##### Table of Contents



As filed with the Securities and Exchange Commission on April 10, 2006
   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, 2005
Commission file number: 1-15156  
 TELEKOM AUSTRIA AG
  AUSTRIA
  Lassallestrasse 9, 1020 Vienna, Austria
 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,
    
    New York Stock Exchangerepresenting Common StockCommon Stock, no par value
    
    Vienna Stock ExchangeNew 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.
 
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
 
 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 if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. þ Yes o No
 If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 o Yes þ No
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by ®  Section 13 or 15(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 Yes o No
 Indicate by check mark which financial statement item the registrant has elected to follow. o Item 17 þ Item 18
 If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). o Yes þ No




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##### 



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
    
    
    144.1. History and Development of the company
    
    
    144.2. Business Overview
    
    
    16Strategy
    
    
    16Wireline
    
    
    18Wireless
    
    
    33Properties
    
    
    44Research and Development
    
    
    444.3. Regulation and Legal Framework
    
    
    46Item 5.
    
    Operating and Financial Review and Prospects
    
    
    625.1. Overview
    
    
    625.2. Results of operations 2005 compared to 2004
    
    
    695.3. Results of operations 2004 compared to 2003
    
    
    835.4. Liquidity and capital resources
    
    
    99Item 6.
    
    Directors, Senior Management and Employees
    
    
    107Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    113Item 8.
    
    Financial Information
    
    
    115Item 9.
    
    The Offer and Listing
    
    
    118Item 10.
    
    Additional Information
    
    
    11910.1. Memorandum and Articles of Association
    
    
    11910.2. Taxation
    
    
    13110.3. Documents on Display
    
    
    136Item 11.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    137Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    139PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    139Item 14.
    
    Material Modifications to the Rights of Security Holders
and Use of Proceeds
    
    
    139Item 15.
    
    Controls and Procedures
    
    
    139Item 16A.
    
    Audit Committee Financial Expert
    
    
    139Item 16B.
    
    Code of Ethics
    
    
    140Item 16C.
    
    Principal Accountant Fees and Services
    
    
    140Item 16D.
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    141Item 16E.
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    142PART IIIItem 17.
    
    Financial Statements
    
    
    144Item 18.
    
    Financial Statements
    
    
    144Item 19.
    
    Exhibits
    
    
    144Exhibit 1.1Exhibit 4.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1
  i




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REFERENCES
  FORWARD-LOOKING STATEMENTS
  
    
    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 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;
    
    the successful integration of acquired subsidiaries;
    
    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.
  1




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisors
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 
 3.1. SELECTED FINANCIAL AND OTHER DATA
    Autel Beteiligungs GmbH
 KPMG
Austria GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft Grant Thornton  Jonasch &
Platzer Wirtschaftsprüfungs- und Steuerberatungsgesellschaft-OHG KPMG Alpen-Treuhand GmbH Wirtschaftsprüfungs- und Steuerberatungsgesellschaft Grant Thornton Wirtschaftsprüfungs- und Steuerberatungs-GmbH KPMG Wirtschaftsprüfungs- und
Steuerberatungs GmbH
 2




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##### Table of Contents



Year ended December 31,2005 (6)
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in EUR millions, except per share information)Consolidated statements of operations:Operating revenues (1) (2) (3)
    
    
    4,377.3
    
    
    
    4,056.3
    
    
    
    3,969.8
    
    
    
    3,118.1
    
    
    
    2,659.7Operating expenses:Materials
    
    
    (346.5
    )
    
    
    (324.5
    )
    
    
    (297.1
    )
    
    
    (196.4
    )
    
    
    (71.9
    )Employee costs, including benefits
and taxes (4)
    
    
    (679.0
    )
    
    
    (673.7
    )
    
    
    (699.3
    )
    
    
    (600.7
    )
    
    
    (619.1
    )Depreciation and amortization
    
    
    (1,119.8
    )
    
    
    (1,114.8
    )
    
    
    (1,133.2
    )
    
    
    (1,016.3
    )
    
    
    (904.1
    )Impairment charges
    
    
    (17.4
    )
    
    
    (1.3
    )
    
    
    (6.8
    )
    
    
    (41.9
    )
    
    
    (145.1
    )Other operating expenses
    
    
    (1,594.6
    )
    
    
    (1,489.3
    )
    
    
    (1,463.6
    )
    
    
    (1,205.4
    )
    
    
    (1,114.9
    )Total operating expenses
    
    
    (3,757.3
    )
    
    
    (3,603.6
    )
    
    
    (3,600.0
    )
    
    
    (3,060.7
    )
    
    
    (2,855.1
    )Operating income (loss)
    
    
    620.0
    
    
    
    452.7
    
    
    
    369.8
    
    
    
    57.4
    
    
    
    (195.4
    )Other income (expense):Interest income
    
    
    89.1
    
    
    
    70.0
    
    
    
    75.2
    
    
    
    88.2
    
    
    
    82.7Interest expense
    
    
    (198.2
    )
    
    
    (188.8
    )
    
    
    (231.0
    )
    
    
    (244.6
    )
    
    
    (241.0
    )Dividend income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    2.2Equity in earnings of affiliates
    
    
    0.6
    
    
    
    0.6
    
    
    
    19.1
    
    
    
    140.5
    
    
    
    195.4Other, net
    
    
    12.0
    
    
    
    15.6
    
    
    
    (0.5
    )
    
    
    2.3
    
    
    
    (44.0
    )Income (loss) before income
taxes and
minority interests
    
    
    523.5
    
    
    
    350.1
    
    
    
    232.6
    
    
    
    43.8
    
    
    
    (200.1
    )Income tax benefit (expense)
    
    
    (106.4
    )
    
    
    (122.2
    )
    
    
    (83.1
    )
    
    
    (26.1
    )
    
    
    94.9Minority interests
    
    
    (0.0
    )
    
    
    (0.6
    )
    
    
    (3.4
    )
    
    
    (4.9
    )
    
    
    0.6Income before extraordinary
items and
cumulative effect of change in
accounting principle
    
    
    417.1
    
    
    
    227.3
    
    
    
    146.1
    
    
    
    12.8
    
    
    
    (104.6
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (11.9
    )
    
    
    
    
    
    
    Net income (loss)
    
    
    417.1
    
    
    
    227.3
    
    
    
    134.2
    
    
    
    12.8
    
    
    
    (104.6
    )Basic and fully diluted earnings (loss) per
share
    
    
    0.85
    
    
    
    0.46
    
    
    
    0.27
    
    
    
    0.03
    
    
    
    (0.21
    )Basic and fully diluted earnings (loss) per share
excluding cumulative effect of change in
accounting principle
    
    
    0.85
    
    
    
    0.46
    
    
    
    0.29
    
    
    
    0.03
    
    
    
    (0.21
    )
 Year ended December 31,2005 (6)
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in EUR millions)Consolidated cash flow data:Cash generated from operations
    
    
    1,513.7
    
    
    
    1,304.7
    
    
    
    1,219.9
    
    
    
    1,171.4
    
    
    
    842.4Cash used in investing activities
    
    
    (1,780.9
    )
    
    
    (509.3
    )
    
    
    (643.9
    )
    
    
    (1,175.9
    )
    
    
    (453.2
    )Cash from (used in) financing activities
    
    
    96.2
    
    
    
    (704.9
    )
    
    
    (406.8
    )
    
    
    1.8
    
    
    
    (380.7
    )Effect of exchange rate differences
    
    
    (0.4
    )
    
    
    (4.2
    )
    
    
    5.4
    
    
    
    3.6
    
    
    
    0.1Net increase (decrease) in
cash and cash equivalents
    
    
    (171.4
    )
    
    
    86.3
    
    
    
    174.6
    
    
    
    0.9
    
    
    
    8.7
 3




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At December 31,2005 (6)
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in EUR millions)Consolidated balance sheet data:Assets:Current assets
    
    
    1,204.6
    
    
    
    1,273.9
    
    
    
    1,124.8
    
    
    
    865.2
    
    
    
    839.2Property, plant and equipment, net
    
    
    3,774.6
    
    
    
    3,888.7
    
    
    
    4,457.7
    
    
    
    5,000.7
    
    
    
    4,591.8Intangible assets, net (5)
    
    
    2,581.7
    
    
    
    1,263.9
    
    
    
    1,309.6
    
    
    
    1,316.6
    
    
    
    80.7Investments
    
    
    160.5
    
    
    
    136.8
    
    
    
    147.2
    
    
    
    171.3
    
    
    
    682.2Other assets and deferred tax assets
    
    
    690.5
    
    
    
    679.2
    
    
    
    857.0
    
    
    
    1,180.5
    
    
    
    1,315.5Due from related parties (long-term)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218.0Total assets
    
    
    8,411.9
    
    
    
    7,242.5
    
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3Liabilities:Current liabilities
    
    
    1,919.2
    
    
    
    1,872.1
    
    
    
    1,789.7
    
    
    
    2,531.0
    
    
    
    1,680.1Long-term debt, net of current portion
    
    
    2,557.7
    
    
    
    1,647.2
    
    
    
    2,342.3
    
    
    
    2,079.9
    
    
    
    2,005.2Lease obligations, net of current portion
    
    
    817.9
    
    
    
    761.1
    
    
    
    861.3
    
    
    
    1,076.4
    
    
    
    1,086.9Employee benefit obligations
    
    
    107.3
    
    
    
    110.0
    
    
    
    156.0
    
    
    
    232.5
    
    
    
    378.1Other liabilities and deferred income taxes
    
    
    140.3
    
    
    
    110.5
    
    
    
    107.6
    
    
    
    105.0
    
    
    
    76.6Total liabilities
    
    
    5,542.4
    
    
    
    4,500.9
    
    
    
    5,256.9
    
    
    
    6,024.8
    
    
    
    5,226.9Stockholders equity
    
    
    2,869.5
    
    
    
    2,741.6
    
    
    
    2,639.4
    
    
    
    2,509.5
    
    
    
    2,500.4Total liabilities and Stockholders equity
    
    
    8,411.9
    
    
    
    7,242.5
    
    
    
    7,896.3
    
    
    
    8,534.3
    
    
    
    7,727.3
 At December 31,Other data:
    
    2005 (6)
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Wireline (in thousands)Fixed access lines
    
    
    2,801.9
    
    
    
    2,906.7
    
    
    
    3,010.8
    
    
    
    3,097.3
    
    
    
    3,166.9Fixed access channels
    
    
    3,433.7
    
    
    
    3,570.7
    
    
    
    3,684.2
    
    
    
    3,762.3
    
    
    
    3,806.2Internet customers in Austria
    
    
    1,424.2
    
    
    
    1,187.0
    
    
    
    1,026.6
    
    
    
    846.5
    
    
    
    666.4thereof ADSL customers
    
    
    468.5
    
    
    
    298.4
    
    
    
    207.6
    
    
    
    143.1
    
    
    
    86.4Customers Czech On Line
    
    
    187.9
    
    
    
    247.1
    
    
    
    279.4
    
    
    
    275.3
    
    
    
    238.2Wireless customers (in thousands)Austria
    
    
    3,392.2
    
    
    
    3,273.6
    
    
    
    3,163.2
    
    
    
    3,001.4
    
    
    
    2,849.9Bulgaria
    
    
    3,594.2
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.
    
    
    
    n.a.Croatia
    
    
    1,612.9
    
    
    
    1,308.6
    
    
    
    1,210.5
    
    
    
    1,097.8
    
    
    
    855.7Slovenia
    
    
    359.6
    
    
    
    363.3
    
    
    
    361.5
    
    
    
    350.0
    
    
    
    269.6Liechtenstein
    
    
    4.2
    
    
    
    3.5
    
    
    
    2.5
    
    
    
    2.0
    
    
    
    1.3Total
    
    
    8,963.1
    
    
    
    4,949.0
    
    
    
    4,737.7
    
    
    
    4,451.2
    
    
    
    3,976.5Full-time equivalent employees, including
mobilkom austria group (year-end) (2)
    
    
    15,595
    
    
    
    13,307
    
    
    
    13,890
    
    
    
    14,951
    
    
    
    16,586
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(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. This change had no impact on operating
income.
 (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 consolidated 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.
 (6)
    
    Starting from July 12, 2005, we included the results of operations of Mobiltel AD in our
consolidated financial statements (see note (2) of the accompanying consolidated financial
statements).
 5




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3.2. DIVIDENDS
  For the fiscal year
    
    Dividends declared and paid per shareEUR
    
    
    USD2001
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    2003
    
    
    0.13
    
    
    
    0.162004
    
    
    0.24
    
    
    
    0.29
    6




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3.3. EXCHANGE RATE INFORMATION
   Year or Month
    
    End of period
    
    
    High
    
    
    Low
    
    
    AverageUSD per EUR 1.00 (1)2001
    
    
    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
    
    
    
    1.24782005
    
    
    1.1842
    
    
    
    1.3476
    
    
    
    1.1667
    
    
    
    1.2400October 2005
    
    
    1.1995
    
    
    
    1.2148
    
    
    
    1.1914November 2005
    
    
    1.1790
    
    
    
    1.2067
    
    
    
    1.1667December 2005
    
    
    1.1842
    
    
    
    1.2041
    
    
    
    1.16692006January 2006
    
    
    1.2130
    
    
    
    1.2287
    
    
    
    1.1980February 2006
    
    
    1.1860
    
    
    
    1.2100
    
    
    
    1.1860March 2006
    
    
    1.2139
    
    
    
    1.2197
    
    
    
    1.1886April 2006 (through April 6)
    
    
    1.2216
    
    
    
    1.2272
    
    
    
    1.2124
 
 (1)
    
    Based on the U.S. Federal Reserve Bank noon buying rate for the euro. The average exchange
rates for 2001, 2002, 2003, 2004 and 2005 are calculated using the rate on the last business
day of each month during the period specified.
 7




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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.
      8




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At year-end, approximately 82% of our revenues were generated on 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.
   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.
    We are limited in our ability to adjust our operating expenses according to the changing
market environment.
  9




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##### Table of Contents



Our customer tariffs for fixed line services are in general subject to prior approval by the
regulatory authorities in Austria, and we may be further required to decrease our fixed or mobile
interconnection rates. By these restrictions we may be further limited in our flexibility in
pricing, particularly in bidding for contracts from the public sector, and may be adversely
affected in our profitability.
     We may also become subject to European regulation in setting our roaming charges which may
limit our flexibility in pricing and may adversely affect our net income.
  The implementation of sharing our infrastructure and services with our competitors remains to
be settled 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.
    10




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##### Table of Contents



To the extent we need to enter into mobile radio
agreements with various Austrian federal provinces we
may incur additional costs for relocation of existing installations and be limited in our
locations.
   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.
  Technological change could increase competition, render existing technologies obsolete or
require us to make substantial additional investments.
   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.
  Our investment in Mobiltel is an important acquisition which presents us with significant
challenges.
  11




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##### Table of Contents




    
    the need to integrate Mobiltels infrastructure,
including management information systems;
    
    the integration of marketing, customer service and product offerings; and
    
    the integration of different company and management cultures.
  The Groups business may be adversely affected by exchange rate fluctuations and a
strengthening of the euro.
    Actual or perceived health risks or other problems relating to mobile handsets or transmission
masts could lead to litigation or decreased mobile communications usage.
  Risks relating to disputes and litigation with regulators, competitors and other private
parties.
  12




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##### Table of Contents



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
 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.
    Currency fluctuations may adversely affect the trading prices of our common stock and ADSs and
the value of any distributions we make.
  Shareholders rights are governed by Austrian law and differ in some respects from the rights
of shareholders under U.S. law.
  It may not be possible for shareholders to enforce judgments of U.S. courts against members of
our Supervisory Board or Management Board.
  13




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##### Table of Contents



Item 4. Information on the Company
 Aktiengesellschaft
   
 4.1. HISTORY AND DEVELOPMENT OF THE COMPANY
 Post- und
Telegraphenverwaltung Post und Telekom Austria AG Poststrukturgesetz Post und Telekom Austria AG Post- und Telekom
Beteiligungsgesellschaft mbH
 Post und Telekom Austria AG Post und Telekom Austria AG Post und
Telekom Austria AG Post und
Telekom Austria AG , Post und Telekom Austria AG
 ÖIAG-Gesetz 2000 Post und Telekom Austria AG Österreichische Industrieholding AG
   14




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##### Table of Contents



Change in mobilkom austrias corporate form and ownership
  Autel Beteiligungs GmbH
 15




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##### Table of Contents



4.2. BUSINESS OVERVIEW
  
    
    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).
    
