option plan
2000, the Company purchased an American call option. As the American call option was written on
already issued and outstanding shares, the number of potential shares outstanding is not affected
by the American call option and all of these shares are already included in basic EPS. Accordingly,
the call option and employee options do not have a dilutive effect. Employee stock options under the Stock option plan 2004 were treated as potential common
shares in computing diluted earnings per share under the treasury stock method in accordance with
SFAS No. 128. Asset retirement obligation The Company accounts for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs in accordance with SFAS No. 143, Accounting for
Asset Retirement Obligations. The Company records the fair value of an asset retirement obligation
as a liability in the period in which the legal obligation associated with the retirement of a
tangible long-lived asset is incurred. An amount equal to the initial obligation is recorded as an
increase to the carrying amount of the related long-lived asset and depreciated over the remaining
useful life of the asset. The liability is adjusted at the end of each period to reflect the
passage of time and changes in the estimated future cash flows underlying the initial fair value
measurement. F-12




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Employee benefit obligations The Company provides retirement benefits under defined contribution and defined benefit plans. In the case of defined contribution plans the Company pays contributions to publicly or
privately administered pension insurance plans on a mandatory or contractual basis. Once the
contributions have been paid, the Company has no further payment obligations. The regular
contributions constitute net periodic costs for the year in which they are incurred. All other retirement benefit plans are unfunded defined benefit plans for which the Company
records accruals. The pension provisions are calculated using the projected unit credit method in
accordance with SFAS No. 87. The future benefit obligations are valued using actuarial methods on
the basis of an appropriate assessment of the discount rate, rate of compensation increase and rate
of increase of pensions. Concentration of risks A portion of the Companys revenue is derived from services provided to other companies in the
telecommunications industry, mainly to alternative telecommunications and cellular companies and
internet online services. As a result, the Company has some concentration of credit risk in its
customer base. The Company performs ongoing credit evaluations of its large customers financial
condition to support its receivables. As of the balance sheet dates, the Company does not have any
significant concentrations of business transacted with a particular supplier or lender that could,
if suddenly eliminated, severely impact operations. The Company also does not have a concentration
of available sources of labor, services, franchises, or licenses or other rights that could, if
suddenly eliminated, severely impact operations. The Company invests its cash with several
high-quality credit institutions. Foreign currency translation The functional currency of the Company is the Euro. Foreign currency receivables and liabilities are recognized at the exchange rate applicable on
the transaction date and retranslated periodically at the then ruling balance sheet rate.
Unrealized foreign exchange losses and gains due to exchange rate fluctuations are recognized in
the statement of operations. The functional currency for the Companys foreign operations is the applicable local currency.
Assets and liabilities are translated using the current exchange rate in effect at the balance
sheet date. Revenues and expenses are translated using the weighted average exchange rate during
the period. Resulting translation adjustments are recorded as other comprehensive income or loss. F-13




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The following table provides the exchange rates for the currencies in which the Company
conducts most of its transactions: Balance sheet rates at
    
    
    Average exchange rates for theDecember 31
    
    
    period ended December 312004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2002Croatian Kuna (HRK)
    
    
    7.6712
    
    
    
    7.6495
    
    
    
    7.4943
    
    
    
    7.5621
    
    
    
    7.4081Czech Crown (CZK)
    
    
    30.4640
    
    
    
    32.4100
    
    
    
    31.9062
    
    
    
    31.8409
    
    
    
    30.8023Hungarian Forint (HUF)
    
    
    245.9700
    
    
    
    262.5000
    
    
    
    251.6906
    
    
    
    253.0343
    
    
    
    242.9780Japanese Yen (JPY)
    
    
    139.6500
    
    
    
    135.0500
    
    
    
    134.3904
    
    
    
    130.8971
    
    
    
    118.0898Slovak Crown (SKK)
    
    
    38.7450
    
    
    
    41.1700
    
    
    
    40.0270
    
    
    
    41.4919
    
    
    
    42.6889Slovenian Tolar (SIT)
    
    
    239.7600
    
    
    
    236.7000
    
    
    
    239.0826
    
    
    
    233.8404
    
    
    
    225.9533Swiss Franc (CHF)
    
    
    1.5429
    
    
    
    1.5579
    
    
    
    1.5442
    
    
    
    1.5204
    
    
    
    1.4672US Dollar (USD)
    
    
    1.3621
    
    
    
    1.2630
    
    
    
    1.2432
    
    
    
    1.1299
    
    
    
    0.9456
 Revenue recognition Wireline The Company generates revenues from fixed line services to individuals, commercial and
non-commercial organizations and other national and foreign carriers. Fixed line services include
access fees, domestic and long distance services, including internet, fixed to mobile calls,
international traffic, voice value-added services, interconnection, call center services and public
payphone services. The Company recognizes long distance and local service revenue based upon minutes of traffic
processed or contracted fee schedules when the services are rendered. Revenues due from other
national and foreign carriers for incoming calls from outside the companys network are recognized
in the period the call occurs. Access fees, monthly base fees and lines leased to commercial customers are billed in advance
resulting in deferred revenues. These fees are amortized over the period in which the service is
provided. Cash discounts and incentives are accounted for as reductions in revenues when granted. Product and other service revenues are recognized when the products are delivered and accepted
by customers or when services are provided in accordance with contract terms. The installation of customer lines in residences is a separate service and the Company
provides this installation service in situations where it is not providing other services. Revenue
on such installation work is recognized when the installation work is completed. The Company has entered into a limited number of agreements with other telecommunications
operators outside of Austria whereby the Company grants some pre-defined access to existing
capacity on its physical network in return for similar access to the physical network of the
counter party. In accordance with APB No. 29, Accounting for Nonmonetary Transactions, EITF 01-2,
Interpretation of APB Opinion No. 29, and EITF 99-17, Accounting for Advertising Barter
Transactions, no revenues and obligations (expenses) were recognized because the exchange does not
result in the culmination of an earnings process due to the similarity of the assets exchanged. In
addition, no gain or loss was recognized, as fair value was not considered to be determinable
within reasonable limits. The Company, however, does recognize trade revenues arising from
subscriber transactions under normal tariff plans. The benefits and costs of such swap agreements
will be reflected in the Companys results of operations in the periods in which they are realized
through reduced interconnection obligations and revenues, respectively. F-14




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Wireless The Company provides mobile communications services to individuals and commercial and
non-commercial organizations through mobilkom austria. mobilkom austria generates revenue primarily
by providing digital wireless services as well as value-added services, text and multimedia
messaging, m-commerce and information services. To a lesser extent, mobilkom austria generates
revenue from the sale of wireless handsets. The Company recognizes mobile usage and roaming service revenue based upon minutes of traffic
processed or contracted fee schedules when the services are rendered. Revenues due from foreign
carriers for international roaming calls are included in revenues in the period in which the call
occurs. Certain prepaid usage services in the wireless segment are billed in advance resulting in
deferred revenues. These fees are amortized over the period in which the service is provided.
Discounts and incentives are accounted for as a reduction in revenues when granted. Revenue and related expenses associated with the sale of wireless handsets to distributors are
recognized when the products are delivered and accepted, as such sales transactions are separate
and distinct from the sale of wireless services to customers. The Company also enters into multiple element arrangements which include the sale of handsets,
activation fees and service contracts to customers through Company owned retail stores. These
transactions include the sale of a mobile handset at a price significantly below acquisition cost
(only if a binding contract is signed), the up-front charge of non-refundable activation fees to
connect the customer to the service, and subsequent monthly fees and airtime fees charged during
the contract period. The Company recognizes revenue from the sale of handsets upon delivery to the
customer. The corresponding cost of sales is charged to expense when sales are recognized which
results in a net loss on the sale of the handset. Activation fees charged to the customer are
recognized as revenue and the related cost is expensed upon delivery and sale of the phone. Current
monthly service fees are recorded as revenue from service when performed. Other service revenues are recognized when delivered and accepted by customers and when
services are provided in accordance with contract terms. Customer acquisition costs consist primarily of commissions paid to dealers that sell wireless
services to customers. Such costs are expensed ratably over the contract period as marketing
expense. Allowance for doubtful accounts The Company estimates the portion of its outstanding receivables that are uncollectible based
on aging schedules. Based on historical experience, uncollectibility is estimated as an increasing
percentage of each aging category. Additionally, the Company records an allowance for specific
customers if circumstances indicate non-collectibility. The estimated allowance for doubtful accounts relating to receivables sold and cash drawn
under the securitizations described in note (6) are recorded as accrued liabilities. Stock compensation In previous years, the Company accounted for stock-based employee compensation in accordance
with the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees. Specifically, the Company accounted for its combination
stock option and stock appreciation F-15




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) rights plan under the Stock option plan 2000 in accordance with the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans, which requires the plan be accounted for as a stock
appreciation right. The Company recognized a liability and a pro rata compensation expense in the first period in
which it is probable that the target stock price criteria outlined in the plan will be met. Based
on historical trends of the stock and relevant market conditions, no compensation expense has been
recognized under the plan for any of the comparative years presented. Effective January 1, 2004, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. Because the combination stock option and stock appreciation rights plan at January 1,
2004 permitted employees to call for settlement in cash, the accounting for this plan under SFAS
No. 123 was the same as in prior years under APB 25. Therefore, there was no effect of a change in
accounting principle. SFAS No. 123 also requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost is measured based on the
fair value of the equity instrument issued at the date of grant and recognized over the service
period. Derivative financial instruments All derivative instruments, such as interest rate swap contracts and foreign-currency exchange
contracts, are recognized in the financial statements and measured at fair value regardless of the
purpose or intent for holding them. Changes in the fair value of derivative financial instruments
are recognized periodically either in income or stockholders equity (as a component of accumulated
other comprehensive income), depending on whether the derivative is being used to hedge changes in
fair value or cash flows. For derivatives designated as fair value hedges, changes in fair value of
the hedged item and the derivative are recognized in earnings. For derivatives designated as cash
flow hedges, fair value changes of the effective portion of the hedging instruments are recognized
in accumulated other comprehensive income in the balance sheet until the hedged item is recognized
in earnings. The ineffective portion of the value changes are recognized in earnings immediately.
SFAS No. 133 also requires that certain derivative instruments embedded in host contracts be
accounted for separately as derivatives. The Company has entered into various foreign currency forward contracts which are accounted
for as free standing derivatives. These forward contracts serve as economic hedges of the Companys
operating exposure to fluctuations in foreign currencies. Changes in the fair values of such
forward contracts are recorded directly in income. Fair value of financial instruments The carrying amounts of cash, accounts receivable, accounts receivable sold, accounts payable,
receivables due from and payables due to related parties and accrued liabilities approximate their
fair value. The fair values of securities held-to-maturity and securities available-for-sale is
based on quoted market rates. The fair value of long-term debt and swap agreements is determined
based on the cash flows from such financial instruments discounted at the Companys estimated
current interest rate to enter into similar financial instruments. The fair value of some investments is estimated based on quoted market prices. For other
investments, mainly in unconsolidated subsidiaries and equity investments, for which there are no
quoted market prices (Cost method investments), the Company estimates the fair value to
approximate the carrying value based on the audited financial statements, if available. Those
investments are tested for impairment if losses are generated over an extended period or if the
business environment changes materially. F-16




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires the use of
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. New accounting pronouncements In October 2004, the FASB issued SFAS No. 151, Inventory Costsand clarified the accounting
for abnormal amounts of idle facility expenses, freight, handling costs, and waste material. The
Statement requires that those items be recognized as current period charges regardless of whether
they meet the criterion of so abnormal. In addition, this Statement requires that allocation of
fixed production overheads to the cost of conversion be based on the normal capacity of the
production facility. The provisions of SFAS 151 shall be effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of
SFAS No. 151 will have a material impact on the Companys consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets  an amendment
of APB Opinion No. 29, which eliminated the exception of non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of SFAS No. 153 shall be effective for the exchange of non-monetary assets incurred
during fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect
on its financial statements. In
December 2004, the FASB issued revised SFAS No. 123(R), Share-Based Payment. SFAS No.
123(R) requires that the compensation cost relating to share-based payment transactions be
recognized in financial statements. The compensation cost is measured based on the fair value of
the equity or liability instrument issued. The revised statement eliminated the alternative to
continue accounting for share-based payments in accordance with APB 25, which measured the
compensation cost at its intrinsic value. The revised SFAS No. 123(R) shall be applied
as of the first interim or annual period that begins after June 15, 2005. As the Companys
accounting for stock based compensation is based on the fair value of the equity instrument issued
in accordance with SFAS No. 123, the Company does not expect that the adoption of SFAS No. 123(R)
will have a material impact on the Companys consolidated financial statements. International Financial Reporting Standards In July 2002 the European Parliament adopted a regulation requiring all European Union (EU)
companies to prepare their financial statements in conformity with International Financial
Reporting Standards (IFRS) if their securities are traded on a regulated market within the EU. The
regulation shall be applied as of the first period that begins on or after January 1, 2005.
However, Member States may defer mandatory application until the first period that begins on or
after January 1, 2007 for companies that already use other internationally accepted standards and
that are publicly traded outside of the EU. This transitional clause applies to the Company as it
is listed on the New York Stock Exchange and prepares its financial statements in accordance with
US GAAP. Accordingly, the Company will not be required to prepare financial statements in
accordance with IFRS until fiscal year beginning on January 1, 2007. The Company is currently
considering adopting IFRS at a date earlier than the latest required. F-17




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (2)