 Strategy
       16




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##### Table of Contents



Overview of Telekom Austrias revenues
   2005
    
    
    2004
    
    
    2003(in EUR millions)Operating revenues:Wireline
    
    
    2,135.2
    
    
    
    2,184.7
    
    
    
    2,197.7Wireless
    
    
    2,489.2
    
    
    
    2,125.5
    
    
    
    2,030.2Other activities & eliminations
    
    
    (247.1
    )
    
    
    (253.9
    )
    
    
    (258.1
    )Consolidated operating revenues
    
    
    4,377.3
    
    
    
    4,056.3
    
    
    
    3,969.8
   17




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##### Table of Contents



Wireline
   Market position
     Primary services
  
    
    Switched voice telephony;
    
    Payphones 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).
 18




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##### Table of Contents



Switched voice telephony
 Services
   Access lines
  At December 31,2005
    
    
    2004
    
    
    2003(in thousands)Number of fixed lines:PSTN access lines
    
    
    2,374.5
    
    
    
    2,455.5
    
    
    
    2,555.8Basic ISDN access lines
    
    
    420.1
    
    
    
    443.6
    
    
    
    447.2Multi ISDN access lines
    
    
    7.3
    
    
    
    7.6
    
    
    
    7.8Total access lines
    
    
    2,801.9
    
    
    
    2,906.7
    
    
    
    3,010.8Total access channels
    
    
    3,433.7
    
    
    
    3,570.7
    
    
    
    3,684.2
  Traffic volume
  Year ended December 31,2005
    
    
    2004
    
    
    2003(in millions of minutes)(1)Traffic minutes:National (local + national long distance)
    
    
    3,866
    
    
    
    4,174
    
    
    
    4,485Fixed-to-mobile
    
    
    839
    
    
    
    854
    
    
    
    855International
    
    
    442
    
    
    
    467
    
    
    
    484Total voice minutes
    
    
    5,147
    
    
    
    5,495
    
    
    
    5,824
 (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.
 19




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##### Table of Contents



Tariffs
    Year ended December 31,2005
    
    
    2004
    
    
    2003(in EUR)Average tariffs:National (local + national long distance)
    
    
    0.040
    
    
    
    0.040
    
    
    
    0.044Fixed-to-mobile
    
    
    0.189
    
    
    
    0.187
    
    
    
    0.184International
    
    
    0.181
    
    
    
    0.185
    
    
    
    0.196Average voice tariff
    
    
    0.077
    
    
    
    0.075
    
    
    
    0.078
    20




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##### Table of Contents



Pay phones and value-added services
 Public payphone services
   Value-added services (VAS)
  
    
    Toll-free services, which enable users 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 callers a higher than standard telephone rate
in exchange for services provided, a portion of which is passed on to the information
provider called;
    
    Event-based premium rate services, where each call is charged regardless of the
duration; a portion of the charge is passed on to the event organizer;
    
    IVR (Interactive Voice Response) Solutions;
    
    Voice VPN (Virtual Private Network); VPNs 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.
   Tariffs
  21




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##### Table of Contents



Data and IT-solutions
 Services
  
    
    Leased lines and related services;
    
    Switched data services;
    
    Corporate network services;
    
    Electronic payment solutions;
    
    Safety and security solutions;
    
    IT-solution services; and
    
    Business applications.
  Leased lines and connected services
    Data services based on SDH Technology (Synchronous Digital Hierarchy).
 Switched data services
  IP-MPLS services.
  22




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##### Table of Contents



Packet-switched services.
 Frame relay services.
 ATM services.
 Video Connection services.
 Corporate network services
  
    
    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.
    
    Corporate network LAN solutions. Local-Area Networks (LAN) are computer networks that
are typically confined to a single or a few buildings. We implement and manage LAN
switches and other LAN components of our business customers networks including security
relevant topics.
    
    Network Management solutions provide advanced functionalities for customers to manage
and customize their computer networks.
    
    International Corporate Network & Partner Services over Telekom Austrias
infrastructure abroad (TAJetstream) as well as in cooperation with international
partners provide customers with global access to various network services like IP, ATM,
frame relay 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 (Voice over Internet Protocol). We
offer these IP-Voice Solutions as hosted or dedicated services and as shared version on
a port basis to our customers. Usually these IP Voice services are sold in combination
with applications.
   23




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##### Table of Contents



Electronic payment solutions.
  Safety and Security Solutions
  IT-solution services
   
    
    IT Client Servicesprovide local services at the customer site with defined service
level agreements (desktop services). In 2005, a product re-launch assured that also
SME-customers can be served.
    
    IT infrastructure servicescentrally provide the basic data center infrastructure
(housing services) as well as local services at the customer site (desktop services).
    
    IT Datacenter Servicescentrally 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. Furthermore,
standard applications, such as mailing services and dedicated web space are centrally
provisioned to our customers. In 2005, the launch of Linux hosting enriched the existing
product portfolio as well as the allocation of hosting services in the existing regional
datacenters of Telekom Austria.
    
    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 and VPN services (centrally hosted or locally
provided at the customer site) and the e-mail content filtering services security
service which protects customers e-mail traffic from computer viruses and spam
(unsolicited commercial e-mails).
    
    IT Outsourcing Servicesinclude managing a customers IT landscape partially or
entirely.
 Business applications
   24




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##### Table of Contents



Elektronischer Rechtsverkehr Europäisches
Firmenbuch
   Internet access & media
  Austria
  
    
    Access services (dial-up access, broadband ADSL access, business internet access); and
    
    Portal business paid services and multimedia services.
    At December 31,2005
    
    
    2004
    
    
    2003Dial-up customers
    
    
    955,700
    
    
    
    888,600
    
    
    
    819,000ADSL customers
    
    
    468,500
    
    
    
    298,400
    
    
    
    207,600Total customers
    
    
    1,424,200
    
    
    
    1,187,000
    
    
    
    1,026,600Internet dial-up traffic (in millions of minutes)
    
    
    2,287
    
    
    
    3,376
    
    
    
    3,953Average Internet dial-up tariff (in EUR/min.)
    
    
    0.017
    
    
    
    0.016
    
    
    
    0.017
     25




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##### Table of Contents



aon.tv.
 onDigital TV.
       Czech On Line
  26




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##### Table of Contents




    
    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 based on
wholesale and local loop unbundling;
    
    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 pre-selection;
    
    VoIP (Voice over Internet Protocol) services for business and residential customers;
    
    VAS (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.
  Wholesale voice & internet
  National wholesale services
 
    
    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, SMS);
    
    Wholesale terminating segments of leased lines;
    
    Broadband solutions for ISP and other telecommunications providers; and
    
    Emergency and directory inquiry services.
  27




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##### Table of Contents



International wholesale services
 
    
    Call termination. We deliver international incoming calls to Telekom Austria
customers or subscribers of other network operators;
    
    Voice transit service. Consisting 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;
    
    International internet access. We provide connections to the networks of other
European countries, the United States and worldwide;
    
    Satellite services. We provide bandwidth 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 VPNs. We provide VPNs for national retail business customers through
our international partners throughout the world;
    
    TAJetstream. In 2005, we expanded the development of our fiber optic backbone network
to Slovenia. We are implementing backbone capacities pursuant to actual demand. Telekom
Austria is evaluating further options for extending the international network to other
South East European countries.
 Traffic volume
  Tariffs
   Other services (customer premises equipment and directory services)
 Customer premises equipment
  28




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##### Table of Contents




    
    ISDN and IP (Internet Protocol) based Telephone systems (PABX and IP PABX), which
help corporate customers manage their telephone extensions based on state-of-the-art
technologies and developments like VoIP telephony;
    
    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
    
    Installation and maintenance services.
  Directory services
  Directory assistance services & information services.
 Directory publications & directory data selling.
 Competition
   29




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##### Table of Contents



Sales and marketing
  
    
    Residential retail sales: in this marketing segment we serve about 2.2 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.
    30




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##### Table of Contents



Customer service
   Networks
  Switched network
      Data networks
  Backbone network infrastructure.
  31




---



##### Table of Contents



Access infrastructure.
  Advanced services.
 International network
  Next generation network
    Information technology/Operations support systems
  32




---



##### Table of Contents



Wireless
    
    
    Vodafone live!, a product portfolio, which is predominantly used by our residential
customers, offers 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; important parts of Vodafone live! were re-launched in 2005, such as
mobile radio and international web radio products. Since the fourth quarter of 2005
Vodafone live! users are able to choose TV programs from national as well as commercial
broadcast channels.
    
    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 was
enriched by the EDGE (Enhanced Data Rates for Global Evolution) technology and special
roaming data bundles with preferred rates in Vodafone networks have been introduced in
Austria and Slovenia.
    
    Vodafone World, a new transparent roaming pricing plan, offering a simple pricing plan
world-wide was launched in Croatia and Slovenia, roaming promotions (offering special rates
or other benefits) for our roamers in Austria and Croatia as well as the first local mobile
tourism portal was launched in Austria.
  Austria
   33




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##### Table of Contents



Competition
   Customers and traffic
  34




---



##### Table of Contents



At December 31,2005
    
    
    2004
    
    
    2003(in thousands)Customers at end of periodContract
    
    
    1,929.5
    
    
    
    1,778.8
    
    
    
    1,682.2Prepaid
    
    
    1,462.7
    
    
    
    1,494.8
    
    
    
    1,481.0Total
customers
    
    
    3,392.2
    
    
    
    3,273.6
    
    
    
    3,163.2Net
additions
    
    
    118.6
    
    
    
    110.4
    
    
    
    161.8Market InformationTotal market for mobile services
    
    
    8,670.5
    
    
    
    7,993.0
    
    
    
    7,312.5Our total market
share
    
    
    39.1
    %
    
    
    41.0
    %
    
    
    43.3
    %
    Year ended December 31,2005
    
    
    2004
    
    
    2003Traffic (in millions of
minutes)
    
    
    5,332
    
    
    
    4,751
    
    
    
    4,509Average number of customers (in
thousands)
    
    
    3,302.9
    
    
    
    3,184.4
    
    
    
    3,064.5Minutes per customer per
month
    
    
    135
    
    
    
    124
    
    
    
    123
 Products and Services
   35




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##### Table of Contents



Contract services.
 Prepaid services
 Call back service.
 M-commerce services.
    Business customers.
  International roaming services.
 36




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##### Table of Contents



Sales, marketing and customer service
  
    
    Increasing sales through direct channels and developing them into service points for
our customers, e.g. for hardware replacement, rental handsets in case
of damage;
    
    Strong focus on valuable business customers;
    
    Further improving skills and service orientation of our customer service and sales agents; and
    
    Improve usage and amount of data products, such as mobile broadband, Vodafone live!
or Blackberry.
  
    
    Business customers: individual business solutions are offered to this group of sole
proprietorships and larger corporations and organizations;
    
    Residential customers: residential contract; and customers with medium to high usage of
mobile communications services are included in this group; and
    
    Prepaid customers: customers with low usage of mobile communications services and no
fixed binding are served in this group.
    www.a1.net
   37




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##### Table of Contents



A1Auskunft
        38




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##### Table of Contents



At December 31,2005
    
    
    2004
    
    
    2003Microcell
stations
    
    
    1,073
    
    
    
    1,062
    
    
    
    1,010Macrocell stations
    
    
    4,334
    
    
    
    4,301
    
    
    
    4,199Total (on
air)
    
    
    5,407
    
    
    
    5,363
    
    
    
    5,209
   Wireless Application Protocol (WAP).
 General Packet Radio Service (GPRS).
 Enhanced Data Rates for Global Evolution (EDGE).
 Universal Mobile Telecommunications System (UMTS).
 39




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##### Table of Contents



At December 31,2005
    
    
    2004
    
    
    2003Macrocell stations
    
    
    2,057
    
    
    
    1,697
    
    
    
    1,271Microcell/Indoor stations
    
    
    53
    
    
    
    24
    
    
    
    Total (on air)
    
    
    2,110
    
    
    
    1,721
    
    
    
    1,271
  High Speed Downlink Packet Access (HSDPA).
 Wireless Local Area Network (WLAN)
 Information technology/Operations support systems
    Bulgaria
  40




---



##### Table of Contents



41




---



##### Table of Contents



Croatia
          Slovenia
  42




---



##### Table of Contents



Liechtenstein
   43




---



##### Table of Contents



Properties
  Post und Telekom Austria AG
 Arsenal
 
 Research and Development
      Wireline
    44




---



##### Table of Contents



Wireless
    Capital expenditures
  45




---



##### Table of Contents



4.3. REGULATION AND LEGAL FRAMEWORK
 Regulation
 Austria
 Liberalization (1998-2002)
  The European Union
      46




---



##### Table of Contents



2002 until today
      47




---



##### Table of Contents



Results of the regulation of operators with significant market power
  Märkteverordnung
   Market Analysis
    
  
    
    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. In October 2005 the European Court of Justice rejected the
regulatory authoritys request for a preliminary ruling. At present, the regulatory
authoritys response is still pending.
   48




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##### Table of Contents



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 Carrier Selection and Carrier Preselection Resale-Standard offer on
retail-minus basis
 publicly available local and/or national 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
 minimum set of leased lines
  call termination on individual
public telephone networks provided at a fixed location call origination on the public
telephone network provided at a fixed location transit services
in the fixed public telephone network
 call termination on individual
public telephone networks provided at a fixed location call origination on the public telephone
network 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 terminating segments of leased lines wholesale broadband access.
  access and call origination on public mobile telephone networks
 call termination market on its own mobile network ,
 voice call termination on individual
mobile networks
  49




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##### Table of Contents



wholesale national market for international roaming on public mobile networks
   Ordinances under the Telecommunications Act of 2003
  
    
    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
review of the ordinance was published in February 2006 stating for the first time to
consider VoB-services (voice over broadband) in certain markets are currently in revision
by the regulator.
    
    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, 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. The new decision was issued in March 2006. mobilkom austria will appeal
against this decision (see also  Interconnection and specific network access  Number
Portability below).
    
    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. The ordinance is expected to be revised in the first half of 2006.
    
    Ordinance of Legal Interception Cost (Überwachungskostenverordnung)  of August 12,
2004  which introduces the fees to be paid by courts and governmental authorities for the
interception of voice.
    
    Ordinance of Legal Interception (Überwachungsverordnung) of November 2001  Telekom
Austria implemented the ETSI-Standards (The European Telecommunications Standards Institute
  an independent, non-profit organization, whose mission is to produce telecommunications
standards for today and for the future) which were required by 2005. Refunding of the cost
by the Austrian State is still under negotiation.
 50




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##### Table of Contents




    
    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 Ordinance on Itemized Billing (Einzelentgeltnachweisverordnung) which was enacted
on May 1, 2004 sets forth the standards for itemized billing
  The regulatory authority
 Telekom-Control-Kommission Rundfunk und Telekom
Regulierungs-GmbH Telekom-Control-Kommission Rundfunk und Telekom
Regulierungs-GmbH
 Telekom-Control-Kommission
 Telekom-Control-Kommission
 Telekom-Control-Kommission
 Rundfunk und Telekom Regulierungs-GmbH
 Rundfunk und Telekom Regulierungs-GmbH Telekom-Control-Kommission Rundfunk und Telekom Regulierungs-GmbH Telekom-Control-Kommission Rundfunk und Telekom Regulierungs-GmbHs Rundfunk und Telekom
Regulierungs-GmbH
 Communications Authority
  51




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##### Table of Contents



Other regulatory bodies
  Regulation of market entry
   
    
    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.
   UMTS
    52




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##### Table of Contents



Major regulatory decisions affecting Telekom Austria
 Wholesale line rental
   Current tariffs: voice telephony services and leased lines
  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)
 terminating segments of leased lines leased lines
 Fixed-to-mobile tariffs
   Tariffs for special services
 Fernsprechentgeltzuschussgesetz"
 53




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##### Table of Contents



Interconnection and specific network access
  General principles
     Interconnection in Austria
  Call termination in Austria
  
    
    Local exchange interconnection allows access to all customers
within a local area. At December 31, 2005, we allowed access to 43
local exchanges;
    
    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.
  54




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##### Table of Contents



Regulation of interconnection and access fees
    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
      termination on each
individual mobile network
  55




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##### Table of Contents



Carrier selection
  
    
    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.
  Number portability (see also  Ordinances and the Telecommunication Act of 2003)
 ,
  Nummernübertragungsverordnung
 Access to local subscriber lines
   56




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Wholesale bitstream Services
  Payphone Access Charge
  International Roaming
   57




---



##### Table of Contents



Frequency spectrum
   Numbering
    Universal service
      58




---



##### Table of Contents



Legal framework
 Rights of way
   Ordinance regulating lawful interception
  Competition law and general legal framework
   (Bundeswettbewerbsbehörde)
 59




---



##### Table of Contents



Procurement law and telecommunications act
  Customer protection and data protection
 Customer protection
    Einzelentgeltnachweisverordnung
 Data protection
 
   60




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61




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##### 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).
  
    
    Wireline;
    
    Wireless; and
    
    Other activities (covering internal financial services).
   Accuracy of forward-looking statements
  Certain factors and trends affecting our financial results
   Wireline
 
    
    Decreasing voice traffic volumes, mainly due to fixed-to-mobile substitution;
    
    Continued pricing pressure due to strong competition and regulatory constraints;
 62




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##### Table of Contents




    
    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;
    
    Significant broadband revenue growth together with increasing competition;
    
    Growth in revenues from content and services for business customers provided on the
internet; and
    
    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 newcompetitors 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 HSDPA; and
    
    Expansion of Telekom Austria in targeted international markets, particularly in
south-eastern European countries.
 Open competition
   Regulatory environment
   63




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##### Table of Contents



For
the wholesale national market for international roaming on public mobile networks,
 Technological change
   Tariff reductions and reforms
   Claims against the Republic of Austria
  64




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##### Table of Contents



Court ruling on value added services
  Seasonality
   Critical accounting policies
  Valuation of long-lived assets, intangible assets and goodwill
  65




---



##### Table of Contents



Valuation of employee benefit obligations
   Contractual termination benefits.
 Service awards
 Severance BAWAG Allianz Mitarbeitervorsorgekasse AG
 66




---



##### Table of Contents



Pension benefits
  Valuation of tax assets
    Business Combinations
  New accounting pronouncements
 U.S. GAAP accounting
   EU regulations regarding IFRS
   67




---



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Recent developments
      68




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##### Table of Contents



5.2. RESULTS OF OPERATIONS
 2005 compared to 2004
 OVERVIEW
 Consolidated operating results
  2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Operating revenues
    
    
    4,377.3
    
    
    
    4,056.3
    
    
    
    7.9Operating expenses:Materials
    
    
    (346.5
    )
    
    
    (324.5
    )
    
    
    (6.8
    )Employee costs, including benefits and taxes
    
    
    (679.0
    )
    
    
    (673.7
    )
    
    
    (0.8
    )Depreciation and amortization
    
    
    (1,119.8
    )
    
    
    (1,114.8
    )
    
    
    (0.4
    )Impairment charges
    
    
    (17.4
    )
    
    
    (1.3
    )
    
    
    (1,238.5
    )Other operating expenses
    
    
    (1,594.6
    )
    
    
    (1,489.3
    )
    
    
    (7.1
    )Total operating expenses
    
    
    (3,757.3
    )
    
    
    (3,603.6
    )
    
    
    (4.3
    )Consolidated operating income
    
    
    620.0
    
    
    
    452.7
    
    
    
    37.0
  Operating revenues
  Operating expenses
  Material costs
  69




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Employee costs, including benefits and taxes
  Depreciation and amortization
  Impairment charges
  Other operating expenses
  Operating income
  70




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##### Table of Contents



Other income, taxation, minority interests, cumulative effect of change in accounting principle and
net income
 2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Consolidated operating income
    
    
    620.0
    
    
    
    452.7
    
    
    
    37.0Other income (expense)Net interest
    
    
    (109.1
    )
    
    
    (118.8
    )
    
    
    8.2Equity in earnings of affiliates
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.0Other, net
    
    
    12.0
    
    
    
    15.6
    
    
    
    (23.1
    )Income tax expense
    
    
    (106.4
    )
    
    
    (122.2
    )
    
    
    12.9Minority interest
    
    
    0.0
    
    
    
    (0.6
    )
    
    
    100.0Consolidated net income
    
    
    417.1
    
    
    
    227.3
    
    
    
    83.5Interest Income
    
    
    89.1
    
    
    
    70.0
    
    
    
    27.3Interest Expense
    
    
    (198.2
    )
    
    
    (188.8
    )
    
    
    (5.0
    )(109.1
    )
    
    
    (118.8
    )
    
    
    8.2
 Net interest
  Equity in earnings of affiliates
 Omnimedia Werbegesellschaft mbH
 Income tax expense
    Minority interests
  Consolidated net income
  71




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SUPPLEMENTARY INFORMATION
  2005
    
    
    2004(in EUR millions)Net income
    
    
    417.1
    
    
    
    227.3Adjustments:Depreciation and amortization
    
    
    1,119.8
    
    
    
    1,114.8Impairment charges
    
    
    17.4
    
    
    
    1.3Interest income
    
    
    (89.1
    )
    
    
    (70.0
    )Interest expense
    
    
    198.2
    
    
    
    188.8Equity in earnings of affiliates and dividend income
    
    
    (0.6
    )
    
    
    (0.6
    )Other
income
    
    
    (12.0
    )
    
    
    (15.6
    )Income tax expense
    
    
    106.4
    
    
    
    122.2Minority interests
    
    
    0.0
    
    
    
    0.6Adjusted EBITDA
    
    
    1,757.2
    
    
    
    1,568.8
   72




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2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Adjusted EBITDA:Wireline
    
    
    786.7
    
    
    
    814.3
    
    
    
    (3.4
    )Wireless
    
    
    969.0
    
    
    
    765.4
    
    
    
    26.6Other activities & eliminations
    
    
    1.5
    
    
    
    (10.9
    )
    
    
    n.a.Adjusted EBITDA
    
    
    1,757.2
    
    
    
    1,568.8
    
    
    
    12.0
   73




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SEGMENT RESULTS
  Wireline
    Revenues
  
    
    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.
  74




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2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Wireline operating revenues:Switched voice base traffic
    
    
    398.1
    
    
    
    403.4
    
    
    
    (1.3
    )Switched voice monthly & other voice revenues
    
    
    548.8
    
    
    
    570.1
    
    
    
    (3.7
    )Payphones & VAS
    
    
    48.1
    
    
    
    52.6
    
    
    
    (8.5
    )Data & IT-solutions including wholesale
    
    
    419.7
    
    
    
    441.0
    
    
    
    (4.8
    )Internet access & media
    
    
    241.9
    
    
    
    207.2
    
    
    
    16.7Wholesale voice & internet
    
    
    349.3
    
    
    
    369.0
    
    
    
    (5.3
    )Other
    
    
    129.3
    
    
    
    141.4
    
    
    
    (8.6
    )Total wireline operating revenues
    
    
    2,135.2
    
    
    
    2,184.7
    
    
    
    (2.3
    )
 Switched voice base traffic
  2005
    
    
    2004
    
    
    2005/2004(in millions of minutes)(1)
    
    
    (% change)Traffic minutes:National (local + national long distance)
    
    
    3,866
    
    
    
    4,174
    
    
    
    (7.4
    )Fixed-to-mobile
    
    
    839
    
    
    
    854
    
    
    
    (1.8
    )International
    
    
    442
    
    
    
    467
    
    
    
    (5.3
    )Total voice minutes
    
    
    5,147
    
    
    
    5,495
    
    
    
    (6.3
    )
 
 (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.  Switched voice monthly and other voice revenues
     75




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2005
    
    
    2004
    
    
    2005/2004(in thousands)
    
    
    (% change)Number of fixed lines:PSTN access lines
    
    
    2,374.5
    
    
    
    2,455.5
    
    
    
    (3.3
    )Basic ISDN access lines
    
    
    420.1
    
    
    
    443.6
    
    
    
    (5.3
    )Multi ISDN access lines
    
    
    7.3
    
    
    
    7.6
    
    
    
    (3.9
    )Total access lines
    
    
    2,801.9
    
    
    
    2,906.7
    
    
    
    (3.6
    )Total access channels
    
    
    3,433.7
    
    
    
    3,570.7
    
    
    
    (3.8
    )
  Public payphone services and value added services
  Data and IT-solutions including wholesale
  Internet access and media
   Wholesale voice and internet
  76




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Other revenues (customer premises equipment and directory services)
   Operating expenses
  2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Wireline operating expenses:Material expense
    
    
    65.3
    
    
    
    69.0
    
    
    
    (5.4
    )Employee costs, including benefits and taxes
    
    
    481.3
    
    
    
    494.9
    
    
    
    (2.7
    )Depreciation, amortization and impairment charges
    
    
    720.8
    
    
    
    758.5
    
    
    
    (5.0
    )Interconnection
    
    
    340.4
    
    
    
    333.1
    
    
    
    2.2Maintenance and repairs
    
    
    113.6
    
    
    
    116.5
    
    
    
    (2.5
    )Services received
    
    
    44.8
    
    
    
    41.9
    
    
    
    6.9Other  total:
    
    
    303.1
    
    
    
    315.0
    
    
    
    (3.8
    )Other support services
    
    
    88.7
    
    
    
    87.2
    
    
    
    1.7Other
    
    
    214.4
    
    
    
    227.8
    
    
    
    (5.9
    )Total wireline operating expenses
    
    
    2,069.3
    
    
    
    2,128.9
    
    
    
    (2.8
    )
 Materials
  Employee costs, including benefits and taxes
   77




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Depreciation and amortization including impairment charges
   Interconnection
  Maintenance and Repairs
  Services received
  Other support services
  Other operating expenses
   78




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Wireless
    Revenues
   2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Wireless operating revenuesTraffic revenues
    
    
    1,264.7
    
    
    
    1,141.5
    
    
    
    10.8Monthly rental
    
    
    396.9
    
    
    
    303.9
    
    
    
    30.6Equipment
    
    
    225.6
    
    
    
    180.1
    
    
    
    25.3Roaming
    
    
    204.8
    
    
    
    175.6
    
    
    
    16.6Interconnection
    
    
    392.9
    
    
    
    328.0
    
    
    
    19.8Other
    
    
    18.1
    
    
    
    15.9
    
    
    
    13.8Discounts
    
    
    (13.8
    )
    
    
    (19.5
    )
    
    
    29.2Total wireless operating revenues
    
    
    2,489.2
    
    
    
    2,125.5
    
    
    
    17.1
  Traffic revenues
  79




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2005
    
    
    2004
    
    
    2005/2004(in thousands)
    
    
    (% change)Wireless customers:Austria
    
    
    3,392.2
    
    
    
    3,273.6
    
    
    
    3.6Bulgaria
    
    
    3,594.2
    
    
    
    
    
    
    
    n.a.Croatia
    
    
    1,612.9
    
    
    
    1,308.6
    
    
    
    23.3Slovenia
    
    
    359.6
    
    
    
    363.3
    
    
    
    (1.0
    )Liechtenstein
    
    
    4.2
    
    
    
    3.5
    
    
    
    20.0Total customers
    
    
    8,963.1
    
    
    
    4,949.0
    
    
    
    81.1
    Monthly rental
  Equipment
  Roaming
  80




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Interconnection
  Other
  Discounts
  Operating expenses
  2005
    
    
    2004
    
    
    2005/2004(in EUR millions)
    
    
    (% change)Wireless operating expenses:Material expense
    
    
    302.0
    
    
    
    276.3
    
    
    
    9.3Employee costs
    
    
    198.2
    
    
    
    179.8
    
    
    
    10.2Depreciation and amortization
    
    
    416.8
    
    
    
    358.1
    
    
    
    16.4Interconnection
    
    
    271.3
    
    
    
    236.0
    
    
    
    15.0Repairs
    
    
    66.2
    
    
    
    63.7
    
    
    
    3.9Services received
    
    
    290.4
    
    
    
    267.9
    
    
    
    8.4Other  total:
    
    
    392.1
    
    
    
    336.3
    
    
    
    16.6Other support services
    
    
    22.4
    
    
    
    24.0
    
    
    
    (6.7
    )Other
    
    
    369.7
    
    
    
    312.3
    
    
    
    18.4Total wireless operating expenses
    
    
    1,937.0
    
    
    
    1,718.1
    
    
    
    12.7
 Materials
  81




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Employee costs, including benefits and taxes
  Depreciation and amortization
  Interconnection
  Repairs
  Services received
  Other support services
  Other operating expenses
  Other activities
  82




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5.3. RESULTS OF OPERATIONS
 2004 compared to 2003
 OVERVIEW
 Consolidated operating results
  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
  Operating expenses
  Material costs
  Employee costs, including benefits and taxes
  83




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Depreciation and amortization
   Impairment charges
  Other operating expenses
  Operating income
  84




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##### 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
    )
    
    
    (23.7
    )Equity 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
    )
    
    
    47.1Minority interest
    
    
    (0.6
    )
    
    
    (3.4
    )
    
    
    (82.4
    )Cumulative 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
  Equity in earnings of affiliates
 Omnimedia Werbegesellschaft mbH Herold Business Data AG
 Income tax expense
    Minority interests
  85




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Cumulative effect of change in accounting principle
  Consolidated net income
  86




---



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SUPPLEMENTARY INFORMATION
  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
    87




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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
   88




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SEGMENT RESULTS
  Wireline
    Revenues
  
    
    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.
  89




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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
  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.
   Switched voice monthly and other voice revenues
   90




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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
    )
  Public payphone services and value added services
   Data and IT-solutions including wholesale
   91




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Internet access and media
    Wholesale voice and internet
   Other revenues (customer premises equipment and directory services)
   Operating expenses
  92




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##### 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
  Employee costs, including benefits and taxes
     Depreciation and amortization including impairment charges
   93




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Interconnection
   Maintenance and Repairs
  Services received
  Other support services
  Other operating expenses
    Wireless
   94




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Revenues
   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].
  Traffic revenues
  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
 95




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Monthly rental
  Equipment
  Roaming
  Interconnection
  96




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##### Table of Contents



Other
  Discounts
  Operating expenses
  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
  Employee costs, including benefits and taxes
  97




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Depreciation and amortization
  Interconnection
  Repairs
  Services received
  Other support services
  Other operating expenses
  Other activities
  98




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5.4. LIQUIDITY AND CAPITAL RESOURCES
    Cash flow
    
    2005
    
    
    2004
    
    
    2003(in EUR millions)Cash generated from operationsNet income
    
    
    417.1
    
    
    
    227.3
    
    
    
    134.2Depreciation, amortization and impairment charges
    
    
    1,137.2
    
    
    
    1,116.2
    
    
    
    1,140.0Change in deferred taxes
    
    
    67.6
    
    
    
    62.9
    
    
    
    59.2Equity in earnings of affiliates less than (in excess of)
dividends received
    
    
    (0.1
    )
    
    
    0.0
    
    
    
    1.0Change in accounts receivable  trade
    
    
    (76.6
    )
    
    
    (45.9
    )
    
    
    (140.3
    )Change in accounts payable  trade
    
    
    (19.3
    )
    
    
    (58.8
    )
    
    
    (58.9
    )Change in employee benefit obligation
    
    
    (7.3
    )
    
    
    (46.9
    )
    
    
    (76.6
    )Change in accrued liabilities
    
    
    (46.9
    )
    
    
    (27.1
    )
    
    
    (23.5
    )Other
    
    
    42.0
    
    
    
    77.0
    
    
    
    184.8Cash generated from operations
    
    
    1,513.7
    
    
    
    1,304.7
    
    
    
    1,219.9Cash from (used in) investing activitiesCapital expenditure, including interest capitalized
    
    
    (627.6
    )
    
    
    (548.2
    )
    
    
    (599.7
    )Acquisitions and investments, net of cash acquired
    
    
    (1,185.7
    )
    
    
    (2.2
    )
    
    
    (86.0
    )Other
    
    
    32.4
    
    
    
    41.1
    
    
    
    41.8Cash used in investing activities
    
    
    (1,780.9
    )
    
    
    (509.3
    )
    
    
    (643.9
    )Cash from (used in) financing activitiesProceeds from issuance of long-term debt and bonds
    
    
    1,169.0
    
    
    
    
    
    
    
    775.9Principal payments on long-term debt
    
    
    (760.5
    )
    
    
    (568.0
    )
    
    
    (385.3
    )Changes in short-term bank borrowings
    
    
    338.6
    
    
    
    (6.7
    )
    
    
    (774.6
    )Purchase of Treasury shares
    
    
    (184.5
    )
    
    
    (64.2
    )
    
    
    Proceeds from sale of Treasury shares
    
    
    
    
    
    
    0.8
    
    
    
    Dividends paid
    
    
    (117.8
    )
    
    
    (64.6
    )
    
    
    Principal payments on bonds
    
    
    (348.6
    )
    
    
    (2.2
    )
    
    
    (22.8
    )Cash generated from (used in) financing activities
    
    
    96.2
    
    
    
    (704.9
    )
    
    
    (406.8
    )Effect of exchange rate changes
    
    
    (0.4
    )
    
    
    (4.2
    )
    
    
    5.4Net increase in cash and cash
equivalents
    
    
    (171.4
    )
    
    
    86.3
    
    
    
    174.6Cash and cash equivalents at beginning of period
    
    
    288.2
    
    
    
    201.9
    
    
    
    27.3Cash and cash equivalents at end of period
    
    
    116.8
    
    
    
    288.2
    
    
    