BUSINESS COMBINATIONS All acquisitions have been accounted for under the purchase method, with the excess of the
purchase price over the estimated fair value of the net assets acquired accounted for as goodwill.
The results of operations of the acquired businesses are included in the consolidated financial
statements from the dates of the acquisition. The Companys interests in mobile communications are held through mobilkom austria AG & Co KG
and mobilkom austria AG (mobilkom austria), which, together with its subsidiaries, operate mobile
telecommunications networks and provide ancillary services in Austria, Croatia, Slovenia and
Liechtenstein. The operations include wireless internet access. On June 28, 2002, the Company acquired 100% of AUTEL Beteiligungs GmbH (Autel), which held
a 25.001% interest in mobilkom austria, from Telecom Italia Mobile SpA (the successor of STET
Mobile Holding N.V.), a publicly-traded subsidiary of Telecom Italia, bringing its total interest
in mobilkom austria to 100%. Consequently, the Company consolidated the balance sheet of mobilkom
austria for the first time as of June 28, 2002. Telekom Austria accounted for the acquisition of the 25.001% of mobilkom austria as a step
acquisition using the purchase method in accordance with paragraph 14 of SFAS No.141, Business
Combination. The excess of the purchase price over the estimated fair value of identifiable assets
acquired and liabilities assumed was accounted for as goodwill and the results of operations of the
acquired businesses were included in the consolidated financial statements from the date of
acquisition. The aggregate purchase price was EUR 693,064 and the Company recognized goodwill in the amount
of EUR 431,304, a brand name not subject to amortization of EUR 159,161 and amortizable intangible
assets of EUR 229,004. The consolidated statement of operations for the year ended December 31, 2002 reflects the
Companys equity in earnings of mobilkom austria through June 28, 2002 and mobilkom austrias
results of operations for the period June 28, 2002 until December 31, 2002. As a result of the
acquisition, the Company gained strategic and operating control of mobile communications service
providers in Austria, Croatia, Slovenia and Liechtenstein. As of December 31, 2004, mobilkom austria acquired the remaining 1% of VIPnet d.o.o., Zagreb,
(VIPnet) for a total purchase price of EUR 1,658, bringing its interest to 100%. As of January 30, 2003, mobilkom austria acquired 9% and as of June 23, 2003, a further 19% of
VIPnet for a total purchase price of EUR 69,663, bringing its interest to 99%. mobilkom austria
recognized intangible assets of EUR 34,035, including intangible assets with an indefinite life of
EUR 15,728 and goodwill totaling EUR 11,774 as a result of these two transactions. On July 29, 2003, the Company acquired 74% of World-Direct eBusiness solutions GmbH, bringing
its total interest to 100%. The purchase price amounted to EUR 1,543. The Company recognized
goodwill totaling EUR 1,000 as a result of the transaction. On September 23, 2003, mobilkom austria acquired 100% of paybox cee AG which held a 51.02%
share in paybox österreich AG for a total purchase price of EUR 795. Prior to this acquisition,
mobilkom austria held the remaining 48.98% of paybox österreich AG and accounted for the investment
using the equity method. Consequently, the Company consolidated the balance sheets of paybox cee AG
and subsidiaries for the first time as of September 30, 2003. As the purchase price was less than the fair value of the net assets acquired and
liabilities assumed, the Company reduced the purchase price allocated to intangible assets
(licenses). Following the purchase, paybox österreich AG was merged into paybox cee AG as of
December 17, 2003. On December 23, 2003 mobilkom austria purchased 100% of 3G Mobile Telecommunications GmbH (3G
Mobile). The net assets acquired consist of a UMTS license. The total purchase price was allocated
to the license F-18




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) and therefore no goodwill was recognized. Tax assets on acquired intangible assets
and tax loss carryforwards were not recognized at the acquisition date as the use of these tax
assets was not considered more likely than not. The Company reassessed the valuation allowance in
2004 and, as a result, recognized the resulting tax benefits as a reduction of other non-current
intangible assets related to the acquisition, and the remaining amount as a reduction of income tax
expense. No pro forma disclosure has been presented for the effect of the acquisitions discussed in the
prior five paragraphs because the Company believes that the impact on the financial statements is
not material. On November 28, 2003, the Company sold 90% of Telekom Building Systems GmbH in a management
buy-out transaction for a total purchase price of EUR 537, reducing its interest to 10%. On June
30, 2004 the Company sold its remaining interest in Telekom Building Systems GmbH. On December 17, 2004, the Company entered into call option agreements to acquire a 100% share
in MobilTel AD. (MobilTel), a Bulgarian provider of mobile communications services for a purchase
price of approximately EUR 1,600,000. These options are exercisable from July 12, 2005 until August
23, 2005 (see note (27)).  (3)

INVESTMENTS IN AFFILIATES As of December 31, 2004 and 2003, the investments in affiliates comprise a 26.00% interest in
Omnimedia Werbegesellschaft mbH (Omnimedia) and a 25.10% interest in Output Service GmbH (OSG). In July 2003 the Company sold its 26.00% interest in Herold Business Data AG, the leading
telephone directory provider in Austria, to PASR Vierte Beteiligungsverwaltung GmbH for EUR 22,000
and realized a gain of EUR 18,367 which was recorded in equity in earnings of affiliates. The following table shows the roll forward of investments in affiliates: 2004
    
    
    2003Carrying amount, January 1
    
    
    3,555
    
    
    
    8,642Disposals
    
    
    
    
    
    
    (4,255
    )Changes in equity
    
    
    15
    
    
    
    (832
    )Carrying amount, December 31
    
    
    3,570
    
    
    
    3,555
 F-19




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) A summary of aggregated financial information as reported by equity investees is as follows: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Revenues
    
    
    3,394
    
    
    
    35,515
    
    
    
    68,045Operating income
    
    
    1,584
    
    
    
    4,653
    
    
    
    7,833Net income
    
    
    975
    
    
    
    2,908
    
    
    
    8,285
 At December 31,
    
    2004
    
    
    2003Total current assets
    
    
    31,068
    
    
    
    31,003Total assets
    
    
    31,566
    
    
    
    31,684Current liabilities
    
    
    28,590
    
    
    
    28,808Long-term debt
    
    
    1,401
    
    
    
    1,357Total liabilities
    
    
    29,991
    
    
    
    30,165Total stockholders equity
    
    
    1,575
    
    
    
    1,519
  (4)

MARKETABLE SECURITIES Marketable securities are included in short-term investment and other investments on the
Balance Sheet. Debt securities originating from cross border lease transactions entered into in 1998 and 1999
(see note (17)) are classified as held-to-maturity as the Company is contractually obligated to
hold these securities until maturity. The securities are bonds of triple A rated issuers and are
held by a custodian. Through a further asset based swap the cash inflows from the securities are
transformed into the cash flow stream required to match a specified portion of the lease payments.
The securities are pledged to a counterparty in the swap agreement. No sales of securities
held-to-maturity occurred in 2004, 2003 and 2002. The interest rates on the securities are fixed
and range from 5.65% to 9.01%. Accrued interest is recorded as interest income. The securities will
mature between 2006 and 2011. F-20




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    holding gains
    
    
    holding losses
    
    
    valueAt December 31, 2004Non-current assetsAvailable-for-saledebt securities
    
    
    4,955
    
    
    
    176
    
    
    
    4
    
    
    
    5,127equity securities
    
    
    1,658
    
    
    
    
    
    
    
    
    
    
    
    1,658mutual funds
    
    
    13,342
    
    
    
    1
    
    
    
    472
    
    
    
    12,871Held-to-maturity
    
    
    120,946
    
    
    
    12,919
    
    
    
    
    
    
    
    133,865At December 31, 2003Non-current assetsAvailable-for-saledebt securities
    
    
    4,702
    
    
    
    168
    
    
    
    
    
    
    
    4,870equity securities
    
    
    6,914
    
    
    
    2,646
    
    
    
    605
    
    
    
    8,955mutual funds
    
    
    5,679
    
    
    
    2
    
    
    
    163
    
    
    
    5,518Held-to-maturity
    
    
    124,951
    
    
    
    16,596
    
    
    
    
    
    
    
    141,547
 The contractual maturities of debt securities classified as held-to-maturity at December 31,
2004 were as follows: Amortized
    
    
    Faircost
    
    
    valueHeld-to-maturityDue within one year
    
    
    5,063
    
    
    
    5,134Due after one year through five years
    
    
    59,237
    
    
    
    64,152Due after five years through ten years
    
    
    56,646
    
    
    
    64,579120,946
    
    
    
    133,865
 Proceeds from sales of available-for-sale securities amounted to EUR 8,740 and EUR 545 in 2004
and 2003, respectively. Gross realized gains from sales of available-for-sale securities were EUR
2,124 in 2004, gross realized losses from sales of available-for-sale securities were EUR 3 in
2004. The specific identification method was used to determine the cost in computing realized gains
and losses. F-21




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The unrealized losses on the investment in mutual funds, corporate bonds and equity securities
were caused by fluctuations in the capital markets. The Company considers the fluctuation of the
fair value of these investments to be temporary and therefore did not record impairment. Presented
below is the fair value information for marketable securities held by the Company: Less than 12 months
    
    
    12 months or longer
    
    
    TotalGross unrealized
    
    
    
    
    
    
    Gross unrealized
    
    
    
    
    
    
    Gross unrealizedFair value
    
    
    holding losses
    
    
    Fair value
    
    
    holding losses
    
    
    Fair value
    
    
    holding lossesAt December 31, 2004Non-current assetsAvailable-for-saledebt corporate securities
    
    
    1,068
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    1,068
    
    
    
    4equity securities
    
    
    
    
    
    
    
    
    
    
    1,012
    
    
    
    18
    
    
    
    1,012
    
    
    
    18mutual funds
    
    
    
    
    
    
    
    
    
    
    8,963
    
    
    
    454
    
    
    
    8,963
    
    
    
    454Total temporarily
impaired securities
    
    
    1,068
    
    
    
    4
    
    
    
    9,975
    
    
    
    472
    
    
    
    11,043
    
    
    
    476
  (5)

COST METHOD INVESTMENTS The Company determined, in accordance with paragraphs 14 and 15 of SFAS 107, that it is not
practicable to estimate the fair value of these investments, as quoted market prices are not
available. Therefore, the cost method investments are recorded at cost and reviewed periodically if
there are events or changes in circumstances that may have a significant adverse effect on the fair
value of the investments. The aggregate carrying amount of cost method investments totaled EUR 748 and EUR 2,931 as of
December 31, 2004 and 2003, respectively. Thereof, the aggregate carrying amount of investments
that the Company did not evaluate for impairment totaled EUR 748 and EUR 2,931 as of December 31,
2004 and 2003, respectively. F-22




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s)  (6)

ACCOUNTS RECEIVABLE  TRADE The roll-forward of the allowance for accounts receivable-trade and accounts receivables sold
is as follows: 2004
    
    
    2003Allowance beginning of the year
    
    
    92,238
    
    
    
    74,945Foreign currency adjustment
    
    
    31
    
    
    
    (11
    )Charged to expenses
    
    
    24,707
    
    
    
    30,629Amounts written-off
    
    
    (22,363
    )
    
    
    (13,325
    )Allowance at the end of the year
    
    
    94,613
    
    
    
    92,238of which allowance for accounts receivable-trade
    
    
    73,463
    
    
    
    76,831of which for accounts receivable sold
    
    
    21,150
    
    
    
    15,407
 December
31,2004
    
    
    December 31,2003Accounts receivable-trade, gross
    
    
    482,283
    
    
    
    506,750Allowance for accounts receivable-trade
    
    
    (73,463
    )
    
    
    (76,831
    )Accounts receivable sold, gross
    
    
    194,500
    
    
    
    145,360Allowance for accounts receivable sold
    
    
    (21,150
    )
    
    
    (15,407
    )Accounts receivable, net
    
    
    582,170
    
    
    
    559,872
 Of these receivables, EUR 249,173 are held for sale due to the securitization program
described in the following paragraphs. In January 2002, the Company entered into a revolving period securitization program and sold
trade receivables to a Qualifying Special Purpose Entity (QSPE) unrelated to the Company. The
Company retains servicing responsibilities relating to the sold receivables. Solely for the purpose
of credit enhancement from the perspective of the QSPE, the Company retains interests in the sold
receivables (retained interests). These retained interests are initially measured at estimated fair
values, which the Company believes approximate historical carrying values, and are subsequently
measured based on a periodic evaluation of collections and delinquencies. The Company determined that the transaction met the three sales criteria, that (a) the
transferred assets have been isolated from the transferor, beyond the reach of the transferor and
its creditors, even in the event of bankruptcy or receivership, (b) the transferee obtains the
right, free of any conditions that constrain, to pledge or exchange the assets and (c) the
transferor does not maintain effective control in accordance with SFAS No. 140,Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Additionally, the
limited liability corporation whose shares are owned by a charitable trust under the terms of a
trust fulfilled all conditions required to be a qualifying special purpose entity (QSPE) under SFAS
No. 140. In December 2003 the asset-backed securitization program was extended regarding the trade
receivables sold and the maximum amount transferred to the trust. Additionally, the discounts
required were reduced. The maximum program limit was increased from EUR 290,000 to EUR 350,000. At December 31, 2004, the Company recorded a receivable due from the QSPE of EUR 173,350. This
amount represents accounts receivable sold, net of allowance for doubtful accounts, for which the
Company had not required cash settlement as of December 31, 2004. F-23




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The Company routinely evaluates its portfolio of trade receivables for risk of non-collection
and records an allowance for doubtful accounts to reflect the carrying value of its trade
receivables at estimated net realizable value. Pursuant to the provisions of the revolving-period
securitizations, the Company effectively bears the risk of potential delinquency or default
associated with trade receivables sold or interests retained. Accordingly, in the normal course of
servicing the assets sold, the Company evaluates potential collection losses and delinquencies and
updates the estimated fair value of the Companys retained interest. The allowance recorded for sold receivables, for which the company received cash settlement as
of December 31, 2004, are classified as accrued liabilities. As of December 31, 2004 and 2003,
respectively, the accruals totaled EUR 19,097 and EUR 28,882. In accordance with SFAS No. 140 the Company has not recorded a servicing asset as management
has determined, that it is not practicable to determine a fair value for the servicing asset, as
the benefits of the servicing assets are adequate to compensate the Company for its servicing
responsibility and no servicing assets or servicing liability was recorded. In the years ended December 31, 2004 and 2003, respectively, the following cash flows were
received from and paid to the QSPE: December 31,2004
    
    
    2003Gross trade receivables sold to QSPE
    
    
    2,861,686
    
    
    
    2,789,761Collections made on behalf of and paid to the QSPE
    
    
    (2,806,644
    )
    
    
    (2,578,860
    )Deferred purchase price withheld
    
    
    (9,771
    )
    
    
    (168,846
    )Unearned discount (withheld) reduced
    
    
    (1,489
    )
    
    
    (3,620
    )Liquidity and program fees
    
    
    (3,110
    )
    
    
    (5,788
    )Retained interests
    
    
    (9,142
    )
    
    
    Increase in receivable from the QSPE
    
    
    (49,140
    )
    
    
    (145,360
    )Net cash received from (paid to) QSPE during the period
    
    
    17,610
    
    
    
    (112,713
    )
 Cash settlement with the QSPE takes place on a monthly basis. Gross trade receivables sold
represent the fair value of billed and unbilled receivables to the QSPE during the years ended
December 31, 2004 and 2003, respectively. The Company services these receivables, collecting cash
from receivables previously sold on behalf of the QSPE. The Company recorded discounts, liquidity
and program fees related to the securitization of trade receivables of EUR 3,107 and EUR 5,690 for
the years ended December 31, 2004 and 2003, respectively. These discounts and fees are included in
interest expense in the statement of operations.  (7)

RELATED PARTY TRANSACTIONS The disclosures below present balances and transactions relating to the Companys majority
shareholder ÖIAG and its subsidiary Österreichische Post AG as ÖIAG, with other government
agencies and government-owned entities, for practical reasons, not being disclosed. None of the
individual accounts associated with government agencies or government-owned entities is considered
significant to the Company. The majority of the related party transactions were carried out with mobilkom austria. The
Company charged mobilkom austria for interconnection fees, voice telephony, rent, repair and other
services. mobilkom austria charged F-24




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) the Company mainly for interconnection fees. Since June 28, 2002 such transactions are fully
eliminated in consolidation. Österreichische Post AG and its subsidiaries (Post), a subsidiary of ÖIAG which provides
postal services, charged the Company for different services such as postal charges, rent, repair
and administration. The Company charged Post for IT support, voice telephony, technical services,
rent, repair and other services. On September 17, 2003, Postbus AG, a 100% subsidiary of
Österreichische Post AG, was sold to Österreichische
Bundesbahnen and is therefore no longer
reported as related party. The terms for services provided by Telekom Austria to government entities are generally based
on standard pricing policies. However, the Company is obligated to provide voice telephone services
for disadvantaged individuals at reduced tariffs for which it is entitled to appropriate
compensation from the government on a contractual basis. Beginning January 1, 2001, the contract
with the government specifies the reimbursement of Euro 13.81 per customer per month, which is
recorded as revenue in the service period. The total reimbursement was EUR 40,303, EUR 41,396 and
EUR 41,670 in 2004, 2003 and 2002, respectively. In 2001, a partner in a law firm which provides legal services to the Company was elected to
the Supervisory Board. In 2004, 2003 and 2002, respectively, the Company was charged EUR 640, EUR
560 and EUR 993 for legal services by that law firm. Telecom Italia and the Company charged for interconnection services provided to each other at
standard rates. The Company has entered into agreements with Telecom Italia whereby the Company grants some
pre-defined access to existing capacity on its physical network in return for similar access to the
physical network of Telecom Italia. The Company does not recognize revenue or an obligation under
such agreements apart from the trade revenue arising from subscriber transactions under normal
tariff plans. The benefits and costs of such swap agreements will be reflected in the Companys
results of operations in the periods in which they are realized through reduced interconnection
obligations and revenues, respectively. The following is the detail of the accounts receivable with related parties: At December 31,
    
    2004
    
    
    2003ÖIAG
    
    
    18
    
    
    
    945Affiliated companies and other.
    
    
    67
    
    
    
    604Total
    
    
    85
    
    
    
    1,549
 The following is the detail of the accounts payable to related parties: At December 31,
    
    2004
    
    
    2003ÖIAG
    
    
    9,969
    
    
    
    7,840Omnimedia
    
    
    12,039
    
    
    
    13,192Affiliated companies and other.
    
    
    916
    
    
    
    2,625Total
    
    
    22,924
    
    
    
    23,657
 F-25




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The following is the detail of revenues from and expenses charged to related parties: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Revenuesmobilkom austria
    
    
    
    
    
    
    
    
    
    
    72,879ÖIAG
    
    
    59,992
    
    
    
    62,635
    
    
    
    56,660Telecom Italia
    
    
    
    
    
    
    24,014
    
    
    
    14,361Other
    
    
    2,110
    
    
    
    2,857
    
    
    
    4,090Total
    
    
    62,102
    
    
    
    89,506
    
    
    
    147,990Interest incomemobilkom austria
    
    
    
    
    
    
    
    
    
    
    4,988Other
    
    
    1
    
    
    
    1
    
    
    
    4Total
    
    
    1
    
    
    
    1
    
    
    
    4,992Expensesmobilkom austria
    
    
    
    
    
    
    
    
    
    
    43,590ÖIAG
    
    
    72,903
    
    
    
    70,643
    
    
    
    58,285Telecom Italia
    
    
    
    
    
    
    10,808
    
    
    
    23,559Omnimedia
    
    
    44,440
    
    
    
    36,146
    
    
    
    55,289Other
    
    
    7,356
    
    
    
    11,097
    
    
    
    11,430Total
    
    
    124,699
    
    
    
    128,694
    
    
    
    192,153Interest expensemobilkom austria
    
    
    
    
    
    
    
    
    
    
    837ÖIAG and other
    
    
    59
    
    
    
    30
    
    
    
    101Total
    
    
    59
    
    
    
    30
    
    
    
    938
 The expenses to Omnimedia mainly relate to advertising and marketing services provided.  (8)

INVENTORIES Inventories consist of: At December 31,
    
    2004
    
    
    2003Spare parts, cables and supplies
    
    
    41,167
    
    
    
    44,510Merchandise
    
    
    41,943
    
    
    
    39,025Total
    
    
    83,110
    
    
    
    83,535
 F-26




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (9)

GOODWILL AND OTHER INTANGIBLE ASSETS Other intangible assets consist of: At December 31,
    
    2004
    
    
    2003Wireless and wireline licenses
    
    
    563,080
    
    
    
    559,273Patents and proprietary rights
    
    
    78,482
    
    
    
    53,497Brandnames
    
    
    173,948
    
    
    
    174,046Subscriber base
    
    
    138,504
    
    
    
    138,622Other
    
    
    35,679
    
    
    
    35,858Total intangibles
    
    
    989,693
    
    
    
    961,296Less accumulated amortization.
    
    
    (322,356
    )
    
    
    (249,308
    )Net intangibles
    
    
    667,337
    
    
    
    711,988
 Amortization expense was EUR 74,863 EUR 68,340 and EUR 27,410 for the years 2004, 2003 and
2002, respectively. Licenses are recorded at cost and amortized on a straight-line basis over the estimated useful
life. In November 2000, mobilkom austria purchased a UMTS license for Austria with a term of 20
years for EUR 171,540. Interest in the amount of EUR 1,843 and EUR 6,495 was capitalized in 2003
and 2002, respectively, on the UMTS license. The amortization of the UMTS license over 14 years and
depreciation of the related network equipment over 8 years began in May 2003 after the start of the
UMTS services and the generation of revenues. The Company recorded amortization and depreciation
expenses from the use of these assets of EUR 25,204 in 2004 and expects the same amount on an
annual basis thereafter. In October 2004, VIPnet acquired a UMTS license for Croatia for the purchase price of EUR
17,213. The license covers 20 years. The Company will start to amortize the license in 2005 and
expects amortization and depreciation expenses of EUR 861 on an annual basis. The Company holds licenses to operate as a mobile telecommunications service provider from the
Austrian, Croatian and Slovenian communications commissions. The Croatian license, granted for 10
years, was acquired for EUR 13,672 in 1998. Licenses from the Slovenian Government granted in 2001
and 1999 for 15 years, were acquired for EUR 4,637 and EUR 11,121, respectively. The Company
recorded amortization and depreciation expenses from the use of these assets of EUR 24,489 in 2004
and expects approximately the same amount on an annual basis thereafter. F-27




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Upon adoption of SFAS No. 142 on January 1, 2002, the Company ceased amortizing goodwill. The
following tables illustrate the changes in net book value of goodwill by segment for the years
ended December 31, 2004 and 2003, respectively: Wireline
    
    
    Wireless
    
    
    TotalGoodwill January 1, 2004
    
    
    31,419
    
    
    
    566,158
    
    
    
    597,577Acquisitions
    
    
    202
    
    
    
    
    
    
    
    202Impairment
    
    
    (211
    )
    
    
    
    
    
    
    (211
    )Translation adjustment
    
    
    907
    
    
    
    (1,910
    )
    
    
    (1,003
    )Goodwill December 31, 2004
    
    
    32,317
    
    
    
    564,248
    
    
    
    596,565
 Wireline
    
    
    Wireless
    
    
    TotalGoodwill January 1, 2003
    
    
    30,795
    
    
    
    559,932
    
    
    
    590,727Acquisitions
    
    
    1,000
    
    
    
    11,774
    
    
    
    12,774Translation adjustment
    
    
    (376
    )
    
    
    (5,548
    )
    
    
    (5,924
    )Goodwill December 31, 2003
    
    
    31,419
    
    
    
    566,158
    
    
    
    597,577
 In 2002 impairment charges in the amount of EUR 40,441 were recorded for goodwill originally
recorded from the acquisition of Czech On Line (COL). The acquisition was based on a business
plan assuming the full liberalization of the Czech market. As this remained unsatisfactory with
regard to interconnection and limited wholesale offers to alternative operators, the business of
COL had not developed as originally expected. The valuation of the reporting unit in 2002 was based
on forecasted cash flows and used the weighted average cost of capital employed of 13.2% as a
discount rate. The gross carrying amounts and accumulated amortization of intangible assets subject to
amortization, by major class, are as follows: Accumulated
    
    
    CarryingAt December 31, 2004
    
    Acquisition cost
    
    
    amortization
    
    
    valueWireless and wireline licenses
    
    
    563,080
    
    
    
    (210,172
    )
    
    
    352,908Subscriber base
    
    
    138,504
    
    
    
    (55,149
    )
    
    
    83,355Patents, proprietary rights and others
    
    
    114,161
    
    
    
    (57,035
    )
    
    
    57,126Total
    
    
    815,745
    
    
    
    (322,356
    )
    
    
    493,389
 Accumulated
    
    
    CarryingAt December 31, 2003
    
    Acquisition cost
    
    
    amortization
    
    
    valueWireless and wireline licenses
    
    
    559,273
    
    
    
    (172,301
    )
    
    
    386,972Subscriber base
    
    
    138,622
    
    
    
    (32,088
    )
    
    
    106,534Patents, proprietary rights and others
    
    
    89,355
    
    
    
    (44,919
    )
    
    
    44,436Total
    
    
    787,250
    
    
    
    (249,308
    )
    
    
    537,942
 F-28




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The following table presents expected amortization expense related to amortizable intangible
assets for each of the following periods: 2005
    
    
    74,2272006
    
    
    72,2792007
    
    
    68,9822008
    
    
    57,0062009
    
    
    41,6692010
    
    
    39,567Thereafter
    
    
    139,659
 The total carrying amount of intangible assets, other than goodwill, not subject to
amortization is EUR 173,948 as of December 31, 2004. This amount relates entirely to the value of
brandnames. The value of brandnames increased by EUR 15,728 in 2003 as a result of the acquisition
of the 28% interest in VIPnet (see note (2)).  (10)

PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment transferred to the Company by the government was recorded upon
transfer at cost less accumulated depreciation as of that date. Acquisitions since then have been
recorded at cost. At December 31,
    
    2004
    
    
    2003Land
    
    
    59,172
    
    
    
    60,281Buildings and leasehold improvements
    
    
    689,639
    
    
    
    663,044Communications network and other equipment
    
    
    9,506,621
    
    
    
    9,381,996Capital leases
    
    
    8,961
    
    
    
    13,963Software
    
    
    441,223
    
    
    
    376,567Construction in progress, network
    
    
    158,007
    
    
    
    186,48710,863,623
    
    
    
    10,682,338Less accumulated depreciation (other than capital leases)
    
    
    (6,968,516
    )
    
    
    (6,214,641
    )Less accumulated depreciation, capital leases
    
    
    (6,416
    )
    
    
    (10,031
    )Property, plant and equipment, net
    
    
    3,888,691
    
    
    
    4,457,666
 F-29




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Major additions in 2004 and 2003 related to the communications network in the wireline segment
and GSM and UMTS network infrastructure in the wireless segment. Total interest capitalized and amortization and depreciation expenses and impairment charges
for the years ended December 31, 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Interest capitalized
    
    
    1,557
    
    
    
    1,605
    
    
    
    2,635Depreciation and amortization expense
    
    
    1,039,967
    
    
    
    1,064,808
    
    
    
    988,901Impairment charges
    
    
    1,123
    
    
    
    6,825
    
    
    
    977of whichAmortization expense of software
    
    
    81,903
    
    
    
    79,059
    
    
    
    42,623Amortization expense of leased assets
    
    
    1,466
    
    
    
    3,663
    
    
    
    2,341
  (11)

ASSETS HELD FOR SALE The Company classified one Austrian UMTS license frequency band with zero carrying amount and
several buildings with carrying amount of EUR 2,660 as held for sale as of December 31, 2004. The
assets have been accounted for at the lower of the carrying amount or each assets estimated fair
value less costs to sell. The aforementioned UMTS license frequency band was acquired among others in 2003 in the
purchase of 100% of 3G Mobile Telecommunications GmbH and has subsequently been classified as held
for sale as required by the authorities. The license frequency band was sold in January 2005.
Certain buildings are subject to the Companys real estate optimization program and are expected to
be sold on several dates during 2005. The Company recognized a gain from assets held for sale of EUR 4,762 and EUR 10 for the years
ended December 31, 2004 and 2003, respectively.  (12)

SHORT-TERM BORROWINGS The Companys short-term borrowings include: At December 31,
    