    201.9
 99




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Cash generated from operations
      Cash used in investing activities
   Cash (used in) generated from financing activities
     100




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Funding sources
  At December 31,
    
    Maturity
    
    2005
    
    
    2004
    
    

2003(1)(in EUR millions)Face value of Bonds unter EMTN Program
    
    
    
    
    1,750.0
    
    
    
    750.0Interest rate SWAP on EMTN bonds
    
    
    
    
    (5.3
    )
    
    
    11.2Discount and issue cost of EMTN program
    
    
    
    
    (16.7
    )
    
    
    (7.7
    )Short-term debt EMTN Program
    
    
    
    
    39.0
    
    
    
    14.0Bonds under EMTN Program
    
    2010-2017
    
    
    1,767.0
    
    
    
    767.5
    
    
    
    745.1Other bonds guaranteed by the Federal Republic of Austria
    
    2005
    
    
    
    
    
    
    149.6
    
    
    
    159.7Bank debt
    
    2006-2009
    
    
    790.3
    
    
    
    675.3
    
    
    
    613.0Bank debt guaranteed by the Federal Republic of Austria
    
    2006-2011
    
    
    297.2
    
    
    
    707.6
    
    
    
    1,354.6Total bank debt
    
    
    
    
    1,087.5
    
    
    
    1,382.9
    
    
    
    1,967.6Other
    
    2007
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.82,854.5
    
    
    
    2,300.2
    
    
    
    2,873.2Less current portion of long-term debt
    
    
    
    
    (296.8
    )
    
    
    (653.0
    )
    
    
    (530.9
    )Long-term debt, net of current portion
    
    
    
    
    2,557.7
    
    
    
    1,647.2
    
    
    
    2,342.3
 
 (1)
    
    In 2003 EUR 7.3 million of interest, discount and issue costs were shown in other bonds instead
of bonds under the EMTN program, and were therefore not guaranteed by the Federal Republic of
Austria. Bonds
 Telekom Finanzmanagement GmbH TFG
 TFG
 TFG
  Bank debts
   101




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##### Table of Contents



2005
    
    2004
    
    2003Bonds
    
    
    4.32
    %
    
    
    4.56
    %
    
    
    4.57
    %Bank debt
    
    
    4.07
    %
    
    
    4.62
    %
    
    
    4.96
    %
  Moodys
    
    StandardInvestors
    
    &Service
    
    PoorsLong-term debt
    
    
    A3
    
    
    BBB+Short-term debt
    
    
    P -2
    
    
    
    A-2
  102




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Other funding sources
   Capital expenditures
  103




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2005
    
    
    2004
    
    
    2003(in EUR millions)Capital expenditures:Wireline
    
    
    314.1
    
    
    
    280.4
    
    
    
    300.0Tangible
    
    
    314.0
    
    
    
    280.0
    
    
    
    298.0Intangible
    
    
    0.1
    
    
    
    0.4
    
    
    
    2.0Wireless
    
    
    313.5
    
    
    
    267.8
    
    
    
    300.4Tangible
    
    
    303.9
    
    
    
    225.6
    
    
    
    290.6Intangible
    
    
    9.6
    
    
    
    42.2
    
    
    
    9.8Total capital expenditures
    
    
    627.6
    
    
    
    548.2
    
    
    
    600.4
     
    
    Assure sufficient capacity for mobile networks by further investing in UMTS and EDGE
equipment, but also in HSDPA technology;
    
    Extend the broadband access and optimize broadband backbone network infrastructure;
    
    Investments (such as software) in customer services supporting access line retention in
the fixed line mass market
    
    Establish a multi-service-data-network; and
    
    Improve our information technology capabilities.
  104




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Net debt
  2005
    
    
    2004
    
    
    2003(in EUR millions)Long-term debt
    
    
    2,557.7
    
    
    
    1,647.2
    
    
    
    2,342.3Short-term debt
    
    
    785.8
    
    
    
    751.1
    
    
    
    631.3Less: Short-term portion of capital and cross border lease
    
    
    (122.7
    )
    
    
    (95.3
    )
    
    
    (95.5
    )Capital lease obligations
    
    
    0.6
    
    
    
    1.6
    
    
    
    2.1Cash and cash equivalents,
short-term and long-term investments
    
    
    (139.3
    )
    
    
    (312.9
    )
    
    
    (226.4
    )Financial instruments, included in other assets
    
    
    0.0
    
    
    
    (17.8
    )
    
    
    (16.5
    )Net debt of Telekom Austria
    
    
    3,082.1
    
    
    
    1,973.9
    
    
    
    2,637.3
   Contractual obligations and commercial commitments
  Total
    
    
    Up to 1 year
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 years(in EUR millions)Contractual Obligations:Long-term debt (1)
    
    
    2,854.5
    
    
    
    296.8
    
    
    
    335.7
    
    
    
    974.9
    
    
    
    1,247.1Capital lease payments
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.0
    
    
    
    
    
    
    
    Operating leases
    
    
    219.9
    
    
    
    42.6
    
    
    
    75.2
    
    
    
    67.6
    
    
    
    34.6Cross border leases
    
    
    1,200.0
    
    
    
    122.2
    
    
    
    272.6
    
    
    
    333.1
    
    
    
    472.1Purchase
Obligations (2)
    
    
    3,020.2
    
    
    
    866.1
    
    
    
    1,276.2
    
    
    
    588.3
    
    
    
    289.5Total obligations
    
    
    7,295.2
    
    
    
    1,328.3
    
    
    
    1,959.7
    
    
    
    1,963.9
    
    
    
    2,043.3
 
 (1)
    
    Excluding interest accruing over the term of the long-term debts.(2)
    
    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
   105




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Research and development
  Foreign exchange rate risk
       106




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Item 6. Directors, Senior Management and Employees
 Management Board members
  Name
    
    Age
    
    Term of appointment
    
    Area of responsibilityHeinz Sundt
    
    
    58
    
    
    April 11, 2000  May 23, 20061
    
    Chairman of the
Board, Chief
Executive Officer
(CEO)Stefano Colombo
    
    
    45
    
    
    April 11, 2000  April 10, 2007
    
    Chief Financial Officer (CFO), Vice Chairman2Rudolf Fischer
    
    
    52
    
    
    November 1, 1998 
April 10, 20083
    
    Chief Operating Officer Wireline (COO Wireline), Vice Chairman4Boris Nemsic
    
    
    48
    
    
    July 1, 2002  April 10, 20083
    
    Vice
Chairman5
and Chief Operating
Officer Wireless (COO Wireless),
 Chairman of the
Board, Chief
Executive Officer
(CEO)4
 
 1
    
    Resignation of CEO Sundt as of May 23, 2006 was accepted by Supervisory Board
of Telekom Austria on January 12, 20062
    
    Until April 10, 20053
    
    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, 2010.4
    
    As of May 24, 20065
    
    From April 11, 2005 until May 23, 2006 Heinz Sundt Hochschule für Welthandel
 Stefano Colombo
 Rudolf Fischer
 Boris Nemsic
 107




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108




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Supervisory Board members
  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 Österreichische
Elektrizitätswirtschafts-AktiengesellschaftStephan Koren
    
    September 17, 1999 / June 4, 2003
    
    Deputy CEO BAWAG P.S.K. Bank für
Arbeit und Wirtschaft und
Österreichische Postsparkasse AGPeter Mitterbauer
    
    July 15, 2005
    
    CEO of MIBA AGHarald Sommerer
    
    June 4, 2003
    
    CEO AT&S AGWilfried Stadler
    
    July 15, 2005
    
    CEO of Investkredit Bank AGHarald Stöber
    
    June 4, 2003
    
    CEO Arcor AG & Co. KGRainer 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 EuropeWilhelm Eidenberger
    
    April 30, 2001
    
    Employee representativeMarkus Hinker
    
    July 15, 2005
    
    Employee representativeWalter Hotz
    
    December 9, 2003
    
    Employee representativeMichael Kolek
    
    March 20, 2002
    
    Employee representativeFranz Kusin
    
    August 6, 2004
    
    Employee representative
     Audit Committee and other Supervisory Board Committees
  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 HotzPersonnel Committee
    
    Peter Michaelis, Edith Hlawati,, Michael Kolek
 109




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Stock option plans
      110




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Employees
  2005
    
    
    2004
    
    
    2003Number of Employees (year-end)Wireline
    
    
    9,557
    
    
    
    9,682
    
    
    
    10,234Wireless
    
    
    6,038
    
    
    
    3,625
    
    
    
    3,656Total
    
    
    15,595
    
    
    
    13,307
    
    
    
    13,890
  Civil servants
 of Post- und Telekom Austria AG
   111




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##### Table of Contents



Private law employees
     Inter-company representation of interests
  Adjustment measures with regard to personnel
  Transfer of employees
 Telekom Austria Personalmanagement GmbH
   Relationship with employees
  112




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Item 7. Major Shareholders and Related Party Transactions
   Relationship with the Republic of Austria and ÖIAG
     Pension contributions for civil servants
  The Republic of Austria as regulator
   113




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The Republic of Austria as customer
  (Bundesbeschaffung GmbH)
 Federal guarantees for Telekom Austria and mobilkom austria group loans
  Relationship with Österreichische Post
  114




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##### Table of Contents



Item 8. Financial Information
 8.1 CONSOLIDATED FINANCIAL STATEMENTS
  8.2 OTHER INFORMATION
 Litigation
  Wireline
 Rechnungshof)
 Wireless
       115




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##### Table of Contents



Regulatory matters regarding Telekom Austria and mobilkom austria AG & Co KG
 Wireline
  publicly available local and/or national telephone services provided at a fixed location for
residential customers
 
 Wireless
 termination in each
individual mobile network
   116




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##### Table of Contents



tele.ring Telekom
Service GmbH
  Dividends
 Declaration of dividends
      Payment of dividends
  117




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##### Table of Contents



Item 9. The Offer and Listing
 9.1 MARKETS
   Finanzmarktaufsicht)
   1
 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
    
    
    
    8.602004
    
    
    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
    
    
    
    11.272005
    
    
    45.4
    
    
    
    36.7
    
    
    
    19.6
    
    
    
    13.9First Quarter
    
    
    40.5
    
    
    
    36.7
    
    
    
    15.5
    
    
    
    13.9Second Quarter
    
    
    40.4
    
    
    
    36.9
    
    
    
    16.6
    
    
    
    14.4Third Quarter
    
    
    43.0
    
    
    
    38.4
    
    
    
    17.6
    
    
    
    15.9Fourth Quarter
    
    
    45.4
    
    
    
    39.1
    
    
    
    19.6
    
    
    
    16.0October
    
    
    41.9
    
    
    
    39.1
    
    
    
    17.5
    
    
    
    16.0November
    
    
    45.4
    
    
    
    39.7
    
    
    
    19.6
    
    
    
    16.6December
    
    
    45.3
    
    
    
    42.7
    
    
    
    19.3
    
    
    
    18.22006First Quarter
    
    
    49.1
    
    
    
    44.8
    
    
    
20.7
    
    
    
18.6January
    
    
    49.1
    
    
    
    44.8
    
    
    
    20.5
    
    
    
    18.6February
    
    
    49.0
    
    
    
    45.9
    
    
    
    20.7
    
    
    
    19.2March
    
    
    49.0
    
    
    
    45.5
    
    
    
    20.4
    
    
    
    19.1April (through 6)
    
    
47.0
    
    
    
   46.3
    
    
    
   19.5
    
    
    
18.9
 
 1
    
    Intraday high and low; Source: Reuters 118




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##### Table of Contents



Item 10. Additional Information
 
 10.1. MEMORANDUM AND ARTICLES OF ASSOCIATION
 Overview
   Shares and share capital
 Stückaktien
  pro rata
   119




---



##### Table of Contents




    
    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, or shares of one or more companies acquisitions abroad;
    
    to resell them in accordance with Paragraph 65, Sec. 1b of the Stock Corporation
Act, (i) anytime over the stock exchange or by public offer; (ii) within a period of
five years in any way 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;
    
    to decrease the Share Capital of the Company according to Paragraph 65 Sec 1 No 8
last sentence in connection with Para 192 of the Stock Corporation Act by up to EUR
109,050,000 by withdrawing these own shares without further Shareholders resolution.
The Supervisory Board is authorized to resolve upon the amendments of the Articles of
Association required by the withdrawal of Shares.
    120




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##### Table of Contents



Corporate governance
 Vorstand Aufsichtsrat
     Management Board (Vorstand)
  Prokuristen)
     121




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##### Table of Contents



Supervisory Board (Aufsichtsrat)
     
    
    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;
    
    Granting of general powers-of-attorney; and
    
    Entering into agreements with Members of the Supervisory Board or businesses in which
members of the Supervisory Board hold a significant stake whereby these Members or
businesses receive more than an insignificant consideration.
  122




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##### Table of Contents



Supervisory Board Committees
 .
 Financial Committee Prüfungsausschuss
 Audit Committee
   Chairing Committee Präsidium
 Corporate Structure Committee
 Personnel Committee
 Annual General Meeting (Shareholders meeting)
    123




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##### Table of Contents



Hinterlegungsbescheinigung
   
    
    Amendment of the business purpose;
    
    Increase of the share capital with a simultaneous exclusion of preemptive rights;
    
    Authorized capital/conditional capital;
    
    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
    
    
    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
 124




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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.
  
    
    Request that an 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.
  Important rules regarding acquisitions
 Wiener Zeitung
  125




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Differences in Telekom Austria AGs corporate governance and New York Stock Exchange corporate
governance practices
  Independent Directors Vorstand Aufsichtsrat
 Non-management Directors Meetings
 Nominating/Corporate Governance Committee
 Compensation Committee Präsidium .
 Audit Committee Composition and Responsibilities Finanzausschuss
 126




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Adoption and Disclosure of Corporate Governance Guidelines
 Code of business conduct and ethics
 Annual Certification by the Chief Executive Officer
 Preemptive rights
 pro rata Wiener Zeitung
  127




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##### Table of Contents



pro rata
 Repurchase of shares
  
    
    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.
      
    
    anytime over the stock exchange or by public offer;
    
    within a period of five years in any way 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; and
 128




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##### Table of Contents




    
    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 21;
    
    The authorization by the AGM also extends 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;
    
    To sell the shares in any way permitted by law, also over the counter
and to any purchaser as chosen by us; and
    
    to decrease the share capital of the Company by up to EUR 109,050.000
by withdrawing these own shares without further Shareholders resolution.
  Liquidation
   Takeover rules
   
    
    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.
 129




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##### Table of Contents




    
    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.
     Material contracts
  Exchange controls
  130




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##### Table of Contents



10.2. TAXATION
 Austrian taxation
     Taxation of dividends
 Residents of Austria
 Kapitalertragsteuer
   Non-residents of Austria
    131




---



##### Table of Contents



Special tax rules for U.S. shareholders
  
    
    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.
 Kapitalertragsteuer
  Taxation of capital gains
 Residents of Austria
  
    
    A shareholder alienates shares or ADSs within 12 months of purchase (deemed speculative
by tax legislation);
 
    
    In the absence of speculative transactions, a shareholder held a substantial investment
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 assets.
    132




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##### Table of Contents



Non-residents of Austria
  Taxation of other income  Inheritance and gift tax
 Residents of Austria
  Non-residents of Austria
     United States federal income taxation
  
    
    A citizen or resident of the United States;
    
    A corporation, or other entity taxable as a corporation, founded or organized under the
laws of the United States or of any political subdivision of the United States; or
 133




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##### Table of Contents




    
    An estate or trust the income of which is includible in gross income for U.S. federal
income tax purposes regardless of its source.
    
    
    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;
    
    Persons who actually or constructively own 10% or more of our voting stock;
    
    Partnerships or other entities classified as partnerships for U.S. federal income tax purposes; or
    
    Persons who acquired our ADSs or shares pursuant to the exercise of any employee stock
option or otherwise as compensation.
  Taxation of distribution
  134




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Taxation of capital gains
   Information reporting and backup withholding
   135




---



##### Table of Contents



10.3. DOCUMENTS ON DISPLAY
    136




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##### Table of Contents



Item 11. Quantitative and Qualitative Disclosures about Market Risk
    Interest rate risk
   Assets subject to interest rate risk at December 31, 2005Maturities, year ended December 31,2011 and
    
    
    
    
    
    
    Fair2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafter
    
    
    Total
    
    
    Value(in EUR thousands, except percentages)ASSETS:Cash at bank and in hand:Fixed rate
    
    
    116,756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,756
    
    
    
    116,756Average interest rate (%) (1)
    
    
    2.72
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.72
    %Short-term investments:Securities available-for-sale
    
    
    16,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,449
    
    
    
    16,449Securities held-to-maturity
    
    
    6,091
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,091
    
    
    
    6,091
 
 (1)
    
    Weighted average of the year end interest rates applicable to the outstanding amounts. 137




---



##### Table of Contents



Liabilities and related derivative instruments subject to interest rate risk at December 31, 2005Maturities, year ended December 31,2011 and
    
    
    
    
    
    
    Fair2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    thereafter
    
    
    Total
    
    
    Value(in EUR thousands, except percentages)LIABILITIES:Bank OverdraftsFixed Rate
    
    
    8,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,484
    
    
    
    8,484Average interest rate (%) (1)
    
    
    2.30
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.30
    %Short-term borrowingsFixed Rate
    
    
    357,736
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    357,736
    
    
    
    357,736Average interest rate (%) (1)
    
    
    2.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.26
    %BondsFixed rate
    
    
    (5,311
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490,731
    
    
    
    1,242,615
    
    
    
    1,728,035
    
    
    
    1,923,304Average interest rate (%) (1)
    
    
    4.33
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.38
    %
    
    
    4.70
    %
    
    
    4.33
    %LoansFixed rate
    
    
    257,341
    
    
    
    6,012
    
    
    
    184,762
    
    
    
    415,659
    
    
    
    
    
    
    
    
    
    
    
    863,775
    
    
    
    897,148Average interest rate (%) (1)
    
    
    6.65
    %
    
    
    7.00
    %
    
    
    5.40
    %
    
    
    5.50
    %
    
    
    
    
    
    
    
    
    
    
    5.83
    %Variable rate
    
    
    44,810
    
    
    
    93,677
    
    
    
    51,234
    
    
    
    63,756
    
    
    
    4,724
    
    
    
    4,532
    
    
    
    262,732
    
    
    
    262,732Average interest rate (%) (1)
    
    
    2.65
    %
    
    
    2.41
    %
    
    
    4.03
    %
    
    
    4.04
    %
    
    
    3.34
    %
    
    
    3.34
    %
    
    
    3.20
    %SWAP AGREEMENTS:Fixed to variable interest
rate Swaps in EURFixed to variable (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500,000
    
    
    
    300,000
    
    
    
    800,000
    
    
    
    (5,311
    )Average pay rate (%)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.40
    %
    
    
    2.99
    %
    
    
    2.62
    %Average receive rate (%) (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.38
    %
    
    
    5.00
    %
    
    
    3.98
    %Foreign currency forward
contractNotional amount in EUR
    
    
    2,794
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,794
    
    
    
    (1
    )Notional amount in USD
    
    
    3,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,300
 
 (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 Exchange rate risk
   138




---



##### Table of Contents



Item 12. Description of Securities Other than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
  Item 16. [Reserved]
 
 Item 16A. Audit Committee Financial Expert
     
    
    1986-1990: Vienna University of Economics and Business Administration, Master in Social
and Economic Sciences
 139




---



##### 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
  
    
    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
  
 Item 16C. Principal Accountant Fees and Services
  KPMG Wirtschaftsprüfungs- und Steuerberatungs GmbH
 For fiscal year ended
    
    
    For fiscal year endedType of Fees
    
    December 31, 2005
    
    
    December 31, 2004(EUR in millions)Audit Fees
    
    
    3.6
    
    
    
    2.6Audit-Related Fees
    
    
    0.4
    
    
    
    0.3Tax Fees
    
    
    0.5
    
    
    
    0.3All Other Fees
    
    
    0.0
    
    
    
    0.0Total
    
    
    4.5
    
    
    
    3.2
  Audit Committee pre-approval policies
 KPMG Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und
Steuerberatungsgesellschaft
 140




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##### Table of Contents



KPMG Austria GmbH, Wirtschaftsprüfungs- und
Steuerberatungsgesellschaft KPMG
Alpen-Treuhand GmbH, Wirtschaftsprüfungs- und Steuerberatungsgesellschaft KPMG Wirtschaftsprüfungs- und Steuerberatungs GmbH
    
    
    Audits for subsidiaries and services associated with SEC registration statements;
 
    
    Statutory audits of our financial statements;
 
    
    Internal control audits and assistance with internal control reporting requirements.
  
    
    Due diligence relating to contemplated acquisitions and dispositions;
 
    
    Consultations by the Companys management as to accounting or disclosure treatment of
transactions or events and/or the actual or potential impact of final or proposes rules,
standards or interpretations by the SEC, FASB, or other regulatory or standard-setting
bodies;
 
    
    Attestation services not required by statute or regulation (regarding EMTN Program
including insurance premium).
  
    
    Tax planning;
 
    
    Local, state, national and international tax compliance;
 
    
    National and international tax advice.
   
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  141




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##### Table of Contents



Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
  
    
    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.
  
    
    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;
 
    
    To sell own shares over the Stock Exchange or via a public offer any time;
 
    
    To sell own shares for 5 years from the date of the resolution in any way permitted by
law, also over the counter and to any purchaser as chosen by us; as well as
 142




---



##### Table of Contents




    
    To decrease the Share Capital of the Company according to Para 65 Sec 1 No 8 last
sentence in connection with Para 192 of the Stock Corporation Act by up to EUR 109,050.000
by withdrawing these own shares without further Shareholders resolution. The Supervisory
Board is authorized to resolve upon the amendments of the Articles of Association required
by the withdrawal of Shares.
   
    
    Buyback of up to 30 million shares, i.e. up to 6% of the current common stock;
 
    
    Price margin: EUR 9 to EUR 21;
 
    
    Duration of authorization by the AGM: to November 24, 2006;
 
    
    The buyback takes place via the stock exchange.
  Purchase of equity securitiesNumber of
    
    
    Weighted
    
    
    Toatal number
    
    
    Maximum numbershares
    
    
    average price
    
    
    of shares
    
    
    that may bePeriod
    
    purchased
    
    
    per share
    
    
    purchased
    
    
    purchased (3)as of 31. December 2004
    
    
    6,345,442
    
    
    
    10.11
    
    
    
    6,345,442
    
    
    
    23,654,5581.  31. January 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,654,5581.  28. February 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,654,5581.  31. March 2005
    
    
    1,006,801
    
    
    
    14.78
    
    
    
    7,352,243
    
    
    
    22,647,7571.  30. April 2005
    
    
    1,628,298
    
    
    
    15.00
    
    
    
    8,980,541
    
    
    
    21,019,4591.  31. May 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,019,4591.  30. June 2005
    
    
    1,450,000
    
    
    
    16.12
    
    
    
    10,430,541
    
    
    
    19,569,4591.  31. July 2005
    
    
    1,724,351
    
    
    
    16.16
    
    
    
    12,154,892
    
    
    
    17,845,1081.  31. August 2005
    
    
    100,000
    
    
    
    16.24
    
    
    
    12,254,892
    
    
    
    17,745,1081.  30. September 2005
    
    
    1,378,411
    
    
    
    16.87
    
    
    
    13,633,303
    
    
    
    16,366,6971.  31. October 2005
    
    
    2,648,001
    
    
    
    16.80
    
    
    
    16,281,303
    
    
    
    13,718,6971.  30. November 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,718,6971.  31. December 2005
    
    
    1,305,551
    
    
    
    18.80
    
    
    
    17,586,854
    
    
    
    12,413,146Total 2005 (1) (2)
    
    
    17,586,854
    
    
    
    14.14
    
    
    
    17,586,854
 
 (1)
    
    In this sum, 89,748 shares are included which were used to serve stock option programs.(2)
    
    During the year 2005 we bought back 11,241,412 shares. On
December 31, 2005, we therefore held
17,497,106 treasury shares bought at an average price of EUR 14.16.(3)
    
    According to a Management Board Resolution of May 31, 2005, the maximum number that may be
purchased under this program was reduced to 6% of the current common stock. 
 143




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##### Table of Contents



PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
         144




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##### Table of Contents



SIGNATURES
  TELEKOM AUSTRIA AGBy
    /s/ Heinz SundtName:
    Heinz SundtTitle:
    Chief Executive OfficerBy
    /s/ Stefano ColomboName:
    Stefano ColomboTitle:
    Chief Financial Officer
  145




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##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageTelekom Austria AktiengesellschaftConsolidated Financial StatementsReports of independent registered public accounting firms
    
    F-2Consolidated balance sheets as of December 31, 2005 and 2004
    
    F-4Consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003
    
    F-5Consolidated statements of cash flows for the years ended December 31, 2005, 2004 and 2003
    
    F-6Consolidated statements of changes in stockholders equity for the years ended December 31, 2005, 2004 and 2003
    
    F-7Notes to consolidated financial statements
    
    F-8
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm




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##### Table of Contents



Report of Independent Registered Public Accounting Firm




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##### Table of Contents



TELEKOM AUSTRIA AG
 
 CONSOLIDATED BALANCE SHEETS
(in EUR 000s, except per share information)
 December 31,
    
    
    December 31,Notes No
    
    
    2005
    
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    
    
    
    
    
    116,756
    
    
    
    288,195Short-term investments
    
    
    
    
    
    
    7,301
    
    
    
    10,540Accounts receivable  trade, net of allowances of EUR 104,234 and EUR 73,463
as of December 31, 2005 and December 31, 2004
    
    
    (5
    )
    
    
    452,878
    
    
    
    408,820Accounts receivable sold, net of allowances of EUR 39,820 and EUR 21,150
as of December 31, 2005 and December 31, 2004
    
    
    
    
    
    
    228,279
    
    
    
    173,350Receivables due from related parties
    
    
    (6
    )
    
    
    66
    
    
    
    85Inventories
    
    
    (7
    )
    
    
    90,913
    
    
    
    83,110Deferred tax assets
    
    
    (21
    )
    
    
    27,803
    
    
    
    59,939Prepaid expenses
    
    
    
    
    
    
    121,701
    
    
    
    100,169Taxes receivable
    
    
    
    
    
    
    11,134
    
    
    
    3,702Assets held for sale
    
    
    (11
    )
    
    
    880
    
    
    
    2,660Other current assets
    
    
    
    
    
    
    146,868
    
    
    
    143,338TOTAL CURRENT ASSETS
    
    
    
    
    
    
    1,204,579
    
    
    
    1,273,908Property, plant and equipment, net
    
    
    (10
    )
    
    
    3,774,554
    
    
    
    3,888,691Goodwill
    
    
    (8
    )
    
    
    1,149,175
    
    
    
    596,565Other intangible assets, net
    
    
    (9
    )
    
    
    1,432,516
    
    
    
    667,337Investments in affiliates
    
    
    (3
    )
    
    
    3,642
    
    
    
    3,570Other investments
    
    
    
    
    
    
    156,900
    
    
    
    133,239Deferred tax assets
    
    
    (21
    )
    
    
    5,385
    
    
    
    19,436Other assets
    
    
    
    
    
    
    685,102
    
    
    
    659,761TOTAL ASSETS
    
    
    
    
    
    
    8,411,853
    
    
    
    7,242,507LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesShort-term borrowings
    
    
    (12
    )
    
    
    785,773
    
    
    
    751,139Accounts payable  trade
    
    
    
    
    
    
    529,197
    
    
    
    534,498Accrued liabilities
    
    
    (13
    )
    
    
    171,004
    
    
    
    194,319Payables to related parties
    
    
    
    
    
    
    20,244
    
    
    
    22,924Deferred income
    
    
    (14
    )
    
    
    199,510
    
    
    
    168,984Income taxes payable
    
    
    
    
    
    
    6,260
    
    
    
    18,005Other current liabilities
    
    
    
    
    
    
    207,233
    
    
    
    182,217TOTAL CURRENT LIABILITIES
    
    
    
    
    
    
    1,919,221
    
    
    
    1,872,086Long-term debt, net of current portion
    
    
    (16
    )
    
    
    2,557,703
    
    
    
    1,647,171Lease obligations, net of current portion
    
    
    (17
    )
    
    
    817,866
    
    
    
    761,132Employee benefit obligations
    
    
    (18
    )
    
    
    107,261
    
    
    
    109,984Other liabilities and deferred income
    
    
    (19
    )
    
    
    140,344
    
    
    
    110,504Stockholders equityShare capital, no par value shares, 560,000,000 authorized (2004: 560,000,000),
500,000,000 issued (2004: 500,000,000),
482,502,894 outstanding (2004: 493,744,306)
    
    
    
    
    
    
    1,090,500
    
    
    
    1,090,500Treasury stock
    
    
    
    
    
    
    (247,818
    )
    
    
    (63,353
    )Additional paid in capital
    
    
    
    
    
    
    453,614
    
    
    
    458,137Retained earnings
    
    
    
    
    
    
    1,565,830
    
    
    
    1,266,551Accumulated other comprehensive gain / (loss)
    
    
    
    
    
    
    7,332
    
    
    
    (10,205
    )TOTAL STOCKHOLDERS EQUITY
    
    
    (23
    )
    
    
    2,869,458
    
    
    
    2,741,630TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    
    
    
    
    
    8,411,853
    
    
    
    7,242,507
  F-4




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##### Table of Contents



TELEKOM AUSTRIA AG
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in EUR 000s, except per share information)
 twelve months endedDecember 31,Notes No
    
    
    2005
    
    
    2004
    
    
    2003Operating revenues (a)
    
    
    (24
    )
    
    
    4,377,291
    
    
    
    4,056,268
    
    
    
    3,969,750Operating expenses (b)
Materials
    
    
    
    
    
    
    (346,504
    )
    
    
    (324,518
    )
    
    
    (297,084
    )Employee costs, including benefits and taxes
    
    
    
    
    
    
    (678,974
    )
    
    
    (673,688
    )
    
    
    (699,348
    )Depreciation and amortization
    
    
    
    
    
    
    (1,119,801
    )
    
    
    (1,114,830
    )
    
    
    (1,133,148
    )Impairment charges
    
    
    
    
    
    
    (17,388
    )
    
    
    (1,334
    )
    
    
    (6,825
    )Other operating expenses
    
    
    (25
    )
    
    
    (1,594,632
    )
    
    
    (1,489,224
    )
    
    
    (1,463,521
    )OPERATING INCOME
    
    
    
    
    
    
    619,992
    
    
    
    452,674
    
    
    
    369,824Other income (expense)Interest income (c)
    
    
    
    
    
    
    89,084
    
    
    
    70,016
    
    
    
    75,167Interest expense (d)
    
    
    
    
    
    
    (198,151
    )
    
    
    (188,818
    )
    
    
    (230,979
    )Equity in earnings of affiliates
    
    
    
    
    
    
    570
    
    
    
    552
    
    
    
    19,112Other, net
    
    
    (26
    )
    
    
    12,025
    
    
    
    15,656
    
    
    
    (567
    )INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS
    
    
    
    
    
    
    523,520
    
    
    
    350,080
    
    
    
    232,557Income tax expense
    
    
    (21
    )
    
    
    (106,372
    )
    
    
    (122,186
    )
    
    
    (83,036
    )Minority interests
    
    
    
    
    
    
    (2
    )
    
    
    (631
    )
    
    
    (3,422
    )INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE
    
    
    
    
    
    
    417,146
    
    
    
    227,263
    
    
    
    146,099Cumulative effect of change in accounting principle,
net of tax of EUR 6,071 in 2003
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (11,858
    )NET INCOME
    
    
    
    
    
    
    417,146
    
    
    
    227,263
    
    
    
    134,241Basic and fully diluted earnings per share
    
    
    (23
    )
    
    
    0.85
    
    
    
    0.46
    
    
    
    0.27Basic and fully diluted earnings per share excluding
cumulative effect of change in accounting principle
    
    
    
    
    
    
    0.85
    
    
    
    0.46
    
    
    
    0.29a) includes revenues from related parties of
    
    
    
    
    
    
    57,497
    
    
    
    62,102
    
    
    
    89,506b) includes operating expenses from related parties of
    
    
    
    
    
    
    117,893
    
    
    
    124,699
    
    
    
    128,694c) includes interest income from related parties of
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1d) includes interest expense from related parties of
    
    
    
    
    
    
    18
    
    
    
    59
    
    
    
    30
  F-5




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##### Table of Contents



TELEKOM AUSTRIA AG
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in EUR 000s, except per share information)
 twelve months endedDecember 31,Notes No
    
    
    2005
    
    
    2004
    
    
    2003Cash generated from operationsNet income
    
    
    
    
    
    
    417,146
    
    
    
    227,263
    
    
    
    134,241Adjustments to reconcile net income to cash
generated from operationsDepreciation, amortization and impairment charges
    
    
    
    
    
    
    1,137,189
    
    
    
    1,116,164
    
    
    
    1,139,973Write-offs from investments
    
    
    
    
    
    
    284
    
    
    
    716
    
    
    
    2,840Employee benefit obligation  non cash
    
    
    
    
    
    
    4,246
    
    
    
    908
    
    
    
    307Allowance for doubtful accounts
    
    
    
    
    
    
    43,393
    
    
    