    2004
    
    
    2003Current portion of long-term debt
    
    
    653,022
    
    
    
    530,869Lines of credit
    
    
    2,775
    
    
    
    4,962Current portion of lease obligations
    
    
    95,342
    
    
    
    95,490Total
    
    
    751,139
    
    
    
    631,321
 The weighted-average interest rate on lines of credit was 2.21% and 3.20% in 2004 and 2003,
respectively. As of December 31, 2004 the Company had unused committed credit lines of EUR 450,000
and recorded commitment and servicing fees for these unused lines of EUR 779. The credit line
commitments will expire between November 2006 and December 2007. F-30




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Short-term borrowings increased as the short-term portion of long-term debt which is due in
the next twelve months increased compared to prior year.  (13)

ACCRUED LIABILITIES Accrued liabilities consist of the following: At December 31,
    
    2004
    
    
    2003Taxes, other than income
    
    
    7,643
    
    
    
    9,845Employee benefits
    
    
    61,830
    
    
    
    69,935Customer discounts
    
    
    42,279
    
    
    
    47,444Customer retention programs
    
    
    34,712
    
    
    
    40,161Exit costs
    
    
    123
    
    
    
    6,829Bad debt reserve for sold receivables
    
    
    19,097
    
    
    
    28,882Other
    
    
    28,635
    
    
    
    28,682Total
    
    
    194,319
    
    
    
    231,778
 Other accruals mainly relate to legal fees and lawsuits, audit fees, public fees and
consulting services. In establishing accruals, management assesses different scenarios of reasonably estimated
outcomes in determining the amount that the Company is expected to pay upon the resolution of a
contingency. The Company records the most likely of all scenarios contemplated or, if none of the
scenarios is more likely to occur, the scenario with the lowest amount is considered in
establishing the accrual. As of December 31, 2002, the Company recorded an accrual totaling EUR 8,363 for certain
non-cancellable lease contracts related to premises which the Company vacated in 2003. As of
December 31, 2003, the Company recorded an additional accrual of EUR 1,763. This accrual covers the
minimum lease payments until the end of the lease contracts. For the years ended December 31, 2004
and 2003, respectively, the Company utilized EUR 6,706 and EUR 3,297 of the accrual. As of December
31, 2004, the Company has a remaining accrual of EUR 123 that is expected to be fully utilized.  (14)

DEFERRED INCOME At December 31,
    
    2004
    
    
    2003Unearned income
    
    
    162,002
    
    
    
    143,266Unamortized gain on sale of tax benefits
    
    
    44,331
    
    
    
    51,573206,333
    
    
    
    194,839Less non-current portion
    
    
    (37,349
    )
    
    
    (44,461
    )Deferred income net of non-current portion
    
    
    168,984
    
    
    
    150,378
 The deferred income mainly relates to prepaid access fees, monthly base fees, leased lines to
commercial customers, prepaid mobile fees and rental income from site sharing. These fees are
amortized over the period the service is provided. F-31




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Additional information concerning the sale of tax benefits is contained in note (17).  (15)

ASSET RETIREMENT OBLIGATION The Company adopted SFAS No. 143 as of January 1, 2003 and recorded the following additions to
long-lived assets, asset retirement obligations and a cumulative change in accounting principles: At January 1,
    
    2003Addition to long-lived assets
    
    
    6,288Addition to accumulated depreciation
    
    
    (2,263
    )Cumulative effect of change in accounting principle
    
    
    17,929Asset retirement obligations
    
    
    21,954
 The roll-forward of asset retirement obligations is as follows: 2004
    
    
    2003Asset retirement obligations as of January 1
    
    
    23,262
    
    
    
    21,954Foreign exchange differences
    
    
    (33
    )
    
    
    (3
    )Liability incurred in the current period
    
    
    11,451
    
    
    
    451Accretion expense
    
    
    6,173
    
    
    
    1,336Settlements
    
    
    (2,248
    )
    
    
    (461
    )Releases
    
    
    (344
    )
    
    
    (15
    )Asset retirement obligations as of December 31
    
    
    38,261
    
    
    
    23,262
 The Company recorded asset retirement obligations for the retirement and decommissioning of
base stations, buildings, booths for public payphones and wooden masts impregnated with tar or
salt. The Company has an obligation to operate a sufficient number of booths to assure that the
Austrian population has sufficient access to telecommunications services. As long as the Company
stays in business and technology does not materially change, the number of booths operated will be
reduced but not eliminated completely for the foreseeable future. The Company estimated the number
and timing of booths to be retired from service and estimated the asset retirement obligation based
on probability-weighted cash flow estimates. The Company has also recorded an asset retirement obligation for masts impregnated with tar or
salt. Although the Company stopped setting up tar-masts in 1992, some will be in operation for
approximately another 30 years. Masts impregnated with salt are currently in operation and set up
for the foreseeable future. The Company has recorded an asset retirement obligation based on
estimated settlement dates and expected cash flows. Additionally, the Company recorded asset retirement obligations for buildings concerning
obligations for the disposal of hazardous substances. mobilkom austria situates base stations on land, rooftops and other premises under various
types of rental contracts. In estimating the fair value of its retirement obligation for its base
stations, mobilkom austria made a range of assumptions such as retirement dates, timing and
percentage of early cancellations, development of technology and the cost of removing network
equipment and remediating the sites. F-32




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Additionally, mobilkom austria recorded asset retirement obligations for buildings and shops
under operating leases in accordance with the obligation to refurbish the sites at the expiration
of the lease contracts.  (16)

LONG-TERM DEBT The outstanding long-term debt, other than lease obligations, are summarized as follows: At December 31,
    
    Maturity
    
    2004
    
    
    2003Bonds under EMTN Programme
    
    2005-2013
    
    
    767,509
    
    
    
    752,387Other bonds guaranteed by the Federal Republic of Austria
    
    2005
    
    
    149,602
    
    
    
    152,471Bank debt
    
    2005-2008
    
    
    675,296
    
    
    
    612,926Bank debt guaranteed by the Federal Republic of Austria
    
    2005-2011
    
    
    707,566
    
    
    
    1,354,583Other
    
    2007
    
    
    220
    
    
    
    7902,300,193
    
    
    
    2,873,157Less current portion of long-term debt
    
    
    
    
    (653,022
    )
    
    
    (530,869
    )Long-term debt, net of current portion
    
    
    
    
    1,647,171
    
    
    
    2,342,288
 The interest rates on the guaranteed and unguaranteed bank debt vary between 2.1% and 7.4%.
The weighted average interest rate for the years ended December 31, 2004 and 2003, respectively,
were 5.0% and 4.6% for bonds and 4.9% and 5.2% for bank debt. The year-end average interest rates for the long-term debt excluding interest rate swap
agreements for 2004 and 2003 are as follows: 2004
    
    
    2003Bonds
    
    
    4.56
    %
    
    
    4.57
    %Bank debt
    
    
    4.62
    %
    
    
    4.96
    %
 Following is a table that shows the aggregate amounts of long-term debt maturing during the
next five years and thereafter: 2005
    
    
    653,0222006
    
    
    243,8382007
    
    
    100,5272008
    
    
    236,6372009
    
    
    300,055Thereafter
    
    
    766,114
 As of December 31, 2004, the Company was in compliance with all covenants required by its loan
agreements. Bonds under EMTN Programme On June 30, 2003, Telekom Austria AG and Telekom Finanzmanagement GmbH (the 100% financing
subsidiary of Telekom Austria AG) initiated a Euro Medium Term Note (EMTN) Programme. The
payments of all amounts due in respect of notes issued by Telekom Finanzmanagement GmbH under this
framework agreement are F-33




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) unconditionally and irrevocably guaranteed by Telekom Austria AG. The
maximum aggregate nominal amount of all notes outstanding at any time under the programme will not
exceed the equivalent of EUR 2,500,000. Under this programme the Company successfully launched and placed a Eurobond offering which
raised EUR 750,000 with a 10-year maturity and a coupon of 5.00% on July 10, 2003. The notes were
issued at a discount including issue costs of EUR 9,053 (EUR 7,731 as of December 31, 2004) and
were used to refinance existing debt. Other bonds Other bonds issued by the Company before the privatization are guaranteed by the Federal
Republic of Austria and consist of two bonds, of which EUR 145,346 will become due in September
2005 and EUR 3,270 will become due in December 2005. Bank debt Bank debt incurred by the Company after its privatization is not guaranteed by the Federal
Republic of Austria. These contracts can be described in more detail as follows: In March 2000, the Company entered into a loan agreement for EUR 145,000 with the European
Investment Bank. As of December 31, 2004, EUR 87,000 of the loan is outstanding in accordance with
the repayment terms. Under the terms of this agreement, the Company must observe covenants
requiring the Company to meet certain financial ratios. Further, in October 2000 the Company entered into a loan agreement for EUR 232,553 to fund the
acquisition of COL. As of December 31, 2004 the loan is outstanding in full in accordance with the
repayment terms. Under the terms of the contract the Company has to maintain a minimum equity in
COL, otherwise the loan becomes due. The interest rates vary depending on the rating of the
Company. As of December 31, 2004, EUR 295,160 of a syndicated loan granted to mobilkom austria was
outstanding. The original loan totaled EUR 305,000 and was guaranteed by Telekom Austria AG. In March 1999, Si.mobil entered into a loan agreement amounting to EUR 36,000 (original
currency: Deutsche Mark 71,000) to finance the construction of the GSM network in Slovenia. The
loan is secured by bills of exchange, property, receivables and shares of Si.mobil. The loan is
repayable through March 2007. Bank debt guaranteed by the Federal Republic of Austria Bank debt entered into before the Companys privatization is guaranteed by the Federal
Republic of Austria From the bank debt as of December 31, 2004 and 2003, respectively, EUR 176,635 and EUR 192,567
are denominated in Swiss Francs. A bank loan denominated in Japanese Yen, which amounted to EUR
74,046 as of December 31, 2003, was repaid in 2004. The Company uses cross currency swaps to reduce
the exposure to the risks of adverse changes in exchange rates as described in note (22). F-34




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s)  (17)

LEASING The Company leases equipment used in its operations. The leases are classified as either
operating or capital leases. The lease contracts expire on various dates through 2015. Future minimum lease payments for noncancelable operating leases, capital leases and cross
border leases as of December 31, 2004 are: Cross
    
    
    Otherborder
    
    
    Capital
    
    
    Operatingleases
    
    
    leases
    
    
    leases2005
    
    
    94,154
    
    
    
    1,359
    
    
    
    42,7422006
    
    
    106,265
    
    
    
    318
    
    
    
    39,1232007
    
    
    125,525
    
    
    
    3
    
    
    
    34,5982008
    
    
    110,541
    
    
    
    
    
    
    
    30,6872009
    
    
    160,547
    
    
    
    
    
    
    
    29,954after 2009
    
    
    538,288
    
    
    
    
    
    
    
    40,201Total minimum lease payments
    
    
    1,135,320
    
    
    
    1,680
    
    
    
    217,305Less amount representing interest
    
    
    (280,489
    )
    
    
    (37
    )Present value of lease payments
    
    
    854,831
    
    
    
    1,643Less current portion
    
    
    (94,154
    )
    
    
    (1,188
    )Non-current lease obligations
    
    
    760,677
    
    
    
    455
 Total rent expense was EUR 79,204, EUR 74,358 and EUR 67,666 in 2004, 2003 and 2002,
respectively. Cross border leases In 1999 and 1998, the Company entered into various cross border lease transactions whereby
certain equipment items, mainly switches, were sold to a U.S.-based trust and leased back over
certain terms. Concurrent with the inception, the Company entered into Payment Undertaking
Agreements (PUA) with several counterparties whereby the counterparties agreed to make lease
payments on behalf of the Company in exchange for a deposit. The counterparties in the PUAs
received upfront payments totaling EUR 509,285 and EUR 113,763 for a portion of the debt assumed in
1999 and 1998, respectively. Interest accruing on the cash deposits matches interest on the debt
portion financed through the deposit. In addition to the cash deposits, the Company purchased debt
securities, deposited those securities with a custodian and pledged the securities to one of the
counterparties in the PUA; the balance is to cover the remaining portion of the present value of
the lease obligation not yet covered by the cash deposit made by the Company. The Company then also
entered into a swap agreement with that same counterparty swapping the entire cash flows from the
securities for cash flows from the portion of the lease payments that the counterparty is obligated
to pay under the PUA. As a result of the swap agreement, interest income on the securities matches
interest expense on the lease. In 1999, mobilkom austria entered into similar cross border lease transactions whereby certain
equipment items (mainly transceiver stations, base station controllers and location registers) were
sold to four U.S.-based trusts and leased back over certain terms. In 2001, the Company entered into a cross border lease transaction whereby certain equipment
items, mainly switches were leased to a U.S.-based trust and leased back over certain terms.
Concurrent with the inception, the Company entered into PUAs with several counterparties whereby
the counterparties agreed to make lease payments on behalf of the Company in exchange for the
upfront lease payments received under the head lease. The counter- F-35




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) parties in the PUAs received upfront payments totaling EUR 200,526 for a portion of the debt
assumed in 2001. In addition to the PUAs the Company provided a loan of EUR 66,554 to the
U.S.-based trust. Interest accruing on the PUAs and the loan match interest on the debt portion. The difference between the cash proceeds from the sale and the present value of the future
minimum lease payments represents a gain on the sale of a tax benefit. The net cash effect
resulting from these transactions was a gain from the sale of the tax benefits which amounted to
EUR 14,547, EUR 44,437 and EUR 7,337 in 2001, 1999 and 1998, respectively. The Company is
amortizing these amounts over the term of the lease. The cash deposits, the securities purchased in
connection with the PUAs and the upfront payments received for the head lease and the lease
obligations are recorded separately on the balance sheets as the Company has not been released from
their obligation under the lease and a legal right to offset does not exist. Accordingly, interest
income and expenses in an equal amount totaling EUR 58,243, EUR 65,669 and EUR 70,634 have been
recognized in 2004, 2003 and 2002, respectively. Total assets and liabilities recorded in connection with the cross border leases are as
follows: At December 31,
    