    23,597
    
    
    
    30,629Change in deferred taxes
    
    
    
    
    
    
    67,532
    
    
    
    62,938
    
    
    
    59,241Equity in earnings of affiliates in excess of dividends received
    
    
    
    
    
    
    (73
    )
    
    
    (15
    )
    
    
    1,027Stock compensation
    
    
    (20
    )
    
    
    13,322
    
    
    
    4,766
    
    
    
    Asset retirement obligation  non cash expense, net
    
    
    
    
    
    
    3,087
    
    
    
    5,829
    
    
    
    1,336Settlement of asset retirement obligation
    
    
    
    
    
    
    
    
    
    
    (2,248
    )
    
    
    Cumulative effect of change in accounting principle, net of tax
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    11,858Gain on sale of investments
    
    
    
    
    
    
    (4,013
    )
    
    
    (5,163
    )
    
    
    (17,903
    )(Gain) / loss on disposal / retirement of equipment
    
    
    
    
    
    
    (1,510
    )
    
    
    28,788
    
    
    
    41,571Other
    
    
    
    
    
    
    (5,770
    )
    
    
    (252
    )
    
    
    (660
    )1,674,833
    
    
    
    1,463,291
    
    
    
    1,404,460Changes in assets and liabilities, net of effect of business acquiredAccounts receivable  trade
    
    
    
    
    
    
    (76,585
    )
    
    
    (45,898
    )
    
    
    (140,331
    )Due from related parties
    
    
    
    
    
    
    595
    
    
    
    1,464
    
    
    
    5,813Inventories
    
    
    
    
    
    
    (2,583
    )
    
    
    425
    
    
    
    5,765Prepaid expenses and other assets
    
    
    
    
    
    
    362
    
    
    
    (19,526
    )
    
    
    71,506Accounts payable  trade
    
    
    
    
    
    
    (19,270
    )
    
    
    (58,814
    )
    
    
    (58,944
    )Employee benefit obligation
    
    
    
    
    
    
    (7,276
    )
    
    
    (46,883
    )
    
    
    (76,649
    )Accrued liabilities
    
    
    
    
    
    
    (46,993
    )
    
    
    (27,104
    )
    
    
    (23,487
    )Due to related parties
    
    
    
    
    
    
    (6,767
    )
    
    
    (731
    )
    
    
    (13,358
    )Other liabilities and deferred income
    
    
    
    
    
    
    (2,603
    )
    
    
    38,433
    
    
    
    45,100(161,120
    )
    
    
    (158,634
    )
    
    
    (184,585
    )Cash generated from operations
    
    
    
    
    
    
    1,513,713
    
    
    
    1,304,657
    
    
    
    1,219,875Cash from (used in) investing activitiesCapital expenditures, including interest capitalized
    
    
    
    
    
    
    (627,639
    )
    
    
    (548,169
    )
    
    
    (599,684
    )Acquisitions and investments, net of cash acquired
    
    
    
    
    
    
    (1,185,652
    )
    
    
    (2,180
    )
    
    
    (85,989
    )Final consolidation of subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205Proceeds from sale of equipment
    
    
    
    
    
    
    24,143
    
    
    
    36,213
    
    
    
    17,300Purchase of investments  short-term
    
    
    
    
    
    
    (48,918
    )
    
    
    (51,609
    )
    
    
    (79,750
    )Purchase of investments  long-term
    
    
    
    
    
    
    (1,660
    )
    
    
    (1,997
    )
    
    
    (601
    )Proceeds from sale of American call options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    957Proceeds from sale of investments  short-term
    
    
    
    
    
    
    57,220
    
    
    
    51,909
    
    
    
    80,108Proceeds from sale of investments  long-term
    
    
    
    
    
    
    1,605
    
    
    
    6,502
    
    
    
    23,599Cash used in investing activities
    
    
    
    
    
    
    (1,780,901
    )
    
    
    (509,331
    )
    
    
    (643,855
    )Cash from (used in) financing activitiesPrincipal payments on bonds
    
    
    
    
    
    
    (348,616
    )
    
    
    (2,180
    )
    
    
    (22,765
    )Proceeds from issuance of long-term debt and bonds
    
    
    
    
    
    
    1,168,950
    
    
    
    
    
    
    
    775,948Principal payments on long-term debt
    
    
    
    
    
    
    (760,543
    )
    
    
    (568,110
    )
    
    
    (385,330
    )Changes in short-term bank borrowings
    
    
    
    
    
    
    338,717
    
    
    
    (6,707
    )
    
    
    (774,644
    )Purchase of treasury stock
    
    
    
    
    
    
    (184,465
    )
    
    
    (64,161
    )
    
    
    Proceeds from sale of treasury stock
    
    
    
    
    
    
    
    
    
    
    808
    
    
    
    Dividends paid
    
    
    
    
    
    
    (117,866
    )
    
    
    (64,579
    )
    
    
    Cash provided by (used in) financing activities
    
    
    
    
    
    
    96,177
    
    
    
    (704,929
    )
    
    
    (406,791
    )Effect of exchange rate changes
    
    
    
    
    
    
    (428
    )
    
    
    (4,128
    )
    
    
    5,360Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (171,439
    )
    
    
    86,269
    
    
    
    174,589Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    288,195
    
    
    
    201,926
    
    
    
    27,337Cash and cash equivalents at end of period
    
    
    
    
    
    
    116,756
    
    
    
    288,195
    
    
    
    201,926
  F-6




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##### 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, 2003
    
    
    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 income
Net 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 of 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
    )
    
    
    2,741,630Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    417,146
    
    
    
    
    
    
    
    417,146Net unrealized gains on securities, net of
EUR (201) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    602
    
    
    
    602Net realized loss on securities, net of
EUR 3 deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Foreign currency translation adjustment, net
of EUR (308) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,097
    
    
    
    14,097Realized net gain on hedging activities,
net of EUR (1,485) deferred income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,846
    
    
    
    2,846Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    434,683Distribution of dividend
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (117,867
    )
    
    
    
    
    
    
    (117,867
    )Modification of Stock Option Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,523
    )
    
    
    
    
    
    
    
    
    
    
    (4,523
    )Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    (11,241,412
    )
    
    
    (184,465
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (184,465
    )Balance December 31, 2005
    
    
    500,000,000
    
    
    
    1,090,500
    
    
    
    (17,497,106
    )
    
    
    (247,818
    )
    
    
    453,614
    
    
    
    1,565,830
    
    
    
    7,332
    
    
    
    2,869,458
  F-7




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##### 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
      Basis of presentation




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  Year ended December 31,2003
    
    
    2003pro-forma
    
    
    as reportedRevenues
    
    
    3,923,864
    
    
    
    3,969,750Operating expenses
    
    
    (3,554,040
    )
    
    
    (3,599,926
    )Operating income
    
    
    369,824
    
    
    
    369,824
 Principles of consolidation
   Cash and cash equivalents
  Marketable securities
  Inventories
  F-9




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Property, plant and equipment
    YearsTransmission equipment
    
    
    3  20Cables and wires
    
    
    10  20Communications equipment
    
    
    4  10Software
    
    
    3  8Furniture, fixtures and other
    
    
    3  10Buildings and leasehold improvements
    
    
    10  50
  Goodwill and other intangible assets
 Goodwill and Other
Intangible Assets Accounting for the Impairment or Disposal of Long-Lived
Assets
   F-10




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  YearsWireless and wireline licenses
    
    
    10  15Patents and proprietary rights
    
    
    4  20Subscriber base
    
    
    6  7Other
    
    
    10  30
 Impairment of long-lived assets and long-lived assets to be disposed of
  Internally developed software
  Advertising and promotional costs
  F-11




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Research and development costs
  Income taxes
     Earnings per share
    Earnings per Share
 F-12




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Treasury stock
  Asset retirement obligation
 Accounting for
Asset Retirement Obligations
 Employee benefit obligations
   Employers Accounting for Pensions
 Concentration of risks
   F-13




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Foreign currency translation
     Balance sheet rates at
    
    Average exchange rates for theDecember 31
    
    period ended December 312005
    
    2004
    
    2005
    
    2004
    
    2003Bulgarian Lev (BGN)
    
    
    1.9563
    
    
    
    1.9559
    
    
    
    1.9558
    
    
    
    1.9530
    
    
    
    1.9490Croatian Kuna (HRK)
    
    
    7.3715
    
    
    
    7.6712
    
    
    
    7.4038
    
    
    
    7.4943
    
    
    
    7.5621Czech Crown (CZK)
    
    
    29.0000
    
    
    
    30.4640
    
    
    
    29.7803
    
    
    
    31.9062
    
    
    
    31.8409Hungarian Forint (HUF)
    
    
    252.8700
    
    
    
    245.9700
    
    
    
    247.9480
    
    
    
    251.6906
    
    
    
    253.0343Japanese Yen (JPY)
    
    
    138.9000
    
    
    
    139.6500
    
    
    
    136.8544
    
    
    
    134.3904
    
    
    
    130.8971Slovak Crown (SKK)
    
    
    37.8800
    
    
    
    38.7450
    
    
    
    38.5928
    
    
    
    40.0270
    
    
    
    41.4919Slovenian Tolar (SIT)
    
    
    239.5000
    
    
    
    239.7600
    
    
    
    239.5698
    
    
    
    239.0826
    
    
    
    233.8404Swiss Franc (CHF)
    
    
    1.5551
    
    
    
    1.5429
    
    
    
    1.5484
    
    
    
    1.5442
    
    
    
    1.5204US Dollar (USD)
    
    
    1.1797
    
    
    
    1.3621
    
    
    
    1.2446
    
    
    
    1.2432
    
    
    
    1.1299
 Revenue recognition
 Wireline
     F-14




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
   Wireless
        F-15




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Allowance for doubtful accounts
   Stock compensation
 Accounting for Stock Issued to Employees Accounting for
Stock Appreciation Rights and Other Variable Stock Option or Award Plans
 Accounting for Stock-Based
Compensation
    Derivative financial instruments
  F-16




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 Accounting for Derivative Instruments and Hedging Activities
  Fair value of financial instruments
   Use of estimates
  New accounting pronouncements
 Accounting for Conditional Asset Retirement
Obligationsan interpretation of FASB Statement No. 143 Accounting for Asset Retirement Obligations
 Accounting Changes and Error Corrections Reporting Accounting Changes in Interim
Financial Statements
 F-17




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  International Financial Reporting Standards
  (2) BUSINESS COMBINATIONS
   F-18




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  Current assets
    
    
    110,974Tangible assets
    
    
    274,031Intangible assets
    
    
    870,740Deferred tax asset from acquisition
    
    
    7,003Goodwill
    
    
    565,963Current liabilities
    
    
    (376,609
    )Long-term liabilities
    
    
    (237,834
    )Net assets acquired
    
    
    1,214,268
   Wireless operating licenses
    
    
    98,989Subscriber base
    
    
    508,682Brand name
    
    
    262,991Other
    
    
    78Total intangible assets acquired
    
    
    870,740
   2005
    
    
    2004Revenues
    
    
    4,639,271
    
    
    
    4,530,543Net income
    
    
    479,696
    
    
    
    318,756Weighted average number of dilutive shares outstanding
    
    
    489,050,517
    
    
    
    496,524,827Basic and fully diluted earnings per share
    
    Euro 0.98
    
    
    Euro 0.64
  F-19




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
   (3) INVESTMENTS IN AFFILIATES
    2005
    
    
    2004Carrying amount, January 1
    
    
    3,570
    
    
    
    3,555Changes in equity
    
    
    72
    
    
    
    15Carrying amount, December 31
    
    
    3,642
    
    
    
    3,570
  Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Revenues
    
    
    6,308
    
    
    
    6,506
    
    
    
    35,515Operating income
    
    
    3,482
    
    
    
    3,466
    
    
    
    4,653Net income
    
    
    2,186
    
    
    
    2,117
    
    
    
    2,908
 At December 31,
    
    2005
    
    
    2004Total current assets
    
    
    39,018
    
    
    
    31,068Total assets
    
    
    39,501
    
    
    
    31,566Current liabilities
    
    
    36,167
    
    
    
    28,590Long-term debt
    
    
    1,480
    
    
    
    1,401Total liabilities
    
    
    37,647
    
    
    
    29,991Total stockholders equity
    
    
    1,854
    
    
    
    1,575
 F-20




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (4) MARKETABLE SECURITIES
   Gross
    
    
    GrossAmortized
    
    
    unrealized
    
    
    unrealized
    
    
    Faircost
    
    
    holding gains
    
    
    holding losses
    
    
    valueAt December 31, 2005Non-current assetsAvailable-for-saledebt securities
    
    
    5,363
    
    
    
    104
    
    
    
    27
    
    
    
    5,440equity securities
    
    
    119
    
    
    
    
    
    
    
    1
    
    
    
    118mutual funds
    
    
    10,472
    
    
    
    442
    
    
    
    24
    
    
    
    10,890Held-to-maturity
    
    
    145,796
    
    
    
    8,412
    
    
    
    
    
    
    
    154,208At 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
    
    
    
    
    
    
    
    133,865
  Amortized
    
    
    Faircost
    
    
    valueHeld-to-maturityDue within one year
    
    
    6,091
    
    
    
    6,091Due after one year through five years
    
    
    110,714
    
    
    
    115,949Due after five years through ten years
    
    
    28,991
    
    
    
    32,168145,796
    
    
    
    154,208
   F-21




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  Less than 12 months
    
    
    12 months or longer
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    Grossunrealized
    
    
    
    
    
    
    unrealized
    
    
    
    
    
    
    unrealizedFair value
    
    
    holding losses
    
    
    Fair value
    
    
    holding losses
    
    
    Fair value
    
    
    holding lossesAt December 31, 2005Non-current assetsAvailable-for-saledebt corporate
securities
    
    
    1,838
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    1,838
    
    
    
    27equity securities
    
    
    117
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    117
    
    
    
    2mutual funds
    
    
    
    
    
    
    
    
    
    
    4,948
    
    
    
    23
    
    
    
    4,948
    
    
    
    23Total temporarily
impaired securities
    
    
    1,955
    
    
    
    29
    
    
    
    4,948
    
    
    
    23
    
    
    
    6,903
    
    
    
    52
 (5) ACCOUNTS RECEIVABLE  TRADE
  2005
    
    
    2004Allowance beginning of the year
    
    
    94,613
    
    
    
    92,238Foreign currency adjustment
    
    
    24
    
    
    
    31Addition from acquisition of Mobiltel
    
    
    27,763
    
    
    
    Charged to expenses
    
    
    43,393
    
    
    
    24,707Amounts written-off
    
    
    (21,739
    )
    
    
    (22,363
    )Allowance at the end of the year
    
    
    144,054
    
    
    
    94,613of which allowance for accounts receivable-trade
    
    
    104,234
    
    
    
    73,463of which for accounts receivable sold
    
    
    39,820
    
    
    
    21,150
 December 31,
    
    
    December 31,2005
    
    
    2004Accounts receivable-trade, gross gross
    
    
    557,112
    
    
    
    482,283Allowance for accounts receivable-trade
    
    
    (104,234
    )
    
    
    (73,463
    )Accounts receivable-trade, net
    
    
    452,878
    
    
    
    408,820Accounts receivable sold, gross
    
    
    268,099
    
    
    
    194,500Allowance for accounts receivable sold
    
    
    (39,820
    )
    
    
    (21,150
    )Accounts receivable sold, net
    
    
    228,279
    
    
    
    173,350Accounts receivable, net
    
    
    681,157
    
    
    
    582,170
 F-22




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##### Table of Contents



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




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  December 31,2005
    
    
    2004Gross trade receivables sold to QSPE
    
    
    3,044,009
    
    
    
    2,861,686Collections made on behalf of and paid to the QSPE
    
    
    (3,105,085
    )
    
    
    (2,806,644
    )Deferred purchase price withheld
    
    
    1,644
    
    
    
    (9,771
    )Unearned discount (withheld) reduced
    
    
    (111
    )
    
    
    (1,489
    )Liquidity and program fees
    
    
    (2,335
    )
    
    
    (3,110
    )Retained interests
    
    
    9,142
    
    
    
    (9,142
    )Increase in receivable from the QSPE
    
    
    (73,599
    )
    
    
    (49,140
    )Net cash received from (paid to) QSPE during the period.
    