    2004
    
    
    2003Securities held-to-maturity, non-current
    
    
    115,883
    
    
    
    119,793Other assets
    
    
    738,948
    
    
    
    834,910Total assets in connection with cross border leases
    
    
    854,831
    
    
    
    954,703Of which current
    
    
    94,297
    
    
    
    94,517Lease obligations
    
    
    854,831
    
    
    
    954,703Of which current
    
    
    94,154
    
    
    
    93,725
 In 2001, two banks issued letters of credit to the trust for the liabilities of the Company.
As of December 31, 2004, these letters of credit totaled EUR 67,741.  (18)

EMPLOYEE BENEFIT OBLIGATIONS Long-term liabilities for employee benefits consist of the following: At December 31,
    
    2004
    
    
    2003Contractual termination benefits
    
    
    19,394
    
    
    
    31,932Service awards
    
    
    44,418
    
    
    
    46,870Severance
    
    
    37,096
    
    
    
    67,606Pensions
    
    
    9,076
    
    
    
    9,552Total
    
    
    109,984
    
    
    
    155,960
 Contractual termination benefits In June 2000, June 1999 and in November 1997, the Company offered voluntary retirement
incentive programs (VRIPs) to civil servants who cannot be terminated involuntarily. Under the
terms of these programs employees that accept voluntary retirement are eligible to receive these
payments until the day of retirement. An obligation for VRIPs was recognized when the eligible
civil servant accepted the offer. The present value of the F-36




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) obligation is determined
based on current compensation levels and the law. An annual increase of 2.5% for future years
and a discount rate of 4.5% are used. VRIPs are not funded. On January 1, 2002 a law was enacted that covers civil servants over the age of 55 by a
governmental retirement plan with the effect of reducing the Companys obligation under the VRIPs.
Following that law the Company reversed EUR 1,358 and EUR 26,802 of these accruals in 2004 and
2003, respectively. As of December 31, 2004, the accrual for the VRIPs relates to 118 employees. In
connection with VRIPs the Company made payments of EUR 5,365, EUR 69,634 and EUR 95,262 during
2004, 2003 and 2002, respectively. Expenses as well as the reversals of accruals are reflected as a reduction of employee costs
in the accompanying consolidated statement of operations. Actuarial assumptions The assumptions used in the measurement of obligations for service awards, severance payments
and pensions are shown in the following table: At December 31,
    
    2004
    
    
    2003
    
    
    2002Actuarial assumptions:Discount rate
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Rate of
compensation increase  civil servants.
    
    
    5.0
    %
    
    
    4.0
    %
    
    
    3.7
    %Rate of
compensation increase  other employees
    
    
    4.0
    %
    
    
    2.5
    %
    
    
    3.7
    %Rate of increase of pensions
    
    
    1.8
    %
    
    
    1.8
    %
    
    
    1.1
    %
 Service awards Civil servants and certain employees (together employees) are eligible to receive service
awards. Under these unfunded plans, eligible employees receive a cash bonus after a specified
service period. The bonus is equal to two months salary after 25 years of service and four months
salary after 40 years of service. Employees with at least 35 years of service when retiring are
also eligible to receive a bonus equal to four months salary. The compensation is accrued as earned
over the period of service taking into account estimates of employees whose employment will be
terminated or who will retire prior to reaching the required service period. All actuarial gains
and losses are recognized immediately in the period realized. The following table provides the components and a reconciliation of the changes in service
awards for the years ended December 31, 2004 and 2003, respectively: 2004
    
    
    2003Accrual at the beginning of the year
    
    
    46,870
    
    
    
    57,862Service cost
    
    
    2,149
    
    
    
    2,301Interest cost
    
    
    2,288
    
    
    
    2,814Recognized actuarial gains
    
    
    (4,191
    )
    
    
    (12,125
    )Benefits paid
    
    
    (2,698
    )
    
    
    (3,982
    )Accrual at the end of the year
    
    
    44,418
    
    
    
    46,870
 F-37




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The benefits expected to be paid are shown in the following table: 2005
    
    
    2,3892006
    
    
    2,5572007
    
    
    2,4972008
    
    
    2,5822009
    
    
    2,9792010-2014
    
    
    25,355
 Severance Severance benefit obligations for employees hired before January 1, 2003 are covered by
defined benefit plans as described below. Following a legal change, obligations for employees
starting to work for the Company in Austria after January 1, 2003 are covered by a defined
contribution plan and the Company paid EUR 330 and EUR 119 to this defined contribution plan (BAWAG
Allianz Mitarbeitervorsorgekasse AG) in 2004 and 2003, respectively. Upon retirement, eligible employees receive severance payments equal to a multiple of their
monthly compensation which comprises fixed compensation plus variable elements such as overtime and
bonuses. Maximum severance is equal to a multiple of twelve times eligible monthly compensation. Up
to three months of benefits are paid upon termination, with any benefit in excess of that amount
being paid in monthly installments over a period not exceeding ten months. In case of death, the
heirs of an eligible employee will receive 50% of the severance benefits. The following tables provide the components of the net periodic benefit cost and a
reconciliation of the changes in severance benefit obligations for the years ended December 31,
2004, 2003 and 2002, respectively: 2004
    
    
    2003
    
    
    2002Service cost
    
    
    2,853
    
    
    
    4,218
    
    
    
    3,926Interest cost
    
    
    1,467
    
    
    
    1,784
    
    
    
    1,311Amortization of unrecognized net obligation
    
    
    96
    
    
    
    310
    
    
    
    221Curtailment loss / settlement
    
    
    
    
    
    
    1,090
    
    
    
    683Net periodic benefit cost
    
    
    4,416
    
    
    
    7,402
    
    
    
    6,141
 2004
    
    
    2003Projected benefit obligation at the beginning of the year.
    
    
    29,629
    
    
    
    36,849Change in reporting units
    
    
    
    
    
    
    (587
    )Service cost
    
    
    2,853
    
    
    
    4,218Interest cost
    
    
    1,467
    
    
    
    1,784Actuarial (gains) losses
    
    
    8,638
    
    
    
    (11,004
    )Curtailment loss / settlement
    
    
    
    
    
    
    1,090Benefits paid
    
    
    (1,777
    )
    
    
    (2,723
    )Projected benefit obligation at the end of the year
    
    
    40,810
    
    
    
    29,627Unrecognized net actuarial losses
    
    
    (13,183
    )
    
    
    (4,782
    )Accrued liability at the end of the year
    
    
    27,627
    
    
    
    24,845Voluntary severance obligation
    
    
    9,469
    
    
    
    42,761Total accrued severance liabilities at the end of the year
    
    
    37,096
    
    
    
    67,606
 F-38




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) The benefits expected to be paid are shown in the following table: 2005
    
    
    12,1962006
    
    
    1,9042007
    
    
    2,0122008
    
    
    2,2472009
    
    
    2,2742010-2014
    
    
    13,821
 The liability for voluntary severance payments relates to individuals who are generally not
entitled to severance payments, but have accepted a special offer by the Company to receive
severance payments for voluntary termination of employment. The Austrian government offered to civil servants of a certain age an early retirement at
reduced future pension payments. The Company offered these eligible employees additional severance
payments to further encourage the acceptance of the government offer. The Company incurred a legal
obligation to civil servants making use of this opportunity and recorded expenses of EUR 19,315 and
EUR 47,308 in the year ended December 31, 2004 and 2003, respectively. Telekom Austria does not
expect any future liabilities in addition to these accruals. Due to this offer the Companys
workforce was reduced by 470 and 650 civil servants in 2004 and 2003, respectively. Pensions Defined contribution pension plans Pension benefits are generally provided by social security for employees and by the government
for civil servants in Austria. The Company is required to assist in funding the Austrian
governments pension and health care obligations to the Companys current and former civil servants
and their surviving dependents. The Company was legally obligated to make annual contributions to
the Austrian government for active civil servants. These contributions gradually increased from
27.5% in 2000 to 30.1% in 2004. Beginning in October 2005 the contribution will be reduced to
28.3%. Contributions to the government, net of the share contributed by civil servants, were EUR
46,854, EUR 51,520 and EUR 52,647 in 2004, 2003 and 2002, respectively. In 2000 and 1999, the Company sponsored a defined contribution plan covering substantially all
employees of one subsidiary. In 2001, this plan was also offered to the employees of Telekom
Austria and all its other Austrian subsidiaries. The Companys contributions to this plan are based
on a percentage of the compensation not exceeding 5% of the salaries. The annual cost of this plan
amounted to approximately EUR 9,154, EUR 9,082 and EUR 6,961 in 2004, 2003 and 2002, respectively. Defined benefit pension plan The Company provides defined benefits for certain former employees. All of such employees are
retired and were employed prior to January 1, 1975. This unfunded plan provides benefits based on a
percentage of salary and on years employed, not exceeding 80% of the salary before retirement
including the pension provided by social security. The Company uses the projected unit credit method to determine pension cost for financial
reporting purposes. In conjunction with this method the Company amortizes actuarial gains and
losses using the corridor method. F-39




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The pension benefits for 2004, 2003 and 2002 are shown in the following table: 2004
    
    
    2003
    
    
    2002Interest cost
    
    
    363
    
    
    
    396
    
    
    
    424Amortization of actuarial
gain
    
    
    (90
    )
    
    
    (64
    )
    
    
    (50
    )Amortization of unrecognized transition obligation
    
    
    
    
    
    
    343
    
    
    
    343Net periodic pension benefit cost
    
    
    273
    
    
    
    675
    
    
    
    717
 The following table provides a reconciliation of the changes of benefit obligations for the
years ended December 31, 2004 and 2003, respectively: 2004
    
    
    2003Projected benefit obligation at the beginning of the year
    
    
    7,618
    
    
    
    8,327Interest cost
    
    
    363
    
    
    
    396Actuarial gains
    
    
    (582
    )
    
    
    (273
    )Benefits paid
    
    
    (749
    )
    
    
    (832
    )Projected benefit obligation at the end of the year
    
    
    6,650
    
    
    
    7,618Unrecognized net gain
    
    
    2,426
    
    
    
    1,934Accrued pension liability
    
    
    9,076
    
    
    
    9,552
 The benefits expected to be paid are shown in the following table: 2005
    
    
    6832006
    
    
    6562007
    
    
    6292008
    
    
    6012009
    
    
    5732010-2014
    
    
    2,424
  (19)

OTHER LIABILITIES AND DEFERRED INCOME The Companys other long-term liabilities and deferred income consist of: At December 31,
    
    2004
    
    
    2003Asset retirement obligation
    
    
    38,042
    
    
    
    23,262Unamortized balance on sale of tax benefit
    
    
    37,349
    
    
    
    44,461Deferred tax liabilities
    
    
    19,721
    
    
    
    12,773Financial Instruments
    
    
    
    
    
    
    15,515Other
    
    
    15,392
    
    
    
    11,618Total
    
    
    110,504
    
    
    
    107,629
 F-40




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (20)

STOCK BASED COMPENSATION In 2000, the Company launched a stock option plan (Stock Option Plan 2000), under which all
exercisable options were exercised in the year ended December 31, 2004. In 2004, the company
launched a succeeding stock option plan under modified conditions. The new stock option plan (Stock
Option Plan 2004) consists of three tranches, of which one tranche has been granted in the year
ended December 31, 2004. The Company reported an expense of EUR 8,736 from the Stock Option Plan
2000 and EUR 4,521 from the Stock Option Plan 2004 in the year ended December 31, 2004. Stock Option Plan 2000 (2000 plan) On October 4, 2000, the shareholders of Telekom Austria approved stock option plans for
employees of the Company, which expired on February 27, 2004. Under this plan, the Company granted
a total of 4,686,881 options, each of which entitled eligible grantees upon exercise of the option
to receive at their choice either cash or shares equal to the difference between the average quoted
price of Telekom Austria stock during the five trading days preceding the exercise and the IPO
price of Euro 9. The options granted were exercisable on specific dates between May 31, 2002 and
February 27, 2004, as long as the average share price during the five days prior to exercise
exceeded the initial public offering price of Euro 9 by 30% or more. As the stock price in the
years ended 2003 and 2002 did not exceed the hurdle, no compensation expense was recorded for these
years. However, as of February 27, 2004, the average share price had exceeded the Initial Public
Offering price by more than 30% for five consecutive days. Therefore, 3,230,718 options became
exercisable and compensation expense of EUR 8,736, excluding related payroll taxes and social
contributions, was recorded in the year ended December 31, 2004. The following table shows stock option activity under the 2000 Plan for the years ended
December 31, 2004, 2003 and 2002, respectively: 2004
    
    
    2003
    
    
    2002Outstanding as of January 1
    
    
    3,268,850
    
    
    
    3,432,927
    
    
    
    3,953,693Granted
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (38,132
    )
    
    
    (164,077
    )
    
    
    (520,766
    )Exercised
    
    
    (3,230,718
    )
    
    
    
    
    
    
    Outstanding as of December 31
    
    
    
    
    
    
    3,268,850
    
    
    
    3,432,927of which exercisable as of December 31
    
    
    
    
    
    
    
    
    
    
    
 Stock Option Plan 2004 (2004 plan) Based on an authorization of the Annual General Meeting, the Supervisory Board of Telekom
Austria approved the 2004 plan for members of the Management Board and senior members of management
on April 16, 2004. Under this plan, the Company may grant a total of 10,000,000 options in three
tranches between April 2004 and April 2006. Each tranche has to be approved separately by the
Supervisory Board and has a vesting period of twelve months or longer and an exercise period of
approximately three years. To be eligible to receive options, plan members must hold a continuous
investment in Telekom Austria shares until the options are exercised. In addition, in order for the
stock options to vest, certain performance must be achieved by the Company based on basic earnings
per share adjusted for certain effects (the hurdle). The hurdle will be determined annually for
each subsequent tranche of options and must be approved by the Supervisory Board. Each option
entitles the holder to receive, at the Companys choice, either shares at the exercise price or
cash equal to the difference between the quoted market price F-41




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) of the Companys shares on the date of
the options exercise and the exercise price. The exercise price is defined as the average quoted
closing price of Telekom Austria stock during a period of twenty trading days ending two days
before the granting of options. One option is convertible into one share. If one years hurdle is
not met, options will accumulate until the hurdle of the next tranche is achieved provided that it
is set higher than the original hurdle. The vesting period is adjusted until the next tranche
becomes exercisable. The accounting assumes a settlement in stock, as it is the Companys choice to settle the
options either in shares or in cash. The compensation expense is measured based on the fair value
of the options at grant date and recognized over the service period on a straight-line basis. The
fair value estimation is based on the binomial option pricing model applying the following
parameters: Stock option plan2004Expected average dividend per share
    
    Euro 0.25Expected volatility
    
    25%Risk-free interest rate range
    
    2.053%  4.280%Expected first exercise date
    
    April 20, 2005Expected expiry date
    
    May 30, 2008Fair value per option
    
    Euro 2.73
 On April 19, 2004 the first tranche of 2,539,480 options was offered to the eligible
employees. The exercise price of the first tranche is EURO 11.92 and for every 15 options awarded
an eligible employee must hold one ordinary share until exercise. Subsequent to the fulfillment of
this holding condition 2,392,925 options were granted to the eligible employees, of which 384,000
options were granted to the members of the Management Board. The first tranche has a vesting period
of twelve months from the grant day and an exercise period of three years after becoming
exercisable. The fair value of the options as of grant day amounted to EUR 6,340 and the Company
recognized compensation expense from the first tranche amounting to EUR 4,521, excluding related
payroll taxes and social contributions, for the year ended December 31, 2004. The fair value
calculation was based on an expected forfeiture rate of 2.95% per year. The hurdle set for the
first tranche was met as of December 31, 2004. The following table shows stock option activity under the 2004 plan for the year ended
December 31, 2004: 2004Outstanding as of January 1
    
    
    Granted
    
    
    2,392,925Forfeited
    
    
    (29,000
    )Outstanding as of December 31
    
    
    2,363,925of which exercisable as of December 31
    
    
    
 F-42




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (21)

INCOME TAXES Income before income taxes, minority interests and cumulative effect of a change in accounting
principle is attributable to the following geographic locations: 2004
    
    
    2003
    
    
    2002Domestic
    
    
    281,477
    
    
    
    186,197
    
    
    
    33,710Foreign
    
    
    68,603
    
    
    
    46,360
    
    
    
    10,101Total
    
    
    350,080
    
    
    
    232,557
    
    
    
    43,811
 Income tax expense attributable to income before income taxes, minority interests and
cumulative effect of a change in accounting principle for the years ended December 31, consisted of
the following: 2004
    
    
    2003
    
    
    2002CurrentDomestic
    
    
    22,266
    
    
    
    8,899
    
    
    
    1,097Foreign
    
    
    14,800
    
    
    
    14,511
    
    
    
    5,77137,066
    
    
    
    23,410
    
    
    
    6,868DeferredDomestic
    
    
    84,491
    
    
    
    52,506
    
    
    
    15,627Foreign
    
    
    629
    
    
    
    7,120
    
    
    
    3,61785,120
    
    
    
    59,626
    
    
    
    19,244Total
    
    
    122,186
    
    
    
    83,036
    
    
    
    26,112
 Benefits of operating loss carryforwards of EUR 594, EUR 1,818 and EUR 8,641 were included in
the deferred tax expense for the years ended December 31, 2004, 2003 and 2002, respectively. The table below provides information on total tax allocation in the financial statements: 2004
    
    
    2003
    
    
    2002Continuing operations
    
    
    122,186
    
    
    
    83,036
    
    
    
    26,112Reduction of intangible assets
    
    
    (13,303
    )
    
    
    
    
    
    
    Other comprehensive income
    
    
    1,412
    
    
    
    2,787
    
    
    
    1,024Additional paid in capital
    
    
    2,455
    
    
    
    451
    
    
    
    424112,750
    
    
    
    86,274
    
    
    
    27,560Tax for cumulative effect of change in accounting principle
    
    
    
    
    
    
    (6,071
    )
    
    
    112,750
    
    
    
    80,203
    
    
    
    27,560
 On May 6, 2004 the Austrian National Council passed a tax reform, which became effective as of
January 1, 2005. Among other regulations, the reform reduces the corporate tax rate from 34 % to 25
%, which leads to an overall tax expense of EUR 21,799 from revaluation of the deferred tax assets
and liabilities as of December 31, 2004. In 2004, the Company reassessed a valuation allowance that
was established at the time of the 3G Mobile business combination and based on that assessment,
reduced the valuation allowance by EUR 16,143. Of this amount, EUR 13,303 was used to reduce
intangible assets acquired from this acquisition. The balance of EUR 2,840 net of the effect of
change in tax rate of EUR 5,811 was credited to the income tax expense. F-43




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The following table shows the principal components for the difference between the reported
income tax expense and the amount of income tax expense that would result from applying the
Austrian statutory income tax rate to income before income taxes, minority interests and cumulative
effect of a change in accounting principle: 2004
    
    
    2003
    
    
    2002Income tax expense at statutory rate
    
    
    119,027
    
    
    
    79,069
    
    
    
    14,896Foreign tax rate differential
    
    
    (9,874
    )
    
    
    (7,053
    )
    
    
    (2,125
    )Non-deductible expenses
    
    
    2,879
    
    
    
    3,792
    
    
    
    335Tax incentives
    
    
    (3,450
    )
    
    
    (3,673
    )
    
    
    (3,626
    )Tax free income from investments
    
    
    (185
    )
    
    
    (563
    )
    
    
    (1,163
    )Tax rate differential on equity in earnings of affiliates
    
    
    
    
    
    
    
    
    
    
    (1,389
    )Non-deductible goodwill amortization and impairment charges
    
    
    
    
    
    
    
    
    
    
    4,388Change in valuation allowance
    
    
    (5,566
    )
    
    
    7,724
    
    
    
    11,008Effect of change in tax rate
    
    
    21,799
    
    
    
    
    
    
    
    Other
    
    
    (2,444
    )
    
    
    3,740
    
    
    
    3,788Income tax expense
    
    
    122,186
    
    
    
    83,036
    
    
    
    26,112Effective income tax rate
    
    
    34.9
    %
    
    
    35.7
    %
    
    
    59.6
    %Effective income tax rate excluding effect of change in tax rate
    
    
    28.7
    %
 Non-deductible expenses mainly consist of interest expenses on shareholder loans and
representation expenses. Tax incentives principally consist of research incentives and other
government grants. In 2004 the valuation allowance decreased by EUR 28,075. That primarily resulted from the
reduction of intangible assets of EUR 13,303, related taxes thereon of EUR (4,523) and the effect
of a change in the tax rate of EUR 11,642. In 2003, the valuation allowance increased by EUR 65,425
of which EUR 57,868 resulted from business combinations and had no impact on the income statement.
In 2002, the valuation allowance increased as a change in circumstances caused a change in judgment
about the realizability of the related deferred tax asset in future years. The tax effects of temporary differences that give rise to deferred tax assets and liabilities
at December 31 are shown below. 2004
    
    
    2003Deferred tax assetsGoodwill
    
    
    13,510
    
    
    
    34,846Deferred deduction for write downs of investments in subsidiaries
    
    
    34,565
    
    
    
    63,219Operating loss carryforwards
    
    
    99,223
    
    
    
    227,956Assets held for sale
    
    
    14,734
    
    
    
    Long-term debt
    
    
    655
    
    
    
    6,614Other liabilities
    
    
    11,342
    
    
    
    10,484Accrued liabilities
    
    
    3,173
    
    
    
    407Employee benefit obligations
    
    
    2,690
    
    
    
    3,745Other
    
    
    12,658
    
    
    
    7,869Total deferred tax assets
    
    
    192,550
    
    
    
    355,140Valuation allowance
    
    
    (53,564
    )
    
    
    (81,639
    )Deferred tax assets, net of valuation allowance
    
    
    138,986
    
    
    
    273,501
 F-44




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) 2004
    
    
    2003Deferred tax liabilitiesProperty, plant and equipment
    
    
    (17,449
    )
    
    
    (30,244
    )Long-term investments
    
    
    (84
    )
    
    
    (8,690
    )Other intangible assets
    
    
    (54,693
    )
    
    
    (97,347
    )Accrued liabilities
    
    
    
    
    
    
    (350
    )Other assets
    
    
    
    
    
    
    (5,277
    )Other
    
    
    (7,220
    )
    
    
    (8,093
    )Total deferred tax liabilities
    
    
    (79,446
    )
    
    
    (150,001
    )Net deferred tax asset
    
    
    59,540
    
    
    
    123,500
 The net deferred tax asset decreased by EUR 63,960 in the year ended December 31, 2004. Of
this, EUR 13,303 related to a reduction of intangible assets and EUR (833) related mainly to
foreign exchange differences had no impact on the income statement. EUR 8,690 were reclassified to
deferred tax credits for losses incurred on inter-company transactions. The Company recorded a
deferred tax expense of EUR 85,120 in 2004. At December 31, 2004, the Company had approximately EUR 398,794 of operating loss
carryforwards. Of these, EUR 99,380 relate to foreign subsidiaries and are not available for use in
Austria. Of these loss carryforwards relating to foreign subsidiaries, EUR 98,933 have expiration
dates as follows: Years
    
    Amount2005
    
    
    26,4812006
    
    
    39,8322007
    
    
    24,9262008
    
    
    7,694Total
    
    
    98,933
 The remaining amount of operating loss carryforwards are in Austria and do not expire. In
Austria the annual usage is limited to 75% of the taxable income for that year. In assessing the recoverability of deferred tax assets, management considers whether it is
more likely than not that all the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. As of
December 31, 2004 the Company has recognized a net deferred tax asset of EUR 60,466 related to the
operations in Austria. In order to realize this deferred tax asset the Company will need to
generate future taxable income exclusive of reversing taxable temporary differences of
approximately EUR 322,486 over an indefinite period in Austria. Based on the level of historical taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible differences and operating loss
carryforwards net of valuation allowances. The amount of deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income are reduced. During the years ended December 31, 2004 and 2003 deferred tax benefits of EUR 9,356 excluding
the effect of change in tax rate of EUR 5,996 and deferred tax expenses of EUR 6,560, respectively,
were recognized as adjustments to the valuation allowance because of a change in circumstances that
caused a change in judgement about the realizability of the related deferred tax asset in future
years. F-45




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s)  (22)

FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company to manage its exposure to adverse
fluctuations in interest and foreign exchange rates. The Company has established a control
environment which includes policies and procedures for risk assessment, approval, reporting and
monitoring of derivative financial instrument activities. The Company is not a party to leveraged
derivatives and the policies prohibit the holding or issuing of financial instruments for
speculative purposes. The Company uses various types of financial instruments including derivative financial
instruments in the normal course of business for purposes other than trading. By their nature, all such instruments involve risk, including market risk and credit risk of
nonperformance by counterparties, and the maximum potential loss may exceed the amount recognized
in the balance sheets. However, at December 31, 2004 and 2003, in managements opinion the
probability of nonperformance of the counterparties in these financial instruments was remote. Credit risk The Company monitors its exposure to credit risk. The Company does not have any significant
exposure to any individual customer or counterparty, nor does it have any major concentration of
credit risk related to any financial instrument other than noted in the section concerning the
concentration of credit risk in significant accounting policies. In order to reduce the risk of nonperformance by the other parties to swap agreements, the
contracts are subject to the Swap Dealer Agreements. Market risk Market risk is monitored by using value-at-risk models for interest rate as well as currency
risk for the long-term debt and derivative portfolios. Information with respect to cash flow hedges Changes in the fair value of interest rate swaps designated as hedging instruments of
variability of cash flows associated with variable rate long-term debt are reported in accumulated
other comprehensive income. These amounts are subsequently classified into financial income as a
yield adjustment in the same period in which the related interest on the floating-rate debt
obligations affect earnings. In 2004 and 2003, respectively, no hedge ineffectiveness occurred. Interest rate swap agreements In the years 1995 to 1997 the Company entered into interest rate swaps to reduce the aggregate
exposure to changes in floating interest rates and fair market value fluctuations of the debt
portfolio. Fixed interest rate payments as of December 31, 2004, ranged from 5.0% to 7.7%.
Floating-rate payments are based on rates tied to different inter-bank offered rates. F-46




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) In line with its risk policy the Company entered into fixed to floating interest rate swaps in
2003. The floating rate is based on EURIBOR and enables the company to benefit from current low
short-term interest rates. The following table indicates the types of swaps in use at December 31, 2004 and 2003, and
their weighted-average interest rates and the weighted-average remaining terms of the interest rate
swap contracts. Average variable rates are those in effect at the reporting date and may change
significantly over the lives of the contracts: 2004
    
    
    2003Variable to fixed swaps in EURNotional amount in EUR
    
    
    145,346
    
    
    
    181,682Average receive rate
    
    
    2.26
    %
    
    
    2.25
    %Average pay rate
    
    
    6.66
    %
    
    
    6.47
    %Average maturity in years
    
    
    0.4
    
    
    
    1.4Fixed to variable swaps in EURNotional amount in EUR
    
    
    300,000
    
    
    
    300,000Average receive rate
    
    
    5.00
    %
    
    
    5.00
    %Average pay rate
    
    
    3.02
    %
    
    
    2.96
    %Average maturity in years
    
    
    8.5
    
    
    
    9.5Variable to fixed swaps in Japanese Yen (JPY)Notional amount in JPY
    
    
    
    
    
    
    10,000,000Notional amount in EUR
    
    
    
    
    
    
    74,047Average receive rate
    
    
    
    
    
    
    0.005
    %Average pay rate
    
    
    
    
    
    
    3.15
    %Average maturity in years
    
    
    
    
    
    
    0.5
 Foreign exchange agreements The Company entered into foreign currency denominated loans because of low interest rates
connected to loans denominated in Swiss Francs (CHF). The use of cross currency swaps allows the
Company to reduce the exposure to the risk of adverse changes in exchange rates. Fixed interest
rates as of December 31, 2004, range from 7.6% to 7.7%. F-47