    
    (126,335
    )
    
    
    (17,610
    )
  (6) RELATED PARTY TRANSACTIONS
      F-24




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  (7) INVENTORIES
  At December 31,
    
    2005
    
    
    2004Spare parts, cables and supplies
    
    
    44,297
    
    
    
    41,167Merchandise
    
    
    46,616
    
    
    
    41,943Total
    
    
    90,913
    
    
    
    83,110
 (8) GOODWILL
  Wireline
    
    
    Wireless
    
    
    TotalGoodwill January 1, 2005
    
    
    32,317
    
    
    
    564,248
    
    
    
    596,565Acquisitions
    
    
    
    
    
    
    565,971
    
    
    
    565,971Impairment
    
    
    (16,317
    )
    
    
    
    
    
    
    (16,317
    )Translation adjustment
    
    
    347
    
    
    
    2,609
    
    
    
    2,956Goodwill December 31, 2005
    
    
    16,347
    
    
    
    1,132,828
    
    
    
    1,149,175
 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
   F-25




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
   (9) OTHER INTANGIBLE ASSETS
  At December 31,
    
    2005
    
    
    2004Wireless and wireline licenses
    
    
    684,405
    
    
    
    563,080Patents and proprietary rights
    
    
    73,972
    
    
    
    78,482Brand names
    
    
    437,894
    
    
    
    173,948Subscriber base
    
    
    731,401
    
    
    
    138,504Other
    
    
    31,238
    
    
    
    35,679Total intangibles
    
    
    1,958,910
    
    
    
    989,693Less accumulated amortization
    
    
    (526,394
    )
    
    
    (322,356
    )Net intangibles
    
    
    1,432,516
    
    
    
    667,337
    GSM licenses
    
    
    UMTS licensesGranted until
    
    
    2013  2015
    
    
    
    2020  2024License cost
    
    
    429,233
    
    
    
    246,584Renewal of the Croatian license until year
    
    
    2019
    
    
    
    2044Onetime license fee for extension of the Croatian license
    
    
    14,244
    
    
    
    17,907
   F-26




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  Acquisition
    
    
    Accumulated
    
    
    CarryingAt December 31, 2005
    
    cost
    
    
    amortization
    
    
    valueWireless and wireline licenses
    
    
    684,405
    
    
    
    (268,966
    )
    
    
    415,439Subscriber base
    
    
    731,401
    
    
    
    (198,247
    )
    
    
    533,154Patents, proprietary rights and others
    
    
    105,211
    
    
    
    (59,182
    )
    
    
    46,029Total
    
    
    1,521,017
    
    
    
    (526,395
    )
    
    
    994,622
 Acquisition
    
    
    Accumulated
    
    
    CarryingAt December 31, 2004
    
    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
  2006
    
    
    152,6442007
    
    
    151,8212008
    
    
    140,0002009
    
    
    125,6572010
    
    
    122,8322011
    
    
    109,451Thereafter
    
    
    192,217
   F-27




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (10) PROPERTY, PLANT AND EQUIPMENT
  At December 31,
    
    2005
    
    
    2004Land
    
    
    60,031
    
    
    
    59,172Buildings and leasehold improvements
    
    
    738,439
    
    
    
    689,639Communications network and other equipment
    
    
    9,952,016
    
    
    
    9,506,621Capital leases
    
    
    8,753
    
    
    
    8,961Software
    
    
    519,308
    
    
    
    441,223Construction in progress, network
    
    
    207,804
    
    
    
    158,00711,486,351
    
    
    
    10,863,623Less accumulated depreciation (other than capital leases)
    
    
    (7,704,184
    )
    
    
    (6,968,516
    )Less accumulated depreciation, capital leases
    
    
    (7,613
    )
    
    
    (6,416
    )Property, plant and equipment, net
    
    
    3,774,554
    
    
    
    3,888,691
   2005
    
    
    2004
    
    
    2003Interest capitalized
    
    
    1,123
    
    
    
    1,557
    
    
    
    1,605Depreciation and amortization expense
    
    
    1,005,398
    
    
    
    1,039,967
    
    
    
    1,064,808Impairment charges
    
    
    1,071
    
    
    
    1,123
    
    
    
    6,825of whichAmortization of software
    
    
    77,695
    
    
    
    81,903
    
    
    
    79,059Amortization of leased assets
    
    
    1,408
    
    
    
    1,466
    
    
    
    3,663
  (11) ASSETS HELD FOR SALE
    F-28




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (12) SHORT-TERM BORROWINGS
  At December 31,
    
    2005
    
    
    2004Current portion of long-term debt
    
    
    296,840
    
    
    
    653,022Short-term debt
    
    
    357,736
    
    
    
    Lines of credit
    
    
    8,484
    
    
    
    2,775Cross Border Lease
    
    
    122,227
    
    
    
    94,154Current portion of lease obligations
    
    
    486
    
    
    
    1,188Total
    
    
    785,773
    
    
    
    751,139
  (13) ACCRUED LIABILITIES
  At December 31,
    
    2005
    
    
    2004Taxes, other than income
    
    
    5,623
    
    
    
    7,643Employee benefits
    
    
    53,256
    
    
    
    61,830Customer discounts
    
    
    48,226
    
    
    
    42,279Customer retention programs
    
    
    35,486
    
    
    
    34,712Bad debt reserve for sold receivables
    
    
    4,570
    
    
    
    19,097Other
    
    
    23,843
    
    
    
    28,758Total
    
    
    171,004
    
    
    
    194,319
   F-29




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (14) DEFERRED INCOME
 At December 31,
    
    2005
    
    
    2004Unearned income
    
    
    192,398
    
    
    
    162,002Unamortized gain on sale of tax benefits
    
    
    37,349
    
    
    
    44,331229,747
    
    
    
    206,333Less non-current portion
    
    
    (30,237
    )
    
    
    (37,349
    )Deferred income net of non-current portion
    
    
    199,510
    
    
    
    168,984
   (15) ASSET RETIREMENT OBLIGATION
 Accounting for Asset Retirement Obligations
 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
  2005
    
    
    2004Asset retirement obligations as of January 1
    
    
    38,261
    
    
    
    23,262Foreign exchange differences
    
    
    167
    
    
    
    (33
    )Addition from acquisition of Mobiltel
    
    
    2,502
    
    
    
    Change in estimate
    
    
    2,558
    
    
    
    Liability incurred in the current period
    
    
    2,808
    
    
    
    11,451Accretion expense
    
    
    3,087
    
    
    
    6,173Settlements
    
    
    (1,274
    )
    
    
    (2,248
    )Releases
    
    
    
    
    
    
    (344
    )Asset retirement obligations as of December 31
    
    
    48,109
    
    
    
    38,261
  F-30




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
      (16) LONG-TERM DEBT
  At December 31,
    
    Maturity
    
    
    2005
    
    
    2004Face value of bonds under EMTN Programme
    
    
    2010-2017
    
    
    
    1,750,000
    
    
    
    750,000Interest rate SWAP on EMTN bonds
    
    
    2010-2013
    
    
    
    (5,311
    )
    
    
    11,200Discount and issue cost of EMTN bonds
    
    
    2010-2017
    
    
    
    (16,654
    )
    
    
    (7,731
    )Other bonds guaranteed by the Federal Republic of Austria
    
    
    2005
    
    
    
    
    
    
    
    149,602Bank debt
    
    
    2006-2009
    
    
    
    790,312
    
    
    
    675,296Bank debt guaranteed by the Federal Republic of Austria
    
    
    2006-2011
    
    
    
    297,232
    
    
    
    707,566Other
    
    
    2006-2007
    
    
    
    38,964
    
    
    
    14,2602,854,543
    
    
    
    2,300,193Less current portion of long-term debt
    
    
    
    
    
    
    (296,840
    )
    
    
    (653,022
    )Long-term debt, net of current portion
    
    
    
    
    
    
    2,557,703
    
    
    
    1,647,171
 F-31




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
   2005
    
    
    2004Bonds
    
    
    4.32
    %
    
    
    4.56
    %Bank debt
    
    
    4.07
    %
    
    
    4.62
    %
  2006
    
    
    296,8402007
    
    
    99,6892008
    
    
    235,9972009
    
    
    479,4152010
    
    
    495,455Thereafter
    
    
    1,247,147
  Bonds under EMTN Programme
   Other bonds
  Bank debt
  F-32




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
      Bank debt guaranteed by the Federal Republic of Austria
   F-33




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (17) LEASING
   Cross
    
    
    Otherborder
    
    
    Capital
    
    
    Operatingleases
    
    
    leases
    
    
    leases2006
    
    
    122,227
    
    
    
    578
    
    
    
    42,5792007
    
    
    144,933
    
    
    
    47
    
    
    
    39,7722008
    
    
    127,632
    
    
    
    9
    
    
    
    35,3482009
    
    
    185,371
    
    
    
    
    
    
    
    33,7852010
    
    
    147,713
    
    
    
    
    
    
    
    33,794after 2010
    
    
    472,112
    
    
    
    
    
    
    
    34,584Total minimum lease payments
    
    
    1,199,988
    
    
    
    634
    
    
    
    219,862Less amount representing interest
    
    
    (260,041
    )
    
    
    (2
    )Present value of lease payments
    
    
    939,947
    
    
    
    632Less current portion
    
    
    (122,227
    )
    
    
    (486
    )Non-current lease obligations
    
    
    817,720
    
    
    
    146
  Cross border leases
    F-34




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
    At December 31,
    
    2005
    
    
    2004Securities held-to-maturity, non-current
    
    
    139,705
    
    
    
    115,883Other assets
    
    
    800,242
    
    
    
    738,948Total assets in connection with cross border leases
    
    
    939,947
    
    
    
    854,831Of which current
    
    
    121,145
    
    
    
    94,297Lease obligations
    
    
    939,947
    
    
    
    854,831Of which current
    
    
    122,227
    
    
    
    94,154
  (18) EMPLOYEE BENEFIT OBLIGATIONS
  At December 31,
    
    2005
    
    
    2004Voluntary termination benefits
    
    
    10,457
    
    
    
    19,394Service awards
    
    
    49,385
    
    
    
    44,418Severance
    
    
    37,424
    
    
    
    37,096Pensions
    
    
    8,583
    
    
    
    9,076Other
    
    
    1,412
    
    
    
    Total
    
    
    107,261
    
    
    
    109,984
 Voluntary termination benefits
  F-35




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
    Actuarial assumptions
  At December 31,
    
    2005
    
    2004
    
    2003Actuarial assumptions:Discount rate
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Rate of compensation increase  civil servants.
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    4.0
    %Rate of compensation increase  other employees
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    2.5
    %Rate of increase of pensions
    
    
    0.8
    %
    
    
    1.8
    %
    
    
    1.8
    %
 Service awards
   2005
    
    
    2004Accrual at the beginning of the year
    
    
    44,418
    
    
    
    46,870Addition from acquisition of Mobiltel
    
    
    48
    
    
    
    Service cost
    
    
    1,973
    
    
    
    2,149Interest cost
    
    
    2,278
    
    
    
    2,288Recognized actuarial loss (gain)
    
    
    2,861
    
    
    
    (4,191
    )Benefits paid
    
    
    (2,193
    )
    
    
    (2,698
    )Accrual at the end of the year
    
    
    49,385
    
    
    
    44,418
 F-36




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  2006
    
    
    2,5212007
    
    
    2,4832008
    
    
    2,4962009
    
    
    2,9672010
    
    
    3,4092011-2015
    
    
    27,455
 Severance
    2005
    
    
    2004
    
    
    2003Service cost
    
    
    4,914
    
    
    
    2,853
    
    
    
    4,218Interest cost
    
    
    2,140
    
    
    
    1,467
    
    
    
    1,784Amortization of unrecognized net loss
    
    
    471
    
    
    
    96
    
    
    
    310Curtailment loss / settlement
    
    
    
    
    
    
    
    
    
    
    1,090Net periodic benefit cost
    
    
    7,525
    
    
    
    4,416
    
    
    
    7,402
 2005
    
    
    2004Projected benefit obligation at the beginning of the year
    
    
    40,810
    
    
    
    29,629Addition from acquisition of Mobiltel
    
    
    306
    
    
    
    Service cost
    
    
    4,914
    
    
    
    2,853Interest cost
    
    
    2,140
    
    
    
    1,467Actuarial losses
    
    
    13,694
    
    
    
    8,638Benefits paid
    
    
    (2,934
    )
    
    
    (1,777
    )Projected benefit obligation at the end of the year
    
    
    58,930
    
    
    
    40,810Unrecognized net actuarial losses
    
    
    (26,408
    )
    
    
    (13,183
    )Accrued liability at the end of the year
    
    
    32,522
    
    
    
    27,627Voluntary severance obligation
    
    
    4,902
    
    
    
    9,469Total accrued severance liabilities at the end of the year
    
    
    37,424
    
    
    
    37,096
 F-37




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  2006
    
    
    7,1952007
    
    
    3,0112008
    
    
    2,3632009
    
    
    3,0452010
    
    
    3,3672011-2015
    
    
    15,515
   Pensions
 Defined contribution pension plans
   Defined benefit pension plan
   F-38




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  2005
    
    
    2004
    
    
    2003Interest cost
    
    
    334
    
    
    
    363
    
    
    
    396Amortization of actuarial
gain
    
    
    (136
    )
    
    
    (90
    )
    
    
    (64
    )Amortization of unrecognized transition obligation
    
    
    
    
    
    
    
    
    
    
    343Net periodic pension benefit cost
    
    
    198
    
    
    
    273
    
    
    
    675
  2005
    
    
    2004Projected benefit obligation at the beginning of the year
    
    
    6,650
    
    
    
    7,618Interest cost
    
    
    334
    
    
    
    363Actuarial (gains) losses
    
    
    104
    
    
    
    (582
    )Benefits paid
    
    
    (691
    )
    
    
    (749
    )Projected benefit obligation at the end of the year
    
    
    6,397
    
    
    
    6,650Unrecognized net gain
    
    
    2,186
    
    
    
    2,426Accrued pension liability
    
    
    8,583
    
    
    
    9,076
  2006
    
    
    6712007
    
    
    6742008
    
    
    6772009
    
    
    6802010
    
    
    6812011-2015
    
    
    3,408
 (19)
    
    OTHER LIABILITIES AND DEFERRED INCOME
  At December 31,
    
    2005
    
    
    2004Asset retirement obligation
    
    
    48,109
    
    
    
    38,042Unamortized balance on sale of tax benefit
    
    
    30,237
    
    
    
    37,349Deferred tax liabilities
    
    
    42,236
    
    
    
    19,721Financial Instruments
    
    
    5,311
    
    
    
    Other
    
    
    14,451
    
    
    
    15,392Total
    
    
    140,344
    
    
    
    110,504
 F-39




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
 (20)
    
    STOCK BASED COMPENSATION
  Stock Option Plan 2000 (2000 plan)
    2004Outstanding as of January 1
    
    
    3,268,850Granted
    
    
    Forfeited
    
    
    (38,132
    )Exercised
    
    
    (3,230,718
    )Outstanding as of December 31
    
    
    of which exercisable as of December 31
    
    
    
 Stock Option Plan 2004 (2004 plan)
  F-40




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
    Stock option plan2005
    
    2004Expected average dividend per share
    
    Euro 0.60  0.66
    
    Euro 0.25Expected volatility
    
    22.5%
    
    25%Risk-free interest rate range
    
    2.390%  3.450%
    
    2.053%  4.280%Fair value per option first tranche
    
    Euro 7.27
    
    Euro 2.73Fair value per option second tranche
    
    Euro 5.65
    
    
  First exercise date first tranche
    
    April 20, 2005Expected expiry date first tranche
    
    May 30, 2008First exercise date second tranche
    
    March 16, 2006Expected expiry date second tranche
    
    May 29, 2009
   F-41




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
  2005
    
    
    2004Outstanding as of January 1
    
    
    2,363,925
    
    
    
    Granted
    
    
    2,874,100
    
    
    
    2,392,925Forfeited
    
    
    (92,195
    )
    
    
    (29,000
    )Exercised
    
    
    (1,663,350
    )
    
    
    Outstanding as of December 31
    
    
    3,482,480
    
    
    
    2,363,925of which exercisable as of December 31
    
    
    662,680
    
    
    
    
 (21)
    
    INCOME TAXES
  2005
    
    
    2004
    
    
    2003Domestic
    
    
    348,067
    
    
    
    281,477
    
    
    
    186,197Foreign
    
    
    175,453
    
    
    
    68,603
    
    
    
    46,360Total
    
    
    523,520
    
    
    
    350,080
    
    
    
    232,557
  2005
    
    
    2004
    
    
    2003CurrentDomestic
    
    
    18,523
    
    
    
    22,266
    
    
    
    8,899Foreign
    
    
    20,747
    
    
    
    14,800
    
    
    
    14,51139,270
    
    
    
    37,066
    
    
    
    23,410DeferredDomestic
    
    
    56,912
    
    
    
    84,491
    
    
    
    52,506Foreign
    
    
    10,190
    
    
    
    629
    
    
    
    7,12067,102
    
    
    
    85,120
    
    
    
    59,626Total
    
    
    106,372
    
    
    
    122,186
    
    
    
    83,036
 F-42




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
   2005
    
    
    2004
    
    
    2003Continuing operations
    
    
    106,372
    
    
    
    122,186
    
    
    
    83,036Reduction of intangible assets
    
    
    
    
    
    
    (13,303
    )
    
    
    Other comprehensive income
    
    
    1,991
    
    
    
    1,412
    
    
    
    2,787Additional paid in capital
    
    
    
    
    
    
    
    
    
    
    451108,363
    
    
    
    110,295
    
    
    
    86,274Tax for cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (6,071
    )108,363
    
    
    
    110,295
    
    
    
    80,203
   2005
    
    
    2004
    
    
    2003Income tax expense at statutory rate
    
    
    130,880
    
    
    
    119,027
    
    
    
    79,069Foreign tax rate differential
    
    
    (18,790
    )
    
    
    (9,874
    )
    
    
    (7,053
    )Non-deductible expenses
    
    
    3,524
    
    
    
    2,879
    
    
    
    3,792Tax incentives
    
    
    (1,923
    )
    
    
    (3,450
    )
    
    
    (3,673
    )Tax free income from investments
    
    
    (134
    )
    
    
    (185
    )
    
    
    (563
    )Non-deductible impairment charges
    
    
    4,079
    
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (14,125
    )
    
    
    (5,566
    )
    
    
    7,724Effect of change in tax rate
    
    
    47
    
    
    
    21,799
    
    
    
    Tax expense and corrections previous years
    
    
    3,048
    
    
    
    (579
    )
    
    
    305Other
    
    
    (234
    )
    
    
    (1,865
    )
    
    
    3,435Income tax expense
    
    
    106,372
    
    
    
    122,186
    
    
    
    83,036Effective income tax rate
    
    
    20.3
    %
    
    
    34.9
    %
    
    
    35.7
    %Effective income tax rate excluding effect of change in tax rate
    
    
    20.3
    %
    
    
    28.7
    %
   F-43




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(All amounts in EUR 000s)
   2005
    
    
    2004Deferred tax assetsGoodwill
    
    
    1,398
    
    
    
    13,510Deferred deduction for write downs of investments in subsidiaries
    
    
    26,142
    
    
    
    34,565Operating loss carryforwards
    
    
    56,366
    
    
    
    99,223Accounts receivable
    
    
    7,088
    
    
    
    1,687Assets held for sale
    
    
    
    
    
    
    14,734Long-term debt
    
    
    1,027
    
    
    
    655Other liabilities and deferred credits
    
    
    10,503
    
    
    
    11,342Accrued liabilities
    
    
    2,784
    
    
    
    3,173Employee benefit obligations
    
    
    4,022
    
    
    
    2,690Other
    
    
    8,795
    
    
    
    10,971Total deferred tax assets
    
    
    118,125
    
    
    
    192,550Valuation allowance
    
    
    (39,560
    )
    
    
    (53,564
    )Deferred tax assets, net of valuation allowance
    
    
    78,565
    
    
    
    138,986Deferred tax liabilitiesProperty, plant and equipment
    
    
    (27,971
    )
    
    
    (17,449
    )Long-term investments
    
    
    (83
    )
    
    
    (84
    )Goodwill Mobiltel
    
    
    (2,076
    )
    
    
    Other intangible assets
    
    
    (55,442
    )
    
    
    (54,693
    )Other
    
    
    (2,417
    )
    
    
    (7,220
    )Total deferred tax liabilities
    
    
    (87,989
    )
    
    
    (79,446
    )Net deferred tax asset (liability)
    
    
    (9,424
    )
    
    
    59,540
  Years
    
    Amount2006
    
    
    3952007
    
    
    20,2362008
    
    
    37,9762009
    
    
    24,1222010
    
    
    9,3472012
    
    
    9Total
    
    
    92,085
 F-44




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
    (22) FINANCIAL INSTRUMENTS
    Credit risk
   Market risk
  F-45




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
 Information with respect to cash flow hedges
  Interest rate swap agreements
    2005
    
    
    2004Variable to fixed swaps in EURNotional amount in EUR
    
    
    
    
    
    
    145,346Average receive rate
    
    
    
    
    
    
    2.26
    %Average pay rate
    
    
    
    
    
    
    6.66
    %Average maturity in years
    
    
    
    
    
    
    0.4Fixed to variable swaps in EURNotional amount in EUR
    
    
    800,000
    
    
    
    300,000Average receive rate
    
    
    3.98
    %
    
    
    5.00
    %Average pay rate
    
    
    2.62
    %
    
    
    3.02
    %Average maturity in years
    
    
    5.38
    
    
    
    8.5
 Foreign exchange agreements
  F-46




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
  2005
    
    
    2004Cross Currency Swaps EUR  CHFNotional amount in EUR
    
    
    
    
    
    
    176,635Notional amount in CHF
    
    
    
    
    
    
    300,000Average receive rate CHF
    
    
    
    
    
    
    5.47
    %Average pay rate EUR
    
    
    
    
    
    
    7.65
    %Average maturity in years
    
    
    
    
    
    
    0.4Forward exchange contracts  US $Notional amount in EUR
    
    
    2,794
    
    
    
    4,399Notional amount in US $
    
    
    3,300
    
    
    
    5,700Forward exchange rate (weighted)
    
    
    1.18
    
    
    
    1.30Exchange rate as of the balance sheet date
    
    
    1.18
    
    
    
    1.36Longest term of the contracts
    
    February 2006
    
    

    April 2005
   2005
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    valueFinancial instrumentsCash
    
    
    116,756
    
    
    
    116,756
    
    
    
    288,195
    
    
    
    288,195Accounts receivable  trade
    
    
    452,878
    
    
    
    452,878
    
    
    
    408,820
    
    
    
    408,820Accounts receivable  sold
    
    
    228,878
    
    
    
    228,878
    
    
    
    173,350
    
    
    
    173,350Balances due from related parties
    
    
    66
    
    
    
    66
    
    
    
    85
    
    
    
    85Accounts payable trade
    
    
    (529,197
    )
    
    
    (529,197
    )
    
    
    (534,498
    )
    
    
    (534,498
    )Payables to related parties
    
    
    (20,244
    )
    
    
    (20,244
    )
    
    
    (22,924
    )
    
    
    (22,924
    )Securities held-to-maturity
    
    
    145,796
    
    
    
    154,208
    
    
    
    120,946
    
    
    
    133,865Securities available-for-sale
    
    
    16,448
    
    
    
    16,448
    
    
    
    19,656
    
    
    
    19,656Long-term debt
    
    
    (2,557,703
    )
    
    
    (2,786,345
    )
    
    
    (1,647,171
    )
    
    
    (1,772,904
    )Derivative financial instrumentsInterest rate swap agreements
    
    
    (5,311
    )
    
    
    (5,311
    )
    
    
    (17,294
    )
    
    
    (17,294
    )Cross currency swap agreements
    
    
    
    
    
    
    
    
    
    
    15,849
    
    
    
    15,849Foreign currency forward contract
    
    
    (1
    )
    
    
    (1
    )
    
    
    (216
    )
    
    
    (216
    )
 F-47




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
 (23) SHAREHOLDERS EQUITY
 Share Capital
   Dividend Payment
    Treasury stock
   F-48




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
    Earnings per share
  2005
    
    
    2004Net Income of the year ended December 31
    
    
    417,146
    
    
    
    227,263Weighted average number of common shares outstanding
    
    
    489,050,517
    
    
    
    496,495,378Dilutive effect of Stock Option Plan 2004
    
    
    
    
    
    
    29,449Weighted average number of dilutive shares outstanding
    
    
    489,050,517
    
    
    
    496,524,827Basic earnings per share
    
    Euro 0.85
    
    
    Euro 0.46Diluted earnings per share
    
    Euro 0.85
    
    
    Euro 0.46
  Shares held by members of the Management Board
  Number of sharesJanuary 1,
    
    
    
    
    
    
    
    
    
    
    December 31,2005
    
    
    Purchased
    
    
    Sold
    
    
    2005Heinz Sundt
    
    
    13,011
    
    
    
    
    
    
    
    
    
    
    
    13,011Boris Nemsic
    
    
    10,110
    
    
    
    3,000
    
    
    
    
    
    
    
    13,110Stefano Colombo
    
    
    12,212
    
    
    
    800
    
    
    
    
    
    
    
    13,012Rudolf Fischer
    
    
    13,007
    
    
    
    
    
    
    
    
    
    
    
    13,007
 F-49




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
 Accounting for derivative and hedging activities
    December 31,
    
    
    December 31,2005
    
    
    2004Unrealized LossesGross
    
    
    
    
    
    
    (4,313
    )Less income tax
    
    
    
    
    
    
    1,466Unrealized net loss, net of income tax
    
    
    
    
    
    
    (2,847
    )
 Other comprehensive income
  Unrealized
    
    
    
    
    
    
    AccumulatedUnrealized
    
    
    gain (loss) on
    
    
    Foreign
    
    
    othergain (loss) on
    
    
    hedging
    
    
    currency
    
    
    comprehensivesecurities
    
    
    activities
    
    
    translation
    
    
    incomeBalance January 1, 2003
    
    
    (848
    )
    
    
    (10,342
    )
    
    
    8,106
    
    
    
    (3,084
    )Changes, net of income tax
    
    
    2,214
    
    
    
    3,195
    
    
    
    (10,690
    )
    
    
    (5,281
    )Balance December 31, 2003
    
    
    (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
    )Realized gain (loss), net of income tax
    
    
    (8
    )
    
    
    2,847
    
    
    
    1,157
    
    
    
    3,996Changes, net of income tax
    
    
    602
    
    
    
    
    
    
    
    12,939
    
    
    
    13,541Balance December 31, 2005
    
    
    401
    
    
    
    
    
    
    
    6,931
    
    
    
    7,332
 Sale of American call option
  F-50




---



##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
    Restricted earnings
   (24) REVENUES
 Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Revenues from services
    
    
    4,093,238
    
    
    
    3,810,891
    
    
    
    3,726,955Revenues from sales of merchandise
    
    
    284,053
    
    
    
    245,377
    
    
    
    242,795Total
    
    
    4,377,291
    
    
    
    4,056,268
    
    
    
    3,969,750
 F-51




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##### 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,
    
    2005
    
    
    2004
    
    
    2003Interconnection
    
    
    489,586
    
    
    
    452,171
    
    
    
    421,787Services received
    
    
    253,125
    
    
    
    221,952
    
    
    
    211,445Repairs
    
    
    176,144
    
    
    
    177,277
    
    
    
    178,256Charges from related parties
    
    
    13,022
    
    
    
    13,241
    
    
    
    15,013Advertising and marketing
    
    
    229,580
    
    
    
    198,138
    
    
    
    198,362Rental expenses
    
    
    83,534
    
    
    
    79,204
    
    
    
    74,358Legal and other consulting
    
    
    38,862
    
    
    
    40,354
    
    
    
    44,451Commission expenses
    
    
    56,409
    
    
    
    41,301
    
    
    
    41,078Bad debt expenses
    
    
    43,393
    
    
    
    24,707
    
    
    
    30,629Other support services
    
    
    110,076
    
    
    
    109,721
    
    
    
    96,684Travel expenses
    
    
    22,777
    
    
    
    22,302
    
    
    
    23,696Energy
    
    
    23,599
    
    
    
    21,824
    
    
    
    21,979Other non income taxes
    
    
    6,185
    
    
    
    8,023
    
    
    
    7,201Training expenses
    
    
    12,928
    
    
    
    11,657
    
    
    
    13,129Other
    
    
    35,412
    
    
    
    67,352
    
    
    
    85,453Total
    
    
    1,594,632
    
    
    
    1,489,224
    
    
    
    1,463,521
  (26) OTHER, net
 Year ended December 31,
    
    2005
    
    
    2004
    
    
    2003Foreign exchange losses
    
    
    (149,996
    )
    
    
    (103,572
    )
    
    
    (246,883
    )Foreign exchange gains
    
    
    151,139
    
    
    
    107,081
    
    
    
    242,013Dividend income
    
    
    41
    
    
    
    7
    
    
    
    48Other
    
    
    10,841
    
    
    
    12,140
    
    
    
    4,255Total
    
    
    12,025
    
    
    
    15,656
    
    
    
    (567
    )
  (27) COMMITMENTS AND CONTINGENCIES
  F-52




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
  (28) CASH FLOW STATEMENT
  Years ended December 31,
    
    2005
    
    
    2004
    
    
    2003Cash paid forInterest
    
    
    145,709
    
    
    
    161,057
    
    
    
    182,836Income taxes
    
    
    57,349
    
    
    
    23,330
    
    
    
    16,246Cash received forInterest
    
    
    14,148
    
    
    
    8,080
    
    
    
    3,128Tax refunds
    
    
    
    
    
    
    
    
    
    
    Non cash investing and financingDividends
    
    
    
    
    
    
    
    
    
    
    
 (29) SEGMENT REPORTING
      F-53




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
   Other
    
    
    SegmentWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    ConsolidatedYear ended December 2005External revenues
    
    
    1,973,212
    
    
    
    2,404,032
    
    
    
    47
    
    
    
    4,377,291
    
    
    
    
    
    
    
    4,377,291Intersegmental revenues
    
    
    161,956
    
    
    
    85,156
    
    
    
    
    
    
    
    247,112
    
    
    
    (247,112
    )
    
    
    Total revenues
    
    
    2,135,168
    
    
    
    2,489,188
    
    
    
    47
    
    
    
    4,624,403
    
    
    
    (247,112
    )
    
    
    4,377,291adj. EBITDA (excl. Impairment charges)
    
    
    786,730
    
    
    
    969,029
    
    
    
    (101
    )
    
    
    1,755,658
    
    
    
    1,523
    
    
    
    1,757,181Impairment charges
    
    
    16,317
    
    
    
    1,071
    
    
    
    
    
    
    
    17,388
    
    
    
    
    
    
    
    17,388adj. EBITDA
    
    
    770,413
    
    
    
    967,958
    
    
    
    (101
    )
    
    
    1,738,270
    
    
    
    1,523
    
    
    
    1,739,793Depreciation and amortization
    
    
    704,495
    
    
    
    415,727
    
    
    
    
    
    
    
    1,120,222
    
    
    
    (421
    )
    
    
    1,119,801Operating Income
    
    
    65,918
    
    
    
    552,231
    
    
    
    (101
    )
    
    
    618,048
    
    
    
    1,944
    
    
    
    619,992Total assets
    
    
    5,421,194
    
    
    
    4,965,138
    
    
    
    2,713,776
    
    
    
    13,100,108
    
    
    
    (4,688,255
    )
    
    
    8,411,853Expenditures for additions to long-lived
assets
    
    
    314,145
    
    
    
    313,494
    
    
    
    
    
    
    
    627,639
    
    
    
    
    
    
    
    627,639
 Other
    
    
    SegmentWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    ConsolidatedYear ended December 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
 F-54




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
 Other
    
    
    SegmentWireline
    
    
    Wireless
    
    
    activities
    
    
    totals
    
    
    Eliminations
    
    
    ConsolidatedYear ended December 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
  Year ended December 31,2005
    
    
    2004
    
    
    2003adj. EBITDA (excl. Impairment charges)  segment totals
    
    
    1,755,658
    
    
    
    1,579,732
    
    
    
    1,507,520Impairment charges
    
    
    (17,388
    )
    
    
    (1,334
    )
    
    
    (6,825
    )adj. EBITDA (incl. Impairment charges)  segment totals
    
    
    1,738,270
    
    
    
    1,578,398
    
    
    
    1,500,695Depreciation and amortization
    
    
    (1,119,801
    )
    
    
    (1,114,830
    )
    
    
    (1,133,148
    )Interest income
    
    
    89,084
    
    
    
    70,016
    
    
    
    75,167Interest expense
    
    
    (198,151
    )
    
    
    (188,818
    )
    
    
    (230,979
    )Equity in earnings of affiliates
    
    
    570
    
    
    
    552
    
    
    
    19,112Other
    
    
    13,548
    
    
    
    4,762
    
    
    
    1,710Income before taxes, minority interests
and cumulative effect of change in accounting principle
    
    
    523,520
    
    
    
    350,080
    
    
    
    232,557Income tax expense
    
    
    (106,372
    )
    
    
    (122,186
    )
    
    
    (83,036
    )Minority interests
    
    
    (2
    )
    
    
    (631
    )
    
    
    (3,422
    )Cumulative effect of change in accounting principle, net of tax
    
    
    
    
    
    
    
    
    
    
    (11,858
    )Net income
    
    
    417,146
    
    
    
    227,263
    
    
    
    134,241
  (30) SUBSEQUENT EVENTS
  F-55




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##### Table of Contents



TELEKOM AUSTRIA AG
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(All amounts in EUR 000s)
     F-56