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The following table indicates the types of foreign exchange agreements in use at December 31,
2004 and 2003, and if applicable their weighted-average interest rates, the weighted-average
remaining terms and the respective exchange rates of the contracts: 2004
    
    
    2003Cross
Currency Swaps EUR  CHFNotional amount in EUR
    
    
    176,635
    
    
    
    176,635Notional amount in CHF
    
    
    300,000
    
    
    
    300,000Average
receive rate CHF
    
    
    5.47
    %
    
    
    5.47
    %Average pay
rate EUR
    
    
    7.65
    %
    
    
    7.65
    %Average maturity in years
    
    
    0.4
    
    
    
    1.4Cross
Currency Swaps EUR  JPYNotional amount in EUR
    
    
    
    
    
    
    73,554Notional amount in JPY
    
    
    
    
    
    
    10,000,000Average
receive rate JPY
    
    
    
    
    
    
    3.15
    %Average pay
rate EUR
    
    
    
    
    
    
    6.41
    %Average maturity in years
    
    
    
    
    
    
    0.5Forward
exchange contracts  US $Notional amount in EUR
    
    
    4,399
    
    
    
    2,862Notional amount in US $
    
    
    5,700
    
    
    
    3,350Forward exchange rate (weighted)
    
    
    1.30
    
    
    
    1.17Exchange rate as of the balance sheet date
    
    
    1.36
    
    
    
    1.26Longest term of the contracts
    
    
    April 2005
    
    
    
    February 2004
 The notional amounts of the derivative instruments above do not represent amounts exchanged by the
parties and, therefore, are not a measure of our exposure. The Companys exposure is limited to the
fair value of the contracts with a positive fair value plus interest receivable, if any, at the
reporting date. The following table summarizes the fair values of financial instruments: 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    valueFinancial instrumentsCash
    
    
    288,195
    
    
    
    288,195
    
    
    
    201,926
    
    
    
    201,926Accounts
receivable  trade
    
    
    408,820
    
    
    
    408,820
    
    
    
    429,919
    
    
    
    429,919Accounts receivable  sold
    
    
    173,350
    
    
    
    173,350
    
    
    
    129,953
    
    
    
    129,953Balances due from related parties
    
    
    85
    
    
    
    85
    
    
    
    1,549
    
    
    
    1,549Accounts
payable  trade
    
    
    (534,498
    )
    
    
    (534,498
    )
    
    
    (589,368
    )
    
    
    (589,368
    )Payables to related parties
    
    
    (22,924
    )
    
    
    (22,924
    )
    
    
    (26,657
    )
    
    
    (26,657
    )Securities held-to-maturity
    
    
    120,946
    
    
    
    133,865
    
    
    
    124,951
    
    
    
    141,547Securities available-for-sale
    
    
    19,656
    
    
    
    19,656
    
    
    
    19,344
    
    
    
    19,344Long-term debt
    
    
    (1,647,171
    )
    
    
    (1,772,904
    )
    
    
    (2,342,288
    )
    
    
    (2,423,348
    )Derivative financial instrumentsInterest rate swap agreements
    
    
    (17,294
    )
    
    
    (17,294
    )
    
    
    (19,582
    )
    
    
    (19,582
    )Cross currency swap agreements
    
    
    15,849
    
    
    
    15,849
    
    
    
    13,065
    
    
    
    13,065Foreign currency forward contract
    
    
    (216
    )
    
    
    (216
    )
    
    
    (180
    )
    
    
    (180
    )
 F-48




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (23)

SHAREHOLDERS EQUITY Share Capital At the Annual General Meeting on June 3, 2004 the Management Board was authorized to issue
convertible bonds, which grant the holders subscription and/or conversion rights of up to
90,000,000 shares. The authorization was given for a period of 5 years from the day of
authorization, ending in 2009. In addition, the Management Board was authorized to increase the share capital by up to EUR
109,050 by issuing 50,000,000 ordinary shares to holders of convertible bonds to the extent that
they exercise their subscription and/or conversion rights. At the Annual General Meeting on June 4, 2003, the Management Board was authorized to increase
the share capital by up to EUR 21,810 in order to provide employee stock options for a period of
five years, ending 2008. The share issue is subject to approval by the Supervisory Board. Based on
this authorization and following the relevant approvals by the Supervisory Board, the Management
Board decided (i) to increase conditionally the share capital by up to EUR 6,543 by issuing up to
3,000,000 shares in order to settle the options granted in the first tranche of the Stock Option
Plan 2004 (see note (20)) on March 23, 2004 and (ii) to increase conditionally the share capital by
up to EUR 7,415 by issuing up to 3,400,000 shares in order to settle the options granted in the
second tranche of the Stock Option Plan 2004 on December 13, 2004 (see note (30)). Dividend Payment On June 3, 2004 the shareholders approved at the Annual General Meeting of the company a
dividend distribution of Euro 0.13 per share. The overall dividend payment totaled EUR 64,578 and
was distributed on June 15, 2004. The net income of Telekom Austria AG amounts to EUR 412,683. According to Article 126 of the
Stock Corporation Act, the Supervisory Board and the Management Board decided to transfer an amount
of EUR 271,931 out of Telekom Austria AG 2004 net income of EUR 412,683 to retained earnings,
resulting in unappropriated profits of EUR 145,882. The Management Board and Supervisory Board plan
to propose to the shareholders at the Annual General Meeting to distribute from unappropriated
earnings a dividend totaling EUR 118,499 or Euro 0.24 per share. Treasury stock At the Annual General Meeting on June 3, 2004, the Management Board was authorized to acquire
treasury stock to the maximum extent legally permitted at a minimum price of Euro 9 and a maximum
price of Euro 18 per share during a period of 18 months, ending December, 2005. The Management
Board was empowered to either retire these shares or to use them to satisfy obligations under the
stock option programs described in note (20) and obligations resulting from the issue of
convertible bonds. The Management Board was also authorized to use the treasury stock as a
consideration for company acquisitions. On February 27, 2004, the Company exercised its 3,326,881 American call options on treasury
stock which were acquired during the Initial Public Offering in November 2000 to limit the
Companys exposure under the stock option plan that expired on February 27, 2004. The strike price
of each call option was Euro 9. Following the exercise of the American call option, the Company
held 3,326,881 shares in treasury, 0.67% of its share capital, and F-49




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) available for issuance to
employees under the employee stock option plan, of which 3,230,718 had been awarded and were
exercisable by employees. During the year ended December 31, 2004, 89,748 options were exercised by
employees at the exercise price of Euro 9. The remaining option holders elected to receive cash for
the difference between the exercise price and the average quoted price of Telekom Austria stock. Furthermore, the Company acquired 3,018,561 shares of treasury stock at an average purchase
price of Euro 11.34 in the year ended December 31, 2004. As a result of these transactions the Company holds 6,255,694 shares in treasury at an
average purchase price of Euro 10.13 per share reported as a reduction to shareholders equity in
the amount of EUR 63,353. Earnings per share Basic earnings per share and diluted earnings per share for the years ended December 31, 2004
and 2003 is calculated as follows: 2004
    
    
    2003Net Income of the year ended December 31
    
    
    227,263
    
    
    
    134,241Weighted average number of common shares outstanding
    
    
    496,495,378
    
    
    
    500,000,000Dilutive effect of Stock Option Plan 2004
    
    
    29,449
    
    
    
    Weighted average number of dilutive shares outstanding
    
    
    496,524,827
    
    
    
    500,000,000Basic earnings per share
    
    Euro 0.46
    
    
    Euro 0.27Diluted earnings per share
    
    Euro 0.46
    
    
    Euro 0.27
 On April 19, 2004 the first tranche of 2,392,925 options was granted to the eligible employees
within the scope of Stock Option Plan 2004 as described in note (20). The dilutive effect of this
transaction had no impact on earnings per share, which are reported on the face of the Consolidated
Statements of Operations. Shares held by members of the Management Board The members of the Management Board hold shares in the Company as follows: Number of sharesJanuary 1,
    
    
    
    
    
    
    
    
    
    
    December 31,2004
    
    
    Purchased
    
    
    Sold
    
    
    2004Heinz Sundt
    
    
    12,412
    
    
    
    799
    
    
    
    (200
    )
    
    
    13,011Boris Nemsic
    
    
    10,110
    
    
    
    
    
    
    
    
    
    
    
    10,110Stefano Colombo
    
    
    12,212
    
    
    
    
    
    
    
    
    
    
    
    12,212Rudolf Fischer
    
    
    12,212
    
    
    
    795
    
    
    
    
    
    
    
    13,007
 F-50




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Accounting for derivative and hedging activities Derivative financial instruments are used by the Company to manage its exposure to adverse
fluctuations in interest and foreign exchange rates. The Company has established a control
environment which includes policies and procedures for risk assessment, approval, reporting and
monitoring of derivative financial instrument activities. The Company is not a party to leveraged
derivatives and the policies prohibit the holding or issuing of financial instruments for
speculative purposes. For derivatives designed either as fair value or cash flow hedges, changes in the time value
of the derivatives are excluded from the assessment of hedge effectiveness and are recorded in
earnings. Hedge ineffectiveness, determined in accordance with SFAS No. 133 had no impact on the
Companys earnings for the years ended December 31, 2004 and 2003, respectively. No fair value
hedges or cash flow hedges were derecognized or discontinued during the years ended December 31,
2003. In the year ended December 2004 the Company realized a gain of EUR 268 net of income tax. The cumulative unrealized gains and losses for hedging activities recorded in other
comprehensive income are as follows: December 31,
    
    
    December 31,2004
    
    
    2003Unrealized LossesGross
    
    
    (4,313
    )
    
    
    (10,645
    )Less income tax
    
    
    1,466
    
    
    
    3,498Unrealized net loss, net of income tax
    
    
    (2,847
    )
    
    
    (7,147
    )
 Other comprehensive income Other comprehensive income consists of the following items: Unrealized gain
    
    
    Unrealized gain
    
    
    
    
    
    
    Accumulated other(loss) on
    
    
    (loss) on hedging
    
    
    Foreign currency
    
    
    comprehensivesecurities
    
    
    activities
    
    
    translation
    
    
    incomeBalance January 1, 2002
    
    
    (161
    )
    
    
    (13,061
    )
    
    
    14,602
    
    
    
    1,380Changes, net of income tax
    
    
    (687
    )
    
    
    2,719
    
    
    
    (6,496
    )
    
    
    (4,464
    )Balance December 31, 2002
    
    
    (848
    )
    
    
    (10,342
    )
    
    
    8,106
    
    
    
    (3,084
    )Changes, net of income tax
    
    
    2,214
    
    
    
    3,195
    
    
    
    (10,690
    )
    
    
    (5,281
    )Balance December 31, 2003
    
    
    1,366
    
    
    
    (7,147
    )
    
    
    (2,584
    )
    
    
    (8,365
    )Realized gain (loss), net of income tax
    
    
    (2,655
    )
    
    
    268
    
    
    
    (414
    )
    
    
    (3,069
    )Changes, net of income tax
    
    
    1,096
    
    
    
    4,032
    
    
    
    (4,167
    )
    
    
    1,229Balance December 31, 2004
    
    
    (193
    )
    
    
    (2,847
    )
    
    
    (7,165
    )
    
    
    (10,205
    )
 Sale of American call option The Company had classified the shares issued under this option as permanent equity, since the
optional shares were registered, issued and outstanding, and the Company was under no obligation to
repurchase any shares unless it desired to do so. F-51




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) On November 21, 2000, Telekom Austria purchased 3,832,248 American call options for a premium
of EUR 12,527. The expiration date was February 27, 2004. The underlying shares of the American
call option were the shares of Telekom Austria AG. The strike and execution price of the call
option was Euro 9 and settlement was either physical delivery of the shares or cash, at the request
of Telekom Austria. Since the call requires no cash settlement whatsoever by the Company, nor is
the Company required to issue any additional shares as a result of exercise, the call was
classified as permanent equity in accordance with EITF 00-19. In 2003, the Company sold 610,000 American call options for an aggregate price of EUR 957. In
2002, the Company sold 717,701 American call options for an aggregate price of EUR 1,245. As the
original acquisition of the options was accounted for as permanent equity under the provisions of
EITF 00-19, proceeds from the sale of the options have been credited net of tax directly to
additional paid in capital in the accompanying statement of changes in shareholders equity. On February 27, 2004, the Company exercised its 3,326,881 American call options (see Treasury
stock). Restricted earnings Under the Austrian Stock Corporation Act, retained earnings available for distribution to
shareholders are based upon the unconsolidated retained earnings of Telekom Austria AG as reported
in its balance sheet determined in accordance with the Austrian Commercial Code. The net income of Telekom Austria AG including released untaxed reserves of EUR 48,506 amounts
to EUR 412,683.  (24)

REVENUES Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Revenues from services
    
    
    3,810,891
    
    
    
    3,726,955
    
    
    
    2,931,892Revenues from sales of merchandise
    
    
    245,377
    
    
    
    242,795
    
    
    
    186,172Total
    
    
    4,056,268
    
    
    
    3,969,750
    
    
    
    3,118,064
 F-52




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)  (25)

OTHER OPERATING EXPENSES Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Interconnection
    
    
    452,171
    
    
    
    421,787
    
    
    
    361,608Services received
    
    
    221,952
    
    
    
    211,445
    
    
    
    111,594Repairs
    
    
    177,277
    
    
    
    178,256
    
    
    
    167,496Charges from related parties
    
    
    13,241
    
    
    
    15,013
    
    
    
    32,980Advertising and marketing
    
    
    198,138
    
    
    
    198,362
    
    
    
    153,737Rental expenses
    
    
    79,204
    
    
    
    74,358
    
    
    
    67,666Legal and other consulting
    
    
    40,354
    
    
    
    44,451
    
    
    
    54,368Commission expenses
    
    
    41,301
    
    
    
    41,078
    
    
    
    25,347Bad debt expenses
    
    
    24,707
    
    
    
    30,629
    
    
    
    39,184Other support services
    
    
    109,721
    
    
    
    96,684
    
    
    
    74,922Travel expenses
    
    
    22,302
    
    
    
    23,696
    
    
    
    23,363Energy
    
    
    21,824
    
    
    
    21,979
    
    
    
    21,285Other non income taxes
    
    
    8,023
    
    
    
    7,201
    
    
    
    8,665Training expenses
    
    
    11,657
    
    
    
    13,129
    
    
    
    11,773Other
    
    
    67,352
    
    
    
    85,453
    
    
    
    51,366Total
    
    
    1,489,224
    
    
    
    1,463,521
    
    
    
    1,205,354
 In accordance with SFAS No. 144, as amended, the net loss from retirement of long-lived assets
in 2004, 2003 and 2002 respectively, of EUR 28,788, EUR 41,571 and EUR 18,715 is presented in other
operating expenses, other.  (26)

OTHER, net Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Foreign exchange losses
    
    
    (103,572
    )
    
    
    (246,883
    )
    
    
    (216,261
    )Foreign exchange gains
    
    
    107,081
    
    
    
    242,013
    
    
    
    211,422Dividend income
    
    
    7
    
    
    
    48
    
    
    
    448Other
    
    
    12,140
    
    
    
    4,255
    
    
    
    6,721Total
    
    
    15,656
    
    
    
    (567
    )
    
    
    2,330
 In other income net impairment charges recorded on investments totaling EUR 716 and EUR 2,840
were recorded for the years ended December 31, 2004 and 2003, respectively. No impairment charges
on investments were recorded in 2002.  (27)

COMMITMENTS AND CONTINGENCIES On December 17, 2004, the Company entered into option agreements to acquire a 100% share in
MobilTel AD. (MobilTel), a Bulgarian provider of mobile communications services. The option fee of
EUR 80,000 is payable in the first quarter 2005, provided that MobilTel meets certain financial
performance criteria for 2004. In the event that the performance conditions are not met, the
company has the right to terminate the agreements without paying F-53




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) option fees. The option entitles
the Company to acquire 100% of MobilTel between July 12, 2005 and August 23, 2005 for an expected
purchase price of approximately EUR 1,600,000 including the option fees. The Company had further purchase obligations amounting to EUR 1,754,300, of which EUR 538,500
is short-term as of December 31, 2004. These obligations include purchase commitments for property,
plant and equipment as well as for intangible assets and other non-redeemable contractual
commitments such as service agreements and interconnection obligations. In the normal course of business the Company is subject to proceedings, lawsuits and other
claims, including proceedings under laws and regulations related to interconnection. Such matters
are subject to many uncertainties, and outcomes are not predictable with certainty. Consequently,
management is unable to ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2004. These matters could affect the operating
results or cash flows of any one quarter when resolved in future periods. However, management
believes that after final disposition, any monetary liability or financial impact to the Company
beyond that provided for at yea rend would not be material to its consolidated financial
statements.  (28)

CASH FLOW STATEMENT Following is a summary of supplemental cash flow information: Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Cash paid forInterest
    
    
    161,057
    
    
    
    182,836
    
    
    
    173,940Income taxes
    
    
    23,330
    
    
    
    16,246
    
    
    
    10,558Cash received forInterest
    
    
    8,080
    
    
    
    3,128
    
    
    
    11,122Tax refunds
    
    
    
    
    
    
    
    
    
    
    21Non cash investing and financingDividends
    
    
    
    
    
    
    
    
    
    
    28,294
  (29)

SEGMENT REPORTING As of January 1, 2003 management reorganized its operations into three segments: wireline,
wireless and other activities. The segment reporting for the year 2002 was reformatted to provide
comparable data. Wireline includes fixed line, data communications and internet services and focuses on
wholesale and retail customers. Wholesale customers including telecommunications operators and
service providers are offered network-based services, while retail customers, including business
and residential end-users are offered voice telephony, data communications, internet and other
services. Wireless, operated by our mobile communications segment, offers a full range of digital mobile
communications services to business and residential customers. F-54




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) The segment other activities contains the financing activities of the Company. Adjusted EBITDA is defined by the Company as operating income before depreciation,
amortization and impairment charges. The Company uses adjusted EBITDA to measure the performance of
segments because it is commonly used in the telecommunications industry as a comparative measure of
financial performance. In addition, the Company believes it is a widely accepted indicator of its
ability to incur and service debt. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies (see note (1)). For the year ended December 31, 2004, the segment totals reconcile to the consolidated
financial statements as a result of eliminating transactions and balances between consolidated
segments. For the years ended December 31, 2002 the reconciliation additionally includes the
results of operations of mobilkom austria prior to June 28, 2002 (see note (2)). Other
    
    
    SegmentWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    ConsolidatedYear ended December 31, 2004External revenues
    
    
    2,013,563
    
    
    
    2,042,678
    
    
    
    27
    
    
    
    4,056,268
    
    
    
    
    
    
    
    4,056,268Intersegmental revenues
    
    
    171,179
    
    
    
    82,805
    
    
    
    
    
    
    
    253,984
    
    
    
    (253,984
    )
    
    
    Total revenues
    
    
    2,184,742
    
    
    
    2,125,483
    
    
    
    27
    
    
    
    4,310,252
    
    
    
    (253,984
    )
    
    
    4,056,268adj. EBITDA (excl. Impairment charges)
    
    
    814,328
    
    
    
    765,443
    
    
    
    (39
    )
    
    
    1,579,732
    
    
    
    (10,894
    )
    
    
    1,568,838Impairment charges
    
    
    1,334
    
    
    
    
    
    
    
    
    
    
    
    1,334
    
    
    
    
    
    
    
    1,334adj. EBITDA (incl. Impairment charges)
    
    
    812,994
    
    
    
    765,443
    
    
    
    (39
    )
    
    
    1,578,398
    
    
    
    (10,894
    )
    
    
    1,567,504Depreciation and amortization
    
    
    757,174
    
    
    
    358,077
    
    
    
    
    
    
    
    1,115,251
    
    
    
    (421
    )
    
    
    1,114,830Operating Income
    
    
    55,820
    
    
    
    407,366
    
    
    
    (39
    )
    
    
    463,147
    
    
    
    (10,473
    )
    
    
    452,674Total assets
    
    
    5,260,231
    
    
    
    3,181,735
    
    
    
    1,250,869
    
    
    
    9,692,835
    
    
    
    (2,450,328
    )
    
    
    7,242,507Expenditures for additions to long-lived
assets
    
    
    280,390
    
    
    
    267,779
    
    
    
    
    
    
    
    548,169
    
    
    
    
    
    
    
    548,169
 Other
    
    
    SegmentWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    ConsolidatedYear ended December 31, 2003External revenues
    
    
    2,029,893
    
    
    
    1,939,857
    
    
    
    
    
    
    
    3,969,750
    
    
    
    
    
    
    
    3,969,750Intersegmental revenues
    
    
    167,758
    
    
    
    90,344
    
    
    
    
    
    
    
    258,102
    
    
    
    (258,102
    )
    
    
    Total revenues
    
    
    2,197,651
    
    
    
    2,030,201
    
    
    
    
    
    
    
    4,227,852
    
    
    
    (258,102
    )
    
    
    3,969,750adj. EBITDA (excl. Impairment charges)
    
    
    780,508
    
    
    
    727,057
    
    
    
    (45
    )
    
    
    1,507,520
    
    
    
    2,277
    
    
    
    1,509,797Impairment charges
    
    
    6,825
    
    
    
    
    
    
    
    
    
    
    
    6,825
    
    
    
    
    
    
    
    6,825adj. EBITDA (incl. Impairment charges)
    
    
    773,683
    
    
    
    727,057
    
    
    
    (45
    )
    
    
    1,500,695
    
    
    
    2,277
    
    
    
    1,502,972Depreciation and amortization
    
    
    807,935
    
    
    
    325,620
    
    
    
    
    
    
    
    1,133,555
    
    
    
    (407
    )
    
    
    1,133,148Operating Income
    
    
    (34,252
    )
    
    
    401,437
    
    
    
    (45
    )
    
    
    367,140
    
    
    
    2,684
    
    
    
    369,824Total assets
    
    
    6,116,105
    
    
    
    3,131,630
    
    
    
    1,125,178
    
    
    
    10,372,913
    
    
    
    (2,476,648
    )
    
    
    7,896,265Expenditures for additions to long-lived
assets
    
    
    299,918
    
    
    
    300,129
    
    
    
    
    
    
    
    600,047
    
    
    
    (363
    )
    
    
    599,684
 F-55




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s) Other
    
    
    Segment
    
    
    
    
    
    
    MobileWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    communications
    
    
    ConsolidatedYear ended
December 31, 2002External revenues
    
    
    2,090,006
    
    
    
    1,819,219
    
    
    
    
    
    
    
    3,909,225Intersegmental revenues
    
    
    170,005
    
    
    
    90,132
    
    
    
    
    
    
    
    260,137
    
    
    
    not providedTotal revenues
    
    
    2,260,011
    
    
    
    1,909,351
    
    
    
    
    
    
    
    4,169,362
    
    
    
    (144,348
    )
    
    
    (906,950
    )
    
    
    3,118,064adj. EBITDA (excl. Impairment charges)
    
    
    807,562
    
    
    
    649,487
    
    
    
    (73
    )
    
    
    1,456,976
    
    
    
    7,691
    
    
    
    (349,109
    )
    
    
    1,115,558Impairment charges
    
    
    41,871
    
    
    
    
    
    
    
    
    
    
    
    41,871
    
    
    
    
    
    
    
    
    
    
    
    41,871adj. EBITDA (incl. Impairment charges)
    
    
    765,691
    
    
    
    649,487
    
    
    
    (73
    )
    
    
    1,415,105
    
    
    
    7,691
    
    
    
    (349,109
    )
    
    
    1,073,687Depreciation and amortization
    
    
    880,971
    
    
    
    268,757
    
    
    
    
    
    
    
    1,149,728
    
    
    
    (196
    )
    
    
    (133,220
    )
    
    
    1,016,312Operating Income
    
    
    (115,280
    )
    
    
    380,730
    
    
    
    (73
    )
    
    
    265,377
    
    
    
    7,887
    
    
    
    (215,889
    )
    
    
    57,375Total assets
    
    
    6,428,133
    
    
    
    2,832,149
    
    
    
    1,007,006
    
    
    
    10,267,288
    
    
    
    (1,732,950
    )
    
    
    
    
    
    
    8,534,338Expenditures for additions to long-lived
assets
    
    
    343,409
    
    
    
    340,009
    
    
    
    
    
    
    
    683,418
    
    
    
    (2,336
    )
    
    
    (129,064
    )
    
    
    552,018
 Adjusted EBITDA differs from consolidated net income as a result of the following differences: Yearended December 31,2004
    
    
    2003
    
    
    2002adj. EBITDA (excl. Impairment charges)  segment totals
    
    
    1,579,732
    
    
    
    1,507,520
    
    
    
    1,456,976Impairment charges
    
    
    (1,334
    )
    
    
    (6,825
    )
    
    
    (41,871
    )adj. EBITDA (incl. Impairment charges)  segment totals
    
    
    1,578,398
    
    
    
    1,500,695
    
    
    
    1,415,105Depreciation and amortization
    
    
    (1,114,830
    )
    
    
    (1,133,148
    )
    
    
    (1,016,312
    )Interest income
    
    
    70,016
    
    
    
    75,167
    
    
    
    88,191Interest expense
    
    
    (188,818
    )
    
    
    (230,979
    )
    
    
    (244,628
    )adj. EBITDA  mobilkom austria prior to acquisition
    
    
    
    
    
    
    
    
    
    
    (349,109
    )Equity in earnings of affiliates  mobilkom austria prior to acquisition
    
    
    
    
    
    
    
    
    
    
    142,906Equity in earnings of affiliates
    
    
    552
    
    
    
    19,112
    
    
    
    (2,363
    )Other
    
    
    4,762
    
    
    
    1,710
    
    
    
    10,021Income before taxes, minority interests
and cumulative effect of change in accounting principle
    
    
    350,080
    
    
    
    232,557
    
    
    
    43,811Income tax expense
    
    
    (122,186
    )
    
    
    (83,036
    )
    
    
    (26,112
    )Minority interests
    
    
    (631
    )
    
    
    (3,422
    )
    
    
    (4,910
    )Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    (11,858
    )
    
    
    Net income
    
    
    227,263
    
    
    
    134,241
    
    
    
    12,789
 In 2004, 2003 and 2002, more than 88%, 89% and 90%, respectively, of the revenues
generated by the reportable segments relate to operations in Austria. As of December 31, 2004 and
2003, respectively, 90% and 93% of the long-lived assets were located in Austria.  (30)

SUBSEQUENT EVENTS In January 2005 the Company launched and placed two bonds with a face value of EUR 500,000
each under the EMTN program (see note (16)). The bonds have a maturity of 5 and 12 years,
respectively, and a coupon of 3.375% and 4.250%, respectively. The bonds were issued at a discount
including issue cost of EUR 4,533 and EUR 9,567, respectively. The Company entered into an interest
rate swap to change the interest of the 5 year bond from fixed to floating. F-56




---



##### Table of Contents



TELEKOM AUSTRIA AGNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)(All amounts in EUR 000s) Based on the relevant approval by the Supervisory Board the second tranche of 3,398,800
options was offered to the eligible employees under the stock option plan 2004 (see note (20)) on
January 19, 2005. The exercise price of Euro 13.98 was defined as the average quoted closing price
of Telekom Austria stock during a period of twenty trading days ending two days before the granting
of options. The options can be settled either in cash or in shares at the Companys choice. Vesting
of the stock options awarded is based on the performance of basic earnings per share adjusted for
certain effects. The options have a vesting period of about 14 months from the grant day and an
exercise period of three years after becoming exercisable. The Company is currently evaluating the
fulfillment of the holding condition by the eligible employees. The fair value of one option as of
the grant day amounted to Euro 2.95. F-57